<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CAPTEC NET LEASE REALTY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
24 FRANK LLOYD WRIGHT DRIVE
ANN ARBOR, MICHIGAN 48106
(313) 994-5505
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
PATRICK L. BEACH
24 FRANK LLOYD WRIGHT DRIVE
ANN ARBOR, MICHIGAN 48106
(313) 994-5505
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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With copies to:
<TABLE>
<S> <C>
ALBERT T. ADAMS, ESQ. THOMAS W. DOBSON, ESQ.
BAKER & HOSTETLER LLP LATHAM & WATKINS
3200 NATIONAL CITY CENTER 633 WEST 5TH STREET, SUITE 4000
CLEVELAND, OHIO 44114 LOS ANGELES, CALIFORNIA 90071
(216) 621-0200 (213) 485-1234
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================
TITLE OF EACH CLASS OF PROPOSED PROPOSED
SECURITIES TO BE AMOUNT BEING MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PRICE PER SHARE OFFERING PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value.................. 13,023,750 $15.00 $195,356,250 $59,199
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</TABLE>
(1) Includes 1,698,750 shares of Common Stock which may be purchased by the
Underwriters pursuant to an over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 1997
11,325,000 Shares
CAPTEC NET LEASE REALTY, INC.
COMMON STOCK
$0.01 PAR VALUE
------------------------
Captec Net Lease Realty, Inc. (the "Company"), a Delaware corporation which
intends to qualify as a real estate investment trust (a "REIT"), acquires,
develops and owns high-quality freestanding properties leased to operators of
national and regional chain and franchised restaurants and retailers (the
"Lessees"). As of June 30, 1997, the Company's portfolio consisted of 79
properties (the "Existing Properties") located in 24 states. The Existing
Properties were 96.2% leased principally pursuant to long-term, "triple-net"
leases (the "Leases"), with average remaining terms of approximately 16 years.
All of the shares of common stock, $.01 par value (the "Common Stock"), offered
hereby (the "Offering"), are being sold by the Company. Prior to the Offering,
there has been no public market for the Common Stock. It is anticipated that the
initial public offering price will be $15.00 per share. Upon completion of the
Offering, the shares of Common Stock offered hereby will represent 85.3% of the
outstanding Common Stock (87.0% if the Underwriters' over-allotment option is
exercised in full), with the balance owned by management and other Affiliates of
the Company. To assist the Company in obtaining and maintaining its
qualification as a REIT for federal income tax purposes, ownership by any person
is generally limited to 9.8% of the then outstanding Common Stock. For
information relating to the factors considered in determining the initial public
offering price, see "Underwriting". The Company will apply for listing of the
Common Stock on the New York Stock Exchange ("NYSE") under the symbol "CRR". See
"Glossary" commencing on page 78 for definitions of certain terms used in this
Prospectus.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING ON PAGE 12,
INCLUDING:
- Potential conflicts between the business interests of the Company and
Captec Net Lease Realty Advisors, Inc. and other Affiliates of the
Company.
- Dependence on the Advisor for significant investment and management
decisions.
- Dependence on Lessees for operating income and risk of Lessee defaults and
bankruptcies.
- Concentration of investment in certain Lessees and restaurant concepts.
- General business risks of investment in the foodservice and retail
industries.
- Risks associated with leasing, acquisition and development of commercial
real property, including potential environmental liabilities.
- Potential inability to complete some or all pending acquisitions due to
circumstances beyond the Company's control.
- Potential need to incur substantial indebtedness to fund future
operations, acquisitions, expansion and stockholder distributions.
- Intense competition, including for acquisitions of properties.
- Lack of operating history and experience in qualifying and operating as a
REIT.
- Adverse tax consequences of failing to qualify as a REIT.
- Potential tax reclassification of preferred stock dividends and resulting
tax liability.
- Payment of a substantial portion of the Offering proceeds to an Affiliate
of the lead managing Underwriter.
- Restrictions on stock ownership impeding potential changes of control.
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.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
-------- ------------- ------------
<S> <C> <C> <C>
Per Share........................................................ $ $ $
Total(2)......................................................... $ $ $
</TABLE>
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(1) Before deduction of expenses payable by the Company estimated at $1,000,000.
(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 1,698,750
additional shares to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $ , Underwriting
Discounts and Commissions will be $ and Proceeds to Company will be
$ .
The Common Stock is offered by the several Underwriters when, as and if issued
by the Company, delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that the Common
Stock will be available for delivery on or about , 1997, against
payment in immediately available funds.
CREDIT SUISSE FIRST BOSTON MCDONALD & COMPANY
SECURITIES, INC.
PROSPECTUS DATED , 1997
<PAGE> 3
[insert color pictures here]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".
This Prospectus contains registered trademarks, service marks and trade
names of third parties.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial information and statements, and notes thereto,
appearing elsewhere in this Prospectus. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in "Risk Factors". Unless otherwise indicated, the
information contained in this Prospectus (i) gives effect to the merger of
Captec Net Lease Realty, Inc., a Michigan corporation ("Net Lease Michigan"),
and Captec Net Lease Realty Advisors, Inc., a Michigan corporation ("Advisors
Michigan"), into the Company in September 1997 (the "Merger") (see "-- History
and Formation of the Company"); (ii) assumes an initial public offering price of
$15.00 per share of Common Stock; and (iii) assumes no exercise of the
Underwriters' over-allotment option. See "Glossary" for the definition of
certain terms used in this Prospectus.
THE COMPANY
The Company, which intends to qualify as a REIT, acquires, develops and
owns high-quality freestanding properties leased principally on a long-term
triple-net basis to national and regional chain and franchised restaurants and
retailers. As of June 30, 1997, the Company had a portfolio of 79 Existing
Properties located in 24 states, which was 96.2% leased. In addition, as of
September 1, 1997, the Company had agreements in principle for acquisitions,
which the Company expects to be substantially completed by July 1998, of 62
properties located in 22 states for an aggregate cost of approximately $94.5
million (the "Acquisition Properties"). The Lessees of the Existing Properties
include operators of 24 different restaurant and retail concepts, including
Applebee's, Arby's, Baby Superstore, Black Angus, Blockbuster Music, Blockbuster
Video, Boston Market, Burger King, Church's, Denny's, Golden Corral Family
Steakhouses and Jack in the Box. The Acquisition Properties will expand the
Company's portfolio into five additional states, and further diversify its
property, concept and Lessee base to include operators of Circle K, Michael's
Crafts, Office Depot, SportsMart, Stop n Go, Taco Bell and Tony Roma's. The
Company anticipates that most future acquisitions will be newly constructed at
the time of acquisition.
The Company generally acquires properties from operators or developers in
locations which have exhibited growth in retail sales and population. Upon
acquiring a property, the Company normally enters into a long-term triple-net
Lease (typically 15 to 20 years plus one or more five-year renewal options) with
the Lessee who will operate the property. Under the terms of a typical Lease,
the Lessee is responsible for all operating costs and expenses including
repairs, maintenance, real property taxes, assessments, utilities and insurance.
In addition, the Lease generally provides for minimum rent plus specified fixed
periodic rent increases or, in certain circumstances, indexation to the Consumer
Price Index ("CPI") and/or percentage rent. The Company believes that the
structure of its Leases provides steady periodically escalating long-term
revenue while reducing operating expenses and capital costs, and that its
underwriting standards reduce the risk of default or non-renewal. The Existing
Properties average four years of age and are subject to Leases with an average
remaining term of 16 years.
The Company's senior management and Board of Directors have extensive
experience in the acquisition, development and ownership of net leased
properties, particularly those used in restaurant and retail operations, and
have served in senior positions with large restaurant franchisees, retailers and
real estate companies. The Company's senior executives average 16 years
experience in the franchise and retail finance industry and have been primarily
responsible for the Company's acquisition, development and leasing of the
Existing Properties and agreements in principle to acquire the Acquisition
Properties.
The Company has retained Captec Net Lease Realty Advisors, Inc. ("Captec
Advisors"), an Affiliate which, together with Captec Financial Group, Inc.
("Captec Financial") and its Affiliates (collectively, the "Advisor"), will
manage the operations of the Company and provide it with investment and
financial advisory services pertaining primarily to the acquisition, development
and leasing of properties. The Advisor is a family of affiliated specialized
commercial finance companies providing a diverse line of financing products to
the franchise, chain restaurant and specialty retail industries. Since its
inception in 1981, the Advisor has developed
<PAGE> 5
substantial expertise in all aspects of the franchise, chain restaurant and
specialty retail finance business, including business concept, property and
lessee underwriting, property acquisition, lessee credit analysis and
monitoring, direct marketing, portfolio management, accounting and other
administrative functions. As of June 30, 1997, Captec Financial employed over 60
people, including a senior management team with over 60 years of direct industry
experience and an average tenure of over 10 years with Captec Financial.
Including the Company, Captec Financial had assets under management of
approximately $350.0 million and combined debt and equity capital of
approximately $540.0 million including available, but unutilized, borrowing
capacity. The Company's retention of the Advisor will be reviewed by the Board
of Directors annually.
Since commencing operations in 1995, the Company has experienced
substantial growth in its real estate portfolio, revenues and Funds From
Operations ("FFO"). As of June 30, 1997, the Company had total assets of $123.1
million. In addition, for the year ended December 31, 1996, total revenues and
FFO increased to $6.9 million and $3.6 million, respectively, from $1.9 million
and $1.0 million, respectively, for the year ended December 31, 1995. Similarly,
for the six months ended June 30, 1997, total revenues and FFO increased to $5.8
million and $2.1 million, respectively, from $2.7 million and $1.4 million,
respectively, for the six months ended June 30, 1996.
INDUSTRIES
The net lease industry is a large and rapidly expanding source of financing
to the restaurant and retail industries. The Company believes that net lease
financings will continue to grow because net lease transactions enable a
restaurant operator or retailer to realize the value of its owned real estate
while continuing long-term occupancy. Under the Company's typical net lease
structure, the Lease may be treated by the operator as an off-balance sheet
liability, providing additional financial benefits which may increase the
operator's earnings and borrowing capacity. The Company believes that, due to
the significant demand for net lease transactions, numerous opportunities for
the net leasing of properties through development or sale/leaseback transactions
will be available to the Company for the foreseeable future. See "Industries".
THE RESTAURANT INDUSTRY. The restaurant industry is estimated to have
reached $313.0 billion in sales (representing 4.1% of the gross domestic
product) in 1996 and is projected to exceed $330.0 billion in 1997 and $392.0
billion by 2000. According to the National Restaurant Association, there
presently are over 773,000 foodservice locations in the United States. The
franchise and chain restaurant industries are large and rapidly expanding.
International Franchise Association studies show that one out of every 12
business establishments is a franchise and one-third of all spending by
Americans for goods and services is to a franchised business, and suggest that
sales by franchised businesses could exceed $1.0 trillion by 2000. The Company
believes that the fast-food, family-style and casual dining segments, which are
the Company's primary restaurant focus, have grown rapidly in recent years.
According to the National Restaurant Association, 51.0% of American adults eat
at a fast-food restaurant and 42.0% of adults patronize a moderately priced
family restaurant at least weekly. The National Restaurant Association also
indicates that Americans spend approximately 55 cents of every food dollar on
dining away from home and projects that in 1997 fast-food restaurants will
outpace average industry real growth, with a 4.2% increase over 1996, and that
fast-food sales will increase to $110.8 billion from $105.0 billion in 1996. The
Company believes that the substantial fragmentation of its competition for the
acquisition of restaurant properties among large public corporations, private
companies and individuals results in additional opportunities for, and
advantages to, the Company. See "Industries -- The Restaurant Industry".
THE RETAIL INDUSTRY. The retail industry represents approximately
one-third of gross domestic product. According to the U.S. Department of
Commerce, total retail sales increased by 5.0% in 1996 to $2.465 trillion. The
International Council of Shopping Centers ("ICSC") projects that through 2000
retail sales will increase by nearly $500.0 billion (4.1% annually) to $2.9
trillion. Growth in retail sales has resulted in a growth in demand for retail
properties. ICSC projects that gradual obsolescence of existing facilities,
changes in location and tenant format preferences and increasing sales will
support the development of over 770.0 million additional square feet of retail
space through 2000. The retail industry also is undergoing significant change
which the Company believes it is well-positioned to exploit through its growth
and operating strategies. In order to meet changing consumer preferences, and as
a result of the relatively high cost of mall space, the Company believes that
retailers
2
<PAGE> 6
increasingly prefer smaller freestanding facilities which are more accessible
and facilitate the customized presentation of the retail concept. The Company
believes that it will benefit from these trends because its properties meet
these retailer preferences. See "Industries -- The Retail Industry".
GROWTH STRATEGY
The Company intends to maximize total returns to stockholders by increasing
cash flow per share and the value of its property portfolio. The Company
believes it can achieve these objectives primarily by acquiring additional
properties and structuring net leases on advantageous terms. As of September 1,
1997, the Company had agreements in principle to acquire the 62 Acquisition
Properties for approximately $94.5 million. The Company utilizes procedures and
methodologies which have been developed and refined by the Advisor to identify,
acquire and manage net leased properties, and seeks to avoid utilizing real
estate brokers or other commissioned intermediaries to reduce acquisition costs.
The Company's principal growth strategies include:
ACQUISITIONS FROM OPERATORS. The Company intends to purchase properties
from, and enter into net leases with, creditworthy multi-unit operators of
national and regional chain and franchised restaurants and retailers. The
Company will make such acquisitions when it can achieve escalating revenue and
targeted returns on its investment through base rent and periodic rent
increases. When possible these acquisitions are structured by the Company to
qualify as off-balance sheet liabilities of the Lessees. Occasionally the
Company will purchase from an operator a property undergoing development subject
to a Lease which commences upon completion of construction. See "Business --
Growth Strategy -- Acquisitions from Operators".
ACQUISITIONS FROM DEVELOPERS. The Company intends selectively to acquire
primarily retail properties from developers prior to the completion of the
development process but subsequent to execution of a net Lease with the
property's operator. By acquiring a property during, and assuming certain risks
of, development, the Company seeks to obtain a more favorable purchase price,
thereby enhancing its overall return. The Company intends, in limited
circumstances, to form joint ventures with developers for the ownership and
leasing of properties. See "Business -- Growth Strategy -- Acquisitions from
Developers".
INCREASES IN REVENUES AND OPERATING MARGINS. The Company will seek to
enhance the financial performance of its portfolio primarily through increasing
revenues, maintaining high Lessee retention and aggressively managing operating
expenses. To provide revenue growth, the Company's Leases require fixed periodic
increases in revenue over the term of the Lease, indexation to the CPI and/or
percentage rent. The Company believes that, as its portfolio grows, it will
realize additional operating efficiencies and benefit from its underwriting
policies which are designed to reduce defaults and non-renewals. See
"Business -- Growth Strategy -- Increases in Revenues and Operating Margins".
OPERATING STRATEGY
The Company continually monitors the success of its existing and targeted
restaurant and retail concepts, the financial condition of its Lessees, Lease
compliance and other factors affecting the financial performance of its
properties. The Company's operating strategies, which have resulted from years
of development and refinement by the Advisor, include:
UNDERWRITING RESTAURANT CHAINS AND RETAILERS. The Company undertakes a
thorough analysis in selecting the restaurant and retail concepts towards which
to direct its leasing activities. This analysis includes a review of publicly
available information concerning the franchisor or chain operator, a credit
analysis of the franchisor's or operator's financial statements and operating
history, evaluation of unit level performance including closure and business
failure statistics, analysis of concept penetration and name recognition, and,
for franchisors, a survey of representative franchisees. Once a business concept
has been approved, the Company, with the Advisor, reviews the ongoing
performance of the concept through monitoring of financial information and news
releases. Each concept is formally reviewed annually. See "Business -- Operating
Strategy -- Underwriting Restaurant Chains and Retailers".
3
<PAGE> 7
UNDERWRITING LESSEE CREDIT. The Company's Lessees are predominantly
experienced, multi-unit operators of fast-food, family-style and casual dining
restaurants and retailers. The Company subjects each proposed Lessee to a
thorough underwriting process designed to identify the most creditworthy Lessees
and minimize the Company's risk from defaults and business failures. The Company
targets only Lessees with the competitive position and financial strength to
meet their obligations throughout the Lease term. When appropriate the Company
enhances Lessee credit by requiring guarantees from principals, corporate
parents or third parties. See "Business -- Operating Strategy -- Underwriting
Lessee Credit".
UNDERWRITING SITE SELECTION. Prior to acquiring a property, the Company
engages in an extensive site review. The Company typically undertakes a
long-term viability and market value analysis, including an inspection of the
property and surrounding area by an acquisition specialist, and assessment of
market area demographics, consumer demand, traffic patterns, surrounding land
use, accessibility, visibility, competition and parking. The Company also (i)
obtains an independent appraisal of the property; (ii) obtains an independent
engineering report of the property's mechanical, electrical and structural
integrity; (iii) evaluates both the current and potential alternative uses of
the property; and (iv) obtains an independent Phase I environmental site
assessment. See "Business -- Operating Strategy -- Underwriting Site Selection".
MAINTENANCE OF RELATIONSHIPS WITH RESTAURANT CHAINS, RETAILERS AND
LESSEES. Once a business concept has been approved, the Company, with the
Advisor, seeks to develop a strong ongoing working relationship with national or
regional senior chain or retailer management. The Company believes that
establishing and maintaining such relationships with restaurant chains,
retailers and Lessees provides substantial advantages, including early
identification and resolution of problems affecting Lessees and referrals of
additional financing opportunities. See "Business -- Operating
Strategy -- Maintenance of Relationships with Restaurant Chains, Retailers and
Lessees".
ACTIVE MANAGEMENT OF LESSEE CREDIT. In addition to monitoring Lessee
compliance with Lease obligations, the Company regularly reviews the financial
condition of its Lessees and business, economic and market trends in order to
identify and anticipate problems with Lessee performance which could adversely
affect the Lessee's ability to meet Lease obligations. When potential problems
are identified, the Company seeks early intervention with its Lessees and, when
appropriate, national chain or retailer management in order to address and avoid
such problems. See "Business -- Operating Strategy -- Active Management of
Lessee Credit".
DIVERSIFICATION OF PROPERTY PORTFOLIO, RESTAURANT CHAINS, RETAIL CONCEPTS
AND LESSEES. The Company believes that it has achieved, and will continue to
emphasize, significant diversification of its portfolio both among retail and
restaurant concepts and Lessees. The Company's 79 Existing Properties located in
24 states currently are leased to 36 Lessees operating 18 different restaurant
and six retail concepts. The Company currently anticipates acquiring the 62
Acquisition Properties located in 22 states to be leased to 20 potential Lessees
operating 12 different restaurant and eight retail concepts, resulting in
further diversification of its portfolio. See "Business -- Operating
Strategy -- Diversification of Property Portfolio, Restaurant Chains, Retail
Concepts and Lessees ".
CREDIT FACILITY
Consistent with its investment policies the Company utilizes leverage to
enable it to fund its growth strategies, maintain operating flexibility and
enhance stockholder returns. The Company maintains a $150.0 million revolving
credit facility (the "Credit Facility") with an Affiliate of the lead managing
Underwriter. Upon completion of the Offering and the application of a
substantial portion of the net proceeds to repay the outstanding principal
balance and accrued interest under the Credit Facility, the Company will have no
material debt. The Company will continue to maintain the Credit Facility to fund
the future acquisition and development of properties. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
4
<PAGE> 8
FINANCING POLICY
Subject to economic conditions, the Company intends to maintain a policy
limiting its total indebtedness to 50.0% of the market value of its issued and
outstanding shares of capital stock plus the Company's total consolidated debt
("Market Capitalization"). This policy may be altered without the consent of the
Company's stockholders, and the Company's organizational documents do not limit
the amount of indebtedness that the Company may incur. When appropriate the
Company intends to utilize various sources of capital, including the Credit
Facility and the issuance of debt or equity securities in public or private
capital markets for future acquisitions, capital improvements and development.
See "Business -- Financing Policy".
RISK FACTORS
Prospective investors should carefully consider the matters discussed under
"Risk Factors" prior to investing in the Company. These risks include:
- Potential conflicts between the business interests of the Company and the
Advisor in the acquisition, selection, leasing and sale of the properties
and the operation of the Company.
- Dependence on the Advisor and Affiliates of the Company for significant
investment and management decisions.
- Dependence on Lessees for operating income and risks of Lessee defaults
on leases or franchise obligations resulting in the termination of
franchises, bankruptcy or other Lease termination events.
- Concentration of investment in certain Lessees and restaurant concepts.
- Risks inherent in investment in the foodservice and retail industries.
- The ownership, leasing, acquisition, development and expansion of the
properties, including risks of changes in economic and real estate market
conditions, changes in interest rates and the availability of financing,
impact of environmental laws and potential significant liabilities,
ongoing need for capital improvements and other factors beyond the
Company's control.
- Potential inability to acquire some or all of the Acquisition Properties.
- Potential need to incur substantial indebtedness to fund future
operations, acquisitions, expansion and stockholder distributions.
- Franchise relationships, including the possibility that a franchisor may
impose various increased costs, exercise options to buy or lease
properties and impose restrictions on a Lessee's ability to compete,
potential loss of franchises upon franchisee defaults and the uncertainty
and costs of renewing franchises upon their expiration.
- Intense competition, including for acquisition of properties.
- The Company's lack of experience in qualifying and operating as a REIT.
- Taxation of the Company as a corporation if it fails to qualify as a
REIT.
- Potential tax reclassification of preferred stock dividends and resulting
tax liability.
- Payment of a substantial portion of the Offering proceeds to an Affiliate
of the lead managing Underwriter.
- Restrictions on stock ownership impeding potential changes of control.
- Substantial and immediate dilution in the net tangible book value per
share to the purchasers of Common Stock in the Offering.
- The absence of a prior public market for the Common Stock.
5
<PAGE> 9
THE PROPERTIES
EXISTING PROPERTIES. The 79 Existing Properties are located in 24 states
and leased to 36 operators of 24 different restaurant and retail concepts. As of
June 30, 1997, the Existing Properties (which average four years of age) were
96.2% leased pursuant to Leases with an average remaining term (excluding
renewals) of approximately 16 years. The Existing Properties typically are
freestanding structures located on lots ranging from 20,000 to 80,000 square
feet for restaurant properties and up to 150,000 square feet for retail
properties. Typical building size ranges from 2,000 to 6,000 square feet for
restaurant properties and up to 40,000 square feet for retail properties. The
following is a summary description of the Existing Properties as of June 30,
1997. See "Business" for a detailed description of each Existing Property,
Lessee and related Lease terms.
<TABLE>
<CAPTION>
ANNUALIZED
FACILITY NO. OF ACQUISITION LOCATION ACQUISITION RENT AT
CONCEPT TYPE PROPERTIES DATE (STATE) COST JUNE 30, 1997(1)
- ------------------ ----------- ---------- ----------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Applebee's Restaurant 2 1996 MO,WA $ 3,876,444 $ 398,724
Arby's Restaurant 2 1997 GA,IN 1,292,807 128,009
Baby Superstore Retail 1 1996 MO 3,003,000 309,516
Black Angus Restaurant 4 1996 MN 9,219,000 1,005,108
Blockbuster Music Retail 1 1997 AL 1,449,000 147,480
Blockbuster Video Retail 2 1996 TX 1,554,000 160,500
BMW Retail 1 1997 GA 6,769,613 709,200
Boston Market Restaurant 27 1995-1997 IL,IN,MI,NJ 25,451,285 2,518,835
OH,OR,PA
SC,WA,WI
Burger King Restaurant 1 1997 WV 847,364 88,771
Carrows Restaurant 1 1996 CA 4,620,000 483,996
Church's Restaurant 1 1996 GA 835,321 87,516
Denny's Restaurant 9 1995-1997 AZ,FL,LA,NC,TX 8,017,134 824,867
Golden Corral Restaurant 2 1995-1997 FL,TX 3,829,309 387,322
Jack In The Box Restaurant 1 1996 CA 985,425 100,896
Kenny Rogers Restaurant 5 1995-1997 AZ,CA,FL 3,775,470 282,852
Roasters
Mountain Jack's Restaurant 3 1996-1997 MI,OH 4,105,500 426,192
Nissan Retail 1 1997 GA 3,092,250 323,952
Red Line Burgers Restaurant 2 1995 TX 533,994 30,000
Red Robin Restaurant 2 1996 CO,WA 6,124,417 679,224
Roadhouse Grill Restaurant 1 1995 NY 997,500 118,428
Stanford's Restaurant 1 1996 CO,WA 2,310,000 242,004
Taco Cabana Restaurant 3 1994-1996 GA,NV 3,631,975 380,868
Video Update Retail 2 1997 AZ,IL 2,311,108 243,648
Whataburger Restaurant 1 1997 NM 851,141 52,488
--
----------- ------------
Total 79 $99,483,057 $ 10,130,396
== =========== ============
<CAPTION>
% OF TOTAL LEASE
ANNUAL TERM
CONCEPT RENT EXPIRATION
- ------------------ ---------- ----------
<S> <C> <C>
Applebee's 3.9% 2016
Arby's 1.3 2017
Baby Superstore 3.1 2011
Black Angus 9.9 2021
Blockbuster Music 1.5 2006
Blockbuster Video 1.6 2005-2006
BMW 7.0 2017
Boston Market 24.9 2010-2025
Burger King 0.9 2012
Carrows 4.8 2016
Church's 0.9 2016
Denny's 8.1 2010-2017
Golden Corral 3.8 2009-2012
Jack In The Box 1.0 2009
Kenny Rogers 2.8 2005-2014
Roasters
Mountain Jack's 4.2 2016-2017
Nissan 3.2 2017
Red Line Burgers 0.3 2010
Red Robin 6.7 2016
Roadhouse Grill 1.1 2015
Stanford's 2.4 2016
Taco Cabana 3.7 2014-2016
Video Update 2.4 2012
Whataburger 0.5 2007
-----
Total 100.0%
=====
</TABLE>
- ---------------
(1) Based upon monthly rent as of June 30, 1997 as annualized and without giving
effect to any future rent increases or percentage rent or deduction for the
effect of three presently non-revenue producing properties which in the
aggregate accounted for $346,716 or 3.4% of annualized rent at June 30,
1997.
ACQUISITION PROPERTIES. As of September 1, 1997, the Company had
agreements in principle to purchase the 62 Acquisition Properties which are
located in 22 states for an aggregate cost of approximately $94.5 million. The
Acquisition Properties will expand the Company's existing portfolio into five
additional states and will further diversify its property, concept and Lessee
base to include operators of Circle K, Michael's Crafts, Office Depot,
SportsMart, Stop n Go, Taco Bell and Tony Roma's. The Company expects the
acquisitions of the Acquisition Properties to be substantially completed by July
1998. There is no assurance that the Company will be successful in acquiring any
or all of the Acquisition Properties. See "Risk Factors -- Risk Related to
Acquisition Properties".
6
<PAGE> 10
TAX STATUS OF THE COMPANY
The Company intends to elect to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ending December 31, 1997. If the Company
qualifies as a REIT, under current federal income tax law the Company generally
will not be subject to federal income tax on income distributed to stockholders
provided it distributes at least 95.0% of its REIT taxable income annually and
satisfies other organizational and operational requirements. If the Company
fails to qualify as a REIT in any taxable year, the Company will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at prevailing corporate rates, which effectively would impose on
the Company's stockholders the "double taxation" generally applicable to
investment in a corporation. The Company will receive an opinion of counsel
that, based on certain representations made by the Company and certain
assumptions, the Company will be organized in conformity with the requirements
for qualification as a REIT under the Code and that the method of operation of
the Company will permit the Company to continue to so qualify for its current
and future taxable years. See "Risk Factors -- Risk of Adverse Consequences of
Failure to Qualify as a REIT" and "Federal Income Tax Considerations". Even if
the Company qualifies for taxation as a REIT, it may be subject to certain state
and local taxes on its income and property and excise taxes on its undistributed
income, and will be subject to federal and state income tax on its undistributed
income.
THE OFFERING
All shares of Common Stock offered hereby are being offered by the Company.
Stockholders of the Company prior to the Offering will beneficially own 14.7% of
the Common Stock (13.0% if the Underwriters' over-allotment option is exercised
in full) outstanding immediately following the Offering.
<TABLE>
<S> <C>
Issuer....................................... Captec Net Lease Realty, Inc.
Offering..................................... 11,325,000 shares(1)
Shares outstanding after the Offering........ 13,273,773 shares(1)(2)
Use of Proceeds.............................. Repayment of indebtedness and redemption of,
and payment of accumulated dividends on,
Preferred Stock. See "Use of Proceeds".
Proposed NYSE Symbol......................... "CRR"
</TABLE>
- ---------------
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Does not include 727,000 shares of Common Stock reserved for issuance
pursuant to the Company's Long-Term Incentive Plan, and 600,000 shares of
Common Stock reserved for issuance upon exercise of options to be granted to
Messrs. Beach and Martin pursuant to their employment agreements. See
"Management -- Long-Term Incentive Plan" "-- Executive Compensation and
Employment Contracts", and "-- Compensation of Directors".
7
<PAGE> 11
DISTRIBUTION POLICY
In general, qualification as a REIT requires the annual distribution to
stockholders of at least 95.0% of the REIT's taxable income. Following the
completion of the Offering, the Company intends to pay regular quarterly
dividends to its stockholders. The Company anticipates, based on an assumed
initial public offering price of $15.00 per share, that the first dividend to
stockholders purchasing Common Stock in the Offering will be paid with respect
to the quarter ended December 31, 1997, based upon $ .2813 per share for a full
quarter (which if annualized, would be $1.125 per share or an annual
distribution rate of 7.5%). The Company does not intend to reduce the expected
dividend per share if the Underwriters' over-allotment option is exercised. The
Company has established its initial dividend policy based on information and
certain assumptions described herein. See "Distribution Policy". The Company
intends to maintain its initial distribution rate for the first 12 months
following the Offering, unless actual results of operations, economic conditions
or other factors differ from the assumptions used in its estimate, and to review
the dividend rate on a quarterly basis.
The Company intends to distribute annually approximately 80.0% of its Cash
Available for Distribution, although its initial distributions will approximate
97.1% of Cash Available for Distribution. In general, distributions by the
Company of its current or accumulated earnings and profits, other than capital
gain dividends, will be taxable to stockholders as ordinary income for federal
income tax purposes. The Company anticipates that approximately % of the
distributions intended to be paid by the Company for the 12-month period
following the completion of the Offering will represent a return of capital for
federal income tax purposes. For a discussion of the tax treatment of
distributions to stockholders, see "Federal Income Tax Considerations -- Other
Tax Considerations -- Taxation of Taxable Domestic Stockholders".
8
<PAGE> 12
SUMMARY FINANCIAL DATA
The summary historical financial data set forth below as of December 31,
1996 and December 31, 1995 and for each of the two years in the period ended
December 31, 1996 have been derived from the financial statements of the Company
included elsewhere herein which have been audited by Coopers & Lybrand L.L.P.,
independent accountants, and should be read in conjunction with those financial
statements (including the notes thereto) and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", all appearing
elsewhere in this Prospectus. The statement of operations data for the six
months ended June 30, 1997 and June 30, 1996 and the selected balance sheet data
as of June 30, 1997 have been derived from the Company's unaudited financial
statements appearing elsewhere in this Prospectus which, in the opinion of
management, reflect all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation. Results of operations for
interim periods are not necessarily indicative of results expected for the full
year.
The summary unaudited pro forma balance sheet data as of June 30, 1997 set
forth below is presented as if the transactions contemplated by this Prospectus,
including the Offering and the application of proceeds therefrom, had occurred
on June 30, 1997. The unaudited pro forma statement of operations data for the
six months ended June 30, 1997 and the year ended December 31, 1996 are
presented as if the transactions contemplated by this Prospectus, including the
Offering and the application of proceeds therefrom, had occurred on January 1,
1996. See "Use of Proceeds". The pro forma financial data set forth below is not
necessarily indicative of what the actual results of operations or financial
position of the Company would have been, nor do they purport to represent the
Company's results of operations or financial position for future periods. The
pro forma financial data should be read in conjunction with the Company's pro
forma financial statements and related notes and historical financial statements
and related notes included elsewhere in this Prospectus.
9
<PAGE> 13
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------------------ ------------------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
---------- ---------------------- ---------- ----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1997 1996 1996 1996 1995
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
REVENUE:
Rental income.......... $ 4,996 $ 4,996 $ 1,612 $ 4,907 $ 4,907 $ 614
Interest income on
investments......... 585 585 815 1,691 1,691 541
Interest income on
short-term loans.... 247 247 246 302 302 714
Other.................. 148 (3) 7 486 18 --
---------- --------- --------- ---------- --------- ---------
Total revenue.......... 5,976 5,825 2,680 7,386 6,918 1,869
EXPENSES:
Interest............... -- 2,707 423 -- 1,977 112
General and
administrative...... 837 1,075 511 1,435 1,218 329
Depreciation and
amortization........ 677 677 263 649 649 88
---------- --------- --------- ---------- --------- ---------
Total expenses......... 1,514 4,459 1,197 2,084 3,844 529
---------- --------- --------- ---------- --------- ---------
Income before income
tax.................... 4,462 1,366 1,483 5,302 3,074 1,340
Provision (credit) for
income tax............. -- (39) 372 -- 95 457
---------- --------- --------- ---------- --------- ---------
Net income............. 4,462 1,405 1,111 5,302 2,979 883
Redeemable Preferred
Stock Dividend
Requirements........... -- 3,750 3,750 -- 7,495 3,619
---------- --------- --------- ---------- --------- ---------
Income/(loss)
attributable to
Common Stock........ $ 4,462 $ (2,345) $ (2,639) $ 5,302 $ (4,516) $ (2,736)
========== ========= ========= ========== ========= =========
Income/(loss) per share
of Common Stock..... $ .34 $ (1.78) $ (2.01) $ .40 $ (3.43) $ (2.08)
========== ========= ========= ========== ========= =========
Weighted average number
of shares of Common
Stock outstanding... 13,273,773 1,315,440 1,315,440 13,273,773 1,315,440 1,315,440
========== ========= ========= ========== ========= =========
OTHER DATA:
Funds From Operations
(1)................. $ 5,139 $ 2,082 $ 1,374 $ 5,951 $ 3,628 $ 971
Total properties (at
end of period)...... 79 79 45 63 63 18
</TABLE>
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------------------- ----------------------
PRO FORMA HISTORICAL HISTORICAL
--------- ---------- ----------------------
(IN THOUSANDS)
1997 1997 1996 1995
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 33,765 $ 1,544 $ 3,862 $ 1,969
Properties subject to operating leases,
net....................................... 98,293 98,293 70,175 15,554
Total investments............................ 116,796 113,481 85,735 37,302
Total assets................................. 158,618 123,082 98,614 42,292
Notes payable................................ -- 72,922 48,160 1,588
Total liabilities............................ 1,730 74,652 49,215 2,121
Redeemable Preferred Stock (2)............... -- 48,429 49,399 40,000
Total stockholders' equity................... 156,888 1 1 171
</TABLE>
- ---------------
10
<PAGE> 14
(1) Industry analysts generally consider FFO to be an appropriate measure of the
performance of an equity REIT. In March 1995 the National Association of
Real Estate Investment Trusts ("NAREIT") adopted the NAREIT White Paper on
FFO (the "NAREIT White Paper") which provided additional guidance on the
calculation of FFO. FFO is defined by NAREIT as net income (computed in
accordance with generally accepted accounting principles ("GAAP")),
excluding gains (or losses) from debt restructuring and sales of property,
plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments for
unconsolidated partnerships and joint ventures. FFO does not represent cash
generated from operating activities in accordance with GAAP and is not
necessarily indicative of cash available to fund cash needs. In addition,
FFO should not be considered an alternative to net income as an indicator of
the Company's operating performance or as an alternative to cash flow as a
measure of liquidity or of the Company's ability to make distributions, nor
is it comparable to cash flows provided by operating activities determined
in accordance with GAAP. The Company computes FFO in accordance with the
NAREIT White Paper, which may differ from the methodology for calculating
FFO utilized by other equity REITs. Accordingly, the Company's FFO may not
be comparable to other equity REITs' FFO and does not represent amounts
available for distributions because of certain capital expenditures,
scheduled mortgage loan principal payments and other items. See
"Distribution Policy".
(2) Mandatory redemption value of $58,026, $56,651, and $42,905 at June 30,
1997, December 31, 1996 and December 31, 1995, respectively.
HISTORY AND FORMATION OF THE COMPANY
Net Lease Michigan was incorporated in Michigan in October 1994 and
commenced operations in February 1995. The Company was incorporated in Delaware
in August 1997 and in September 1997, Net Lease Michigan and Advisors Michigan
were merged into the Company. In this Prospectus, references to the "Company"
include the Company, Net Lease Michigan and Advisors Michigan as the context may
require.
The Company currently has outstanding 50,000 shares of Redeemable Preferred
Stock, $.01 par value (the "Preferred Stock"). Upon completion of the Offering,
40,500 shares of the Preferred Stock will be redeemed utilizing a substantial
portion of the net proceeds of the Offering and 9,500 shares of the Preferred
Stock will be exchanged for 633,333 shares of Common Stock, after which there
will be no Preferred Stock outstanding.
Captec Advisors was formed in August 1997 to provide, together with Captec
Financial and other Affiliates of the Company, daily management and investment
and financial advisory services to the Company pertaining primarily to the
acquisition, development and leasing of properties. See "Business -- The Advisor
and the Advisory Agreement".
Subsequent to completion of the Offering, the Company intends to acquire
the general partnership interests in each of Captec Franchise Capital Partners
L.P. III ("Captec III") and Captec Franchise Capital Partners L.P. IV ("Captec
IV") (each an "Affiliated Partnership", and collectively, the "Affiliated
Partnerships") from the corporate general partner of each Affiliated Partnership
and Patrick L. Beach, the Company's Chairman of the Board of Directors,
President and Chief Executive Officer. See "Business -- The Affiliated
Partnerships".
The Company's principal executive offices are located at 24 Frank Lloyd
Wright Drive, Ann Arbor, Michigan 48106, and its telephone number is (313)
994-5505.
11
<PAGE> 15
RISK FACTORS
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE
RISKS DESCRIBED BELOW. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
SPECIFIC FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS, BEFORE DECIDING TO INVEST IN THE COMMON STOCK OFFERED HEREBY.
THIS PROSPECTUS CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WHICH
REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING, BUT NOT LIMITED TO,
STATEMENTS CONCERNING INDUSTRY PERFORMANCE AND THE COMPANY'S OPERATIONS,
PERFORMANCE, FINANCIAL CONDITION, PLANS, GROWTH AND STRATEGIES. ANY STATEMENTS
CONTAINED IN THIS PROSPECTUS THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE
DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE
FOREGOING, WORDS SUCH AS "MAY", "WILL", "EXPECT", "ANTICIPATE", "INTEND",
"COULD", "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR
COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES,
CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING THOSE
DESCRIBED BELOW IN THIS "RISK FACTORS" SECTION AND ELSEWHERE IN THIS PROSPECTUS.
CONFLICTS OF INTEREST
The Company, the Advisor, and certain of the Company's directors and
executive officers will be subject to potential conflicts of interest arising
out of the relationships of the Company, the Advisor, such directors and
executive officers and the Affiliated Partnerships. The Company has adopted
certain procedures to limit or mitigate these potential conflicts and to promote
fair resolution of any conflicts which arise. See "Conflicts of
Interest -- Certain Conflict Resolution Procedures". There is no assurance that
these procedures will be effective or will not be changed, or that conflicts
will be resolved in the best interests of the Company and its stockholders. Any
failure to so resolve conflicts could have a material adverse effect on the
Company's financial condition and ability to make distributions to stockholders.
Potential conflicts include:
Business Opportunities. Affiliates of the Advisor have organized five real
estate investment funds, currently have other real estate holdings, and in the
future may form, offer interests in, and manage other real estate programs and
make additional real estate investments. Some of these have included, and may in
the future include, the acquisition and leasing of restaurant or retail
properties, including in transactions with existing or prospective Lessees of
the Company.
The Affiliated Partnerships are engaged in substantially the same business
as the Company, and their investments have included, and will include, the
acquisition and leasing of restaurant or retail properties, including in
transactions with existing or prospective Lessees of the Company.
Accordingly, future business opportunities which are suitable for, and
sought by, the Company also may be suitable for, and sought by, the Affiliated
Partnerships and Affiliates of the Advisor. The Advisor will be subject to
conflicts of interest in allocating opportunities among the Company and the
Advisor's Affiliates, and the Company will be subject to conflicts of interest
in allocating business opportunities between itself and each of the Affiliated
Partnerships. The Company has a fiduciary duty as general partner to the
Affiliated Partnerships. See "Risk as General Partner of Affiliated
Partnerships". The Advisor has disclaimed any fiduciary responsibility to the
Company in the Advisory Agreement, which further provides for certain
exculpation and indemnification of the Advisor by the Company. The directors and
executive officers of the Company who also are directors or executive officers
of the Advisor have fiduciary duties to each corporation for which they so
serve, and have been indemnified by the Company. See "Business -- The Advisor
and the Advisory Agreement".
12
<PAGE> 16
Business opportunities which must be allocated may include properties
available for acquisition and lease, preferred lessees, preferred contractors
and service providers, interested buyers for properties available for sale,
sources of capital or financing, allocation of management time and corporate
resources, negotiation of terms, utilization of favorable business
relationships, sharing of information, diversification of risk, avoidance of
competition and other matters. See "Conflicts of Interest -- Prior and Future
Programs", "-- Acquisition of Properties", and "-- Joint Investment with
Affiliates".
Management Time and Advisor Resources; Advisor Compensation. Messrs. Beach
and Martin, executive officers of the Company, are also executive officers of
the Advisor and its Affiliates. See "-- Risk of Dependence on Key Personnel and
Limited Management Group". These individuals, who are also the principal
stockholders of the Advisor, will allocate their time among the Company (and the
Affiliated Partnerships) and the Advisor and its Affiliates. The Advisor also
will allocate its resources among the Company and its other Affiliates and
interests. In certain instances, time and resources may be insufficient to
satisfy all demands. Further, certain fee compensation of the Advisor and the
Company as general partner of the Affiliated Partnerships is dependent on the
occurrence of specified transactions, which may encourage transactions of
uncertain investment merit in order to generate fee compensation. See "Conflicts
of Interest -- Competition for Management Time" and "-- Compensation of the
Advisor".
RISK OF RELIANCE ON MANAGEMENT AND CAPTEC ADVISORS; LACK OF STOCKHOLDER CONTROL
Stockholders will be relying substantially on the ability of management of
the Company and the Advisor, particularly with respect to the Company's
restaurant properties. Both the Company and Captec Advisors are newly formed and
have limited operating histories. Captec Advisors (which will rely substantially
on Captec Financial and its Affiliates, subject to the Board of Directors'
oversight), will be responsible for all aspects of the acquisition, financing,
development and leasing of the Company's restaurant properties and certain
aspects of the Company's retail properties. Upon completion of the Offering,
senior management will have significant control over the operations of the
Company as a result of their senior management positions, which influence may
not be consistent with the interests of other stockholders. Stockholders have no
right or power to participate in the management of the Company except through
the exercise of voting rights. The investment and financing policies of the
Company and its policies with respect to certain other activities, including its
growth, capitalization, distributions, REIT status and operating policies are
determined by the Board of Directors. These policies may be changed from time to
time at the discretion of the Board of Directors without a vote of the
stockholders and any such change could be detrimental to the interests of the
stockholders.
RISK RELATING TO CREDITWORTHINESS OF LESSEES AND FINANCIAL INSTRUMENTS
Although the Company requires prospective Lessees to satisfy its
substantial financial and credit underwriting requirements, the Company will
remain subject to the economic risk inherent in the leasing of property,
including that the financial condition of a Lessee may deteriorate over the term
of the Lease resulting in a default, causing an interruption in revenue from the
property and requiring the Company to obtain a new tenant at substantial
expense. The Company also has invested in a small number of equipment and
financing leases which are subject to similar economic and business risks. The
Company holds various financial instruments, some of which are subordinated to
the interests of senior lenders and the borrowers under some of which are
delinquent in the performance of their obligations. There is no assurance that
the borrowers under these instruments will be able to fulfill their obligations
to the Company or that any of these instruments could be sold for the amounts at
which they are recorded on the Company's financial statements.
RISK OF DEPENDENCE ON KEY PERSONNEL AND LIMITED MANAGEMENT GROUP
The Company is dependent on the efforts of Patrick L. Beach, its Chairman,
President and Chief Executive Officer, W. Ross Martin, its Executive Vice
President and Chief Financial Officer and a director, and Ronald Max, its Vice
President and Chief Investment Officer. Because the Company is substantially
dependent on the services of Messrs. Beach, Martin and Max and there currently
are no other executive officers of the Company, the Company may be considered to
have limited management. The loss of the services of any of these executive
officers could have a material adverse effect on the Company's financial
condition and its ability to make
13
<PAGE> 17
distributions to stockholders. Although the Company has entered into three-year
employment agreements with Messrs. Beach and Martin, those agreements may not
assure the continued service of either of them to the Company. See
"Management -- Executive Compensation and Employment Contracts". Moreover,
Messrs. Beach and Martin hold comparable positions with the Advisor, and
although the Advisor has many other employees, the services of Messrs. Beach and
Martin are equally important to the Advisor and to its ability to fulfill its
obligations to the Company. See "-- Conflicts of Interest".
RISK THAT ESTIMATED INITIAL CASH AVAILABLE FOR DISTRIBUTION MAY NOT BE
SUFFICIENT TO MAKE DISTRIBUTIONS AT EXPECTED LEVELS
The Company's proposed initial annual distributions following completion of
the Offering represent 97.1% of the Company's estimated initial Cash Available
for Distribution for the 12 months ending November 30, 1998. In the event that
the Company is not able to pay its estimated initial annual distribution of
$1.125 per share to stockholders out of Cash Available for Distribution, the
Company could be required to fund distributions from working capital, to attempt
to borrow for such distributions or to reduce the amount of such distributions.
Pending investment of the net proceeds, or in the event the Underwriters'
over-allotment option is exercised, the Company's ability to pay such
distribution out of Cash Available for Distribution may be further adversely
affected.
RISK OF OWNERSHIP AND LEASING OF PROPERTIES
Vulnerability to Market and Lessee Conditions. Investment in properties
leased to chain and franchised restaurants, specialty retailers or other
businesses may be affected by adverse changes in general or local economic or
market conditions, increased costs of energy or products, competitive factors,
fuel shortages, quality of management, ability of a franchisor to support its
franchisees, limited alternative uses for buildings, changing consumer habits or
foodservice or retailing trends, condemnation or uninsured losses, changing
demographics and traffic patterns, inability to remodel outmoded or limited
purpose properties as required by the franchise agreement or Lease due to
regulatory or other factors, voluntary or involuntary termination by a Lessee of
its obligations under a Lease or loss by a Lessee of its franchise or operating
rights and other factors. Real estate values also are affected by such factors
as government regulation, interest rates and the availability of financing and
potential liability under, and changes in, environmental, zoning, tax and other
laws.
The rent from the properties, which is the principal source of the
Company's income, and the Lessee's ability to pay rent are affected by these
general economic conditions within the franchise, foodservice and retail
industries as well as changes in consumer preferences and increased competition.
The failure of a particular franchise concept or a franchisor's inability to
support its franchisees could materially adversely affect the ability of a
franchisee to make lease payments, which could have a material adverse effect on
the Company's financial condition and its ability to make distributions to
stockholders. In the event of termination of a Lease or of a franchise agreement
between a Lessee and a franchisor, the Company may be unable to lease the
property on comparable terms and may incur a loss, and in any case is likely to
suffer an interruption of revenue and substantial expense as the property is
refurbished and relet. The Company will not be a party to franchise agreements
between franchisors and Lessees and such agreements could be modified or
canceled without notice to, or the prior consent of, the Company. Laws
regulating the franchise industry in various states may adversely affect the
ability of the Company to enforce contractual agreements or obtain remedies on
default. In the event of a default by a Lessee, the Company may experience
delays in enforcing, and incur substantial costs to enforce, its rights. A
default by the Lessee or other premature termination of a Lease could have a
material adverse effect on the Company's financial condition and its ability to
make distributions to stockholders. As a result of these and other factors,
including the cyclical nature of the real estate markets, the value of the
Company's properties could decrease. See "-- Risk Relating to Creditworthiness
of Lessees".
Market Illiquidity. The inherent illiquidity of real estate investment
will limit the ability of the Company to vary its portfolio expeditiously in
response to changing economic or other conditions. Pursuant to the Code and
related Treasury Regulations, the Company may incur adverse tax consequences in
connection with the sale of properties under certain circumstances. See "Federal
Income Tax Considerations".
14
<PAGE> 18
RISK FROM LEVERAGE
Although upon completion of the Offering the Company will have no material
debt, the Company anticipates that in the future some or all of the Company's
properties, including the Acquisition Properties, will be acquired primarily
with borrowings under the Credit Facility. Amounts borrowed under the Credit
Facility are general obligations of the Company secured by a first priority lien
on substantially all of the Company's tangible and intangible assets, including
its properties, the Leases and all rents derived therefrom, accounts receivable
and bank accounts. In borrowing under the Credit Facility to acquire or develop
a property, the Company anticipates that the funds needed to service any debt
attributable to that property will be derived from the income to be produced
from the property for which the indebtedness is incurred. Any default by a
Lessee of a property which has been acquired and/or developed utilizing
borrowings under the Credit Facility will require the Company to divert funds
from other sources in order to service that portion of the Company's obligations
under the Credit Facility. Further, the rental from any re-letting or the
proceeds from the sale of any property may be insufficient to satisfy related
debt service. The use of leverage, while intended to provide a greater rate of
return to stockholders by permitting the Company to acquire properties of
greater aggregate cost than would otherwise be possible, also increases the
Company's risk of loss.
Upon completion of the Offering and the repayment of all amounts
outstanding under the Credit Facility, the Company will be able to borrow up to
$150.0 million under the Credit Facility subject to satisfaction of conditions
set forth in the Credit Facility for such borrowing, including with respect to
the value of property pledged as collateral. The Credit Facility will expire
approximately two years after the completion of the Offering, at which time the
entire outstanding balance of the Credit Facility will mature. Since the Company
intends to grow its portfolio aggressively through the acquisition of additional
properties utilizing funds from the Credit Facility and to lease those
properties on a long-term basis, it is likely the Company will not have
sufficient funds available to repay the outstanding balance of the Credit
Facility upon its maturity. Accordingly, the Company would be required to obtain
the funds necessary to repay the Credit Facility at maturity either through the
refinancing of the Credit Facility, the issuance of additional equity or debt
securities or the sale of properties. The Company has not received a commitment
from any institutional or other lender or investor to loan the funds or purchase
any of the Company's equity or debt securities which the Company may seek to
issue to refinance its indebtedness under the Credit Facility. If the Company
were unable to obtain funds to repay indebtedness on acceptable terms, or at
all, the Company might be forced to dispose of properties or take other actions
upon disadvantageous terms, which could result in losses to the Company and have
a material adverse effect on the Company's financial condition and its ability
to make distributions to stockholders. Pursuant to the Code and related Treasury
Regulations, the Company may incur adverse tax consequences in connection with
the sale of properties under certain circumstances. See "Federal Income Tax
Considerations". For these reasons, there is no assurance that the Company will
be able to repay the Credit Facility upon its maturity. Any default by the
Company under the Credit Facility would subject the Company to risk of
foreclosure on substantially all of its assets, including the properties, to the
extent necessary in order to repay any amounts due under the Credit Facility
including, but not limited to, principal, interest, penalties or other costs and
expenses incurred in the event of a default. Any such default would have a
material adverse effect on the Company's financial condition and its ability to
make distributions to stockholders.
RISK RELATED TO INTEREST RATE INCREASES
The interest rate on borrowings under the Credit Facility is a variable
rate based on prevailing short-term rates while the rents from Leases vary in
accordance with their terms, generally based primarily on periodic increases.
Changes in interest rates and rents are unlikely to be uniform, and increases on
interest rates on borrowings may exceed increases in related rents, potentially
for sustained periods of time. Similarly, interest rates or other costs of funds
to refinance the Credit Facility may be higher than those prevailing under the
Credit Facility without any corresponding increase in rental rates. Such
increases in costs of funds could have a material adverse effect on the
Company's financial condition and its ability to make distributions to
stockholders.
Increases in interest rates may also decrease the value of the Company's
properties, including as collateral, and the Company's ability to borrow.
Increases in interest rates also may adversely affect the value of the
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Common Stock as compared to alternative investments, and other REITs. See
"-- Risk of Ownership and Leasing of Properties".
RISK OF COMPETITION
The restaurant and retail chain finance industry is characterized by
intense competition. The Company will compete with other restaurant and retail
finance companies (some of which are REITs), commercial banks, other financial
institutions and certain franchisors which offer financing services directly to
their franchisees. The Company considers Franchise Finance Corporation of
America, Realty Income Trust and Commercial Net Lease Realty, Inc. to be its
primary competitors among REITs. Some of these competitors for investment
opportunities have substantially greater financial resources than the Company.
These entities generally may be able to accept more risk than the Company
prudently can manage, including risk with respect to the creditworthiness of
lessees or risk related to geographic or other concentration of investment. Such
competition may reduce the number of suitable investment properties available to
the Company and increase the bargaining position of the owners of those
properties.
RISK OF LESSEE AND CONCEPT CONCENTRATION
For the six months ended June 30, 1997, two of the Company's Lessees,
United Auto Group, Inc. (which leases two retail properties in Georgia) and ARG
Enterprises, Inc. (which leases four Black Angus restaurant properties in
Minnesota) accounted for 10.2% and 9.9%, respectively, of the Company's total
annual rent from its properties. At such date operators of Boston Market
restaurants were the Lessees of 27 of the Company's properties in 10 states
which accounted for 24.9% of the Company's total annual rent. Accordingly, the
Company is significantly dependent on revenues derived from these Lessees as
well as the continued success of the Boston Market and Black Angus restaurant
concepts. The loss of either of these significant Lessees or a material adverse
change in the popularity of either the Boston Market or Black Angus restaurants
could have a material adverse effect on the financial condition of the Company
and its ability to make distributions to stockholders. Although the Company
seeks to diversify its Lessee and concept base, there is no assurance it will be
successful in doing so and may continue to be substantially reliant on the
success of specific Lessees and concepts for the foreseeable future. See
"Business -- Properties".
RISK AS GENERAL PARTNER OF AFFILIATED PARTNERSHIPS
Subsequent to the completion of the Offering, the Company will become the
sole general partner of Captec III and Captec IV, each of which is a Delaware
limited partnership engaged in substantially the same business as the Company.
Both Affiliated Partnerships have publicly offered securities under the
Securities Act of 1933, as amended (the "Securities Act") and have numerous
limited partners. The offering of Captec IV is continuing at the date of this
Prospectus. See "Business -- The Affiliated Partnerships". As part of the
acquisition of general partnership interests in Captec III and Captec IV, and in
addition to their existing rights of indemnification from the Affiliated
Partnerships, the Company has agreed to indemnify the former general partners,
including Mr. Beach, from certain liabilities incurred in their capacity as
such, including liabilities under the Securities Act. See "-- Limited Liability
and Indemnification of Officers, Directors and the Advisor". The acquisition by
the Company of the general partnership interests in the Affiliated Partnerships
is contingent on the approval of a majority in interest of the limited partners
of each of the Affiliated Partnerships. There is no assurance that the limited
partners of either or both Affiliated Partnership(s) will approve the
transaction and that the Company will be successful in acquiring the general
partnership interest in either or both Affiliated Partnership(s).
The Company's rights, responsibilities and obligations as the general
partner of each Affiliated Partnership are set forth in the respective
partnership agreements or arise at law. As a general partner, the Company will
own a 1.0% interest in each Affiliated Partnership and be responsible for all
recourse obligations of each Affiliated Partnership to the extent of any
insufficiency of partnership assets. For a description of certain liabilities of
the Affiliated Partnerships, see "Business -- The Affiliated Partnerships". As
the general partner, the Company will also owe the limited partners of each
Affiliated Partnership a fiduciary duty; for the breach of this duty, or of
other obligations under the partnership agreements or at law, the Company may be
liable to the limited partners
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or others. Because the Company and the Affiliated Partnerships are engaged in
substantially the same business, conflicts of interest may arise between the
interests of the Company's stockholders and the interests of the limited
partners.
As general partner, the Company will be entitled to its allocable share of
partnership income or loss in respect of its 1.0% interest, certain additional
income or loss in certain circumstances, certain fees for its services, and the
reimbursement of certain expenses from the Affiliated Partnerships. See
"Business -- The Affiliated Partnerships". Generally, such income and fees
including certain income allocated to the Company with respect to its 1.0%
interest will not qualify for the 95.0% income test applicable to REITs, and all
such income and other non-qualifying income must aggregate less than 5.0% of the
Company's income in any year for the Company to qualify as a REIT. Moreover, for
purposes of the income and asset tests described in "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT", the Company will be
treated as owning a proportionate share of the assets of the Affiliated
Partnerships, and as earning a proportionate share of the income of the
Affiliated Partnerships, which own Affiliated Partnerships assets and have
income which are "nonqualifying" for certain REIT requirements under the Code.
The accumulation by the Affiliated Partnerships of such assets or accrual of
such income could result in the Company failing to meet these tests and failing
to qualify as a REIT. In addition, in the event either Captec III or Captec IV
loses its classification as a partnership for federal income tax purposes for
any reason (such as the excessive transferability of partnership interests) the
Company could cease to be qualified as a REIT which would have a material
adverse effect on the Company's financial condition and its ability to make
distributions to stockholders. See "Federal Income Tax Considerations --
Requirements for Qualification as a REIT". The need to resolve these matters in
the Company's interest may create additional conflicts of interest. See
"-- Conflicts of Interest".
RISK RELATED TO ACQUISITION PROPERTIES
As of September 1, 1997, the Company had agreements in principle to acquire
the 62 Acquisition Properties located in 22 states for an aggregate cost of
approximately $94.5 million. The Acquisition Properties are material to the
Company's current growth strategy. Although the Company and sellers of the
Acquisition Properties have reached agreement on certain fundamental terms of
each of the proposed acquisitions, the consummation of each acquisition by the
Company remains contingent upon the negotiation, execution and closing of
definitive agreements and numerous other factors and contingencies, many of
which are beyond the control of the Company. For these reasons, there is no
assurance that the Company will be successful in acquiring any of the
Acquisition Properties. The Company's ability to make distributions may be
adversely affected if it is unsuccessful in acquiring some or all of the
Acquisition Properties and unable to obtain satisfactory alternative investments
for an extended period of time. There also is no assurance that any of the
Acquisition Properties which may be acquired by the Company will perform
satisfactorily.
RISK OF JOINT VENTURES
Some of the Company's future investments may be owned by joint ventures
between the Company and others, including Affiliates. Joint ventures are subject
to the potential risk of impasse in business decisions where the approval of
each venturer is required. Joint venture ownership of properties also may
involve risks not otherwise present in sole ownership, including that the
Company's co-venturer might become bankrupt or have economic or business
interests or goals inconsistent with those of the Company, or may act contrary
to the Company's interests, subjecting the joint venture to unanticipated
liabilities. See "Business -- Growth Strategy -- Acquisitions from Developers".
RISK OF ACQUIRING PROPERTIES UNDER CONSTRUCTION
Under certain circumstances the Company may acquire the site on which a
particular property is to be built prior to commencement or completion of
construction. To the extent the Company acquires property on which improvements
are to be constructed or completed, the Company may be subject to certain risks
from the builder's inability to control construction costs or to build in
conformity with plans, specifications and timetables. The builder's failure to
perform its contractual obligations may necessitate legal action by the Company
to rescind its
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purchase of a property (which may not be possible in the case of certain
property where the site is purchased prior to completion), to compel performance
or to seek damages. Any such legal action would result in increased costs to the
Company. In any case in which improvements are to be constructed or completed or
in which a property is not yet in operation, the Company will be subject to
additional risks, including the risks of delay in completion and the resulting
delay in receipt of rental income and that the Lessee will not be successful.
See "Business -- Operating Strategy -- Construction and Renovation".
RISK OF RECHARACTERIZATION OF SALE/LEASEBACK TRANSACTIONS
Frequently, the Company enters into sale/leaseback transactions, pursuant
to which the Company purchases a property and leases it back to the seller. In
the event of the bankruptcy of a seller-Lessee, a sale/leaseback transaction may
be recharacterized as either a financing or a joint venture resulting in adverse
economic consequences to the Company. If the transaction is recharacterized as a
loan, the Company may be required to recognize a repayment of principal, thereby
losing the benefit of any rent participation payments it would otherwise have
been entitled to receive. Similar adverse consequences can result if the
transaction is recharacterized as a joint venture between the Company and a
Lessee.
RISK OF UNINSURED LOSSES; COSTS AND AVAILABILITY OF INSURANCE
Each Lessee is required to obtain comprehensive insurance for the
properties, including casualty, liability, fire and extended coverage in amounts
and on other terms satisfactory to the Company. There are certain types of
losses (generally of a catastrophic nature, such as earthquakes, hurricanes,
floods and civil disorder) which are either uninsurable or not economically
insurable. The destruction of, or significant damage to, property due to an
uninsurable cause would result in an economic loss to the Company and could
result in the Company losing both its investment in, and anticipated profits
from, such property. Even in the event that a loss is insured, the coverage may
be insufficient in amount or duration (as in the case of business interruption
insurance), or a Lessee's customers may be lost, such that the Lessee cannot
resume its business after the loss at prior levels or at all, resulting in
reduced rent or a default under its Lease. Any such loss could have a material
adverse effect on the financial condition of the Company and its ability to make
distributions to stockholders.
The Company carries insurance against such risks and in such amounts as it
believes is customary for businesses of its kind. However, the costs and
availability of insurance change, and the Company is not covered presently, and
may not be covered in the future, against certain losses where the cost or
availability of coverage or the remoteness of perceived risk does not, in the
judgment of management, warrant it. There is no assurance that the Company's
insurance against loss is, or will be, sufficient.
RISK OF POTENTIAL ENVIRONMENTAL LIABILITY
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property and may be held liable to a governmental
entity or to private parties for property damage and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws typically impose clean-up responsibility and liability without regard
to whether the owner knew or caused the presence, of the contaminants, and the
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure properly to remediate the contamination on such property, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances at a disposal or treatment facility also may be
liable for the costs of removal or remediation of a release of hazardous or
toxic substances at such disposal or treatment facility, whether or not such
facility is owned or operated by such person. In addition, some environmental
laws create a lien on the contaminated site in favor of the government for
damages and costs incurred in connection with the contamination. Finally, the
owner of a site may be subject to common law claims by third parties for damages
and costs resulting from environmental contamination emanating from such site.
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Certain federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials
("ACM") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACM and may permit third parties to seek
recovery from owners or operators for personal injury resulting from ACM. In
connection with its ownership and operation of the properties, the Company may
be potentially liable for such costs.
In the past few years, independent environmental consultants have conducted
or updated environmental site assessments, including Phase I and Phase II site
assessments, and other environmental investigations as appropriate
("Environmental Site Assessments") at the Existing Properties. These
Environmental Site Assessments have included, among other things, a visual
inspection of the Existing Properties and the surrounding area, employee
interviews and a review of relevant state, federal and historical documents.
Soil and groundwater sampling was performed where warranted and remediation, if
necessary, has been or is being conducted. The Company currently is not
directing or paying the costs of any remediation or monitoring work at any
Existing Property. In addition, where possible, the Company has entered into
indemnification agreements with current Lessees and/or prior owners at certain
of the Existing Properties where potential environmental issues have been
raised, but have been remediated or otherwise resolved.
The Environmental Site Assessments of the Existing Properties have not
revealed any environmental liability that the Company believes would have a
material adverse effect on the Company's financial condition or ability to make
distributions to stockholders, nor is the Company aware of any such material
environmental liability. Nevertheless, it is possible that the Company's
Environmental Site Assessments do not reveal all environmental liabilities and
that there are material environmental liabilities of which the Company is
unaware. Moreover, there is no assurance that (i) future laws, ordinances or
regulations will not impose any material environmental liability or (ii) the
current environmental condition of the Existing Properties or any future
properties, including the Acquisition Properties, will not be affected by
Lessees, by the condition of land or operations in the vicinity of the
properties (such as the presence of underground storage tanks), or by third
parties unrelated to the Company.
The Company has not been notified by any governmental authority, and is not
otherwise aware, of any material noncompliance, liability or claim relating to
hazardous or toxic substances or petroleum products in connection with ownership
of any of the Existing Properties. As part of its underwriting procedures, the
Company will obtain Environmental Site Assessments for all future properties,
including the Acquisition Properties.
RISK RELATED TO AMERICANS WITH DISABILITIES ACT COMPLIANCE
Under the American with Disabilities Act (the "ADA"), places of public
accommodation or commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. Although the Company
believes the Existing Properties are materially in compliance with the present
requirements of the ADA, the Company may incur additional costs in connection
with ADA compliance in the future. Also, the ADA and other federal, state and
local laws and regulations concerning access by disabled persons may require
modifications to the Company's properties. Non-compliance with the ADA could
result in the imposition of fines, awards of damages to private litigants or an
order to correct non-compliance. Although under the Company's Leases, the
Lessees are responsible for ensuring that the properties comply with all laws
and regulations, including the ADA, this contractual responsibility does not
relieve the Company of its obligations under the ADA in the event of any
non-compliance by a Lessee and, notwithstanding the provisions of the Leases,
the Company may be required to make substantial capital expenditures to comply
with the ADA.
RISK RELATED TO SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, all 11,325,000 shares of Common Stock
offered hereby will be eligible for public sale under the Securities Act,
without restriction, except for shares acquired in the Offering by Affiliates.
In addition, of the remaining shares of Common Stock to be outstanding
immediately after the Offering, 1,315,440 will be eligible for immediate resale
under Rule 144 promulgated under the Securities Act ("Rule 144"), subject to
Rule 144's volume, manner of sale and other restrictions, and 633,333 shares
will be so eligible upon satisfaction of such conditions and of a one year
holding period. The Company also may, at any
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time following the completion of the Offering, register 1,327,000 shares of
Common Stock reserved for issuance pursuant to its Long-Term Incentive Plan and
upon exercise of options to be granted to Messrs. Beach and Martin pursuant to
their employment agreements. The Company also has agreed to register 633,333
shares of the Common Stock to be issued to an Affiliate in exchange for shares
of unredeemed Preferred Stock in the event of a subsequent public offering of
Common Stock by the Company or upon demand at any time subsequent to 180 days
following the completion of the Offering. In addition, the Company has the
authority to issue additional shares of Common Stock and shares of one or more
series of the Preferred Stock. The issuance of such shares could result in the
dilution of voting power of the shares of Common Stock purchased in the Offering
and could have a dilutive effect on earnings per share. The Company currently
has no plans to designate and/or issue any additional shares of Preferred Stock.
Future sales of substantial amounts of Common Stock, or the potential for such
sales, could adversely affect prevailing market prices. The Company and its
officers, directors and all current stockholders each have agreed that they will
not, without the prior written consent of Credit Suisse First Boston
Corporation, the lead managing Underwriter, offer, sell, contract to sell, grant
any option to purchase or otherwise dispose of any shares of Common Stock or any
securities convertible into, exercisable or exchangeable for such Common Stock
or in any other manner transfer all or a portion of the beneficial ownership of
such Common Stock for a period of 180 days from the date of this Prospectus. See
"Shares Eligible for Future Sale".
RISK OF ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company intends to operate to qualify as a REIT under the Code
commencing with its taxable year ending December 31, 1997. The Company does not
have any operating history or experience in qualifying, or operating in
accordance with the requirements for maintaining qualification, as a REIT and
there is no assurance that the Company will qualify or, once qualified will
remain qualified, as a REIT. There is no assurance that new legislation,
regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. Qualification as a REIT
involves the application of highly technical and complex Code provisions for
which there are only limited judicial and administrative interpretations. The
determination of various factual matters and circumstances not entirely within
the Company's control may affect the Company's ability to qualify as a REIT. For
example, in order to qualify as a REIT, at least 95.0% of the Company's gross
income in any year must be derived from qualifying sources, and the Company must
make distributions to stockholders aggregating annually at least 95.0% of its
REIT taxable income (excluding capital gains). The Company intends to make
distributions to its stockholders to comply with the distribution provisions of
the Code. Although the Company anticipates that its cash flows from operations
will be sufficient to pay its operating expenses and meet distribution
requirements, no assurance can be given in this regard.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates, and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its stockholders. Unless entitled to relief under certain
statutory provisions, the Company also would be ineligible for qualification as
a REIT for the four taxable years following the year during which qualification
was lost. Such disqualification would reduce the net earnings of the Company
available for investment or distribution to its stockholders due to the
additional tax liability of the Company for the years involved. See "Federal
Income Tax Considerations -- Requirements for Qualification as a REIT -- Failure
to Qualify".
RISK RELATED TO REIT MINIMUM DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company generally will be required to
distribute to stockholders annually at least 95.0% of its net taxable income
(excluding any net capital gain). The Company will be subject to a 4.0%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of 85.0% of
its ordinary income plus 95.0% of its capital gain net income for that year plus
amounts not distributed in prior years. The Company intends to make
distributions to its stockholders to comply with the 95.0% distribution
requirement and to avoid the nondeductible excise tax. The Company's income will
consist primarily of its income from the properties. Differences in timing
between taxable income and receipt of Cash Available for Distribution and the
seasonality of certain industries or a default
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or Lease termination could cause the Company to have taxable income without
sufficient cash to make the annual distributions required of a REIT under the
Code. In such cases, the Company could be compelled to seek to borrow, or to
liquidate investments on disadvantageous terms, in order to meet the
distribution requirements. See "Business" and "Federal Income Tax
Considerations". Distributions will be determined by the Board of Directors and
will depend on a number of factors, including the amount of Cash Available for
Distribution, the Company's financial condition, any decision by the Board of
Directors to reinvest rather than distribute available funds, the Company's
capital expenditures, the annual distribution requirements under the REIT
provisions of the Code and any other factors the Board of Directors deems
relevant. See "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT -- Annual Distribution Requirements".
RISK RELATED TO FAILURE TO DISTRIBUTE NON-REIT EARNINGS AND PROFITS
The Company was incorporated in Delaware in August 1997 and in September
1997 Net Lease Michigan and Advisors Michigan were merged into the Company in a
transaction in which the Company succeeded to the earnings and profits of the
merged companies. Under the Code, a company with earnings and profits
accumulated in a non-REIT year must distribute all of such earnings and profits
by the end of the year in which it elects to be taxed as a REIT in order to
qualify as a REIT. If for any reason the Company fails to distribute all such
earnings and profits by December 31, 1997, the Company will fail to qualify as a
REIT. See " -- Risk of Adverse Consequences of Failure to Qualify as a REIT" and
"Federal Income Tax Considerations -- Requirements for Qualification as a
REIT -- Failure to Qualify".
RISK RELATED TO OTHER TAX LIABILITIES
Even if the Company qualifies as a REIT for federal income tax purposes, it
may be subject to certain federal, state and local taxes on its income and
property and excise taxes on its undistributed income, and will be subject to
federal and state income taxes on its undistributed income. See "Federal Income
Tax Considerations -- Other Tax Considerations -- State and Local Taxes".
The Company has deducted from its income for federal income tax purposes
the dividends paid on the Preferred Stock as interest expense, and has not
withheld any amounts in respect of such distributions to the holder of the
Preferred Stock. If the deduction or failure to withhold is challenged by the
Internal Revenue Service (the "IRS"), the Company could be assessed and
ultimately required to pay income and withholding taxes which, as of June 30,
1997, could aggregate up to $3.4 million, plus interest and costs of defense.
The Company's financial statements reflect as of June 30, 1997 an aggregate
provision of $875,000 which represents, in accordance with GAAP, the minimum
amount (exclusive of costs of defense) the Company believes would be necessary
to settle any claim brought by the IRS. There is no assurance that if any claim
is asserted, it could be settled for $875,000 or any amount less than the entire
claim. See Note 9 to Financial Statements.
RISK OF CHANGES IN TAX LAWS
The discussion of the federal income tax aspects of the Offering is based
on current law, including the Code, the Regulations, certain administrative
interpretations thereof and court decisions. Future events that modify or affect
prevailing law may result in federal income tax treatment of the Company and the
stockholders that is materially and adversely different from that described in
this Prospectus, both for taxable years arising before and after such events.
There is no assurance that future legislation and administrative interpretations
will not be retroactive in effect.
RISK RELATED TO REPAYMENT OF INDEBTEDNESS TO AFFILIATE OF LEAD MANAGING
UNDERWRITER
Credit Suisse First Boston Mortgage Capital, L.L.C. ("CSFBMC"), an
Affiliate of Credit Suisse First Boston Corporation, will receive approximately
$107.1 million of the net proceeds of the Offering for the repayment of the
outstanding principal balance of, and accrued interest on, the Credit Facility.
See "Underwriting".
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RISK RELATED TO CERTAIN ANTI-TAKEOVER EFFECT OF LIMITATION ON OWNERSHIP OF
COMMON STOCK
In order for the Company to maintain its qualification as a REIT, not more
than 50.0% in value of the outstanding Common Stock of the Company may be owned,
directly or indirectly, by five or fewer individuals. The Company's Certificate
of Incorporation (the "Certificate") prohibits ownership of more than 9.8% of
the Common Stock by any single stockholder following completion of the Offering,
with certain exceptions. A holder of Common Stock may be prohibited from
increasing its holdings of Common Stock. Generally prohibiting any stockholder
from owning more than 9.8% of the Common Stock may (i) discourage a change in
control of the Company; (ii) deter tender offers for the Common Stock, which may
otherwise be beneficial to the Company's stockholders; or (iii) limit the
opportunity for stockholders to receive a premium for their Common Stock that
could be obtained from an investor attempting to assemble a block of Common
Stock in excess of 9.8% or to effect a change in control of the Company.
Certain tender offers and invitations for tender for more than 10.0% of the
outstanding shares of the Company's Common Stock also may be subject to Section
203 of the Delaware General Corporation Law (the "GCL"). See "Capital Stock of
the Company -- Delaware Business Combination Provisions".
The Certificate authorizes the Board of Directors to issue up to 10,000,000
shares of Preferred Stock and to designate certain preferences and rights of any
such shares. Upon completion of the Offering, a substantial portion of the net
proceeds of which will be utilized to redeem 40,500 shares of Preferred Stock
from an Affiliate, and the Affiliate will exchange 9,500 shares of Preferred
Stock for 633,333 shares of the Common Stock, after which no Preferred Stock
will be outstanding. The Company has no current intention to issue any
additional Preferred Stock. The future issuance of any Preferred Stock with
preferential dividend rights would reduce the Cash Available for Distribution to
the holders of Common Stock. The issuance of shares of Preferred Stock also
could delay or prevent a change in control of the Company even if a change in
control otherwise was in the stockholders' interest. See "Capital Stock of the
Company -- Preferred Stock".
RISK RELATED TO NO LIMITATION ON DEBT
Although the Board of Directors has adopted a policy to limit the Company's
indebtedness to 50.0% of Market Capitalization, the organizational documents of
the Company do not limit the amount or percentage of indebtedness that the
Company may incur. The Board of Directors, without stockholder approval, could
alter the Company's borrowing policy at any time. If this policy were changed,
the Company could become more highly leveraged, resulting in an increase in debt
service expense that could materially adversely affect the Company's financial
condition and its ability to make distributions to stockholders and increase the
Company's risk of default on its obligations. See "-- Risks from Leverage" and
"Business -- Financing Policy".
LIMITED LIABILITY AND INDEMNIFICATION OF OFFICERS, DIRECTORS AND THE ADVISOR
The Certificate and Bylaws of the Company (the "Bylaws") provide that an
officer or director's liability to the Company, its stockholders or third
parties for monetary damages may be limited. Generally, the Company is obligated
under the Certificate and the Bylaws to indemnify its officers and directors
against certain liabilities incurred in connection with their service in such
capacities. The Company has executed indemnification agreements with each
officer and director requiring indemnification by the Company for most
liabilities incurred. Pursuant to the Advisory Agreement, the Company has agreed
that the Advisor, which includes Captec Advisors, Captec Financial and other
Affiliates, will not be liable to the Company, its stockholders or others,
except for acts constituting fraud, willful misconduct or reckless disregard of
its obligations under the Advisory Agreement, and will not be responsible for
any action of the Board of Directors in following or declining to follow any
advice or recommendation given by the Advisor. The Company also has agreed to
indemnify the Advisor with respect to acts or omissions of the Advisor
undertaken in good faith, in accordance with, and pursuant to, the requirements
of the Advisory Agreement. The foregoing provisions and agreements could limit
the legal remedies available to the Company and its stockholders against such
persons, and could require the Company to pay amounts, which could be material,
to such persons for their defense or in satisfaction of their obligations. See
"Management -- Indemnification and Limitation of Liability".
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RISK RELATED TO DILUTION
Purchasers of the Common Stock in the Offering will experience immediate
and substantial dilution of $3.25 per share from the initial public offering
price in the net tangible book value per share of the Common Stock. See
"Dilution".
ABSENCE OF PRIOR PUBLIC MARKET FOR THE COMMON STOCK
Prior to the Offering, there has been no public market for the Common
Stock. There is no assurance that an active trading market will develop or be
sustained following the Offering or that at any time the Common Stock may be
resold at or above the initial public offering price. The initial public
offering price will be determined through negotiations between the Company and
the representatives of the Underwriters (the "Representatives") without
independent appraisals or other valuations and may not be indicative of the
value of the Company's assets or the market price of the Common Stock after the
Offering. See "Underwriting".
23
<PAGE> 27
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after payment of
Offering expenses, are estimated to be approximately $157.0 million ($180.7
million if the Underwriters' over-allotment option is exercised in full), based
on the assumed initial public offering price of $15.00 per share.
The Company will use the net proceeds approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF NET
APPLICATIONS OF PROCEEDS DOLLAR AMOUNT PROCEEDS
- --------------------------------------------------------------- ------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Repayment of Credit Facility(1)................................ $ 107,050 68.2%
Redemption of, and payment of accrued dividends on, the
Preferred Stock(1)........................................... 47,686 30.4
Repayment of notes payable..................................... 2,248 1.4
------------- ------
Total........................................................ $ 156,984 100.0%
============= ======
</TABLE>
- ---------------
(1) Projected balances at October 31, 1997.
The Company will use approximately $107.1 million of the net proceeds of
the Offering to repay the outstanding principal balance of and accrued interest
on, the Credit Facility with CSFBMC, an Affiliate of the lead managing
Underwriter. The Credit Facility currently accrues interest on its outstanding
principal balance at a variable annual rate of LIBOR for U.S. dollar deposits
with 30 day maturities (the "Benchmark Rate") in effect from time to time plus
2.318% (the "Revolving Loan Rate"). As of June 30, 1997, the Benchmark Rate was
5.691% and the Revolving Loan Rate was 8.009%. Upon completion of the Offering,
the Revolving Loan Rate will be reduced to the Benchmark Rate plus 1.75% and the
expiration date of the Credit Facility (currently February 26, 1998) will be
extended until the second anniversary of the completion of the Offering.
The Company will use approximately $47.7 million of the net proceeds of the
Offering to redeem Preferred Stock from an Affiliate, and for the payment of
approximately $7.2 million in accumulated but unpaid dividends on the Preferred
Stock for 1997, 1996 and 1995.
The Company will use approximately $2.3 million of the net proceeds of the
Offering to repay the outstanding principal balance of, and accrued interest on,
two notes payable to Heller Financial. These notes bear interest at fixed annual
rates of 9.85% and 10.35%, respectively, and mature in 1999 and 2001,
respectively.
If the Underwriters' over-allotment option is exercised, the additional net
proceeds will be used for working capital and general corporate purposes,
including possible financing of the Acquisition Properties. Pending the
described uses, the net proceeds may be invested in interest-bearing accounts
and short-term interest-bearing securities consistent with the Company's
intention to qualify as a REIT. These investments may include government and
government agency securities, certificates of deposit, and interest-bearing bank
deposits.
DISTRIBUTION POLICY
Subsequent to the Offering, the Company intends to make quarterly
distributions to stockholders. The first dividend, for the period commencing
upon the completion of the Offering and ending December 31, 1997, is anticipated
to be in a prorated amount approximately equivalent to a quarterly distribution
of $.2813 per share (which, if annualized, would equal $1.125 per share), or an
annual yield of 7.5% per share based on an assumed initial public offering price
of $15.00 per share. The Company does not intend to reduce the expected
distribution per share if the Underwriters' over-allotment option is exercised.
The Company intends to distribute annually approximately 80.0% of its Cash
Available for Distribution, although its initial distributions will approximate
97.1% of its estimated Cash Available for Distribution. Such distribution amount
could change if actual results from operations, economic conditions or other
factors differ significantly from the assumptions used by the Company in
calculating estimated Cash Available for Distribution.
24
<PAGE> 28
While the Company believes that its estimate of Cash Available for
Distribution constitutes a reasonable basis for setting the initial distribution
rate, such estimate is made solely for such purpose and is not intended to be a
projection or forecast of the Company's results of operations or its liquidity.
The Company's actual return, if any, will be affected by a number of factors,
including the revenue received from its properties, operating expenses, the
interest expense incurred on borrowings, the ability of Lessees to meet Lease
obligations and unanticipated capital expenditures. See "Risk Factors -- Risk of
Ownership and Leasing of Properties".
The following table illustrates the adjustments made by the Company to its
pro forma FFO for the 12 months ended June 30, 1997 in order to calculate
estimated Cash Available for Distribution for the 12 months ending November 30,
1998:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
Pro forma net income for the year ended December 31, 1996....................... $ 5,302
Plus: Pro forma net income for the six months ended June 30, 1997............... 4,462
Less: Pro forma net income for the six months ended June 30, 1996............... (1,939)
Plus: Pro forma depreciation for the 12 months ended June 30, 1997(1)........... 1,063
--------
Pro forma FFO for the 12 months ended June 30, 1997............................. 8,888
Adjustments:....................................................................
Net increase from Existing Leases and new leases(2)........................... 9,094
Net change in interest expense(3)............................................. (438)
Net increase from Affiliated Partnerships(4).................................. 46
Net change in general and administrative expenses(5).......................... (496)
Pro forma FFO for the 12 months ended November 30, 1998......................... 17,094
--------
Net effect of straight-line rents(6)............................................ (1,721)
--------
Estimated adjusted pro forma cash flows from operating activities for the 12
months ended November 30, 1998................................................ 15,373
Capital expenditures and scheduled debt payments................................ 0
--------
Estimated Cash Available for Distribution for the 12 months ended November 30,
1998.......................................................................... $ 15,373
========
Total estimated initial distributions........................................... $ 14,933
========
Estimated initial annual distributions per share................................ $ 1.125
========
Payout ratio based on estimate Cash Available for Distribution.................. 97.1%
</TABLE>
- ---------------
(1) Pro forma depreciation of $649,000 for the year ended December 31, 1996 plus
$677,000 for the period ended June 30, 1997 less $263,000 for the period
ended June 30, 1996.
(2) Represents the incremental increase in FFO attributable to rental revenue
from the Existing Properties and rental revenue from that portion of the
Acquisition Properties for which rental income is expected to commence by
December 1, 1997, for the 12 month period ending November 30, 1998.
(3) Represents the incremental decrease in FFO attributable to a net increase in
interest expense from the pro forma 12 months ended June 30, 1997 to the pro
forma 12 months ending November 30, 1998, resulting from debt estimated to
be incurred prior to December 1, 1997 and subsequent to the repayment of the
outstanding principal balance of the Credit Facility.
(4) Represents the incremental increase in FFO attributable to a net increase in
other revenue from the Affiliated Partnerships from the pro forma 12 months
ended June 30, 1997 to the pro forma 12 months ending November 30, 1998.
(5) Represents the incremental decrease in FFO attributable to a net increase in
general and administrative expense resulting from increases in asset
management fees from the pro forma 12 months ending June 30, 1997 to the pro
forma 12 months ending November 30, 1998 for acquisitions to be completed
prior to December 1, 1997.
(6) Represents the effect of adjusting straight-line rental income included in
the 12 months ending November 30, 1998 from accrual basis under GAAP to a
cash basis.
In order to qualify to be taxed as a REIT, the Company must make annual
distributions to stockholders of at least 95.0% of its REIT taxable income
(determined without regard to the dividends received deduction and by excluding
any net capital gains). See "Federal Income Tax Considerations -- Taxation of
the Company as a REIT -- Annual Distribution Requirements". The Company
anticipates that its estimated Cash Available for
25
<PAGE> 29
Distribution will exceed its REIT taxable income due to non-cash expenses,
primarily depreciation and amortization, to be incurred by the Company. It is
possible, however, that the Company occasionally may not have sufficient cash or
other liquid assets to meet these distribution requirements due to timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of the Company. In the event that such
timing differences occur, in order to meet the distribution requirements, the
Company may find it necessary to arrange for short-term, or possibly long-term,
borrowings or to pay dividends in the form of taxable stock dividends.
Distributions by the Company to the extent of its current and adjusted earnings
and profits for federal income tax purposes, other than capital gain dividends,
will be taxable to stockholders as ordinary dividend income. Capital gain
distributions generally will be treated as long-term capital gains.
Distributions in excess of earnings and profits generally will be treated as
non-taxable return of capital to the extent of each stockholder's basis in the
Common Stock and thereafter as taxable gain. The non-taxable distributions will
reduce each stockholder's tax basis in the Common Stock and, therefore, the gain
(or loss) recognized on the sale of such Common Stock or upon liquidation of the
Company will be increased (or decreased) accordingly. For a discussion of the
tax treatment of distributions to holders of Common Stock, see "Federal Income
Tax Considerations -- Taxation of Taxable Domestic Stockholders" and
"-- Taxation of Foreign Stockholders".
Financing activities such as repayment or refinancing of loans also may
affect the Company's assets and liabilities and the amount of Cash Available for
Distribution for future periods. Management will seek to control the timing and
nature of investing and financing activities in order to maximize the Company's
return on invested capital.
Future distributions by the Company will be subject to the requirements of
the GCL and the annual distribution requirements under the REIT provisions of
the Code (see "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT -- Annual Distribution Requirements") and will depend on
the actual cash flow of the Company, its financial condition, its capital
requirements and such other factors as the Board of Directors deems relevant.
There is no assurance that any distributions will be made or that the expected
level of distributions will be maintained by the Company. See "Risk
Factors -- Risk of Ownership and Leasing of Properties" and "-- Risk that
Estimated Initial Cash Available for Distribution May Not be Sufficient to Make
Distributions at Expected Levels". If future revenues generated by the Company's
properties decrease materially from current levels, the Company's ability to
make expected distributions would be materially adversely affected, which could
result in a decrease in the market price of Common Stock.
The Company may in the future implement a distribution reinvestment program
under which holders of shares of Common Stock may elect automatically to
reinvest distributions in additional shares of Common Stock. The Company may
repurchase or arrange for the repurchase of shares of Common Stock in the open
market for purposes of fulfilling its obligations under this distribution
reinvestment program, if adopted, or may elect to issue additional shares of
Common Stock. There can be no assurance that the Company will adopt such a
program.
26
<PAGE> 30
CAPITALIZATION
The following table sets forth as of June 30, 1997, the capitalization of
the Company and the pro forma capitalization of the Company as adjusted to
reflect the sale of shares of Common Stock pursuant to the Offering at an
assumed initial public offering price of $15.00 per share, the application of
the net proceeds therefrom as described under "Use of Proceeds", and the
redemption of the Preferred Stock and the exchange of Common Stock for
unredeemed Preferred Stock. The information set forth in the following table
should be read in conjunction with "Selected Financial Data", the financial
statements of the Company and notes thereto, the pro forma financial statements
of the Company and notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Credit Facility(1).................................................... $ 70,669 --
Notes Payable......................................................... 2,253 --
Redeemable Preferred Stock(2) (mandatory redemption
value -- $58,026)................................................... 48,429 --
Stockholders' Equity:
Preferred Stock, $.01 par value, 10,000,000 shares authorized(2).... -- --
Common Stock, $.01 par value, 40,000,000 shares authorized,
1,315,440 shares issued and outstanding; 13,273,773 shares as
adjusted(3)...................................................... 13 $ 132
(Capital Deficit) Paid-In Capital................................... (12) 156,756
-------- ---------
Total stockholders' equity............................................ 1 156,888
-------- ---------
Total capitalization............................................. $121,352 $ 156,888
======== =========
</TABLE>
- ---------------
(1) Upon completion of the Offering and repayment of the outstanding principal
balance and accrued interest of the Credit Facility, the Company may,
subject to the provisions of the Credit Facility, borrow up to $150.0
million on a revolving credit basis. See "Risk Factors -- Risk from
Leverage" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations --Liquidity and Capital Resources".
(2) 50,000 shares of Redeemable Preferred Stock issued and
outstanding -- mandatory redemption value $1,000 per share, plus accumulated
and unpaid dividends; none issued or outstanding as adjusted.
(3) Does not include 1,327,000 shares of Common Stock reserved for issuance
pursuant to the Company's Long-Term Incentive Plan and upon exercise of
options to be granted to Messrs. Beach and Martin pursuant to their
employment agreements, and 1,698,750 shares of Common Stock which the
Underwriters may purchase pursuant to the over-allotment option. See
"Management -- Long-Term Incentive Plan", "-- Executive Compensation and
Employment Contracts", "-- Compensation of Directors" and "Underwriting".
27
<PAGE> 31
DILUTION
At June 30, 1997, the Company's tangible book value (deficit) was
$(10,538,438), or $(8.01) per share. At June 30, 1997, giving effect to the
exchange of Common Stock for unredeemed Preferred Stock, the pro forma net
tangible book value per share was $(.53). The anticipated initial public
offering price per share of Common Stock exceeds the pro forma net tangible book
value per share, and stockholders of the Company immediately prior to the
Offering will realize an immediate increase in the net tangible book value of
their Common Stock upon completion of the Offering, while purchasers of Common
Stock sold in the Offering will realize immediate and substantial dilution from
the initial public offering price in the net tangible book value of their
shares. Net tangible book value per share is determined by subtracting the sum
of total liabilities plus the mandatory redemption value of the Preferred Stock
from total tangible assets and dividing the remainder by the number of shares of
Common Stock that will be outstanding before the Offering. Pro forma net
tangible book value per share is determined by subtracting total liabilities
from total tangible assets and dividing the remainder by the number of shares of
Common Stock that will be outstanding after the Offering. The following table
illustrates the dilution to purchasers of Common Stock sold in the Offering,
based on an assumed initial public offering price of $15.00 per share.
<TABLE>
<S> <C> <C>
Initial public offering price per share.................................. $ 15.00
------
Pro forma net tangible book value per share before the Offering..... $ (.53)
Increase per share attributable to new investors.................... 12.28
------
Pro forma net tangible book value per share after the Offering........... 11.75
------
Dilution per share to new investors...................................... $ 3.25
======
</TABLE>
The following table sets forth the number of shares of Common Stock to be
sold by the Company in the Offering, the total amount to be paid to the Company
by purchasers of Common Stock sold in the Offering (assuming an initial public
offering price of $15.00 per share), the number of shares of Common Stock
outstanding immediately prior to the Offering (giving effect to the exchange of
unredeemed Preferred Stock for Common Stock) and the total consideration paid
and average price per share paid for such shares by the existing stockholders.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 1,948,773 14.7% $ 9,501 5.3% $ 4.88
New investors................. 11,325,000 85.3% $169,875 94.7% $ 15.00
---------- ----- ------------ ----- -----
Total....................... 13,273,773 100.0% $179,376 100.0%
========== ===== ============ =====
</TABLE>
28
<PAGE> 32
SELECTED FINANCIAL DATA
The selected historical financial data set forth below as of December 31,
1996 and December 31, 1995 and for each of the two years in the period ended
December 31, 1996 have been derived from the financial statements of the Company
included elsewhere herein which have been audited by Coopers & Lybrand L.L.P.,
independent accountants, and should be read in conjunction with those financial
statements (including the notes thereto) and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", all appearing
elsewhere in this Prospectus. The statement of operations data for the six
months ended June 30, 1997 and June 30, 1996 and the selected balance sheet data
as of June 30, 1997 have been derived from the Company's unaudited financial
statements appearing elsewhere in this Prospectus which, in the opinion of
management, reflect all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation. Results of operations for
interim periods are not necessarily indicative of results expected for the full
year.
The selected unaudited pro forma balance sheet data as of June 30, 1997 set
forth below is presented as if the transactions contemplated by this Prospectus,
including the Offering and the application of the proceeds therefrom, had
occurred on June 30, 1997. The unaudited pro forma statement of operations data
for the six months ended June 30, 1997 and the year ended December 31, 1996 are
presented as if the transactions contemplated by this Prospectus, including the
Offering and the application of the proceeds therefrom, had occurred on January
1, 1996. See "Use of Proceeds". The pro forma financial data set forth below is
not necessarily indicative of what the actual results of operations or financial
position of the Company would have been, nor do they purport to represent the
Company's results of operations or financial position for future periods. The
pro forma financial data should be read in conjunction with the Company's pro
forma financial statements and related notes and historical financial statements
and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------------ -------------------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
----------- ---------------------- ----------- -----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1997 1996 1996 1996 1995
----------- ---------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUE:
Rental income.................... $ 4,996 $ 4,996 $ 1,612 $ 4,907 $ 4,907 $ 614
Interest income on investments... 585 585 815 1,691 1,691 541
Interest income on short-term
loans.......................... 247 247 246 302 302 714
Other............................ 148 (3) 7 486 18 --
----------- ---------- ---------- ----------- ---------- ----------
Total revenue.................... 5,976 5,825 2,680 7,386 6,918 1,869
EXPENSES:
Interest......................... -- 2,707 423 -- 1,977 112
General and administrative....... 837 1,075 511 1,435 1,218 329
Depreciation and amortization.... 677 677 263 649 649 88
----------- ---------- ---------- ----------- ---------- ----------
Total expenses................... 1,514 4,459 1,197 2,084 3,844 529
----------- ---------- ---------- ----------- ---------- ----------
Income before income tax........... 4,462 1,366 1,483 5,302 3,074 1,340
Provision (credit) for income
tax.............................. -- (39) 372 -- 95 457
----------- ---------- ---------- ----------- ---------- ----------
Net income....................... 4,462 1,405 1,111 5,302 2,979 883
Redeemable Preferred Stock Dividend
Requirements..................... -- 3,750 3,750 -- 7,495 3,619
----------- ---------- ---------- ----------- ---------- ----------
Income/(loss) attributable to
Common Stock................... $ 4,462 $ (2,345) $ (2,639) $ 5,302 $ (4,516) $ (2,736)
=========== ========== ========== =========== ========== ==========
Income/(loss) per share of Common
Stock.......................... $ .34 $ (1.78) $ (2.01) $ .40 $ (3.43) $ (2.08)
=========== ========== ========== =========== ========== ==========
Weighted average number of shares
of Common Stock outstanding.... 13,273,773 1,315,440 1,315,440 13,273,773 1,315,440 1,315,440
=========== ========== ========== =========== ========== ==========
OTHER DATA:
Funds From Operations(1)......... $ 5,134 $ 2,082 $ 1,374 $ 5,951 $ 3,628 $ 971
Total properties (at end of
period)........................ 79 79 45 63 63 48
</TABLE>
29
<PAGE> 33
<TABLE>
<CAPTION>
JUNE 30 DECEMBER
------------------------ -----------------------
PRO FORMA HISTORICAL HISTORICAL
----------- ---------- -----------------------
(IN THOUSANDS)
1997 1997 1996 1995
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 33,765 $ 1,544 $ 3,862 $ 1,969
Properties subject to operating leases, net............ 98,293 98,293 70,175 15,554
Total investments...................................... 116,796 113,481 85,735 37,302
Total assets........................................... 158,618 123,082 98,614 42,292
Notes payable.......................................... -- 72,922 48,160 1,588
Total liabilities...................................... 1,730 74,652 49,214 2,121
Redeemable Preferred Stock(2).......................... -- 48,429 49,399 40,000
Total stockholders' equity............................. 156,888 1 1 171
</TABLE>
- ---------------
(1) Industry analysts generally consider FFO to be an appropriate measure of the
performance of an equity REIT. In March 1995, NAREIT adopted the NAREIT
White Paper which provided additional guidance on the calculation of FFO.
FFO is defined by NAREIT as net income (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of property,
plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments for
unconsolidated partnerships and joint ventures. FFO does not represent cash
generated from operating activities in accordance with GAAP and is not
necessarily indicative of cash available to fund cash needs. In addition,
FFO should not be considered an alternative to net income as an indicator of
the Company's operating performance or as an alternative to cash flow as a
measure of liquidity or of the Company's ability to make distributions, nor
is it comparable to cash flows provided by operating activities determined
in accordance with GAAP. The Company computes FFO in accordance with the
NAREIT White Paper, which may differ from the methodology for calculating
FFO utilized by other equity REITs. Accordingly, the Company's FFO may not
be comparable to other equity REITs' FFO and does not represent amounts
available for distributions because of certain capital expenditures,
scheduled mortgage loan principal payments and other items. See
"Distribution Policy".
(2) Mandatory redemption value of $58,026, $56,651, and $42,905 at June 30,
1997, December 31, 1996 and December 31, 1995, respectively.
30
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's historical and pro forma financial
statements and notes thereto appearing elsewhere in this Prospectus. The
historical financial data include certain interest, general and administrative
and income tax expenses which will not be incurred by the Company after the
Offering which are excluded from pro forma financial data. Conversely, the
historical financial data does not include certain revenues from the Affiliated
Partnerships which are included in the pro forma financial data.
The Company derives the preponderance of its revenues from the leasing of
restaurant and retail properties on a long-term triple net basis under Leases
which generally impose on the Lessee all obligations of repairs, maintenance,
real property taxes, assessments, utilities and insurance. The Leases typically
provide for minimum rent plus specified fixed periodic rent increases or, in
certain circumstances, indexation to the CPI and/or percentage rent. Other
revenues are derived primarily from interest income on long- and short-term
investments and will include fees and income from the Affiliated Partnerships.
The Company records rental revenue on a straight line basis over the term of
each Lease.
General and administrative expenses will include management fees paid to
the Advisor under the terms of the Advisory Agreement.
Substantially all of the Leases are treated as operating leases for
purposes of GAAP and the related properties are recorded at cost less
accumulated depreciation. All costs associated with the acquisition and
development of a property, including fees paid to the Advisor, are capitalized
at the time of the acquisition. Buildings acquired or developed are amortized on
a straight-line basis over a 40-year period.
Since the Company has not historically been a REIT, a provision for income
tax has been recorded. This provision does not bear the usual relationship to
pretax income as a result of the treatment of dividends paid on Preferred Stock
as deductible interest expense for tax purposes. See Note 9 to Financial
Statements and "Risk Factors -- Risks Related to Other Tax Liabilities".
The substantial change in revenues and expenses from year to year is the
result primarily of the acquisition and development of properties and the
commencement of Leases during the year of acquisition and the recognition of a
full year's operation in the year subsequent to acquisition.
HISTORICAL RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1997 TO JUNE 30,
1996
Total revenue increased to $5.8 million for the six months ended June 30,
1997 as compared to $2.7 million for the six months ended June 30, 1996.
Rental revenue increased to $5.0 million for the six months ended June 30,
1997 from $1.6 million for the six months ended June 30, 1996. The increase in
rental revenue resulted principally from the acquisition of 34 net leased
properties and the benefit of a full period of rental revenue from properties
acquired and leased in preceding periods.
Interest income on investments decreased to $585,000 for the six months
ended June 30, 1997 from $814,000 for the six months ended June 30, 1996, as the
Company's investments and short-term loans declined.
Interest expense increased to $2.7 million for the six months ended June
30, 1997 from $423,000 for the six months ended June 30, 1996. The increase was
primarily due to interest on $59.3 million of additional debt used to fund the
acquisition of properties which was incurred during the six months ended June
30, 1997, as well as a full period of interest on debt incurred in prior
periods.
General and administrative expenses increased to $1.1 million for the six
months ended June 30, 1997 from $511,000 for the six months ended June 30, 1996.
The increase was primarily due to an increase in management fees paid to
Affiliates.
31
<PAGE> 35
Depreciation and amortization increased to $678,000 for the six months
ended June 30, 1997 from $263,000 for the six months ended June 30, 1996,
primarily due to the continued acquisition of net leased properties and the
effect of a full period of depreciation of properties acquired and leased in the
preceding period.
The provision for income tax for the six months ended June 30, 1997
reflects a credit of $39,000 as compared to an expense of $372,000 for the
comparable period in the prior year. The 1997 amount reflects the benefit of a
loss-carryforward, net of a reserve for taxes, and the effect of treating
Preferred Stock dividends as deductible interest for tax purposes. See Note 9 to
Financial Statements and "Risk Factors -- Risk Related to Other Tax
Liabilities".
As a result of the foregoing, the Company's net income prior to Preferred
Stock dividend requirements increased to $1.4 million for the six months ended
June 30, 1997, from $1.1 million for the six months ended June 30, 1996, and FFO
increased to $2.0 million from $1.4 million for the same periods, respectively.
Loss after Preferred Stock dividend requirements deceased to $2.3 million for
the six months ended June 30, 1997 from $2.6 million in the comparable period of
the prior year.
HISTORICAL RESULTS OF OPERATIONS -- 1996 TO 1995
Total revenue increased to $6.9 million for the year ended December 31,
1996 from $1.9 million for the year ended December 31, 1995.
Rental revenue increased to $4.9 million for the year ended December 31,
1996 from to $614,000 for the year ended December 31, 1995. The increase in
rental revenue resulted principally from the acquisition of 45 net leased
properties and the benefit of a full period of rental revenue from properties
acquired and leased in the preceding period.
Interest income on investments increased to $1.7 million for the year ended
December 31, 1996 from $541,000 for the year ended December 31, 1995, primarily
as a result of the benefit of a full period of interest income from investments
made in the preceding period.
Interest expense increased to $2.0 million for the year ended December 31,
1996 from $112,000 for the year ended December 31, 1995. The increase was
primarily due to interest on $46.6 million of debt used to fund the acquisition
of properties which was incurred during 1996 and a full period of interest on
debt incurred in the preceding year.
General and administrative expense increased to $1.2 million for the year
ended December 31, 1996 from $329,000 for the year ended December 31, 1995. The
increase was primarily due to an increase in management fees paid to Affiliates.
Depreciation and amortization increased to $649,000 for the year ended
December 31, 1996 from $88,000 for the year ended December 31, 1995, primarily
due to the continued acquisition of net leased properties and the effect of a
full period of depreciation of properties acquired and leased in the preceding
period.
The provision for income tax for 1996 decreased to $95,000 from $457,000 in
1996 primarily as a result of the increased amount of Preferred Stock dividends
in 1996 and their treatment as deductible interest for tax purposes. See Note 9
to Financial Statements and "Risk Factors -- Risk Related to Other Tax
Liabilities".
As a result of the foregoing, the Company's net income prior to Preferred
Stock dividend requirements increased to $2.98 million for 1996 from $883,000 in
1995, and FFO increased to $3.6 million from $971,000 for the same periods,
respectively. Loss after Preferred Stock dividend requirements increased to $4.5
million in 1996 from $2.7 million in 1995.
PRO FORMA RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1997
Pro forma net income was $4.5 million for the six months ended June 30,
1997, compared to historical net income of $1.4 million for the period. Pro
forma revenue increased by $151,000 as a result of the inclusion of revenues
from the Affiliated Partnerships. Pro forma expenses declined by $2.7 million as
a result of: (i) the elimination of interest expense based on repayment of the
entire outstanding principal balance of the Credit
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Facility and other notes payable; (ii) a reduction in management fees to conform
with the terms of the Advisory Agreement; and (iii) elimination of the provision
for income tax based upon the intent of the Company to qualify as a REIT, the
aggregate effect of which were offset in part by an increase in general and
administrative expenses to reflect the commencement of salaries and benefits and
other incremental costs related to operating as a public REIT. The pro forma
adjustments were assumed to have occurred on January 1, 1996.
PRO FORMA RESULTS OF OPERATIONS -- 1996
Pro forma net income was $5.3 million for the year ended December 31, 1996,
compared to historical net income of $3.0 million for the period. Pro forma
revenue increased by $468,000 as a result of the inclusion of revenues from the
Affiliated Partnerships. Pro forma expenses declined by $1.8 million as a result
of: (i) the elimination of interest expense based on repayment of the entire
outstanding principal balance of the Credit Facility and other notes payable;
(ii) a reduction in management fees to conform with the terms of the Advisory
Agreement; and (iii) elimination of the provision for income tax based upon the
intent of the Company to qualify as a REIT, which reductions were offset in part
by an increase in general and administrative expenses to reflect the
commencement of salaries and benefits and other incremental costs related to
operating as a public REIT. The pro forma adjustments were assumed to have
occurred on January 1, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company will use proceeds of the Offering to repay the Credit Facility
and its other notes payable, to redeem a substantial portion of the Preferred
Stock and pay the accrued dividends thereon; unredeemed shares of Preferred
Stock will be exchanged for Common Stock. As a result, cash required to service
debt and pay Preferred Stock dividends will decrease substantially. The Credit
Facility combined with the absence of leverage upon the completion of the
Offering will enhance the Company's ability to take advantage of acquisition
opportunities.
After the Offering and subject to the satisfaction of certain conditions,
the Company will be able to borrow up to $150.0 million under the Credit
Facility. The Company anticipates that the Credit Facility will be used
primarily to acquire properties, including the Acquisition Properties. The
Credit Facility is secured by a first lien on properties financed and other
assets of the Company. Upon completion of the Offering, the expiration date of
the Credit Facility will be extended from February 26, 1998 to the second
anniversary of the completion of the Offering, and the Revolving Loan Rate will
be reduced from LIBOR plus 2.318% to LIBOR plus 1.75%. During the term of the
Credit Facility, the Company is required to make monthly payments of interest
only, and the Credit Facility may be prepaid without premium or penalty at any
time provided that certain conditions of the Credit Facility are met. The
Company also may be required to make principal payments in order to maintain
certain ratios between the Company's aggregate indebtedness under the Credit
Facility and the value of the collateral pledged as security for the Credit
Facility. The Credit Facility imposes certain limitations upon the Company's
ability to incur additional financing.
The Credit Facility will expire approximately two years after the
completion of the Offering, at which time the entire outstanding balance of the
Credit Facility will mature. Since the Company intends to grow its portfolio
aggressively through the acquisition of additional properties utilizing funds
from the Credit Facility and to lease those properties on a long-term basis, it
is likely the Company will not have sufficient funds available to repay the
outstanding balance of the Credit Facility upon its maturity. Accordingly, the
Company would be required to obtain the funds necessary to repay the Credit
Facility at maturity either through the refinancing of the Credit Facility, the
issuance of additional equity or debt securities or the sale of properties. The
Company has not received a commitment from any institutional or other lender or
investor to loan the funds or purchase any of the Company's equity or debt
securities which the Company may seek to issue in order to refinance its
indebtedness under the Credit Facility. If the Company were unable to obtain
funds to repay indebtedness on acceptable terms, or at all, the Company might be
forced to dispose of properties or take other actions upon disadvantageous
terms, which could result in losses to the Company and have a material adverse
effect on the Company's financial condition and its ability to make
distributions to stockholders. See "Risk Factors -- Risk From Leverage".
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Subsequent to completion of the Offering, the Company expects to make
distributions from Cash Available for Distribution, which the Company expects
will exceed historical Cash Available for Distribution as a result of the
reduction in debt service and Preferred Stock dividend requirements, the
decreases in advisory fee rates, and other factors described in the pro forma
results of operations, as well as the anticipated growth of the portfolio of net
leased properties. See "Risk Factors -- Risk that Estimated Initial Cash
Available for Distribution May Not be Sufficient to Make Distributions at
Expected Levels," "Distribution Policy," and the pro forma financial statements.
The Company intends to meet its short-term liquidity requirements generally
through its working capital and net cash provided by operations. The Company
believes that net cash from operations will be sufficient to allow the Company
to make distributions necessary to enable the Company to qualify as a REIT. The
Company also believes that the foregoing sources of liquidity will be sufficient
to fund its short-term liquidity needs for the foreseeable future.
The Company intends to meet its long-term liquidity requirements such as
property acquisition and development and scheduled debt maturities through
long-term secured and unsecured indebtedness and the issuance of additional
equity or debt securities. Specifically, the Company expects to utilize the
Credit Facility to finance the acquisition and development of additional
properties, including the Acquisition Properties. For a discussion of certain
contingencies pertaining to the Company's income tax liabilities, see Note 9 to
Financial Statements.
INFLATION
The Company's Leases contain provisions which mitigate the adverse impact
of inflation. The Leases generally provide for specified periodic rent increases
including, fixed increased amounts, indexation to CPI and/or percentage rent. In
addition, most of the Company's Leases require the Lessee to pay all operating
costs and expenses including repairs, maintenance, real property taxes,
assessments, utilities and insurance, thereby substantially reducing the
Company's exposure to increases in costs and operating expenses resulting from
inflation.
The Credit Facility will bear interest at a variable rate, which will be
influenced by changes in short-term interest rates, and will be sensitive to
inflation.
ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT ADOPTED BY THE COMPANY
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement No.
128"), which establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock. Statement
No. 128 simplifies the standards for computing EPS previously found in APB
Opinion No. 15, "Earnings Per Share", and makes them comparable to international
EPS standards. It replaces the presentation of primary EPS with a presentation
of basic EPS.
In February 1997, SFAS No. 129, "Disclosure of Information about Capital
Structure," was issued. SFAS No. 129, which applies to all entities that have
issued securities, requires, in summary form, the pertinent rights and
privileges of the various securities outstanding. Examples of information that
shall be disclosed are dividends and liquidation preferences, participation
rights, call prices and dates, conversion or exercise prices or rates and
pertinent dates, sinking-fund requirements, unusual voting rights, and
significant terms of contracts to issue additional shares. SFAS No. 129 is
effective for financial statements issues for periods ending after December 15,
1997.
INDUSTRIES
The net lease industry is a large and rapidly expanding source of financing
to the restaurant and retail industries. The Company believes that net lease
financings will continue to grow because net lease transactions enable a
restaurant or retailer to realize the value of its owned real estate while
continuing long-term occupancy. Under the Company's typical net lease structure,
the Lease may be treated by the operator as an off-balance sheet
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liability, providing additional financial benefits which may increase the
operator's earnings and borrowing capacity. The Company believes that, due to
the significant demand for net lease transactions, numerous opportunities for
the net leasing of properties through development or sale/leaseback transactions
will be available to the Company for the foreseeable future.
THE RESTAURANT INDUSTRY
The foodservice industry is one of the largest industries in the United
States. In 1996 total foodservice industry revenue increased by $14.8 billion
from 1995 to $313.0 billion and represented 4.1% of gross domestic product.
According to the National Restaurant Association there presently are over
773,000 food service locations in the United States.
The Company invests primarily in properties for lease to operators of
select national and regional fast-food, family-style and casual dining chains.
Fast-food restaurants such as Burger King, Arby's and Jack in the Box feature
quality food and quick service, which often includes drive-through facilities,
and offer a variety of menu items such as hamburgers, pizza, chicken, hot and
cold sandwiches and salads. Family-style restaurants such as Denny's and Golden
Corral feature services generally associated with full-service restaurants such
as buffets or full table service and cooked to order food at value-conscious
prices. Casual dining restaurants such as Applebee's and Tony Roma's feature a
variety of popular contemporary foods, full table service, moderate prices and
surroundings that are appealing and entertaining to families and services
generally associated with full-service restaurants. The fast-food, family-style
and casual dining segments of the restaurant industry have demonstrated the
ability to adapt to changes in consumer influences such as health and dietary
issues, time constraints on working families and environmental awareness through
various innovations, including special value pricing and promotions, expansion
into non-traditional locations, menu expansion and new packaging.
The Company believes that the fast-food, family-style and casual dining
segments, which are the Company's primary restaurant focus, have grown rapidly
in recent years. The franchise and chain restaurant industries are large and
rapidly expanding. International Franchise Association studies show that one out
of every 12 business establishments is a franchise and one-third of all spending
by Americans for goods and services is to a franchised business. The National
Restaurant Association projects that for 1996 fast-food restaurants will have
outpaced average industry real growth with a 4.2% increase over 1995. Sales in
this segment of the restaurant industry are projected to increase from $105.0
billion in 1996 to $110.8 billion in 1997. According to Nation's Restaurant
News, the 100 largest restaurant chains posted average sales growth of 6.5% for
1996. Casual dining concepts are among the chains showing the strongest growth,
experiencing system-wide sales growth of 12.9% in 1995 and 14.6% in 1996.
Forecasts in the January 1, 1997 issue of Restaurants and Institutions project
that full service restaurant sales will experience 6.0% real growth in 1997 to
$102.0 billion. According to Nation's Restaurant News the 15 largest casual
dining chains have a total of 4,913 restaurants throughout the United States
with 1996 revenues in excess of $11.0 billion.
According to the National Restaurant Association, 51.0% of American adults
eat at a fast-food restaurant and 42.0% of adults patronize a moderately priced
family restaurant at least weekly. The National Restaurant Association indicates
that Americans spend approximately 55 cents of every food dollar on dining away
from home. Surveys published in Restaurant Business indicate that families with
children choose quick-service restaurants four out of every five times they dine
out.
The Company believes that it will have the opportunity to participate in
foodservice industry growth through the ownership of properties leased to
operators of these restaurant concepts. The Company also believes that the
substantial fragmentation of its competition for the acquisition of restaurant
properties among large public corporations, private companies and individuals
results in additional opportunities for, and advantages to, the Company.
THE RETAIL INDUSTRY
The retail industry represents approximately one-third of the gross
domestic product. According to the U.S. Department of Commerce, total retail
sales increased by 5.0% in 1996 to $2.465 trillion. The International Council of
Shopping Centers ("ICSC") projects that through 2000 retail sales will increase
by nearly
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$500.0 billion (4.1% annually) to $2.9 trillion. Growth in retail sales has
resulted in a growth in demand for retail properties. ICSC projects that gradual
obsolescence of existing facilities, changes in location and tenant format
preferences and increasing sales will support the development of over 770.0
million additional square feet of retail space through 2000. The retail industry
also is undergoing significant change which the Company believes it is
well-positioned to exploit through its growth and operating strategies. In order
to meet changing consumer preferences, and as a result of the relatively high
cost of mall space, the Company believes that retailers increasingly prefer
smaller, freestanding facilities which are more accessible and facilitate the
customized presentation of the retail concept. The typical retail property is
increasingly likely to be a freestanding facility of the size and type of
property which has been, and will continue to be, the focus of the Company's
retail acquisition strategy. The Company believes that it will benefit from
these trends because its properties meet these retailer preferences.
BUSINESS
GENERAL
The Company, which intends to qualify as a REIT, acquires, develops and
owns high-quality freestanding properties leased principally on a long-term
triple-net basis to national and regional chain and franchised restaurants and
retailers. As of June 30, 1997, the Company had a portfolio of 79 Existing
Properties located in 24 states, which was 96.2% leased. In addition, as of
September 1, 1997, the Company had agreements in principle for acquisitions of
the 62 Acquisition Properties located in 22 states for an aggregate cost of
approximately $94.5 million, which the Company expects to be substantially
completed by July 1998. The Lessees of the Existing Properties include operators
of 24 different restaurant and retailer concepts, including Applebee's, Arby's,
Baby Superstore, Black Angus, Blockbuster Music, Blockbuster Video, Boston
Market, Burger King, Church's, Denny's, Golden Corral Family Steakhouses and
Jack in the Box. The Acquisition Properties will expand the Company's portfolio
into five additional states, and further diversify its property, concept and
Lessee base to include operators of Circle K, Michael's Crafts, Office Depot,
SportsMart, Stop n Go, Taco Bell and Tony Roma's. The Company anticipates that
most future acquisitions will be newly constructed at the time of acquisition.
The Company generally acquires properties from operators or developers in
locations which have exhibited growth in retail sales and population. Upon
acquiring a property, the Company normally enters into a long-term triple-net
Lease (typically 15 to 20 years plus one or more five-year renewal options) with
the Lessee who will operate the property. Under the terms of a typical Lease,
the Lessee is responsible for all operating costs and expenses including
repairs, maintenance, real property taxes, assessments, utilities and insurance.
In addition, the Lease generally provides for minimum rent plus specified fixed
periodic rent increases or, in certain circumstances, indexation to the CPI
and/or percentage rent. The Company believes that the structure of its Leases
provides steady periodically escalating long-term revenue while reducing
operating expenses and capital costs, and that its underwriting standards reduce
the risk of Lessee default or non-renewal. The Existing Properties average four
years of age and are subject to Leases with an average remaining term of 16
years.
The Company's senior management and Board of Directors have extensive
experience in the acquisition, development and ownership of net leased
properties, particularly those used in restaurant and retail operations, have
served in senior positions with large restaurant franchisees, retailers and real
estate companies. The Company's senior executives average 16 years experience in
the franchise and retail finance industry and have been primarily responsible
for the Company's acquisition, development and leasing of the Existing
Properties and agreements in principle to acquire the Acquisition Properties.
The Company has retained the Advisor, which will manage the operations of
the Company and provide it with investment and financial advisory services
pertaining primarily to the acquisition, development and leasing of properties.
The Advisor is a family of affiliated specialized commercial finance companies
providing a diverse line of financing products to the franchise, chain
restaurant and specialty retail industries. Since its inception in 1981, the
Advisor has developed substantial expertise in all aspects of the franchise,
chain restaurant and specialty retail finance business, including business
concept, property and lessee underwriting, property
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acquisition, lessee credit analysis and monitoring, direct marketing, portfolio
management, accounting and other administrative functions. As of June 30, 1997,
Captec Financial employed over 60 people, including a senior management team
with over 60 years of direct industry experience and an average tenure of over
10 years with Captec Financial. Including the Company, Captec Financial had
assets under management of approximately $350.0 million and combined debt and
equity capital resources of approximately $540.0 million including available,
but unutilized, borrowing capacity. The Company's retention of the Advisor will
be reviewed by the Board of Directors annually.
Since commencing operations in 1995, the Company has experienced
substantial growth in its real estate portfolio, revenues and FFO. As of June
30, 1997, the Company had total assets of $123.1 million. In addition, for the
year ended December 31, 1996, total revenues and FFO increased to $6.9 million
and $3.6 million, respectively, from $1.9 million and $1.0 million,
respectively, for the year ended December 31, 1995. Similarly, for the six
months ended June 30, 1997, total revenues and FFO increased to $5.8 million and
$2.1 million, respectively, from $2.7 million and $1.4 million, respectively,
for the six months ended June 30, 1996.
GROWTH STRATEGY
The Company intends to maximize returns to stockholders by increasing cash
flow per share and the value of its property portfolio. The Company believes it
can achieve these objectives primarily by acquiring additional properties and
structuring net Leases on advantageous terms. As of September 1, 1997, the
Company had agreements in principle to acquire the 62 Acquisition Properties for
approximately $94.5 million. The Company utilizes procedures and methodologies
which have been developed and refined by the Advisor to identify, acquire and
manage net leased properties, and seeks to avoid utilizing real estate brokers
or other commissioned intermediaries to reduce acquisition costs. The Company's
principal growth strategies include:
Acquisitions from Operators. The Company intends to purchase properties
from, and enter into net leases with, creditworthy multi-unit operators of
national and regional chain and franchised restaurants and retailers. The
Company will make such acquisitions when it can achieve escalating revenue and
targeted returns on its investment through base rent and periodic rent
increases. When possible these acquisitions are structured by the Company to
qualify as off-balance sheet liabilities of the operators. Occasionally, the
Company will purchase from an operator a property undergoing development subject
to a Lease which commences upon completion of construction. In those
circumstances, the Lease is executed at the time the land is purchased and is
structured to provide the Company with rates of return based upon the Company's
total acquisition cost.
Acquisitions from Developers. The Company intends selectively to acquire
primarily retail properties from developers prior to the completion of the
development process but subsequent to execution of a net lease with the
property's operator. By acquiring a property during, and assuming certain risks
of, development, the Company seeks to obtain a more favorable purchase price,
thereby enhancing its overall return. The Company intends, in limited
circumstances, to form joint ventures with developers to combine the capital
resources of the Company with the developer's capability and property supply. It
is anticipated that in these joint ventures the Company typically will provide
some or all of the development capital in return for a market rate of return
plus a share of development profits. Upon completion of development the Company
may acquire some or all of the property from the joint venture net of the
Company's interest in the property with the objective of obtaining a higher
return than otherwise is realized when acquiring a developed property. See "Risk
Factors -- Risk of Joint Ventures".
Increases in Revenues and Operating Margins. The Company will seek to
enhance the financial performance of its portfolio primarily through increasing
revenues, maintaining high Lessee retention and aggressively managing operating
expenses. To provide revenue growth, the Company's Leases require fixed periodic
increases in revenue over the term of the Lease, indexation to the CPI and/or
percentage rent. The Company believes that as its portfolio grows, it will
realize additional operating efficiencies and benefit from its underwriting
policies which are designed to reduce defaults and non-renewals.
The Company intends to maintain significant flexibility with respect to the
form of its acquisition transactions, using cash available from operations or
the Credit Facility for sellers seeking immediate liquidity, as well as
tax-advantaged partnership structures to attract tax-motivated sellers. Such
structures may include joint
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ventures or other types of co-ownership with sellers, whether in the form of
limited partnerships, limited liability companies, or other entities expected to
be controlled by the Company. The sellers may be offered interests in the
ventures which are convertible or exchangeable for shares of Common Stock or
otherwise allow the seller to participate in the financial growth of the
Company. Although the Company has no present intention of doing so, the Company
may in the future acquire all or substantially all of the securities of other
REITs or similar entities when such investments would be consistent with the
Company's investment objectives.
OPERATING STRATEGY
The Company continually monitors the success of its existing and targeted
restaurant and retail concepts, the financial condition of its Lessees, Lease
compliance and other factors affecting the financial performance of its
properties. The Company's operating strategies, which have resulted from years
of development and refinement by the Advisor, include:
Underwriting Restaurant Chains and Retailers. The Company leases its
properties to franchisees and operators of select major regional and national
restaurants and retailers because the Company believes these widely recognized
and centrally supported chains possess significant advantages over their
independent competitors. These competitive advantages, which include the use of
nationally recognized trademarks and logos and substantial management, training,
advertising, market and product support from franchisors and national or
regional chain management, strengthen the business and financial position of the
Company's Lessees. The Company monitors many franchise, restaurant and retail
concepts, ranging from smaller newly created concepts to large, mature
nationally recognized concepts with established operating histories.
The Company employs thorough underwriting procedures which have been
developed and refined by the Advisor to select the franchise and chain business
concepts towards which to direct its leasing activities. This analysis includes
a review of publicly available information concerning franchisors or chain
operators; credit analysis of the franchisor's or operator's financial
statements for the three most recent fiscal years; assessment of business
strategies, operating history and key personnel; operational and financial
evaluation of unit level performance, including sales, costs, margins and
closure statistics; comparison of fee and expense structure to industry
averages; analysis of concept penetration and name recognition; assessment of
non-quantitative factors contributing to concept success; and, for franchisors,
surveys of representative franchisees to develop data on average sales,
profitability and satisfaction with franchisor support.
To be considered by the Company, a franchise concept generally must meet
the following requirements:
- Minimum of 50 units
- Minimum of five years franchising experience
- Franchisor net worth of $5.0 million
- Two consecutive years net operating profit
- Low unit closure rates
- Limited litigation history, especially with franchisees
Non-franchised concepts are subject to similar criteria except that a smaller
number of units generally is required.
The Company's concept underwriting procedures also result in the
establishment of credit standards for concept Lessees. Once selected, the
Company conducts ongoing review of the performance of the business concept
through monitoring of financial information and news releases. Each business
concept is formally reevaluated annually.
Underwriting Lessee Credit. The Company's Lessees predominantly are
experienced, multi-unit operators of fast-food, family-style and casual dining
restaurants and retailers. The Company subjects each proposed Lessee to an
underwriting process designed to identify the most creditworthy Lessees and
minimize the Company's risk from defaults and business failures. The Company
targets only Lessees with the competitive position and financial strength to
meet their obligations throughout the Lease term. The Company's Lessees, as
franchisees or operators of major national and regional franchised and chain
outlets, undergo rigorous scrutiny
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and training by national and regional franchisor and chain management and often
must make substantial capital investments prior to conducting business. This
provides additional assurance as to the quality of the Company's Lessees and
further reduces the Company's risk. The Company seeks to identify Lessees with
positive trends in sales and profits; positive cash flow sufficient to cover
current long-term debt and Lease obligations; moderate leverage position; and
satisfactory bank and trade references, personal and business financial
histories and credit reports. The Company favors applicants, the principals of
which can demonstrate previous operating success particularly within the same or
similar concept, and who have beneficial occupational expertise (such as a chief
financial officer who is a certified public accountant) and significant business
contacts and presence within the operating territory. The franchise agreement
also is reviewed and the term of the proposed financing must not exceed the
remaining term of the franchise agreement. When appropriate, the Company
enhances Lessee credit by requiring guarantees from principals, corporate
parents or third parties. The Company's Lessee underwriting process requires a
completed Lease application and application fee; two years of annual comparative
financial statements for existing operations on a consolidated and unit basis
and/or two years of tax returns; capitalization structure adequate to support
existing and planned units; credit application including bank and trade
references and verification of assets; demographic and site information; monthly
projections for 12 months of operations; and detailed statements of the business
experience of principals. The Company believes its success in attracting
high-quality Lessees is based on a number of factors, including the reputation
of Captec Financial and Messrs. Beach and Martin in the commercial net lease
property industry. See "Risk Factors -- Risk Relating to Creditworthiness of
Lessees".
Underwriting Site Selection. Prior to acquiring a property, the Company
engages in an extensive site review. The Company typically undertakes a
long-term viability and market value analysis, including an inspection of the
property and surrounding area by an acquisition specialist, and assessment of
market area demographics, consumer demand, traffic patterns, surrounding land
use, accessibility, visibility, competition and parking. The Company also (i)
obtains an independent appraisal of the property; (ii) obtains an independent
engineering report of the property's mechanical, electrical and structural
integrity; (iii) evaluates both the current and potential alternative use of the
property; and (iv) obtains an independent Phase I environmental site assessment.
In addition, many of the restaurant chain operators and franchisors have
sophisticated full-time staffs engaged in site selection, evaluation and
pre-approval of all new sites. As operators of national and regional franchised
and chain restaurants, the Company's Lessees typically are required to submit
their proposed locations to rigorous site evaluation pre-approval by franchisors
or national chain management, which typically includes assessments of many of
the factors considered by the Company in performing its analysis. These studies
often are made available to, and utilized by, the Company in analyzing a
potential acquisition. The retailers which become the Company's Lessees also
generally have full-time staffs engaged in site selection and evaluation and
typically develop new retail sites in conjunction with selected developers who
assist in site evaluation and selection. The retailers operating on the
Company's properties also submit their proposed locations to a rigorous site
evaluation and pre-approval process similar to that for restaurants. These
processes provide additional support and confirmation for the Company's site
selection process.
The Company ultimately determines to acquire or develop a property based
principally on an examination and evaluation of the site, the financial
condition and business history of the proposed Lessee, area demographics, the
proposed purchase price and Lease terms, geographic and market diversification
and potential sales. Although the purchase of each property is supported by an
independent appraisal, the Company makes an independent judgment in determining
whether to acquire a property. The purchase price of each property generally
does not exceed its appraised value. The Company makes an independent assessment
of both Lessees and properties and may decline to purchase certain properties or
accept certain Lessees notwithstanding satisfaction of franchisor or chain
standards.
Maintenance of Relationships with Restaurant Chains, Retailers and
Lessees. Once a business concept has been approved, the Company, with the
Advisor, seeks to develop a strong ongoing working relationship with national or
regional senior chain or retailer management. The Company believes that such
relationships facilitate
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the identification, negotiation and consummation of transactions, are beneficial
in resolving disputes or problems which arise during the terms of Leases and are
an excellent referral source of additional financing opportunities.
Active Management of Lessee Credit. In addition to monitoring Lessee
compliance with Lease obligations, the Company regularly reviews the financial
condition of its Lessees and business, economic and market trends in order to
identify and anticipate problems with Lessee performance which could adversely
affect the Lessee's ability to meet Lease obligations. When potential problems
are identified, the Company seeks early intervention with its Lessees and, when
appropriate, chain or retailer national chain management in order to address and
avoid such problems.
Diversification of Property Portfolio, Restaurant Chains, Retail Concepts
and Lessees. The Company believes that it has achieved, and will continue to
emphasize, significant diversification of its portfolio both among retail and
restaurant concepts and Lessees. The Company's 79 Existing Properties located in
24 states currently are leased to 36 Lessees operating 18 different restaurant
and six retail concepts. The Company currently anticipates acquiring the 62
Acquisition Properties located in 22 states to be leased to 20 potential Lessees
operating 12 different restaurant and eight retail concepts, resulting in
further diversification of its portfolio. Although the Company expects to
complete the acquisition of substantially all of the Acquisition Properties by
July 1998, there is no assurance the Company will be successful in acquiring any
of the Acquisition Properties. See "Risk Factors -- Risk Related to Acquisition
Properties" and "-- Risk of Lessee and Concept Concentration".
Construction. In certain circumstances, the Company will acquire a site on
which a property is to be built prior to the commencement or completion of
construction. In these circumstances, the Company typically acquires the
property subject to construction simultaneously with the execution of a Lease
which commences immediately upon the completion of construction. During
construction, the Company acts essentially as a construction lender providing
periodic progress advances and construction draws against fully documented and
completed project costs. Amounts advanced for construction prior to the
completion of the property and commencement of the Lease bear a market rate of
return which may be paid currently or capitalized into the cost of the property.
Acquiring properties under construction enables the Company to compete against
others engaged in real estate development and investment which provide similar
services and also benefits the Company by allowing it to invest its capital and
derive the resulting returns earlier in the development process. See "Risk
Factors -- Risk of Acquiring Properties Under Construction".
PROPERTIES
Existing Properties. The 79 Existing Properties are located in 24 states
and leased to 36 operators of 24 district restaurant and retail concepts. As of
June 30, 1997, the Existing Properties (which average four years of age) were
96.2% leased and subject to Leases with an average remaining term (excluding
renewals) of approximately 16 years. The Existing Properties typically are
freestanding structures located on lots ranging from 20,000 to 80,000 square
feet for restaurant properties and up to 150,000 square feet for retail
properties. Typical building size ranges from 2,000 to 6,000 square feet for
restaurant properties and up to 40,000 square feet for retail properties. The
following is a summary description of the Existing Properties and Lessees as of
June 30, 1997.
40
<PAGE> 44
<TABLE>
<CAPTION>
ANNUALIZED
CORPORATE RENT AT
OR FACILITY NO. OF LOCATION JUNE 30,
LESSEE FRANCHISEE CONCEPT TYPE PROPERTIES (STATE) 1997
- ----------------------------------- ----------- ------------------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
United Auto Group, Inc............. F BMW/Nissan Retail 2 GA $ 1,033,152
ARG Enterprises, Inc............... C Black Angus Restaurant 4 MN 1,005,108
BC Northwest, Inc.................. F Boston Market Restaurant 6 WA, OR 635,496
BC Great Lakes LLC................. F Boston Market Restaurant 6 IL, IN 563,772
Family Restaurants, Inc............ C Carrows Restaurant 4 CA 483,996
DenAmerica Corp.................... F Denny's Restaurant 5 TX, NC 475,680
Boston Chicken, Inc................ C Boston Market Restaurant 3 IL, PA 457,304
Paragon Steakhouse Restaurant,
Inc............................... C Mountain Jack's Restaurant 3 MI, OH 426,192
P&L Food Services LLC.............. F Boston Market Restaurant 6 PA, OH 403,578
The Snyder Group Company........... F Red Robin Restaurant 1 CO 357,000
Red Robin International, Inc....... C Red Robin Restaurant 1 WA 322,224
Baby Superstore, Inc............... C Baby Superstore Retail 1 MO 309,516
Blockbuster Entertainment Inc...... C Blockbuster Video/Music Retail 3 TX, AL 307,980
Huntington Restaurant Group........ F Denny's Restaurant 3 TX, AZ, LA 266,193
Video Update, Inc.................. C Video Update Retail 2 IL, AZ 243,648
Pacific Coast Restaurant, Inc...... F Stanford's Restaurant 1 CO 242,004
Mid-Atlantic Restaurant Systems,
L.P............................... F Boston Market Restaurant 3 NJ, PA 229,677
Platinum Properties LLC............ F Boston Market Restaurant 3 PA, SC 229,008
Taco Cabana Atlanta JV............. F Taco Cabana Restaurant 2 GA 209,004
Gourmet Systems, Inc............... C Applebees Restaurant 1 MO 204,324
Corral South....................... F Golden Corral Restaurant 1 FL 197,566
Pacific Apple Oregon, Inc.......... F Applebees Restaurant 1 WA 194,400
Golden Corral Corporation.......... C Golden Corral Restaurant 1 TX 189,756
Tropical Taco Cabana, Ltd.(2)...... F Taco Cabana Restaurant 1 NV 171,864
Captec-Roasters LLC................ F Kenny Rogers Roasters Restaurant 3 AZ 108,000
Roadhouse Grill Buffalo LLC........ F Roadhouse Grill Restaurant 1 NY 118,428
KRR Realty, Inc.................... F Arby's Restaurant 1 FL 99,720
RTM Mid-America, Inc............... F Jack in The Box Restaurant 1 IN 101,472
Food Service Management, Inc....... F Kenny Rogers Roasters Restaurant 1 CA 100,896
Western Maryland Fast Foods........ F Burger King Restaurant 1 WV 88,771
America's Favorite Chicken
Company........................... C Church's Restaurant 1 GA 87,516
Crown Management Group, Inc........ F Denny's Restaurant 1 FL 82,994
Pacific Foods, L.P................. F Kenny Rogers Roasters Restaurant 1 CA 75,132
Whatco of New Mexico, Inc.......... F Whataburger Restaurant 1 NM 52,488
Red Line San Antonio One, Ltd...... F Red Line Burgers Restaurant 2 TX 30,000
Progressive Restaurant Concepts.... F Arby's Restaurant 1 GA 26,537
--
-----------
Total.............................. 79 $10,130,396
== ===========
<CAPTION>
PERCENT PRIMARY
OF TOTAL LEASE
ACQUISITION ANNUAL TERM
LESSEE COST(1) RENT EXPIRATION
- ----------------------------------- ----------- -------- ----------
<S> <C> <C> <C>
United Auto Group, Inc............. $ 9,861,863 10.2% 2017
ARG Enterprises, Inc............... 9,219,000 9.9 2021
BC Northwest, Inc.................. 6,607,824 6.3 2011
BC Great Lakes LLC................. 5,712,051 5.5 2016
Family Restaurants, Inc............ 4,620,000 4.8 2016
DenAmerica Corp.................... 4,635,188 4.7 2015
Boston Chicken, Inc................ 4,566,588 4.5 2012
Paragon Steakhouse Restaurant,
Inc............................... 4,105,500 4.2 2016
P&L Food Services LLC.............. 4,112,928 4.0 2012
The Snyder Group Company........... 3,123,750 3.5 2016
Red Robin International, Inc....... 3,000,667 3.2 2016
Baby Superstore, Inc............... 3,003,000 3.0 2011
Blockbuster Entertainment Inc...... 3,003,000 3.0 2006
Huntington Restaurant Group........ 2,582,465 2.6 2017
Video Update, Inc.................. 2,311,108 2.4 2012
Pacific Coast Restaurant, Inc...... 2,310,000 2.4 2016
Mid-Atlantic Restaurant Systems,
L.P............................... 2,404,500 2.3 2011
Platinum Properties LLC............ 2,047,394 2.2 2012
Taco Cabana Atlanta JV............. 2,145,000 2.1 2016
Gourmet Systems, Inc............... 1,986,444 2.0 2016
Corral South....................... 1,903,160 1.9 2017
Pacific Apple Oregon, Inc.......... 1,890,000 1.9 2016
Golden Corral Corporation.......... 1,926,149 1.9 2009
Tropical Taco Cabana, Ltd.(2)...... 1,486,975 1.7 2014
Captec-Roasters LLC................ 2,426,548 1.1 2012
Roadhouse Grill Buffalo LLC........ 997,500 1.2 2015
KRR Realty, Inc.................... 933,647 1.0 2014
RTM Mid-America, Inc............... 1,039,500 1.0 2017
Food Service Management, Inc....... 985,425 1.0 2009
Western Maryland Fast Foods........ 847,364 0.9 2012
America's Favorite Chicken
Company........................... 835,321 0.9 2016
Crown Management Group, Inc........ 799,481 0.8 2017
Pacific Foods, L.P................. 415,275 0.7 2005
Whatco of New Mexico, Inc.......... 851,141 0.5 2007
Red Line San Antonio One, Ltd...... 533,994 0.3 2010
Progressive Restaurant Concepts.... 253,307 0.3 2017
----------- -----
Total.............................. $99,483,057 100.0%
=========== =====
</TABLE>
- ---------------
(1) Based upon monthly rent as of June 30, 1997 as annualized and without giving
effect to any future rent increases or percentage rents or deduction for the
effect of three presently non-revenue producing properties which in the
aggregate account for $346,716 or 3.4% of annualized rent at June 30, 1997.
Acquisition Properties. As of September 1, 1997, the Company had
agreements in principle to purchase the 62 Acquisition Properties which are
located in 22 states for an aggregate acquisition cost of approximately $94.5
million. The Acquisition Properties will expand the Company's existing portfolio
into five additional states and will further diversify its property, concept and
Lessee base to include operators of Circle K, Michael's Crafts, Office Depot,
SportsMart, Stop n Go, Taco Bell and Tony Roma's. The acquisition of each of the
Acquisition Properties, which the Company expects to be substantially completed
by July 1998, is dependent upon numerous contingencies, many of which are beyond
the Company's control, including the negotiation, execution and closing of
definitive agreements for the acquisition of each property. There is no
assurance that any of the Acquisition Properties will be acquired by the
Company. See "Risk Factors -- Risk Related to Acquisition Properties".
41
<PAGE> 45
LEASE EXPIRATION
The following table sets forth as of June 30, 1997, scheduled Lease
expirations:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
YEAR OF LEASES CURRENT TOTAL OF CURRENT
EXPIRATION(1) EXPIRING ANNUAL RENTS(2) TOTAL
------------- --------- --------------- ----------
<S> <C> <C> <C>
1998-2004.................................... -- $ -- 0.0%
2005......................................... 2 152,628 1.5
2006......................................... 2 230,484 2.3
2007......................................... 1 52,488 0.5
2008 and
thereafter..................................... 74 9,694,796 95.7
--
----------- -----
TOTAL.......................................... 79 $10,130,396 100.0%
== =========== =====
</TABLE>
- ---------------
(1) Assumes no early termination due to exercise of purchase options, defaults
or otherwise.
(2) Based on monthly rent as of June 30, 1997 annualized and without giving
effect to any future rent increases or deduction for the effect of three
currently non-revenue producing properties.
THE ADVISOR AND THE ADVISORY AGREEMENT
In September 1997 the Company retained Captec Advisors, a newly formed
Delaware corporation, pursuant to an Advisory Agreement (the "Advisory
Agreement"). Captec Advisors, together with Captec Financial and its Affiliates,
will provide certain management, advisory and administrative services to the
Company.
The directors and officers of Captec Advisors are:
<TABLE>
<CAPTION>
NAME POSITION WITH CAPTEC ADVISORS
- ----------------------------- --------------------------------------------------------------------------
<S> <C>
Patrick L. Beach............. Chairman of the Board of Directors, President and Chief Executive Officer
W. Ross Martin............... Director, Executive Vice President and Chief Financial Officer
George R. Beach.............. Director
</TABLE>
For biographies of Patrick L. Beach and W. Ross Martin, see
"Management -- Directors and Executive Officers". George R. Beach is the father
of Patrick L. Beach and an attorney.
It is anticipated that Captec Financial and its Affiliates will perform
certain of the services required to be provided to the Company pursuant to the
Advisory Agreement. Any services provided to the Company by Captec Financial or
its Affiliates pursuant to the Advisory Agreement will be paid for by the
Advisor and will result in no additional expense to the Company. Initially
Captec Financial will provide substantially all of the services to be rendered
to the Company pursuant to the Advisory Agreement. Subject to the direction of
the Board of Directors, the Advisor's responsibilities will include (i)
selecting restaurant properties for acquisition, formulating and evaluating the
terms of each proposed acquisition, and arranging for the acquisition of
properties by the Company; (ii) identifying potential Lessees for the restaurant
properties and formulating, evaluating and negotiating the terms of Leases;
(iii) negotiating the terms of any borrowing; (iv) performing credit analyses of
prospective restaurant and retail Lessees; (v) conducting legal and business
diligence and overseeing the preparation of all legal documentation for the
development and leasing of all properties; and (vi) identifying restaurant
properties for sale consistent with the Company's investment objectives and
prevailing economic conditions. The Advisor also will provide all necessary and
reasonable billing and administrative functions with respect to the Leases; take
all actions necessary to cause the Company to comply with all applicable laws
and regulations; cooperate with the Company in preparing reports to, and meeting
materials for, stockholders; prepare and deliver to the Company periodic
financial statements; promptly notify the Company in writing upon the occurrence
of certain events including defaults under the Leases; and perform such other
administrative and managerial functions as may be requested by the Company.
42
<PAGE> 46
As compensation for its services the Company will pay to Captec Advisors
the Incentive Acquisition Fee ranging from 1.0% to 4.0% of the acquisition cost
of properties identified by the Advisor and acquired during the term of the
Agreement. The amount of the Incentive Acquisition Fee will be based upon the
extent to which, if at all, the Company's anticipated return on the property at
the time of acquisition (determined by dividing (i) annual straight line rent
adjusted for any CPI increases by (ii) the acquisition cost) exceeds the average
yield on 30-year U.S. Treasury obligations for the 30 days preceding the date of
acquisition by from at least 3.0% (for the minimum 1.0% fee) to 7.5% or more
(for the maximum 4.0% fee). Captec Advisors will refund the Incentive
Acquisition Fee to the Company for any property any rental payment due within
the first 12 months of the Lease becomes more than 90 days delinquent and is not
cured. The Company also will pay to Captec Advisors a Management Fee at the
annual rate of the lesser of (i) six-tenths of one percent (0.6%) of the
aggregate capitalized cost (excluding accumulated depreciation) of all assets in
the Company's portfolio, including all restaurant and other properties, mortgage
loans, leasehold mortgages, secured equipment leases and joint venture and
partnership interests, and, without duplication, assets of the Affiliated
Partnerships, or (ii) 5.0% of the Company's revenues, all determined in
accordance with GAAP. Captec Advisors also may receive from each Lessee a
commitment fee (the "Commitment Fee") of 1.0% of the value of each lease
proposed to be executed by Lessees identified and obtained by the Advisor during
the term of the Advisory Agreement. The Company will reimburse the Advisor for
all expenses incurred directly in connection with the services it provides to
the Company. If the Advisor or an Affiliate performs services beyond the scope
of the Advisory Agreement, it will be compensated at such rates and in such
amounts as may be agreed to by Captec Advisors and the Independent Directors of
the Company.
The Advisory Agreement expires on December 31, 1998, subject to successive,
automatic one-year renewals unless terminated by either party at the conclusion
of the then-applicable term, upon 90 days prior written notice. The Advisory
Agreement may be terminated for cause or by the mutual consent of the parties.
Captec Advisors shall be entitled to receive all accrued but unpaid compensation
and expense reimbursements in cash within 30 days of any termination date.
Captec Advisors has the right to assign the Advisory Agreement to an Affiliate
subject to approval by the Independent Directors of the Company. The Company has
the right to assign the Advisory Agreement to any successor to all of its
assets, rights and obligations.
The Advisory Agreement disclaims any fiduciary obligation of the Advisor to
the Company. The Advisory Agreement also provides that the Advisor will not be
liable to the Company or its stockholders or others except for fraud, willful
misconduct or reckless disregard of its responsibilities under the Advisory
Agreement, and will not be responsible for any action of the Board of Directors
in following or declining to follow, any advice or recommendation of the
Advisor. The Company has agreed in the Advisory Agreement to indemnify the
Advisor with respect to acts or omissions of the Advisor undertaken in good
faith, in accordance with the foregoing standards. See "Risk
Factors -- Limitation of Liability and Indemnification of Officers, Directors
and the Advisor".
FINANCING POLICY
Although its organizational documents contain no limitation on the amount
of debt it may incur, the Company, subject to the discretion of the Board of
Directors, intends to maintain a debt capitalization ratio (total consolidated
debt of the Company as a percentage of Market Capitalization) of not more than
50.0%. The Company may from time to time reevaluate its financing policies and
increase or decrease its ratio of debt to Market Capitalization in response to
changing economic conditions, relative costs of debt and equity capital, market
value of its properties, growth, development and expansion opportunities and
other factors. In addition to the Credit Facility, indebtedness incurred by the
Company may be in the form of purchase money obligations to the sellers of
properties, secured or unsecured bank borrowings and publicly or privately
placed debt instruments. The Affiliated Partnerships, of which the Company will
become the general partner subsequent to completion of the Offering, also may
incur various forms of indebtedness for which the Company will be liable unless
the lender's recourse is expressly limited to collateral pledged as security for
such indebtedness. As of June 30, 1997, the Affiliated Partnerships had no debt
as to which the creditor has a right of recourse against the general partners in
the event of a default. See "Risk Factors -- Risk as General Partners of
Affiliated Partnerships" and "Risk Factors -- Risk of Leverage".
43
<PAGE> 47
The Company may borrow to the extent necessary to permit the Company to
make distributions required to enable the Company to qualify as a REIT for
federal income tax purposes. The Company does not intend to borrow to return
capital to the stockholders unless necessary to eliminate corporate-level tax to
the Company. See "Risk Factors -- Risk Related to REIT Minimum Distribution
Requirements" and "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT -- Annual Distribution Requirements".
INVESTMENT POLICIES OF THE COMPANY
The types of property and property interests in which the Company invests
are described under "Business -- General -- Growth Strategy" and "-- Operating
Strategy". The Company's policy with respect to borrowing is described under
"Business -- Financing Policy". All of the outstanding loans from the Company
are described under "Business -- Investment in Financial Instruments". Although
the Company's policy is to acquire and own properties subject to long-term net
leases during which term the properties may appreciate, it is the policy of the
Company to acquire properties primarily for the production of income. Although
the Company believes it has achieved, and will continue to maintain, substantial
diversification of its property portfolio, the Company does not restrict the
percentage of its assets which may be invested in a single property. Although it
has no present intention of doing so, the Company anticipates that any loans
which it may make in the future will be secured by mortgages on real property.
The Company has not underwritten the securities of any other issuer,
invested in the securities of any other issuer for the purpose of exercising
control or offered its securities in exchange for properties. The Company does
not anticipate engaging in any of the foregoing activities except that it may
issue shares of Common Stock or other of its securities as consideration for the
acquisition of properties.
INVESTMENT IN FINANCIAL INSTRUMENTS
Loans to Affiliate Collateralized by Mortgage Loans. At June 30, 1997 the
Company had a master revolving note (the "Master Note") agreement with Captec
Financial with an outstanding principal balance of $9.7 million which bears
interest of the annual rate of 8.0%, and is payable on demand. The Note is
collateralized in part by a senior interest in a portfolio of first mortgage
loans and in part by a subordinate interest in portfolios of first mortgage and
other secured loans.
The Company also held a $2.0 million promissory note collateralized by a
subordinate class certificate issued by Captec Loans Receivables Trust -- 1996
(the "Captec Trust"), an Affiliate, bearing interest at an annual rate of 15.7%.
The subordinate class certificate was issued in conjunction with an asset-backed
securization of a pool of long-term, fixed rate mortgage loans and other
collateralized loans originated by Captec Financial. See Note 3 to Financial
Statements.
Delinquent Mortgage Loans. The Company acquired in 1996 five delinquent
mortgage loans in anticipation of a restructuring. At June 30, 1997 all but
$788,479 of the loans had been restructured as operating leases and the balance
is expected to be similarly restructured in the near future. See Note 4 to
Financial Statements.
Other Loans. At June 30, 1997 the Company had other loans with a principal
balance of approximately $1.2 million consisting of a subordinated note
collateralized by subordinated interests in real estate and a mortgage loan
secured by a first mortgage on real estate. See Note 5 to Financial Statements.
Financing Leases. At June 30, 1997 the Company had an investment in
financing leases of restaurant properties in the amount $1.5 million. See Note 6
to Financial Statements.
The Company will not make further loans to Affiliates. See "Conflicts of
Interest" and "Federal Income Tax Considerations -- Requirements for
Qualification a REIT -- Income Tests".
OTHER INVESTMENTS
The Company also is the lessor under four secured leases of equipment,
furniture and fixtures to restaurant operators. The equipment subject to these
leases was acquired by the Company for an aggregate cost of
44
<PAGE> 48
approximately $1.6 million and the aggregate annual rental income from these
leases as of June 30, 1997, is $203,000.
EMPLOYEES
The Company's only employees are its executive officers. Day to day
services are provided to the Company by employees of the Advisor.
THE AFFILIATED PARTNERSHIPS
Subsequent to the completion of the Offering the Company will become the
sole general partner of Captec III and Captec IV, each of which is a Delaware
limited partnership engaged in substantially the same business as the Company.
The Company will acquire the general partnership interests from the current
general partners of the Affiliated Partnerships, which are wholly-owned
subsidiaries of Captec Financial and Patrick L. Beach, the Company's Chairman,
President and Chief Executive Officer. The Company will acquire the general
partnership interests in the Affiliated Partnerships for $3.3 million in the
aggregate, $315,000 of which will be paid to Mr. Beach in cash, and the balance
of which will be offset against amounts owed by Affiliates to the Company. As
part of the Company's acquisition of the general partnership interests and in
addition to rights of indemnification from the Affiliated Partnerships, the
current general partners, including Mr. Beach, will be relieved from, and
indemnified by the Company against, all liabilities of the Affiliated
Partnerships to which they may be subject as a result of having served as
general partners, other than for fraud, willful misconduct or breach of
fiduciary duty.
The following tables set forth certain information concerning Captec III's
and Captec IV's portfolios of properties and secured equipment leases as of June
30, 1997:
<TABLE>
<CAPTION>
ORIGINAL
AFFILIATED PARTNERSHIP PRODUCT LINE NUMBER ASSET COST
- ---------------------------------------------------- ---------------------- ------ -----------
<S> <C> <C> <C>
Captec Franchise Capital Partners L.P. III.......... Equipment Lease 10 $ 3,367,818
Net Lease Real Estate 11 14,806,758
---- -----------
Total 21 $18,174,576
==== ===========
Captec Franchise Capital Partners L.P. IV........... Equipment Lease 5 $ 1,529,130
Net Lease Real Estate 1 1,002,560
---- -----------
Total 6 $ 2,531,690
==== ===========
</TABLE>
The public offering of limited partnership interests in Captec IV, which has
been registered under the Securities Act, is ongoing. As of June 30, 1997, $23.9
million in limited partnership interests in Captec IV remained unsold. The net
proceeds of any additional sales of partnership interests in Captec IV may be
used to invest in additional properties, resulting in certain conflicts of
interest. See "Risk Factors -- Conflicts of Interest" and "Conflicts of
Interest".
The Company's rights, responsibilities and obligations as the general
partner of each Affiliated Partnership are set forth in the respective
Affiliated Partnership's Amended and Restated Agreement of Limited Partnership
(each a "Partnership Agreement" and collectively the "Partnership Agreements").
As general partner of each of the Affiliated Partnerships, the Company will own
a 1.0% interest in each Affiliated Partnership and be responsible and liable for
all of the obligations of each Affiliated Partnership. As of June 30, 1997
neither Captec III or Captec IV had any indebtedness or other material
liabilities. The Company will owe a fiduciary duty to the limited partners of
each Affiliated Partnership similar to the fiduciary duty that it owes its
stockholders which could subject it to a conflict between the interests of the
Company's stockholders and those of the limited partners of the Affiliated
Partnerships. See "Risk Factors -- Conflicts of Interest" and "Conflicts of
Interest".
As compensation for its services as a general partner of the Affiliated
Partnerships, the Company will be entitled to receive compensation from each of
the Affiliated Partnerships pursuant to the Partnership Agreements. This
compensation (which in some cases is subordinated to prior distributions to the
limited partners of specified
45
<PAGE> 49
returns on their initial capital investment) includes real property and
equipment acquisition fees, a property management fee based on the gross rental
revenue of the Affiliated Partnerships, reimbursement of expenses and specified
percentages of the net proceeds from the sale, refinancing or liquidation of
property or equipment. Based upon its 1.0% general partnership interest in each
Affiliated Partnership, pursuant to the Partnership Agreement, the Company also
will receive 1.0% of all distributions of cash made by either Affiliated
Partnership (the amount and timing of which distributions will be determined by
Company as the general partner). Generally, income such as that which the
Company will receive from the Affiliated Partnerships in respect of its general
partnership interests will not qualify for the 95.0% income test applicable to
REITs and all such income and other qualifying income must aggregate less than
5.0% of the Company's income for the Company to qualify or remain qualified as a
REIT. See "Federal Income Tax Considerations -- Requirements for Qualification
as a REIT -- Income Tests".
The Company also will be allocated 1.0% of any taxable income, gain or loss
recognized by either Affiliated Partnership. Each Partnership Agreement
obligates the Affiliated Partnership to indemnify the general partner from and
against all liabilities except liabilities arising from misconduct, negligence
or violation of securities laws. Each Partnership Agreement further provides
that a general partner may be removed by a vote of a majority in interest of the
limited partners subject to the Affiliated Partnership's obligation to purchase
the interests of a removed or disqualified (as a result of insolvency or
bankruptcy) general partner for an amount to be agreed upon by the general
partner and its successor or fair market value as determined in arbitration.
The acquisition by the Company of the general partnership interests in the
Affiliated Partnerships is subject to the satisfaction of certain conditions,
including the approval of the majority in interest of the limited partners of
each of the Affiliated Partnerships. There is no assurance that a majority in
interest of the limited partners of either or both Affiliated Partnerships will
approve the transaction and that the Company will be successful in acquiring the
general partnership interests in either or both Affiliated Partnerships. See
"Risk Factors -- Risk as General Partner of Affiliated Partnerships".
46
<PAGE> 50
DESCRIPTION OF PROPERTIES AND LEASES
The 79 Existing Properties conform generally to the following
specifications for size, cost, and type of land and buildings. Based upon its
experience and knowledge of the fast-food, family-style and casual dining
restaurant and retail industries, the Company expects that a majority of its
future properties, including the Acquisition Properties, will conform generally
to these specifications, although the Company may purchase properties which vary
materially from these specifications.
LAND
Lot sizes generally range from 20,000 to 80,000 square feet for restaurant
properties and up to 150,000 square feet for retail properties, depending upon
building size and local demographics. Properties typically are freestanding and
may be located on smaller parcels if sufficient parking is available. Properties
purchased by the Company are in locations zoned for commercial use which have
been reviewed for traffic patterns and volume. Land costs vary but generally
range from $250,000 to $3.0 million, depending upon various factors including
the size of the parcel, competition for sites and local commercial real property
values generally.
BUILDINGS
The style and appearance of the buildings typically are dictated by the
franchisors and chain owners of the businesses which are operated from the
properties. The buildings generally are rectangular and constructed from various
combinations of stucco, steel, wood, brick and tile and typically range from
2,000 to 6,000 square feet for restaurant properties and up to 40,000 square
feet for retail properties. Building and site preparation costs, which generally
range from $300,000 to $4.0 million for each property, vary depending upon the
size of the building and the site and area in which the property is located. The
properties typically are freestanding, surrounded by paved parking areas, and
are convertible to various uses with certain modifications. Generally, the
properties acquired by the Company are improved with buildings although in some
instances the Company may acquire only land (even if improved) or only the
improvements. A Lessee generally is required to make capital expenditures
reasonably necessary to refurbish buildings, premises, signs and equipment so as
to comply with the Lessee's obligations under its franchise or other operating
agreement. The Company believes the size of its typical retail property is
especially well-suited to meet the fundamental change which is occurring in the
retail industry. In order to meet changing consumer preferences, and as a result
of the relatively high cost of mall space, retailers increasingly prefer
smaller, freestanding facilities which are more accessible and facilitate the
customized presentation of the retail concept. The Company believes that it will
benefit from these trends because its properties meet these retailer
preferences.
THE LEASES
The Company typically acquires only properties which are subject to
long-term (typically 15 - 20 years with one or more five-year renewals)
triple-net Leases with creditworthy multi-unit franchisees and operators of
national and regional restaurants and retailers. In limited circumstances the
Company's retail Leases are on a "double-net" basis pursuant to which the
Lessees are required to pay for all repairs, renovations (if permitted under the
Leases), certain maintenance, taxes, utilities, assessments and insurance, and
the Company generally is responsible for maintenance of the exterior walls and
roof of the property. The Company believes that its Leases significantly reduce
operating expenses because the Lessees are responsible for all costs of repairs,
maintenance, real property taxes, assessments, utilities and insurance on the
properties; minimize the risk of default because Lessees are experienced
multi-unit operators of major national and regional restaurant chains and
retailers; provide secure, predictable, periodically increasing revenue through
fixed rent increases or, in certain circumstances, indexation to the CPI and/or
percentage rent; and offer Lessees financial flexibility and the ability to
retain more of their capital for reinvestment in their business. The Company's
strategy of entering into 15- to 20-year Leases with creditworthy Lessees
operating well-located units of the most successful nationally franchised and
chain restaurants and retailers is intended to provide the Company with
long-term, steady and secure revenue growth.
47
<PAGE> 51
TERM OF LEASES
The Leases typically are for initial 15- to 20-year terms with up to three
five-year renewal options, although in some cases the Company will enter into
Leases for shorter terms. Upon termination, the Lessee surrenders possession of
the property to the Company, usually with any improvements made during the Lease
term, except for properties in which the Company owns only the land in which
case the Lessee may retain ownership of the building.
LEASE PAYMENTS
During the term of a Lease, the Lessee pays the Company minimum annual rent
which is determined based upon a specified percentage of the Company's cost of
the property including any costs of construction or renovation. Typically,
Leases provide automatic increases in the base rent at predetermined intervals
during the term of the Lease. In certain limited circumstances, in addition to
base rent, the Lessees may be required to pay percentage rent, which is computed
as a percentage of the Lessee's gross sales or revenues.
INSURANCE, TAXES, MAINTENANCE AND REPAIRS
All triple-net Leases require that the Lessee pay all costs and expenses
including repairs, maintenance, real property taxes, assessments, utilities and
insurance. The double-net Leases are similar to the triple-net Leases, but
require the Company to maintain the exterior walls and/or roof of the property
for which the Company reserves $.15 per square foot on an annual basis. Lessees
are required to maintain all properties in good order and repair. Lessees
generally also are required to maintain, for the benefit of both the Company and
the Lessee, casualty insurance in an amount not less than the full replacement
value of the building and other permanent improvements (or a percent of such
value in the case of certain Leases, but in no event less than an amount as
required to avoid co-insurance), as well as comprehensive general liability
insurance, generally in an amount not less than $1.0 million for each location
and loss occurrence. Lessees (other than those with a substantial net worth)
generally also are required to obtain "rental value" or "business interruption"
insurance for losses in operating revenue due to the occurrence of an insured
event for a specified period, generally six to 12 months.
ASSIGNMENT AND SUBLEASE
Leases may not be assigned or subleased without the Company's prior written
consent except to a Lessee's corporate franchisor, corporate affiliate or
subsidiary, a successor by merger or acquisition, or, in certain cases, another
franchisee, and provided such assignee or subtenant agrees to operate the same
type of business on the premises. The Leases set forth certain factors (such as
the financial condition of the proposed tenant or subtenant) that are deemed to
be reasonable grounds for the Company's refusal to consent. Where consent is
given, the Lessee typically remains fully liable for the performance of all
obligations under the Lease following assignment or sublease.
ALTERATIONS TO PREMISES
A Lessee generally has the right, without the prior consent of the Company,
to make certain immaterial structural modifications to the building and
improvements (with a cost of up to 10.0% of the purchase price of the property)
or, with the Company's prior written consent, to make material structural
modifications that may include demolition and rebuilding. Under certain Leases,
the Lessee may make any type of alterations to the leased premises without the
Company's consent but must provide the Company with plans of any proposed
structural modifications before construction commences. Certain Leases may
require the Lessee to post a payment and performance bond for any structural
alterations with a cost in excess of a specified amount. The Lessee is required
to pay for all permitted alterations.
LESSEE PURCHASE OPTION
In limited circumstances the Leases grant to Lessees a right of first
refusal to match any offer to buy the property prior to acceptance by the
Company. In many cases the Lease affords the Lessee the option to purchase the
property during one or more typically one-month window periods at designated
times during the fifth to
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tenth years of the Lease. Typically the purchase price applicable upon the
exercise of this option by the Lessee is intended to reflect fair market value
at the time the option is exercised and is equal to the contractual rent for the
year following the year in which the option is exercised divided by a percentage
rate which is lower than the current rate of return on the Lease. See "Federal
Income Tax Considerations".
SUBSTITUTION OF BUSINESS ACTIVITY
Under certain Leases, the Lessee, at its expense, is entitled to operate an
alternate approved business concept on the property, provided such alternate
concept has an operating history which reflects an ability to generate gross
sales and potential sales growth equal to, or greater than, that experienced by
the Lessee in operating the original concept. Certain Leases provide the Lessee
with the right to offer the substitution of another restaurant or retail
property selected by the Lessee in the event that (i) the property is not
producing rent pursuant to the terms of the Lease; and (ii) the Lessee
determines in good faith that the property is not economically viable (other
than as a result of an insured casualty loss or condemnation) for the Lessee's
continued use and occupancy in its business operation. If either event occurs,
the Lessee will have the right, pursuant to specified procedures, to offer the
Company the opportunity to change the use of the property for another national
or regional franchised chain or retail property, with a total cost for land and
improvements thereon (including overhead, construction interest, and other
related charges) equal to or greater than, the cost of the property to the
Company. The Lessee is required to pay all costs incurred by the Company in
connection with any substitution of business activity.
EVENTS OF DEFAULT
The Leases generally provide that the following events, among others,
constitute a default subject to applicable cure rights: (i) the insolvency or
bankruptcy of the Lessee; (ii) the failure of the Lessee to make timely payment
of rent or other charges due and payable under the Lease for a specified period
of time (generally three to seven days) after notice of such failure; (iii) the
failure of the Lessee to comply with any of its other obligations under the
Lease for a specified period of time (generally 20 to 30 days) after receipt of
notice from the Company; (iv) a default or termination of a franchise agreement
between the Lessee and its franchisor; (v) a default under, or termination of, a
development agreement for improvement of the property or indemnity agreement or
the failure to establish the minimum annual rent at the end of the development
period; and (vi) a "cross default" under any other Lease between the Lessee and
the Company for other properties.
Upon default by the Lessee, the Company generally has the right under the
Lease and most state laws to evict the Lessee, re-lease the property and hold
the Lessee responsible for any deficiency in Lease payments, or to attempt to
sell the property. In general, the Lessee remains liable for all amounts due
under the Lease to the extent not paid from a security deposit (if any) or by a
new Lessee. In the event of a default under a Lease, the Company either will
attempt to locate a replacement operator acceptable to the franchisor or
remarket the property. In lieu of obtaining a replacement operator, some
franchisors may have the option and may elect to operate the business directly.
The Company will have no obligation to operate the business, and no franchisor
will be obligated to permit the Company or a replacement operator to operate the
business. See "Risk Factors -- Risk of Ownership and Leasing of Properties" and
" -- Risk Relating to Creditworthiness of Lessees".
MANAGEMENT OF PROPERTY PORTFOLIO
The Company intends to monitor its property portfolio continually and will
seek to sell properties when warranted by property value and prevailing
economic, business and other conditions. The Company's general policy will be to
sell properties for cash. The terms of payment to the Company will be affected
by custom in the area in which the property is located and the then prevailing
economic conditions. The Company also may enter into tax free exchanges to
reposition its portfolio. The Company will be subject to those risks inherent in
the investment in real estate including numerous factors beyond the Company's
control affecting the value of its properties. See "Risk Factors -- Risk of
Ownership and Leasing of Properties".
The Company intends, to the extent consistent with its objective as
qualifying and maintaining its status as a REIT, to invest in additional
properties any proceeds of the sale of a property that are not required to be
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distributed to stockholders in order to preserve the Company's REIT status for
federal income tax purposes. The Company also may be required to sell a property
upon the exercise of any purchase options conferred upon Lessees under the
Leases, or pursuant to joint venture agreements. See " -- Description of
Leases -- Lessee Purchase Option". In selling properties, the Company may accept
purchase money obligations as partial payment of the sales price. The terms of
payment will be affected by custom in the area in which the property is located
and by prevailing economic conditions. If a purchase money obligation is
accepted in lieu of cash upon the sale of a property, the Company would continue
to hold a mortgage on the property and the proceeds of the sale would be
realized over a period of years rather than at closing of the sale.
MANAGEMENT
GENERAL
The Company operates under the direction of the Board of Directors, the
members of which are accountable to the Company as fiduciaries. The Company
currently has three directors; it may have no fewer than three directors and no
more than 15 directors. Directors are elected annually, and each director holds
office until the next annual meeting of stockholders or until his successor has
been duly elected and qualified. There is no limit on the number of times that a
director may be elected to office. Although the number of directors may be
increased or decreased as discussed above, a decrease shall not have the effect
of shortening the term of any incumbent director. Any director may resign at any
time and may be removed by the other directors with cause or by the stockholders
with or without cause upon the affirmative vote of at least a majority of all
the outstanding shares of the Common Stock entitled to vote at a meeting called
for this purpose. Officers are appointed and serve at the discretion of the
Board of Directors.
INDEPENDENT DIRECTORS
Under the Certificate, a majority of the Board of Directors must consist of
Independent Directors, except for a period of 90 days after the death, removal
or resignation of an Independent Director. An Independent Director may not be
employed by the Company, be an Affiliate of the Company or an Affiliate of one
of the Company's Affiliates. Prior to the completion of the Offering, the
current directors will elect the Independent Directors.
FIDUCIARY RESPONSIBILITY OF THE BOARD OF DIRECTORS
Although the Board of Directors will be responsible for the management and
control of the affairs of the Company, it will retain the Advisor to provide
certain management services and be responsible primarily for the Company's
restaurant properties and for certain activities relating to its retail
properties, subject at all times to the oversight of the Board of Directors. The
directors are required only to devote such time to the Company and are required
only to devote such time to the affairs of the Company as their duties require.
The Board of Directors will meet as required, but not less frequently than
quarterly. It is anticipated that the directors will rely heavily on the Advisor
with respect to the acquisition, development, financing and leasing of
restaurant properties. The Advisory Agreement states that the Advisor will not
be considered to be a fiduciary of the Company. The directors will monitor the
actions, performance and management of the Company and activities of the Advisor
to assure that such actions are in the best interests of the stockholders and
consistent with the policies and other directives established by the Board of
Directors.
A majority of the Independent Directors and a majority of disinterested
directors must approve each transaction with the Advisor or its Affiliates. The
Board of Directors also is responsible for reviewing and evaluating the
performance of the Advisor before entering into or renewing an advisory
agreement. The Independent Directors shall supervise the performance of the
Advisor and determine from time to time (and at least annually) that the
compensation of the Advisor is reasonable.
The liability of the officers and directors while serving in such capacity
is limited in accordance with the Certificate, the Bylaws and applicable law.
See "-- Indemnification and Limitation of Liability".
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DIRECTORS, PROPOSED DIRECTORS AND EXECUTIVE OFFICERS
The directors, proposed directors and executive officers of the Company
are:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---------------------------------------- ---- -----------------------------------
<S> <C> <C>
Patrick L. Beach........................ 41 Chairman of the Board of Directors,
President and Chief Executive
Officer
W. Ross Martin.......................... 37 Director, Executive Vice President,
Chief Financial Officer and
Treasurer
Ronald Max.............................. 40 Vice President and Chief Investment
Officer
H. Reid Sherard......................... 49 Director
Richard J. Peters....................... 49 Proposed Director
Creed L. Ford, III...................... 45 Proposed Director
William H. Krul, II..................... 48 Proposed Director
</TABLE>
Prior to the completion of the Offering, the Company will add four additional
directors (including the individuals named herein) who will be Independent
Directors.
PATRICK L. BEACH is the Chairman of the Board of Directors, President and
Chief Executive Officer of the Company and Captec Advisors. Since founding
Captec Financial in 1981, Mr. Beach has served as the Chairman of its Board of
Directors, President and Chief Executive Officer, as well as in similar
capacities for various of its Affiliates. Mr. Beach has worked exclusively with
Captec Financial and its Affiliates since 1991. From 1989 to 1991 Mr. Beach also
served as Chairman and President of Illiana Printing, Inc., the master
franchisor for American Speedy Printing Centers, Inc. in the states of Illinois
and Indiana. From 1986 until 1990 Mr. Beach was the Chairman of Wendy's of San
Diego, Inc., a 27-unit franchisee of Wendy's International. Mr. Beach is a
graduate of the University of Michigan School of Business Administration (B.B.A.
1977). See "Risk Factors -- Conflicts of Interest -- Risks of Reliance on
Management and the Advisor" and "-- Dependence on Key Personnel and Limited
Management Group".
W. ROSS MARTIN is a director, Executive Vice President, Chief Financial
Officer and Treasurer of the Company and a director, Executive Vice President
and Chief Financial Officer of Captec Advisors. Mr. Martin joined Captec
Financial in 1985 as Controller, was promoted to Vice President -- Finance in
1986 and Chief Financial Officer in 1994, and currently serves as a director and
Executive Vice President and Chief Financial Officer of Captec Financial and in
a similar capacity for various of its Affiliates. From 1982 until 1985, he was
employed by Deloitte Haskins & Sells, most recently as senior consultant in the
Emerging Business Services practice. Mr. Martin is a graduate of the University
of Michigan School of Business Administration (B.B.A. 1982) and a Certified
Public Accountant. See "Risk Factors -- Conflicts of Interest -- Risks of
Reliance on Management and the Advisor" and "-- Dependence on Key Personnel and
Limited Management Group".
RONALD MAX is Vice President and Chief Investment Officer of the Company.
Mr. Max joined Captec Financial in 1995 to help establish a retail properties
acquisition and development program. From 1988 to 1995 Mr. Max held various
positions with Brauvin Real Estate Funds ("Brauvin"), including Chief Financial
Officer and Director of Acquisitions, where he was responsible for the
acquisition and funding of over $100.0 million of retail properties. Prior to
1988, Mr. Max had extensive experience in real estate and financing. Mr. Max is
a graduate of Northern Illinois University (B.S. 1979) and a Certified Public
Accountant. See "Risk Factors -- Conflicts of Interest -- Risks of Reliance on
Management and the Advisor" and "-- Dependence on Key Personnel and Limited
Management Group".
H. REID SHERARD, a director, currently is Senior Vice President -- Sales
and Marketing of Captec Financial, by which he has been employed since 1994.
From 1986 to 1994 Mr. Sherard was employed by Franchise Finance Corporation of
America in several positions including Vice President, Acquisitions. Mr. Sherard
is a graduate of Charleston Southern University (B.S. 1970).
RICHARD J. PETERS, a proposed director, currently serves as President of
R.J. Peters & Company, L.L.C., a privately held investment company. From 1986
through June 1997, Mr. Peters was a senior executive of Penske
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Corporation ("Penske"), a multi-billion dollar privately held transportation
services company. Most recently, Mr. Peters served as Executive Vice President
and Chief Financial Officer of Penske, and as President and Chief Executive
Officer of Penske Motorsports, Inc. Mr. Peters also is a director of Penske,
Penske Motorsports, Inc. and Aon Funds. Mr. Peters is a graduate of Wayne State
University (B.B.A. 1969).
CREED L. FORD, III, a proposed director, currently is the Chief Executive
Officer of Kona Restaurant Group which owns and operates Johnny Carino's Italian
Kitchen and Kona Ranch Steak House restaurants and is a Chili's Grill and Bar
franchisee. From 1976 until 1997 Mr. Ford served in numerous capacities with
Brinker International ("Brinker"), a multi-concept casual dining company, most
recently as its Chief Operating Officer and a director. While with Brinker, Mr.
Ford participated in the establishment of Chili's, the development of 600
restaurants world-wide and the management of over 70,000 employees. Mr. Ford is
a graduate of Texas A&M University (B.S. 1975).
WILLIAM H. KRUL, a proposed director, has been associated for the past 28
years with the Miller-Valentine Group and its affiliates, most recently as
President of Miller-Valentine Construction, Inc. Mr. Krul is a director of Mercy
Siena Woods Nursing Home and Mercy Western Ohio. Mr. Krul is a graduate of
Wright State University in Dayton, Ohio (B.A. 1971).
AUDIT COMMITTEE
The Audit Committee, which will consist of three Independent Directors,
recommends the engagement of independent public accountants, the plans for, and
results of, audit engagements, approves professional services provided by the
independent public accountants, considers the range of audit and nonaudit fees,
and reviews the independent public accountants' letter of comments and
management's responses thereto, the adequacy of the Company's internal
accounting controls, and major accounting or financial reporting matters.
COMPENSATION COMMITTEE
The Compensation Committee, which will consist of three Independent
Directors, determines compensation for senior management, advises the Board of
Directors on the adoption and administration of employee benefit and
compensation plans and administers the Company's Long-Term Incentive Plan.
INDEMNIFICATION AND LIMITATION OF LIABILITY
As permitted under the GCL, the Company's Certificate eliminates the
personal liability of a director to the Company and its stockholders for
monetary damages for breach of fiduciary duty of care as a director. Liability
is not eliminated or limited for (i) any breach of the director's duty of
loyalty to the Company or its stockholders; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) unlawful payment of dividends or stock purchases or redemptions pursuant
to Section 174 of the GCL; or (iv) any transaction from which the director
derived an improper personal benefit.
The Bylaws also provide for indemnification of officers and directors of
the Company and persons who serve at the request of the Company as a director,
officer, employee, agent or trustee of another corporation, partnership, joint
venture, trust or other enterprise, to the full extent allowed by Delaware law.
The GCL authorizes indemnification of officers, directors and persons serving
other entities in certain capacities at the request of the corporation, subject
to certain conditions and limitations set forth therein, against all expenses
and liabilities incurred by or imposed upon them as a result of actions, suits
and proceedings brought against them in such capacity if they acted in good
faith and in a manner they reasonably believed to be in, or not opposed to, the
best interests of the corporation.
The Company also has entered into indemnification agreements with its
directors and officers which provide for indemnification to the full extent
permitted under Delaware law and has agreed to indemnify the Advisor against
certain liabilities.
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INSURANCE
The Company has obtained a directors and officers liability insurance
policy in the aggregate amount of $5.0 million. Subject to typical exclusions,
the policy insures (i) the officers and directors of the Company from any claim
arising out of an alleged wrongful act by the directors and officers of the
Company in their respective capacities, and (ii) the Company to the extent that
the Company has indemnified the directors and officers for such losses.
EXECUTIVE COMPENSATION AND EMPLOYMENT CONTRACTS
During the year ended December 31, 1996, the Company did not pay
compensation to its officers or directors. In September 1997, Patrick L. Beach
and W. Ross Martin each entered into employment contracts with the Company.
Messrs. Beach's and Martin's agreements provide for initial three-year terms
that are extended automatically for an additional year at the end of each full
calendar year of the agreement, subject to the right of either party to
terminate the agreement at the end of the then applicable term by giving written
notice of termination on or before November 30 of any year. Mr. Beach will
receive an annual base salary of $150,000 and Mr. Martin will receive an annual
base salary of $100,000. Both Mr. Beach and Mr. Martin will be entitled to an
annual bonus on a sliding scale of from 10% to 100% of annual base salary
contingent, and based upon, the percentage increase of FFO per share in any
calendar year from the prior calendar year. For purposes of any bonuses payable
for 1997, the Compensation Committee of the Board of Directors will calculate
appropriate prorated amounts. Messrs. Beach and Martin will also be granted
10-year options to purchase 400,000 and 200,000 shares of Common Stock,
respectively, at the initial public offering price. The options will vest and
become exercisable in three equal annual installments on the first through third
anniversaries of the execution of the employment agreements. Each employment
agreement provides that upon the termination of the employee's employment by the
Company other than for "cause" (as defined in the employment agreements); by the
employee for certain actions of the Company, such as effecting a material
adverse change in the employee's responsibilities or the failure of the Company
to nominate Mr. Beach or Mr. Martin to the Board of Directors; or a "change in
control" of the Company (as defined in the employment agreements), the employee
will be entitled to all compensation and benefits payable under the employment
agreement for the remainder of its term.
COMPENSATION OF DIRECTORS
The Company intends to pay its Independent Directors an annual fee of
$16,000 and a fee of $1,000 for each directors' meeting and each committee
meeting attended and $250 for participation in each meeting by telephone. No
other directors will receive directors' fees. Each Independent Director will
receive a ten-year option for 5,000 shares of Common Stock pursuant to the
Long-Term Incentive Plan, exercisable at the initial public offering price of
the Common Stock and subject to vesting fully within the first two years of
issuance.
DIRECTORS' DEFERRED COMPENSATION PLAN
The purpose of the Company's Directors' Deferred Compensation Plan (the
"Deferred Plan") is to assist in attracting and retaining persons of competence
and stature to serve as Independent Directors by giving them the option to defer
receipt of the fees payable to them by the Company for their services as
directors. The Deferred Plan is (i) applicable to all director's fees payable
with respect to periods commencing with the Company's fiscal quarter that begins
October 1, 1997; (ii) limited to those directors who receive fees for services
as a director and are not employed by the Company, and (iii) administered by
Company officers or directors appointed by the Board of Directors, who are not
eligible to participate in the Deferred Plan.
LONG-TERM INCENTIVE PLAN
The purpose of the Company's Long-Term Incentive Plan (the "Plan") is to
promote the long-term growth and profitability of the Company by enabling it to
attract, retain and reward key employees and directors of the Company and to
strengthen the mutuality of interest between such key employees and the
Company's stockholders. Grants of incentive or nonqualified share options,
restricted shares, deferred shares, share purchase rights, share appreciation
rights in tandem with options ("SARs"), other share-based awards or any
combination
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thereof, may be made under the Plan. Eligible employees of the Company may
participate in the Plan. The Compensation Committee will administer the Plan,
and the members of the Compensation Committee are not eligible to participate in
the Plan. The Company has reserved 727,000 shares of Common Stock for issuance
under the Plan. The share limitations, shares reserved and the terms of
outstanding awards will be adjusted, as the Compensation Committee deems
appropriate, in the event of a share dividend, split or other change in the
corporate structure of the Company affecting the shares.
Share Options and Tandem SARs. The exercise price of share options granted
under the Plan may not be less than the fair market value (as defined in the
Plan) of the shares on the date the option is granted. The Compensation
Committee may grant tandem SARs to any person granted an option under the Plan.
Each tandem SAR will represent the right to receive, in cash or shares as the
Compensation Committee may determine, a distribution in an amount equal to the
excess of the fair market value of the option shares (to which the SAR
corresponds) on the date of exercise over the exercise price for those shares.
Each tandem SAR expires at the same time as its corresponding option. The
exercise of an option will cause an immediate forfeiture of its corresponding
SAR, and the exercise of an SAR will cause an immediate forfeiture of its
corresponding option. The Plan provides that all options and tandem SARs will
vest on a change in control of the Company (as defined in the Plan).
Share Awards. The Compensation Committee may award shares of the Common
Stock under the Plan and may place restrictions on the transfer or defer the
date of receipt of those shares. Each award will specify any applicable
restrictions or deferral date, the duration of those restrictions and the time
at which the restrictions lapse. Participants will be required to deposit shares
with the Company during the period of any restrictions. The Compensation
Committee also may grant share purchase rights for which the purchase price may
not be less than the fair market value (as defined in the Plan) on the date of
grant, except the purchase price may not be less than 85.0% of the fair market
value on the date of the grant if the grant is made in lieu of cash
compensation.
Other Share-Based Awards. The Compensation Committee may grant other awards
of shares and other awards that are valued or otherwise based on the Company's
Common Stock.
Miscellaneous. The Plan provides for vesting, exercise or forfeiture of
rights granted under the Plan on retirement, death, disability, termination of
employment or a change of control. The Board of Directors may modify, suspend or
terminate the Plan provided it does not impair the rights thereunder of any
participant. Under applicable law, the stockholders must approve any increase in
the maximum number of shares reserved for issuance under the Plan, any change in
the classes of employees eligible to participate in the Plan and any material
increase in the benefits accruing to participants. The Company also may, at any
time subsequent to completion of the Offering, register the 727,000 shares of
Common Stock reserved for issuance pursuant to the Plan creating additional
shares of Common Stock eligible to be sold in any public trading market which
may develop for the Common Stock. See "Risk Factors -- Risk Related to Shares
Eligible for Future Sale".
CERTAIN TRANSACTIONS
The Company is part of a family of affiliated specialized commercial
finance companies providing a diverse line of financing products to the
franchise, chain restaurant and specialty retail industries. Since the Company's
inception, Affiliates of Captec Advisors have managed all operations of the
Company, provided investment and financial advisory services and provided
financing to the Company. Prior to the Offering, the Company engaged in numerous
transactions with such Affiliates, including those set forth below.
In 1996 the Company acquired delinquent mortgage loans from Captec
Franchise Capital Partners L.P. II, an Affiliate, in anticipation of a
restructuring. At June 30, 1997, all but $788,479 of the delinquent mortgage
loans had been restructured as operating leases, and the balance is expected to
be similarly restructured in the near future. See "Business -- Investment in
Financial Instruments" and Notes 4 and 6 to Financial Statements.
At June 30, 1997, the Company had a Master Note with Captec Financial, an
Affiliate, collateralized in part by a $6.4 million senior interest in a
portfolio of loans under an assignment of contracts with Captec Financial, and
in part by a $3.3 million subordinate interest in a portfolio of loans owned by
Captec Funding, an Affiliate, under an assignment of contracts with Captec
Financial. This note bears interest at the annual rate of 8.0% and is
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payable on demand. The Company also holds a $2.0 million promissory note
collateralized by a subordinate class certificate issued by Captec Trust, an
Affiliate, which bears interest at an annual rate of 15.7%. See "Conflicts of
Interests" and Note 3 to Financial Statements.
The Company made a demand loan of $421,920 collateralized by a first
mortgage on a Blockbuster Video unit owned by the father-in-law of W. Ross
Martin, Executive Vice President and a director of the Company. This note bears
interest at a rate of 9.0% per annum. See Note 5 to Financial Statements.
Prior to its merger, Captec Michigan had an agreement with Advisors
Michigan whereby Advisors Michigan managed the operations of Captec Michigan and
received fees of $600,000 and $250,000 in 1996 and 1995, respectively, which it
in turn paid to Affiliates. During 1995 and 1996, the Company also made
short-term demand notes to several Affiliates. At June 30, 1997, such loans
aggregated $5.1 million. The notes bear interest at 8.0% and are payable on
demand. See "Business Investment in Financial Instruments" and Note 11 to
Financial Statements.
Creed L. Ford, III, a proposed director of the Company, is a prospective
Lessee with respect to two of the Acquisition Properties.
In September 1997, the Company entered into the Advisory Agreement,
pursuant to which Captec Advisors, an Affiliate, will perform various services
for the Company, particularly with respect to restaurant properties, and will
receive fees and compensation for such services. See "Business -- The Advisor
and the Advisory Agreement" and "Conflicts of Interest -- Compensation of the
Advisor".
The Company has agreed, subsequent to the completion of the Offering, to
acquire the general partnership interests of Captec III and Captec IV from the
current general partners, which are wholly-owned subsidiaries of Captec
Financial, and Patrick L. Beach, the Company's Chairman, President and Chief
Executive Officer. The Company will acquire such partnership interests for $3.3
million in the aggregate, $315,000 of which will be paid to Mr. Beach in cash,
and the balance of which will be offset against amounts owed to the Company by
Affiliates. See "Business -- The Affiliated Partnerships".
Upon completion of the Offering, the Company will redeem 40,500 shares of
Preferred Stock utilizing proceeds of the Offering and exchange 633,333 shares
of Common Stock for 9,500 shares of Preferred Stock. The Company has agreed to
register, at its expense, these shares of Common Stock in the event of a
subsequent public offering of the Common Stock by the Company or upon demand by
the owner of the shares at any time subsequent to 180 days following the
completion of the Offering. See "Prospectus Summary -- History and Formation of
the Company" and "Use of Proceeds".
The Company believes that each of the foregoing transactions is fair to the
Company and on terms no less favorable to the Company than those available from
unrelated third parties.
Subsequent to the Offering, the Company will not make loans to Affiliates
and will enter into transactions with Affiliates only if the transaction has
been approved by a majority of the directors (including a majority of the
Independent Directors) not otherwise interested in such transactions as fair and
reasonable to the Company and on terms and conditions no less favorable to the
Company than those available from unaffiliated third parties. See "Conflicts of
Interest -- Certain Conflict Resolution Procedures".
CONFLICTS OF INTEREST
The Company will be subject to various conflicts of interest arising out of
its relationship to the Advisor, its Affiliates and the Affiliated Partnerships,
as described below.
REPAYMENT OF INDEBTEDNESS TO AFFILIATE OF LEAD MANAGING UNDERWRITER
CSFBMC, an Affiliate of one of the lead managing Underwriters, will receive
approximately $107.1 million, which exceeds 10.0% of the net proceeds of the
Offering for the repayment of outstanding principal balance of, and accrued
interest on, the Credit Facility.
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PRIOR AND FUTURE PROGRAMS
Affiliates of the Company and the Advisor have organized five real estate
investment funds, currently have other real estate holdings, and in the future
expect to form, offer interests in, and manage other real estate programs in
addition to, the Company. Some of these programs involve and will involve
Affiliates of the Company in the ownership, operation, leasing, and management
of fast-food, family-style and casual dining restaurants, retailers and other
businesses that may be suitable for investment by the Company. Certain of these
affiliated public or private real estate programs invest or may invest, in some
cases solely, in restaurants and other retailers, may purchase properties
concurrently with the Company and may lease restaurant and retail properties to
operators who also lease or operate certain of the Company's properties. These
properties, if located in the vicinity of, or adjacent to, properties acquired
by the Company may affect the Company's gross revenues. Such conflicts between
the Company and affiliated programs may affect the value of the Company's
investments as well as its net income. The Company believes that it and the
Advisor have established adequate guidelines to minimize such conflicts. See
"-- Certain Conflict Resolution Procedures".
ACQUISITION OF PROPERTIES
Affiliates of the Company and the Advisor regularly have opportunities to
acquire restaurant and retail properties of a type suitable for acquisition by
the Company as a result of existing relationships and past experience with
various restaurant chains, retailers and franchisees. See "Business -- General".
A purchaser who wishes to acquire one or more of these properties must do so
within a relatively short period of time, occasionally at a time when the
Company (due to insufficient funds, for example) may be unable to make the
acquisition. The Advisor could experience potential conflicts of interest in
connection with the negotiation of the purchase price and other terms of the
acquisition of a property, as well as the terms of the Lease of a property, due
to its relationship with its Affiliates and the ongoing business relationship of
its Affiliates with restaurant operators and retailers. The Advisor or its
Affiliates also may be subject to potential conflicts of interest at such time
as the Company wishes to acquire a property that also would be a suitable
investment for an Affiliate. The Company also will be subject to such conflicts
of interest to the extent a potential property acquisition also would be
appropriate for either or both of the Affiliated Partnerships. Affiliates of the
Company and the Advisor serve as directors of the Company and, in this capacity,
have a fiduciary obligation to act in the best interest of the stockholders of
the Company and, as general partners or directors of Affiliates, to act in the
best interests of the stockholders in other programs with investments that may
be similar to those of the Company. See "Management -- Fiduciary Responsibility
of the Board of Directors". The Company has developed procedures to resolve
potential conflicts of interest in the allocation of properties between the
Company and certain of its Affiliates. See "-- Certain Conflict Resolution
Procedures".
JOINT INVESTMENT WITH AFFILIATES
The Company may invest in joint ventures with the Advisor or other
Affiliates if a majority of the directors, including a majority of the
Independent Directors, determines that the investment in the joint venture is
fair and reasonable to the Company and on terms no less favorable to the Company
then in comparable transactions between unaffiliated parties.
COMPETITION FOR MANAGEMENT TIME
The officers and directors of the Advisor and the officers and directors of
the Company currently are engaged, and in the future will engage, in the
management of other businesses and properties. They will devote only as much of
their time to the business of the Company as they, in their judgment, determine
is reasonably required, which will be substantially less than their full time.
These officers and directors of the Company and officers and directors of the
Advisor may experience conflicts of interest in allocating management time,
services and functions among the Company and the various entities, investor
programs (public or private) and any other business ventures in which any of
them are, or may become, involved.
COMPENSATION OF THE ADVISOR
Pursuant to the Advisory Agreement, the Advisor has been engaged to perform
various services for the Company, particularly with respect to restaurant
properties and will receive fees and compensation for such services. Although
the Advisory Agreement was approved by a majority of the Board of Directors,
including a
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majority of the Independent Directors, as being fair and reasonable to the
Company and on terms and conditions no less favorable than those which could be
obtained from non-Affiliates, the Advisory Agreement was not the result of
arms-length negotiations. The timing and nature of fees and compensation to the
Advisor could create a conflict between the interests of the Advisor and the
stockholders. A transaction involving the purchase, lease and sale of any
property may result in the realization by the Advisor and its Affiliates of
substantial fees, compensation or other income. Potential conflicts may arise in
connection with the determination by the Advisor on behalf of the Company of
whether to sell a property, as such determination could impact the timing and
amount of fees payable to the Advisor. See "Business -- The Advisor and the
Advisory Agreement".
CERTAIN CONFLICT RESOLUTION PROCEDURES
In order to reduce or eliminate certain potential conflicts of interest,
the Company Board of Directors has adopted a number of restrictions relating to
(i) transactions between the Company and the Advisor or its Affiliates; (ii)
certain future offerings; and (iii) allocation of restaurant properties, among
certain Affiliates. These restrictions include the following:
1. No goods or services will be provided by the Advisor or its
Affiliates to the Company except for transactions approved by a majority of
the directors (including a majority of the Independent Directors) not
otherwise interested in such transactions as fair and reasonable to the
Company and on terms and conditions not less favorable to the Company than
those available from unaffiliated third parties and not less favorable than
those available from the Advisor or its Affiliates in transactions with
unaffiliated third parties.
2. The Company will not purchase or lease properties in which the
Advisor or its Affiliates has an interest without the determination, by a
majority of the directors (including a majority of the Independent
Directors) not otherwise interested in such transaction, that such
transaction is competitive and commercially reasonable to the Company and
at a price to the Company no greater than the cost of the property to the
Advisor or its Affiliate unless there is substantial justification for any
amount that exceeds such cost and such excess amount is determined to be
reasonable. In no event shall the Company acquire any such property at an
amount in excess of its appraised value. The Company will not sell or lease
properties to the Advisor or its Affiliates unless a majority of the
directors (including a majority of the Independent Directors) not
interested in the transaction determines the transaction is fair and
reasonable to the Company.
3. The Company will not make any loans to Affiliates. The Advisor and
its Affiliates will not make loans to the Company, or to joint ventures in
which the Company is a co-venturer, for the purchase of properties. Any
loans to the Company by the Advisor or its Affiliates for other purposes
must be approved by a majority of the directors (including a majority of
the Independent Directors) not otherwise interested in such transaction as
fair, competitive, commercially reasonable and no less favorable to the
Company than comparable loans between unaffiliated parties.
4. The Company will have a right of first refusal pertaining to any
opportunity to invest in national or regional chain or franchised
restaurants or retail properties which may be presented to the Advisor. If
a majority of the directors (including a majority of the Independent
Directors) decline to invest in such opportunity, then the Company may, in
its capacity as sole general partner, assign its interest in such
opportunity to the Affiliated Partnerships. See "Business -- The Affiliated
Partnerships" and "Risk Factors -- Risk as General Partner of Affiliated
Partnerships."
5. In addition to any approvals required by applicable law, any matter
related to the removal of, or any transaction with, the Advisor, a director
or an Affiliate which is submitted to a vote of the stockholders will be
required to be approved by the holders of a majority of the voting stock
other than stock owned by the Advisor and its Affiliates (including
management but excluding Independent Directors).
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus and after
giving effect to the Offering, the redemption of the Preferred Stock and the
exchange of Common Stock for the unredeemed Preferred Stock, information
regarding the beneficial ownership of Common Stock by each person known by the
Company to be the beneficial owner of more than 5.0% of the outstanding Common
Stock, by each executive officer, director and
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<PAGE> 61
proposed director of the Company, and by all executive officers and directors of
the Company as a group. To the knowledge of the Company, each person named in
the table has sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by such person. None of such
stockholders is selling any Common Stock in the Offering.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER TO THE OFFERING
NAME AND ADDRESS OF ---------------------- ----------------------
BENEFICIAL OWNER(1) SHARES PERCENTAGE SHARES PERCENTAGE
- -------------------------------------------------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Patrick L. Beach(2)............................... 617,600 47.0% 617,600 4.7%
W. Ross Martin(3)................................. 281,833 21.4 281,833 2.1
H. Reid Sherard................................... 44,396 3.4 44.396 0.3
Ronald Max(4)..................................... -- -- -- --
Richard J. Peters(5).............................. -- -- -- --
Creed L. Ford, III(5)............................. -- -- -- --
William H. Krul, II(5)............................ -- -- -- --
Captec Financial Group, Inc....................... 133,208 10.1 133,208 1.0
Michigan Corp..................................... 192,383 14.6 192,383 1.5
------- ----- ------- -----
All executive officers and directors as a group (8
persons)........................................ 943,829 71.8 943,829 7.1
</TABLE>
- ---------------
(1) Unless otherwise indicated, the address of each such person is 24 Frank
Lloyd Wright Drive, Ann Arbor, Michigan 48016.
(2) Does not include 400,000 shares of the Common Stock subject to options which
are not exercisable within 60 days.
(3) Does not include 200,000 shares of the Common Stock subject to options which
are not exercisable within 60 days.
(4) Does not include 50,000 shares of Common Stock subject to options which are
not exercisable within 60 days.
(5) Does not include 5,000 shares of Common Stock subject to options which are
not exercisable within 60 days.
CAPITAL STOCK OF THE COMPANY
GENERAL
The Certificate authorizes the issuance of up to 40,000,000 shares of
Common Stock of which 1,315,440 shares are issued and outstanding, 10,000,000
shares of Preferred Stock, of which 50,000 shares currently are issued and
outstanding and none of which will be issued and outstanding upon completion of
the Offering, and 10,000,000 shares of Excess Stock, $.01 per share (the "Excess
Stock"), none of which are issued and outstanding. In addition, the Company will
exchange 633,333 shares of Common Stock for 9,500 shares of Preferred Stock upon
the consummation of the Offering and has reserved up to 727,000 shares of Common
Stock for issuance under the Plan and 600,000 shares of Common Stock for
issuance upon exercise of options to be granted to Messrs. Beach and Martin
pursuant to their employment agreements. Following completion of the Offering,
13,273,773 shares of Common Stock will be issued and outstanding (14,972,523 if
the Underwriters' overallotment option is exercised in full) and no shares of
Preferred Stock will be issued and outstanding.
There is no established trading market for the Common Stock. Application
will be made for the listing of the Common Stock on the NYSE under the symbol
"CRR".
will act as transfer agent and registrar for the Common
Stock.
The following description of the Company's capital stock and of certain
provisions of the Certificate is a summary of, and is qualified in its entirety
by reference to, the Certificate, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "Risk Factors --
Risk Related to Certain Anti-Takeover Effect of Limitation on Ownership of
Common Stock" and "Additional Information".
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<PAGE> 62
COMMON STOCK
Holders of the Common Stock are entitled to receive dividends, when, as and
if declared by the Board of Directors of the Company, out of funds legally
available therefor. The holders of Common Stock, upon any liquidation,
dissolution or winding-up of the Company, are entitled to share ratably in any
assets remaining after payment in full of all liabilities of the Company and all
preferences of the holders of any outstanding Preferred Stock. The shares of
Common Stock possess ordinary voting rights, each share entitling the holder
thereof to one vote. Holders of Common Stock do not have cumulative voting
rights in the election of directors and do not have preemptive rights. All of
the shares of the Common Stock now outstanding are, and the shares of the Common
Stock offered hereby when issued and sold to the Underwriters in the manner
described in this Prospectus will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without stockholder approval, to
issue up to 10,000,000 shares of Preferred Stock from time to time in one or
more series, to establish the number of shares of Preferred Stock to be included
in each such series and to fix the designations, powers, preferences and rights
of the Preferred Stock of each such series and the qualifications, limitations
or restrictions thereof. The issuance of Preferred Stock may have the effect of
delaying or preventing a change in control of the Company, could decrease the
amount of earnings and assets available for distribution to the holders of the
Common Stock, could adversely affect the rights and powers, including voting
rights, of the holders of the Common Stock and in certain circumstances, could
have the effect of decreasing the market price of the Common Stock. As of the
date of this Prospectus, there are 50,000 shares of Preferred Stock outstanding,
40,500 of which will be redeemed upon completion of the Offering utilizing a
substantial portion of the net proceeds of the Offering and 9,500 of which will
be exchanged for 633,333 shares of Common Stock at a conversion rate per share
equal to the initial public offering price. Upon the completion of the Offering
there will be no Preferred Stock outstanding. The Company has not designated any
additional Preferred Stock and has no plans to issue any additional Preferred
Stock.
EXCESS STOCK AND RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares. Not more than
50.0% in value of the Company's outstanding shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year of the Company's existence) or during a proportionate part of a shorter
taxable year, and the Company must be owned beneficially by 100 or more persons
during at least 335 days of a taxable year (other than the first year) or during
a proportionate part of a shorter taxable year. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT". Because the Company
expects to qualify as a REIT, the Certificate limits the acquisition of shares
of the Company's capital stock (the "Ownership Limit").
The Ownership Limit provides that, subject to certain exceptions set forth
in the Certificate, no person may own, or be deemed to own, by vote or value, by
virtue of the applicable attribution provisions of the Code, more than 9.8% of
each class of the outstanding shares of the Company. The Board of Directors may,
but is not required to, waive the Ownership Limit if it determines that greater
ownership will not jeopardize the Company's status as a REIT. As a condition of
waiver, the Board of Directors may require opinions of counsel satisfactory to
it and undertakings or representations from the applicant with respect to
preserving the REIT status of the Company.
If any purported transfer of capital shares of the Company or any other
event would otherwise result in any person or entity violating the Ownership
Limit or would cause the Company to be owned beneficially by fewer than 100
persons, that transfer will be void and of no force or effect as to the number
of shares in excess of the Ownership Limit, and the purported transferee (the
"Prohibited Transferee") will acquire no right or interest (or, in the case of
any event other than a purported transfer, the person or entity holding record
title to shares in excess of the Ownership Limit (the "Prohibited Owner") will
cease to own any right or interest) in the excess shares. In addition, if any
purported transfer of shares of the Company or any other event would cause the
Company to
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become "closely held" under the Code or otherwise to fail to qualify as a REIT
under the Code, that transfer will be void and of no force or effect as to the
number of shares in excess of the number that could have been transferred
without that result, and the Prohibited Transferee will acquire no right or
interest (or, in the case of any event other than a transfer, the Prohibited
Owner will cease to own any right or interest) in the excess shares. Also, if
any purported transfer of shares of the Company or any other event would
otherwise cause the Company to own, or be deemed to own by virtue of the
applicable attribution provisions of the Code, 10.0% or more, by vote or value,
of the ownership interests in any Lessee or sublessee, that transfer or event
will be void and of no force or effect as to the number of shares in excess of
the number that could have been transferred or affected by that event without
that result, and the Prohibited Transferee will acquire no right or interest
(or, in the case of any event other than a transfer, the Prohibited Owner will
cease to own any right or interest) in the excess shares.
The Certificate further provides that notwithstanding the foregoing
restriction, in the event of any transfer or other change which results in any
Prohibited Owner owing in excess of the Ownership Limit, the number of shares so
in excess shall be converted automatically and without further action into the
same number of shares of the Excess Stock. Any shares of Excess Stock will be
transferred automatically to a trust of which the Company is trustee and of
which the beneficiary may be designated by the Prohibited Owner subject to
certain limitations (the "Beneficiary"). Shares of Excess Stock in the trust
will be exchanged for the same number and class of shares of stock as was the
subject of the Prohibited Transfer and issued to the Beneficiary providing such
transfer would not violate the Ownership Limit and other conditions are met. For
a 90 day period beginning on the date of a Prohibited Transfer, the resulting
shares of Excess Stock shall be deemed to be offered for sale to the Company for
a price equal to the lesser of the price per share of the transaction resulting
in the Excess Stock (or market price on the date of any gift or reverse
resulting in Excess Stock) or the market price on the date of acceptance by the
Company. Any shares of Excess Stock will not have voting rights (except as
required by law) and will not participate in any dividends. Any holders of
Excess Stock, upon liquidation, dissolution or winding-up of the Company will be
entitled to share ratably with holders of the Common Stock in any assets
remaining after payment in full of all liabilities of the Company and all
preferences of the holders of any outstanding Preferred Stock. All certificates
representing shares of the Company will bear a legend referring to the
restrictions described above.
Every owner of more than 5.0% (or such lower percentage as may be required
by the Code or Treasury Regulations) of the outstanding shares of the Company
must file no later than January 30 of each year a written notice with the
Company containing the information specified in the Certificate. In addition,
each stockholder will be required, upon demand, to disclose to the Company in
writing such information as the Company may request in order to determine the
effect, if any, of that stockholder's actual and constructive ownership on the
Company's status as a REIT and to ensure compliance with the Ownership Limit.
The Ownership Limit may have the effect of precluding an acquisition of
control of the Company without approval of the Board of Directors.
DELAWARE BUSINESS COMBINATION PROVISIONS
As a Delaware corporation, the Company is subject to Section 203 of the GCL
("Section 203") which may have the effect of significantly delaying a
purchaser's ability to acquire the entire interest in the Company if such
acquisition is not approved by the Company's Board of Directors. In general,
Section 203 prevents an "Interested Stockholder" (defined generally as a person
with 15.0% or more of a corporation's outstanding voting stock) from engaging in
a "Business Combination" (defined below) with a Delaware corporation for three
years following the date such person became an Interested Stockholder. For
purposes of Section 203, the term "Business Combination" is defined broadly to
include mergers and certain other transactions with or caused by the Interested
Stockholder, sales or other dispositions to the Interested Stockholder (except
proportionately with the corporation's other stockholders) of assets of the
corporation or a subsidiary equal to 10.0% or more of the aggregate market value
of the corporation's consolidated assets or its outstanding stock; the issuance
or transfer by the corporation or a subsidiary of stock of the corporation or
such subsidiary to the Interested Stockholder (except for transfers in a
conversion or exchange or a pro-rata distribution or certain other transactions,
none of which increase the Interested Stockholder's proportionate ownership of
any class or series of the corporation's or such subsidiary's stock); or receipt
by the Interested Stockholder (except proportionately as a stockholder),
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<PAGE> 64
directly or indirectly, of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on Business Combinations by Section 203
does not apply if: (a) prior to the date on which a stockholder becomes an
Interested Stockholder, the Board of Directors approves either the Business
Combination or the transaction which resulted in the person becoming an
Interested Stockholder; (b) the Interested Stockholder owns 85.0% of the
corporation's voting stock upon consummation of the transaction which made him
or her an Interested Stockholder (excluding from the 85.0% calculation shares
owned by directors who are also officers of the corporation and shares held by
employee stock plans which do not permit employees to decide confidentially
whether to accept a tender or exchange offer); or (c) on or after the date a
person becomes an Interested Stockholder, the Board of Directors approves the
Business Combination, and it is also approved at a stockholders meeting by
two-thirds of the voting stock not owned by the Interested Stockholder. The
restrictions described above do not apply to certain Business Combinations
proposed by an Interested Stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation and a
person who had not been an Interested Stockholder during the previous three
years or who became an Interested Stockholder with the approval of a majority of
the corporation's directors.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering the Company will have outstanding
13,273,773 shares of Common Stock (assuming no exercise of the underwriters'
over-allotment option). All shares sold in the Offering (other than any shares
which may be acquired by an Affiliate) will be freely tradable in the public
market without restriction or further registration under the Securities Act.
The remaining 1,948,773 outstanding shares of Common Stock upon completion
of the Offering are "restricted securities" as that term is defined under Rule
144 and may be sold only pursuant to registration under the Securities Act or
pursuant to an exemption therefrom, such as that provided by Rule 144. In
general, under Rule 144, if one year has elapsed since the later of (i) the date
of acquisition of shares of Common Stock from the Company, or (ii) the date of
acquisition of shares of Common Stock from any Affiliate of the Company (as
defined in the Securities Act), the acquiror or subsequent holder is entitled to
sell within any three-month period a number of shares of Common Stock that does
not exceed the greater of 1.0% of the then-outstanding shares of Common Stock or
the average weekly trading volume of shares of Common Stock on all national
securities exchanges or reported through the consolidated transactions reporting
system during the four calendar weeks preceding the date on which notice of the
sale is filed with the Commission. Sales under Rule 144 also are subject to
certain restrictions on the manner of sales, notice requirements and the
availability of current public information about the Company. If two years have
elapsed since the date of acquisition of shares of Common Stock from the Company
or from any Affiliate of the Company, and the acquiror or subsequent holder
thereof is deemed not to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, such person would be entitled to sell such
shares of Common Stock in the public market under Rule 144(k) without regard to
the volume limitations, manner of sale provisions, public information
requirements or notice requirements. Of the shares of Common Stock to be
outstanding immediately after the Offering 1,315,440 will be eligible for
immediate resale under Rule 144 subject to Rule 144's volume, manner of sale and
other restrictions and 633,333 shares will be so eligible upon satisfaction of
such conditions and of a one year holding period.
After the completion of the Offering, the Company may file a Registration
Statement on Form S-8 under the Securities Act to register all of the shares of
Common Stock reserved for issuance under the Plan and upon exercise of stock
options to be granted to Messrs. Beach and Martin. The Company also has agreed
to register the 633,333 shares of the Common Stock to be issued in exchange for
the unredeemed Preferred Stock in the event of a subsequent public offering of
the Common Stock by the Company or upon demand by the owner of the shares at any
time subsequent to 180 days following the completion of the Offering. After the
date of any such registrations, such shares when issued will be immediately
eligible for sale in the public market, provided that shares owned by Affiliates
of the Company (as defined in the Securities Act), will be subject to the volume
limitations, manner of sale provisions, and public information and notice
requirements of Rule 144.
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Prior to the Offering, there has been no public market for the Common Stock
and the effect, if any, that future market sales of Common Stock or the
availability of such Common Stock for sale will have on the market price of the
Common Stock prevailing from time to time cannot be predicted. Nevertheless,
sales of substantial amounts of Common Stock in the public market (or the
perception that such sales could occur) might adversely affect the market price
for the Common Stock.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the federal income tax considerations
that materially affect a prospective stockholder who is a U.S. citizen or
resident or a tax-exempt organization (including individual retirement
accounts). The discussion is general in nature and not exhaustive of all
possible tax considerations, nor does the discussion give a detailed description
of any state, local, or foreign tax considerations. The discussion does not
address all aspects of federal income tax law that may be relevant to a
prospective stockholder of the Company in light of his or her particular
circumstances or to certain types of stockholders (including, for example,
insurance companies, financial institutions or broker-dealers, tax-exempt
entities, and (except to the limited extent discussed herein) foreign
corporations and persons who are not citizens or residents of the United States)
subject to special treatment under the federal income tax laws.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING
AND EACH PROSPECTIVE STOCKHOLDER OF THE COMPANY IS ADVISED TO CONSULT WITH HIS
OR HER TAX ADVISOR REGARDING THE SPECIFIC FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF THE COMPANY'S COMMON STOCK,
OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
GENERAL
The Company intends to elect to be taxed as a REIT for federal income tax
purposes, and expects that it will be organized and will operate in such a
manner so as to qualify for taxation as a REIT under Sections 856 through 860 of
the Code commencing with its taxable year ending December 31, 1997 and
thereafter. No assurance can be given, however, that the Company will operate in
a manner so as to qualify or remain qualified as a REIT.
Baker & Hostetler LLP, counsel to the Company ("Counsel"), has rendered its
opinion, subject to certain assumptions and qualifications and conditioned upon
certain factual representations by the Company, that (i) the Company will be
organized in conformity with the requirements for qualification as a REIT under
the Code and that the method of operation of the Company will permit the Company
to continue to so qualify for its current and future taxable years provided the
Company meets and continues to meet the asset composition, source of income,
shareholder diversification, distribution, record keeping and other requirements
of the Code necessary for the Company to qualify as a REIT, and (ii) the summary
of federal income tax considerations set forth in this Prospectus accurately
summarizes the federal income tax considerations that are likely to be material
to a holder of Common Stock. Unlike a tax ruling, an opinion of counsel is not
binding on the IRS, and no assurance can be given that the IRS will not
challenge the status of the Company as a REIT for federal income tax purposes.
With respect to Counsel's opinion relating to the qualification of the Company
as a REIT, it should be noted that the Company's continued qualification as a
REIT in current and future taxable years will depend upon whether the Company
continues to meet the various qualification tests imposed under the Code
(discussed in detail below). Counsel will not review compliance with these tests
on a periodic or continuing basis. Accordingly, no assurance is given that the
actual results of the Company's operations for the current or future taxable
years will satisfy such requirements. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT -- Failure to
Qualify".
The opinions and discussion herein are based upon the Code, as currently in
effect, applicable Treasury Regulations adopted thereunder, reported judicial
decisions, and IRS rulings, all as of the date hereof, and certain factual
representations and assumptions made by the Company concerning the organization
and proposed operation of the Company. There is no assurance, however, that the
legal authorities on which such opinions and this discussion are based will not
change (perhaps retroactively), that the Company's representations and factual
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assumptions underlying this discussion will be accurate, or that there will not
be a change in circumstances of the Company that would affect such opinions or
this discussion. Accordingly, there is no assurance that the IRS will not
challenge Counsel's opinions.
TAXATION OF THE COMPANY AS A REIT
If the Company qualifies for taxation as a REIT and distributes to its
stockholders at least 95.0% of its REIT taxable income, it generally will not be
subject to federal corporate income tax on the portion of its ordinary income or
capital gain that is timely distributed to stockholders. This treatment
substantially eliminates the "double taxation" (at the corporate and stockholder
levels) that generally results from investment in a corporation. If the Company
were to fail to qualify as a REIT, it would be taxed at rates applicable to
corporations on all of its income, whether or not distributed to its
stockholders. Even if the Company qualifies as a REIT, it may be subject to
federal income or excise tax as follows:
(i) The Company will be taxed at regular corporate rates on REIT
taxable income and net capital gains not distributed to its stockholders.
With respect to capital gains not distributed to stockholders, however, if
the Company makes a proper tax election (the "Deemed Distribution
Election") and pays the tax due within 30 days after the close of the
taxable year, (i) the stockholder will include in its taxable income, as
long-term capital gains, the amount which would have been included had the
income been distributed, and (ii) the stockholder will be deemed to have
paid the tax on such amount and will be allowed a credit or refund as the
case may be, for the tax so deemed to have been paid by it.
(ii) Under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its tax preference items, if any;
(iii) If the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property,
other than foreclosure property, held primarily for sale to customers in
the ordinary course of business) such income will be subject to a 100.0%
tax;
(iv) If the Company should fail to satisfy the 75.0% gross income test
(the "75.0% Test") or the 95.0% gross income test (the "95.0% Test") (each
as discussed below), but has maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a 100.0%
tax on the income attributable to the greater of the amount by which the
Company fails the 75.0% Test or the 95.0% Test, multiplied by a fraction
intended to reflect the Company's profitability;
(v) If the Company fails to distribute during each calendar year at
least the sum of (A) 85.0% of its REIT ordinary income for such year, (B)
95.0% of its REIT capital gain net income for such year (except to the
extent the Deemed Distribution Election has been made) and (C) any
undistributed taxable income from prior years, it would be subject to a
4.0% excise tax on the excess of such required distribution over the
amounts actually distributed;
(vi) If the Company has (A) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property
acquired by the Company by foreclosure or otherwise on default on a loan
secured by the property) which 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 on such income at the
highest corporate rate; and
(vii) If the Company acquires assets from a C corporation (generally a
corporation subject to tax at the corporate level) in a transaction in
which the Company's bases of the acquired assets are determined by
reference to the bases of the assets (or any other property) of the C
corporation (as it did from the merged companies), and the Company
recognizes net gain on the disposition of such assets in any taxable year
during the 10-year period (the "Restriction Period") beginning on the date
on which such assets were acquired by the Company then, pursuant to IRS
guidelines, and assuming the Company makes an election pursuant to IRS
Notice 88-19, the excess of the fair market value of such property at the
beginning of the applicable Restriction Period over the Company's adjusted
basis in such property at the beginning of the Restriction Period will be
subject to a tax at the highest regular corporate rate.
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REQUIREMENTS FOR QUALIFICATION AS A REIT
General
The Code defines a REIT as a corporation, trust or association which:
(i) is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(iii) would be taxable as a domestic corporation but for Sections 856
through 859 of the Code;
(iv) is neither a financial institution nor an insurance company
subject to certain provisions of the Code;
(v) has the calendar year as its taxable year;
(vi) the beneficial ownership of which is held by 100 or more persons;
(vii) during the last half of each taxable year not more than 50.0% in
value of the outstanding shares of which is owned, directly or indirectly
(applying certain attribution rules), by five or fewer individuals (as
defined in the Code to include certain exempt entities);
(viii) makes an election to be a REIT (or made such an election in a
previous taxable year that is still valid) and satisfies all relevant
filing and other administrative requirements that must be met in order to
maintain REIT status; and
(ix) meets certain income and asset tests, described below.
Conditions (i) through (v), inclusive, must be met during the entire
taxable year and condition (vi) must be met during at least 335 days of a
taxable year of 12 months, or during an equally proportionate part of a taxable
year of less than 12 months. However, conditions (vi) and (vii) will not apply
until after the first taxable year for which an election is made to be taxed as
a REIT. The Company's taxable year will be the calendar year. Following the
consummation of the Offering, the Company will have satisfied the share
ownership requirements set forth in (vi) and (vii) above (respectively, the "100
Stockholder Requirement" and "Five or Fewer Requirement"). In order to assist
the Company in complying with the share ownership requirements, the Company has
placed certain restrictions on the transfer of its Common Stock to prevent
further concentration of share ownership. See "Capital Stock of the
Company -- Restrictions on Transfer". Moreover, to evidence compliance with
these requirements, the Company must maintain records which disclose the actual
ownership of its outstanding Common Stock. In fulfilling its obligation to
maintain these records, the Company must, and will, demand written statements
each year from the record holders of designated percentages of its Common Stock
disclosing the actual owners of such Common Stock. A list of those persons
failing or refusing to comply with such demand must be maintained as a part of
the Company's records. A stockholder failing or refusing to comply with the
Company's written demand must submit with his or her tax return a similar
statement and certain other information. If the Company (i) complies with all of
these requirements designed to ascertain the actual owners of the Company's
Common Stock, and (ii) does not know, or through the exercise of reasonable
diligence would not have known, of the Company's failure to meet the Five or
Fewer Requirement, then the Company will be treated as having met such
requirement for that taxable year.
Asset Tests
In order for the Company to maintain its qualification as a REIT, at the
close of each quarter of its taxable year, it must satisfy three tests relating
to the nature of its assets:
(i) At least 75.0% of the value of the Company's total assets must be
represented by any combination of interests in real property, interests in
mortgages on real property, shares in other REITs, cash, cash items, and
certain government securities;
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(ii) Not more than 25.0% of the Company's total assets may be
represented by securities other than those in the 75.0% asset class; and
(iii) Of the investments included in the 25.0% asset class, the value
of any one issuer's securities owned by the Company may not exceed 5.0% of
the value of the Company's total assets, and the Company may not own more
than 10.0% of any issuer's outstanding voting securities (excluding
securities of a qualified REIT subsidiary (as defined in the Code) or
another REIT).
Where the Company owns an interest in a partnership, it will be treated for
purposes of the asset tests as owning a proportionate part of the partnership's
assets. Except for certain equipment owned and leased by the Affiliated
Partnerships, the Company's investment in the properties through its interest in
the Affiliated Partnerships are expected to constitute qualified assets for
purposes of the 75.0% asset test. Notwithstanding the Affiliated Partnership's
ownership of such equipment, the Company has performed financial analyses to
confirm that more than 75.0% of the value of its assets will be real estate
assets.
Further, the Company does not expect to hold any securities representing
more than 10.0% of any issuer's voting securities, nor does the Company expect
to hold securities of any one issuer in an amount exceeding 5.0% of the value of
the Company's gross assets.
If the Company inadvertently fails one or more of the asset tests at the
end of a calendar quarter, such a failure would not cause it to lose its REIT
status, provided that (i) it satisfied all of the asset tests at the close of a
preceding calendar quarter, and (ii) the discrepancy between the values of the
Company's assets and the standards imposed by the asset tests either did not
exist immediately after the acquisition of any particular asset or was not
wholly or partly caused by such an acquisition. If the condition described in
clause (ii) of the preceding sentence was not satisfied, the Company could still
avoid disqualification by eliminating any discrepancy within 30 days after the
close of the calendar quarter in which it arose.
Income Tests
In order for the Company to maintain its qualification as a REIT, it must
satisfy two percentage tests relating to the source of its gross income in each
taxable year. For purposes of these tests, where the Company invests in a
partnership, the Company will be treated as receiving its proportionate share of
the gross income of the partnership, and such gross income will retain the same
character with the Company as it had with the partnership.
(i) The 75.0% Test. At least 75.0% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from specified real estate sources, including "rents from real
property" and interest and certain other income earned from mortgages on real
property, gain from the sale of real property or mortgages (other than in
prohibited transactions) or income from qualified types of temporary
investments.
(ii) The 95.0% Test. At least 95.0% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from the same items which qualify under the 75.0% Test or from
dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing.
Rents received by the Company will qualify as "rents from real property"
for purposes of the 75.0% Test and the 95.0% Test if the following requirements
are met:
(i) The amount of rent received must generally not be based in whole
or in part on the income or profits derived by any person from such
property. Amounts 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, or of being based on
the net income or profits of the tenant if (a) the tenant derives
substantially all of its income with respect to such property from the
leasing or subleasing of substantially all of such property and (b) such
tenant receives from subtenants only amounts which would be treated as
rents from real property if received directly by the Company;
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(ii) Rent attributable to personal property leased in connection with
a lease of real property will qualify as "rents from real property" unless
such rent is greater than 15.0% of the total rent received under the lease,
in which case none of the rent qualifies (the "15.0% Test"). The rent
attributable to such personal property is the amount that bears the same
ratio to total rent for the taxable year as the average of the adjusted
bases of such personal property at the beginning and at the end of the
taxable year bears to the average of the aggregate adjusted bases of both
the real and personal property of a lease at the beginning and at the end
of such taxable year (the "Adjusted Basis Ratio"). The Company must
generally apply the 15.0% Test to each Lease separately. The Company has
reviewed these requirements and has represented that rents attributable to
personal property will not exceed 15.0% of the total rents received under
any the Leases.
(iii) Rents must not be received from a tenant in which the Company or
a direct or indirect owner of 10.0% or more of the Company owns directly or
constructively a 10.0% or greater interest in the assets or net profits of
such tenant (a "Related Party Tenant"). However, a REIT and a Tenant will
not be related (and, therefore, rents paid by the tenant to the REIT will
be qualifying rents) if (i)(a) the REIT's shares are owned by a partnership
and (b) a partner owning (directly or indirectly) less than a 25.0%
interest in that partnership also owns an interest in the tenant, or (ii)
where owners of the REIT and owners of the tenant are partners in a
partnership and neither the owners of the REIT nor the owners of the tenant
are directly and indirectly 25.0% or greater partners in the partnership;
and
(iv) The Company must not operate or manage its property or furnish or
render directly services to its tenants unless such services are of a type
that a tax-exempt organization can provide its tenants without causing its
rental income to be unrelated business taxable income under the Code
("Qualifying Services"). If such services are not Qualifying Services, such
services must be rendered by an "independent contractor" that is adequately
compensated and from whom the Company derives no income. Receipts for
services furnished (whether or not rendered by an independent contractor)
that are not customarily provided to tenants of properties of a similar
class in the geographic market in which the Company's property is located
("Noncustomary Services") will not qualify as rents from real property.
However, the Company may provide non-Qualifying Services and Noncustomary
Services in an amount (not valued at less than 150.0% of the Company's
direct cost for the services) that does not exceed 1.0% of the gross income
from the property for which the services are provided (the "De Minimis
Service Amount"). Although the Company does provide certain management
services, the Company has represented to Counsel that, except to the extent
of certain services the Company performs for its Affiliated Partnerships,
these services are usual and customary management services provided by
landlords in the geographic areas in which the Company owns property, and
that such services are not primarily for the convenience of its tenants. To
the extent the provision of services would cause the Company to no longer
qualify as a REIT, the Company has represented that it will hire
independent contractors, from which the Company derives no income, to
perform such services.
If the sum of the income realized by the Company that does not satisfy the
requirements of the 75.0% Test and the 95.0% Test (collectively, "Non-Qualifying
Income"), exceeds 5.0% of the Company's gross income for any taxable year, the
Company's status as a REIT would be jeopardized. The Company has recognized that
it will have non-Qualifying Income from a number of sources including, but not
limited to, the following:
1. Income from services performed for Affiliated Partnerships;
2. Income allocation from the Company's general partner interest in
Affiliated Partnerships attributable to equipment leased by such
partnerships;
3. Income from certain equipment and furniture and fixture leases;
4. Rental income from Related Party Tenants; and
5. The proportionate share of the Company's income from its investment in a
REMIC to the extent such income is not derived from the REMIC's
investment in real estate assets.
Notwithstanding the foregoing, the Company has performed financial analysis
with regard to this non-Qualifying Income and has represented that the amount of
its Non-Qualifying Income will not exceed 5.0% of the
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Company's annual gross income for any taxable year. There is no guarantee,
however, that the 75.0% Test and the 95.0% Test will be met.
It is possible that, from time to time, the Company will enter into hedging
transactions with respect to one or more of its assets or liabilities. Any such
hedging transactions could take a variety of forms. If the Company enters into
any contract designed to hedge any indebtedness incurred or to be incurred to
acquire or carry real estate assets, any periodic income or gain from the
disposition of such contract should be qualifying income for purposes of the
95.0% Test, but not for the 75.0% Test. The Company intends to structure any
hedging transactions in a manner that does not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75.0% Test or the 95.0%
Test for any taxable year, it may still qualify as a REIT in such year if (i) it
attaches a schedule of the source and nature of each item of its gross income to
its federal income tax return for such year; (ii) the inclusion of any incorrect
information in its return was not due to fraud with intent to evade tax; and
(iii) the Company's failure to meet such tests is due to reasonable cause and
not due to willful neglect. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. Even if these relief provisions apply, the Company will still be
subject to a tax imposed with respect to the excess net income. See "-- Taxation
of the Company as a REIT".
Characterization of Property Leases
The Company currently leases the Existing Properties pursuant to leases of
the type described in "Description of Properties and Property Leases". The
Company intends to acquire additional properties, including the Acquisition
Properties, and has represented that it will consult with counsel and lease them
on terms substantially identical to the terms described in "Description of
Properties and Leases". The ability of the Company to claim certain tax benefits
associated with ownership of the properties, such as depreciation, depends on a
determination that the lease transactions engaged in by the Company are true
leases (under which the Company is the owner of the leased property for federal
income tax purposes), rather than a conditional sale of the property or a
financing transaction. A determination by the Service that the Company is not
the owner of the properties for federal income tax purposes may have adverse
consequences to the Company, such as the denying of the Company's depreciation
deductions. A denial of the Company's depreciation deductions could result in a
determination that the Company's Distributions to stockholders were insufficient
to satisfy the 95.0% distribution requirement for qualification as a REIT.
However, as discussed above, if the Company has sufficient cash, it may be able
to remedy any past failure to satisfy the distribution requirements by paying a
"deficiency dividend" (plus a penalty and interest). See "-- Annual Distribution
Requirements", below. Furthermore, if the leases are recharacterized as service
contracts, partnership agreements or some other form of arrangement, the rents
likely would be disqualified as "rents from real property." However, in the
event that the Company were determined not to be the owner of a particular
property, the income that the Company would receive pursuant to the
recharacterized lease likely would constitute interest and qualify under the
95.0% Test and 75.0% Test by reason of being interest on an obligation secured
by a mortgage on an interest in real property, because the legal ownership
structure of such property will have the effect of making the building serve as
collateral for the debt obligation.
The characterization of transactions as leases, conditional sales or
financings has been addressed in numerous cases. The courts have not identified
any one factor as being determinative of whether the lessor or the lessee of
property is to be treated as the owner, and courts have reached different
conclusions even where characteristics of two lease transactions were
substantially similar. Judicial decisions and pronouncements of the IRS with
respect to the characterization of transactions as either leases, conditional
sales or financing transactions have made clear that the characterization of
leases for tax purposes is a question which must be decided on the basis of a
weighing of many factors.
For example, a transaction generally will be treated as a lease and the
lessor will be treated as the owner of the property for federal income tax
purposes and will be entitled to claim depreciation and other tax benefits
associated with such ownership if the following conditions exist:
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1. The lessor owns an equity investment at least equal to 20% of the
cost of both the building (or buildings, if there is more than one
building) and the underlying land with respect to a property, such equity
investment remains at risk throughout the lease term, and the lessor's
commitment to make its equity investment and continue with the transaction
is unconditional at the time the lease commences;
2. The lessor and lessee intend for their relationship to be that of
lessor and lessee and such relationship is documented by lease agreements;
3. The lessor bears the risk of loss in value of the building or
buildings and the underlying land with respect to a property;
4. The lessor benefits from any appreciation in value of the building
or buildings and the underlying land with respect to a property;
5. The lessee is liable for repairs and to return the property in
reasonably good condition;
6. Insurance proceeds will be used to restore the property and, to the
extent not so used, will belong to the lessor;
7. Any lessee purchase option is exercisable only at an amount equal
to the then fair market value of the leased property;
8. The lease term is less than 30 years, excluding renewal options
exercisable at fair market value;
9. The property is reasonably expected to have, at the end of its
lease term (including all renewal periods), a fair market value of at least
20% of the lessor's cost;
10. The remaining useful life of a property, at the end of its lease
term (including all renewal periods), will have a remaining useful life of
at least 20% of the property's useful life at the beginning of its lease
term;
11. The lessee has the right to exclusive possession and use and quiet
enjoyment of a property during the term of the lease;
12. The lessee benefits from any savings in the costs of operating a
property during the lease term;
13. The lessee stands to incur substantial losses (or reap substantial
gains) depending on how successfully it operates a property;
14. Any lessee renewal option will provide for rents equal to the then
fair market rental value;
15. The rent is set at fair market rental value and the lessor expects
to receive a profit from the lease transaction exclusive of the benefits
derived from tax attributes associated with the lease or the leased
property;
16. No lessee (or person related to a lessee) will loan the lessor any
funds, guarantee any lessor debt, or have any investment interest in the
cost of the leased property.
While certain characteristics of the Leases suggest the Company might not
be the owner of the properties, such as the fact that most of such leases are
triple-net leases, a substantial number of other characteristics indicate the
bona fide nature of such leases and that the Company is the owner of the
Existing Properties. For example, under the types of leases described in
"Description of Properties and Leases," the Company will bear the risk of
substantial loss in the value of the Existing Properties because the Company
acquired an interest in the Existing Properties with an equity investment,
rather than with nonrecourse indebtedness. Further, the Company, rather than the
Lessee, will benefit from any appreciation in the Existing Properties, since the
Company has the right at any time to sell or transfer its properties, subject to
the tenant's right to purchase the property at a price intended to be not less
than the property's fair market value.
Other factors that are consistent with the ownership of the Existing
Properties by the Company are (i) the Company and the lessees intend for their
relationship to be that of a lessor and lessee and such relationship is
documented by lease agreements; (ii) the lessees have the right to exclusive
possession and use and quiet
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enjoyment of the Existing Properties during the term of the Leases; (iii) the
lessee bears the cost of, and is responsible for, day-to-day maintenance and
repair of the Existing Properties (other than the case of "double-net" leases,
where the Company bears the cost of maintaining exterior walls and/or roof of
the Existing Property) and dictates how the Existing Properties are operated,
maintained and improved; (iv) the tenants are generally liable for repairs and
to return the Existing Properties in reasonably good condition; (v) casualty
insurance proceeds generally are to be used to restore the Existing Properties
and, to the extent not so used, belong to the Company; (vi) the tenants agree to
subordinate their interest in the Existing Properties to the lien of any first
mortgage upon delivery of a nondisturbance agreement and agree to attorn to the
purchaser upon any foreclosure sale; (vii) the tenants may not assign or
sublease without the consent of the Company; and (viii) based on the Company's
representation that the Existing Properties and any Acquisition Properties can
reasonably be expected to have at the end of their lease terms (generally a
maximum of 30 to 35 years) a fair market value of at least 20.0% of the
Company's cost and a remaining useful life of at least 20.0% of their useful
lives at the beginning of the leases (and that no lessee will be permitted to
purchase a property for an amount intended to be less than the property's fair
market value at such time), the Company has not relinquished the Existing
Properties to the tenants for their entire useful lives, but has retained a
significant residual interest in them. Moreover, the Company will not be
primarily dependent upon tax benefits in order to realize a reasonable return on
its investments.
Concerning the Existing Properties for which the Company owns the buildings
and the underlying land, on the basis of the foregoing, assuming (i) the Company
leases the Existing Properties on substantially the same terms and conditions
described in "Description of Properties and Leases," and (ii) as is represented
by the Company, the residual value of the Existing Properties remaining after
the end of their lease terms (including all renewal periods) may reasonably be
expected to be at least 20.0% of the Company's cost of such properties, and the
remaining useful lives of the Existing Properties after the end of their lease
terms (including all renewal periods) may reasonably be expected to be at least
20.0% of the Existing Properties' useful lives at the beginning of their lease
terms, it is the opinion of Counsel that the Company will be treated as the
owner of the Existing Properties for federal income tax purposes and the Company
therefore will be entitled to claim depreciation and other tax benefits
associated with such ownership and may include rents from such leases as "rents
from real property" for purposes of the 75.0% Test and the 95.0% Test. In the
case of leases with respect to which the Company does not own the underlying
land, including, without limitation, equipment leases, and furniture and
fixtures leases and any leases not yet in place, Counsel cannot opine that such
transactions will be characterized as leases. As described above, the foregoing
conclusions and Counsel's opinion are based upon an analysis of all the facts
and circumstances and upon rulings and judicial decisions involving situations
that are considered to be analogous, as well as representations by the Company
and assumptions that are described above and set out in Counsel's opinion.
Opinions of counsel are not binding upon the IRS or a court. Accordingly, there
is no assurance that the IRS will not assert successfully a contrary position
and, therefore, prevent the Company from qualifying for taxation as a REIT.
The law governing the characterization of transactions as leases is
complicated and is in a state of change. Furthermore, for federal income tax
purposes, lease characterization is made on a property-by-property basis, based
on an analysis of each particular location including, among other factors, fair
rental value of the particular property and, in the case of any lease involving
a lessee purchase option, the fair market value of the property at the time the
option is exercisable. There are no controlling Treasury Regulations, published
rulings, or judicial decisions involving leases with terms substantially the
same as the Leases that discuss whether such leases constitute true leases for
federal income tax purposes. The foregoing conclusions with respect to the
relationship between the Company and the Lessees are based upon all of the facts
and circumstances and upon rulings and judicial decisions involving situations
that are considered to be analogous. There is no assurance that the IRS will not
successfully assert a contrary position. If the Leases are recharacterized as
service contracts or partnership agreements, rather than leases, part or all of
the payments that the Company receives from the Lessees may not be considered
rent or may not otherwise satisfy the various requirements for qualification as
"rents from real property." In that case, the Company likely would not be able
to satisfy either the 75.0% Test or the 95.0% Test and, as a result, would lose
its REIT status. See "-- Requirements for Qualification as a REIT -- Income
Tests".
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In summary, if the rents do not qualify as "rents from real property"
because (i) the percentage rent is based on income or profits of the Lessee,
(ii) the Company exceeds the Tenant Ownership Limitation, (iii) the Company
furnishes more than the De Minimis Service Amount of non-Qualifying Services to
the Lessees of the properties other than through a qualifying independent
contractor (or furnishes more than the De Minimis Service Amount of
Non-Customary Services (whether or not through an independent contractor) unless
separately charged for by the independent contractor), or (iv) for some other
reason, the Company likely would lose its REIT status because it would be unable
to satisfy either the 75.0% Test or the 95.0% Test. See "-- Requirements for
Qualification as a REIT -- Income Tests".
Annual Distribution Requirements
In order to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (A) the sum of (i) 95.0% of the Company's "REIT taxable
income" (computed without regard to the dividends paid deduction and the REITs
net capital gain) and (ii) 95.0% of the net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of noncash income. In
addition, if the Company disposes of any asset during its Restriction Period,
the Company will be required to distribute at least 95.0% of the built-in gain
(after tax), if any, recognized on the disposition of such asset. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that the Company does not distribute all
of its net capital gain (or make the Deemed Distribution Election) or
distributes at least 95.0%, but less than 100.0%, of its "REIT taxable income,"
as adjusted, it will be subject to tax on the undistributed amount at regular
corporate tax rates. Moreover, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85.0% of its REIT ordinary income for
such year, (ii) 95.0% of its REIT net capital gain income for such year (except
to the extent the Deemed Distribution Election is made) and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4.0% excise tax on the excess of such required distribution over the amounts
actually distributed.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements. From time to time, the Company may not have
sufficient cash or other liquid assets to meet the 95.0% distribution
requirements due to primarily to the expenditure of cash for nondeductible
expenses such as principal amortization or capital expenditures. In the event
that such timing differences occur, the Company may find it necessary to borrow
or liquidate some of its investments in order to meet the annual distribution
requirement or attempt to declare a consent dividend, which is a hypothetical
distribution to holders of shares of Common Stock out of the earnings and
profits of the Company. The effect of such a consent dividend (which, in
conjunction with dividends actually paid, must not be preferential to those
holders who agree to such treatment) would be that such holders would be treated
for federal income tax purposes as if they had received such amount in cash and
they then had immediately contributed such amount back to the Company as
additional paid-in capital. This would result in taxable income to those holders
without the receipt of any actual cash distribution but would also increase
their tax basis in their shares of Common Stock by the amount of the taxable
income recognized. In order to avoid any problem with the 95.0% distribution
requirement, the Company will closely monitor the relationship between its REIT
taxable income and cash flow and, if necessary, will borrow funds in order to
satisfy the distribution requirements.
If the Company fails to satisfy the 95.0% distribution requirement as a
result of an adjustment to the Company's tax return by the IRS, the Company may
be permitted to remedy such a failure by paying a "deficiency dividend" (plus
applicable interest and penalties) within a specified time.
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable corporate alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company, nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable to them as
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ordinary income, and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company also will be
ineligible for qualification as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief.
OTHER TAX CONSIDERATIONS
Taxation of Taxable Domestic Stockholders
Provided the Company qualifies as a REIT, distributions made to the
Company's taxable stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such stockholders as ordinary income. Domestic stockholders generally
are stockholders who are (i) citizens or residents of the United States; (ii)
corporations, partnerships or other entities created in, or organized under, the
laws of the United States or any political subdivision thereof; or (iii) estates
or trusts the income of which is subject to United States federal income
taxation regardless of its source. Corporate stockholders will not be entitled
to the dividends received deduction. Any dividend declared by the Company in
October, November or December of any year payable to a stockholder of record on
a specific date in any such month shall be treated as both paid by the Company
and received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by the Company during January of the following
calendar year.
Distributions that are designated as capital gain dividends will be taxed
as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the stockholder has held its shares. In addition, to the extent the
Company makes a Deemed Distribution Election, stockholders will be required to
include, in calculating their long-term capital gains for the taxable year, such
amount as the Company designates in respect of each stockholder's Common Stock
in a written notice to the stockholder mailed within 60 days of the close of the
Company's taxable year (or mailed with its annual report for the year). However,
the Company must pay tax on these capital gains within 30 days of the close of
the Company's taxable year, and each stockholder will be deemed to have paid the
portion of such tax imposed on the income that stockholder was required to
include in computing long-term capital gains and shall be entitled to a credit
or refund, as the case may be, for the tax so deemed to have been paid. As a
result, the adjusted basis of each stockholders's Common Stock will be
simultaneously increased by the amount of such includible gains, and decreased
by the amount of tax deemed paid by the stockholder on such gains.
Notwithstanding any of the foregoing, corporate stockholders may be required to
treat up to 20.0% of certain capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's Common Stock, but rather will reduce the
adjusted basis of such shares. To the extent that such distributions exceed the
adjusted basis of a stockholder's Common Stock, they will be included in income
as long-term capital gain assuming the shares are a capital asset of the
stockholder and have been held for more than one year.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. In general, a stockholder
will realize capital gain or loss on the disposition of Common Stock equal to
the difference between (a) the sales price for such shares and (b) the adjusted
tax basis of such shares. Gain or loss realized upon the sale or exchange of
Common Stock by a stockholder who has held such Common Stock for more than one
year (after applying certain holding period rules) will be treated as long-term
gain or loss, respectively, and otherwise will be treated as short-term capital
gain or loss. Under tax legislation passed in August 1997, capital gains rates
applicable to individuals were reduced to 20.0% for assets held longer than
eighteen months. However, losses incurred upon a sale or exchange of Common
Stock by a stockholder who has held such shares for six months or less (after
applying certain holding period rules) will be deemed a long-term capital loss
to the extent of any capital gain dividends received by the selling stockholder
with respect to such Common Stock.
Distributions from the Company and gain from the disposition of shares will
not be treated as passive activity income. Distributions from the Company (to
the extent they do not constitute a return of capital) will
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generally be treated as investment income for purposes of the investment
interest limitation. Gain from the disposition of shares and capital gain
dividends will not be treated as investment income unless the taxpayer elects to
have the gain taxed at ordinary income rates.
Backup Withholding
The Company will report to its domestic stockholders and the IRS the amount
of dividends paid during each calendar year, and the amount of tax withheld, if
any, with respect thereto. Under the backup withholding rules, a stockholder may
be subject to backup withholding at the rate of 31.0% with respect to dividends
paid unless such stockholder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A stockholder who does not provide the Company with its
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions made to any stockholders who
fail to certify their nonforeign status to the Company.
Taxation of Tax-Exempt Stockholders
Tax-exempt entities, including qualified employee pension and
profit-sharing trusts, individual retirement accounts and certain funded welfare
plan arrangements ("Exempt Organizations"), generally are exempt from federal
income taxation. However, they are subject to taxation on their unrelated
business taxable income ("UBTI"). While many investments in real estate generate
UBTI, the IRS has issued a published ruling that dividend distributions by a
REIT to an exempt employee pension trust do not constitute UBTI, provided that
the shares of the REIT are not otherwise used in an unrelated trade or business
of the exempt employee pension trust. Based on that ruling and on the intention
of the Company to invest its assets in a manner that will avoid the recognition
of UBTI by the Company, amounts distributed by the Company to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of the Common Stock with debt, a portion
of its income from the Company will constitute UBTI pursuant to the
"debtfinanced property" rules. Social clubs, voluntary employee benefits
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Code section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions from
the Company as UBTI. A pension trust that owns more than 10.0% of the Company is
required to treat a percentage of the dividends from the Company as UBTI (the
"UBTI Percentage") in certain circumstances. The UBTI Percentage is the gross
income derived from an unrelated trade or business (determined as if the Company
were a pension trust) divided by the gross income of the Company for the year in
which the dividends are paid. The UBTI rule applies only if (i) the UBTI
Percentage is at least 5.0%, (ii) the Company qualifies as a REIT by reason of
the modification of the 5/50 Rule that allows the beneficiaries of the pension
trust to be treated as holding shares of the Company in proportion to their
actuarial interests in the pension trust, and (iii) either (A) one pension trust
owns more than 25.0% of the value of the Company's stock or (B) a group of
pension trusts individually holding more than 10.0% of the value of the
Company's stock collectively own more than 50.0% of the value of the Company's
stock.
While an investment in the Company by an Exempt Organization generally is
not expected to result in UBTI except in the circumstances described in the
preceding paragraph, any gross UBTI that arises from such an investment will be
combined with all other gross UBTI of the Exempt Organization for a taxable year
and reduced by all deductions attributable to the UBTI plus $1,000. Any amount
then remaining will constitute UBTI on which the Exempt Organization will be
subject to tax. If the gross income taken into account in computing UBTI exceeds
$1,000, the Exempt Organization is obligated to file a tax return for such year
on an IRS Form 990-T. Neither the Company, its Board of Directors, nor any of
its Affiliates expects to undertake the preparation or filing of IRS Form 990-T
for any Exempt Organization in connection with an investment by such Exempt
Organization in the Common Stock. Generally, IRS Form 990-T must be filed with
the IRS by April 15 of the year following the year to which it relates.
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Taxation of Foreign Stockholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. STOCKHOLDERS SHOULD CONSULT THEIR TAX ADVISORS TO DETERMINE THE IMPACT
OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN THE
COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
It is currently anticipated that the Company will qualify as a
"domestically controlled REIT" (i.e., a REIT in which at all times during a
specified testing period less than 50.0% of the value of the shares is owned
directly or indirectly by Non-U.S. Stockholders) and therefore gain from the
sale of Common Stock by a Non-U.S. Stockholder would not be subject to United
States taxation unless such gain is treated as "effectively connected" with the
Non-U.S. Stockholder's United States trade or business.
Distributions that are not attributable to gain from the sale or exchange
by the Company of United States real property interests (and are not designated
as capital gain dividends) will be treated as dividends of ordinary income to
the extent that they are made out of current or accumulated earnings and profits
of the Company. Such distributions generally will be subject to a United States
withholding tax equal to 30.0% of the gross amount of the distribution, subject
to reduction or elimination under an applicable tax treaty. However, if
dividends from the investment in the shares are treated as "effectively
connected" with the Non-U.S. Stockholder's conduct of a United States trade or
business, such dividends will be subject to regular U.S. income taxation
(foreign corporations may also be subject to the 30.0% branch profits tax). The
Company expects to withhold United States income tax at the rate of 30.0% on the
gross amount of any such dividends made to a Non-U.S. Stockholder unless: (i) a
lower treaty rate applies and the Non-U.S. Stockholder files certain information
evidencing its entitlement to such lower treaty rate, or (ii) the Non-U.S.
Stockholder files an IRS Form 4224 with the Company claiming that the
distribution is "effectively connected" income. Distributions which exceed
current and accumulated earnings and profits of the Company will not be taxable
to the extent that they do not exceed the adjusted basis of a stockholder's
shares but, rather, will reduce (but not below zero) the adjusted basis of such
shares. To the extent that such distributions exceed the adjusted basis of a
Non-U.S. Stockholder's shares, they generally will give rise to United States
tax liability if the Non-U.S. Stockholder would otherwise be subject to tax on
gain from the sale or disposition of his or her shares in the Company, as
described above. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current and accumulated
earnings and profits, the distributions will be subject to withholding at the
same rate as dividends. However, amounts thus withheld are refundable if it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
Distributions by the Company to a Non-U.S. Stockholder that are
attributable to gain from sales or exchanges by the Company of a United States
real property interest are subject to income and withholding tax under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, these distributions, if any, that are treated as gain
recognized from the sale of a United States real property interest, are taxed as
income "effectively connected" with a United States business. Non-U.S.
Stockholders would thus be taxed at the normal capital gain rates applicable to
U.S. Stockholders (subject to the applicable alternative minimum tax and a
special alternative minimum tax for nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30.0% branch profits tax in
the hands of a foreign corporate stockholder not entitled to treaty exemption.
The Company is required by applicable Treasury Regulations to withhold 35.0% of
any distribution that could be designated by the Company as a capital gains
dividend. This amount is creditable against the Non-U.S. Stockholder's FIRPTA
tax liability. A refund may be available if the amount exceeds the Non-U.S.
Stockholder's federal tax liability.
State and Local Taxes
The Company or its stockholders or both may be subject to state, local or
other taxation in various state, local or other jurisdictions, including those
in which they transact business or reside. The tax treatment in such
jurisdictions may differ from federal income tax consequences discussed above.
Prospective stockholders should
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consult with their tax advisors regarding the effect of state, local and other
tax laws on an investment in the Common Stock of the Company.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit sharing, retirement, welfare or other
employee benefit plan ("ERISA Plan") subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), should consider the fiduciary
standards under ERISA in the context of the ERISA Plan's particular
circumstances before authorizing an investment of a portion of the ERISA Plan's
assets in the Common Stock. Accordingly, any such fiduciary should consider (i)
whether the investment satisfies the diversification requirements of Section
404(a)(1)(C) of ERISA, (ii) whether the investment is in accordance with the
documents and instruments governing the ERISA Plan as required by Section
404(a)(1)(D) of ERISA, and (iii) whether the investment is prudent under ERISA.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA, and the corresponding provisions of the
Code, prohibit a wide range of transactions involving the assets of the ERISA
Plan and persons who have certain specified relationships to the ERISA Plan
("parties in interest" within the meaning of ERISA or/and, "disqualified
persons" within the meaning of the Code). Thus, an ERISA Plan fiduciary
considering an investment in the Common Stock also should consider whether the
acquisition or the continued holding of the Common Stock might constitute or
give rise to a direct or indirect prohibited transaction.
The Department of Labor (the "DOL") has issued final regulations (the "DOL
Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. The DOL Regulations, by their terms do not apply to any interest in an
entity, which interest is either a "publicly offered security" or a security
issued by an investment company registered under the Investment Company Act of
1940, as amended. The DOL Regulations define a "publicly offered security" as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or sold pursuant to an effective registration
statement under the Securities Act (provided the securities are registered under
the Exchange Act within 120 days after the end of the fiscal year of the issuer
during which the public offering occurred). The Common Stock is being sold in an
offering registered under the Securities Act and will be registered under the
Exchange Act.
The DOL Regulations provide that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control. The
Company expects the Common Stock to be "widely held" on completion of the
Offering.
The DOL Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulations further provide that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as is the case with the Offering, certain restrictions ordinarily will
not, alone or in combination, affect the finding that those securities are
"freely transferable". The Company believes that the restrictions imposed under
its Certificate on the transfer of the Common Stock are limited to the
restrictions on transfer generally permitted under the DOL Regulations and are
not likely to result in the failure of the Common Stock to be "freely
transferable." The Company also believes that certain restrictions that apply to
the Common Stock to be held by the Company, or derived from contractual
arrangements requested by the Underwriters in connection with the Offering, are
unlikely to result in the failure of the Common Stock to be "freely
transferable." See "Shares Eligible for Future Sale" and "Underwriting." The DOL
Regulations establish only a presumption in favor of the finding of free
transferability and no assurance is given that the DOL and the U.S. Treasury
Department will not reach a contrary conclusion.
Assuming that the Common Stock will be "widely held" and "freely
transferable," the Company believes that the Common Stock will be publicly
offered securities for purposes of the DOL Regulations and that the assets of
the Company will not be deemed to be "plan assets" of any ERISA Plan that
invests in the Common Stock.
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UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1997 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom Credit Suisse First
Boston Corporation and McDonald & Company Securities, Inc. are acting as
representatives (the "Representatives"), have severally but not jointly agreed
to purchase from the Company the following respective numbers of Common Stock:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Credit Suisse First Boston Corporation...............................
McDonald & Company Securities, Inc...................................
----------
Total................................................................ 11,325,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the Common Stock offered
hereby (other than those shares covered by the over-allotment option described
below) if any are purchased. The Underwriting Agreement provides that, in the
event of a default by an Underwriter, in certain circumstances, the purchase
commitments of the non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, expiring at the
close of business on the 30th day after the date of this Prospectus, to purchase
up to 1,698,750 additional shares at the initial public offering price less the
underwriting discounts and commissions, all as set forth on the cover page of
this Prospectus. Such option may be exercised only to cover over-allotments in
the sale of the shares of Common Stock. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of Common
Stock as it was obligated to purchase pursuant to the Underwriting Agreement.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus and,
through the Representatives, to certain dealers at such price less a concession
of $ per share, and the Underwriters and such dealers may allow a
discount of $ per share on sales to certain other dealers. After the
initial public offering, the public offering price and concession and discount
to dealers may be changed by the Representatives.
The Representatives have informed the Company that it does not expect
discretionary sales by the Underwriters to exceed 5.0% of the number of shares
being offered hereby.
The Company and its officers, directors and stockholders have agreed that
they will not offer, sell, contract to sell, announce their intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Commission a registration statement under the Securities Act relating to, any
additional shares of Common Stock or securities convertible or exchangeable into
or exercisable for any shares of Common Stock without the prior written consent
of Credit Suisse First Boston Corporation for a period of 180 days after the
date of this Prospectus.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
Application will be made to list the Common Stock on the NYSE.
Prior to the Offering there has been no public market for the Common Stock.
The initial price to the public for the shares of Common Stock has been
negotiated among the Company and the Representatives. Such initial price is
based on, among other things in addition to prevailing market conditions, the
Company's financial and operating history and condition, its prospects and the
prospects for its industry in general, the management of the
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Company and the market prices for securities of companies in business similar to
that of the Company. See "Risk Factors -- Absence of Prior Public Market for the
Common Stock".
The Representatives, on behalf of the Underwriters, may engage in
over-allotments, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act. Over-
allotment involves syndicate sales in excess of the Offering size, which creates
a syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the Common Stock
in the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Representatives to reclaim a
selling concession from a syndicate member when the Common Stock originally sold
by such syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Common Stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the NYSE or otherwise and, if commenced,
may be discontinued at any time.
CSFBMC, an affiliate of Credit Suisse First Boston Corporation, currently
has a lending relationship with the Company. In February 1996, the Company
entered into the $150.0 million Credit Facility with CSFBMC for the purpose of
funding the acquisition of properties. At June 30, 1997, the Company was
indebted to CSFBMC in the amount of $70.7 million. Interest continues to accrue
on this debt at a variable rate which, as of June 30, 1997, was 8.0% per annum.
All amounts outstanding under the Credit Facility for principal and accrued
interest, at the date of the Offering, will be repaid to CSFBMC utilizing a
substantial portion of the proceeds of the Offering.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of Common Stock are effected. Accordingly, any resale of the Common
Stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the Common Stock.
REPRESENTATION OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from whom
such purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Common Stock without the
benefit of a prospectus qualified under such securities laws; (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent; and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
RIGHT OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
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ENFORCEMENT OF LEGAL RIGHTS
All of the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
Company or such persons. All or a substantial portion of the assets of the
Company and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the Company or such persons in
Canada or to enforce a judgment obtained in Canadian courts against the Company
or such persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to the Offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisers with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the shares for investment by the purchaser under relevant Canadian legislation.
LEGAL MATTERS
The legality of the shares of the Common Stock offered hereby will be
passed upon for the Company by Baker & Hostetler LLP, Cleveland, Ohio. In
addition, the description of federal income tax consequences contained in this
Prospectus entitled "Federal Income Tax Considerations" is based upon the
opinion of Baker & Hostetler LLP, Cleveland, Ohio. Certain legal matters related
to the Offering will be passed upon for the Underwriters by Latham & Watkins,
Los Angeles, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1995
and for each of the two years in the period ended December 31, 1996 included in
this Prospectus and the related financial statement schedule included elsewhere
in the Registration Statement have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as stated in their reports appearing herein and
elsewhere in the Registration Statement, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act, with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement. For further information with respect to
the Company and the Common Stock offered hereby, reference is hereby made to the
Registration Statement. 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 document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. Copies of the Registration Statement may be
obtained from the Commission's principal office at 450 5th Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission at 7 World
Trade Center, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, upon payment of the fees prescribed by the Commission,
or may be examined without
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<PAGE> 81
charge at the offices of the Commission. In addition, copies of the Registration
Statement and related documents may be obtained through the Commission's
Internet address at http:\\www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements which have been certified by its
independent public accountants and quarterly reports containing an audited
summary financial information for each of the first three quarters of each
fiscal year.
GLOSSARY
Unless otherwise indicated or the context otherwise requires, the following
capitalized terms have the meanings set forth below for purposes of this
Prospectus.
"75.0% Test" means the requirement of the Code concerning the Company's
initial and continued qualification as a REIT that at least 75.0% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived from specified real estate sources, including
"rents from real property" and interest and certain other income earned from
mortgages on real property, gain from the sale of real property or mortgages
(other than in prohibited transactions) or income from qualified types of
temporary investments.
"95.0% Test" means the requirement of the Code concerning the Company's
initial and continued qualification as a REIT that at least 95% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from the sale of items which qualify under the
75.0% Test or from dividends, interest and gain from sale or disposition of
stock or securities, or from any combination of the foregoing.
"100 Stockholder Requirement" means requirement of the Code concerning the
Company's initial and continued qualification as a REIT that it be beneficially
owned by 100 or more persons.
"ACM" means asbestos-containing materials.
"Acquisition Properties" means the 62 Properties located in 22 states which
are subject to acquisition by the Company pursuant to agreements in principle
between the Company and the owners of the Acquisition Properties as of the date
of this Prospectus.
"ADA" means the Americans with Disabilities Act.
"Adjusted Basis Ratio" means the ratio to total rent for the taxable year
as the average of the adjusted basis of the personal property of a property at
the beginning and at the end of the taxable year bears to the average of the
aggregate adjusted basis of the real and personal property of a property at the
beginning and end of such taxable year.
"Advisor" means Captec Advisors, together with Captec Financial and its
Affiliates, or any person or entity with which Captec Advisors subcontracts, or
upon which it relies for the performance of its responsibilities pursuant to the
Advisory Agreement.
"Advisors Michigan" means Captec Net Lease Realty Advisors, Inc., a
Michigan corporation.
"Advisory Agreement" means the Advisory Agreement between the Company and
Captec Advisors pursuant to which the Advisor will provide specified management
and advisory services to the Company.
"Affiliate" of any person means (i) any person who directly or indirectly
controls or is controlled by or is under common control with that person, (ii)
any other person who owns, beneficially, directly or indirectly, five percent
(5.0%) or more of the outstanding capital stock, shares or equity interests of
that person, or (iii) any officer, director, employee, partner or trustee of
that person or any person controlling, controlled by or under common control
with that person (excluding trustees and persons serving in similar capacities
who are not otherwise an affiliate of that person). The term "person" means and
includes individuals, corporations, general and limited partnerships, stock
companies or associations, joint ventures, associations, companies, trust banks,
trust companies, land trusts, business trusts, or other entities and governments
and agencies and political subdivisions thereof. For purposes of this
definition, "control" (including the correlative meanings of the terms
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"controlled by" and "under common control with"), as used with respect to any
person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of that person, through the
ownership of voting securities, partnership interests or other equity interests.
"Affiliated Partnerships" means Captec III and Captec IV.
"Benchmark Rate" means the designated LIBOR for U.S. dollar deposits with
30 days' maturity which plus 2.318% (1.75% upon completion of the Offering)
equals the Revolving Loan Rate under the Credit Facility.
"Board of Directors" means the directors of the Company as amended time to
time.
"Bylaws" means the bylaws of the Company.
"Captec III" means Captec Franchise Capital Partners L.P. III, a Delaware
limited partnership.
"Captec IV" means Captec Franchise Capital Partners L.P. IV, a Delaware
limited partnership.
"Captec Advisors" means Captec Net Lease Realty Advisors, Inc., a Delaware
corporation.
"Captec Financial" means Captec Financial Group, Inc., a Michigan
corporation and an Affiliate of the Company and Captec Advisors.
"Captec Funding" means Captec Financial Group Funding Corporation.
"Captec Trust" means Captec Loans Receivables Trust -- 1996.
"Cash Available For Distribution" means FFO as adjusted for capital
expenditures and scheduled principal payments.
"Certificate" means the Certificate of Incorporation of the Company as
amended from time to time.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Commitment Fee" means the 1.0% of the value of each Lease proposed to be
executed by prospective Lessees identified and obtained by the Advisor during
the term of the Advisory Agreement.
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
"Company" means Captec Net Lease Realty, Inc., a Delaware corporation and,
as the context may require, Net Lease Michigan and Advisors Michigan.
"Consumer Price Index" means the "U.S. City Average, All Items" Consumer
Price Index for All Urban Consumers published by the Bureau of Labor Statistics
of the United States Department of Labor (Base: 1982-1984), or any successor
index thereto.
"Counsel" means Baker & Hostetler LLP, counsel to the Company.
"CPI" means the Consumer Price Index.
"Credit Facility" means the Company's $150.0 million revolving credit
facility with CSFBMC, an Affiliate of one of the managing Underwriters of the
Offering.
"CSFBMC" means Credit Suisse First Boston Mortgage Capital L.L.C., an
Affiliate of the lead managing Underwriter and the lender under the Credit
Facility.
"Deferred Plan" means the Company's Directors' Deferred Compensation Plan.
"De Minimis Service Amount" means the amount of Non-Qualifying Services and
Noncustomary Services which the Company may provide (which amount is not valued
at less than 150.0% of the Company's direct cost for service that does not
exceed 1.0% of the gross income from the property for which the services are
provided) so that rents received by the Company will qualify as rents from real
property for purposes of the 75.0% Test and the 95.0% Test.
79
<PAGE> 83
"DOL" means the U.S. Department of Labor.
"DOL Regulations" means the final regulations issued by DOL as to what
constitutes assets of an employee benefit plan under ERISA.
"Environmental Site Assessments" means environmental site assessments,
including Phase I and Phase II site assessments, and other environmental
investigations.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit-sharing, retirement, or other employee
benefit plan subject to ERISA.
"Excess Shares" means the excess shares exchanged for shares of Common
Stock or Preferred Stock, as the case may be, transferred or proposed to be
transferred in excess of the Ownership Limit or which would otherwise jeopardize
the Company's status as a REIT under the Code.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Properties" means the 79 Properties located in 24 states owned by
the Company as of June 30, 1997.
"FFO" means Funds From Operations.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"Five or Fewer Requirement" means the requirement of the Code concerning
the Company's initial and continued qualification as a REIT that during the last
half of each taxable year not more than 50.0% in value of the outstanding shares
of the Company be owned directly or indirectly (applying certain attribution
rules) by five or fewer individuals (as defined in the Code to include certain
exempt entities).
"Funds From Operations" means, as defined by the National Association of
Real Estate Investment Trusts, net income (loss) (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments for
unconsolidated partnerships and joint ventures.
"GAAP" means United States generally accepted accounting principles.
"GCL" means the Delaware General Corporation Law, as amended from time to
time.
"ICSC" means the International Council of Shopping Centers.
"Incentive Acquisition Fee" means the fee to be paid by the Company to
Captec Advisors pursuant to the Advisory Agreement in connection with the
acquisition of certain properties as described under the heading
"Business -- The Advisor and the Advisory Agreement".
"Independent Director" means a person who is not (i) employed by the
Company, (ii) an Affiliate of the Company, any subsidiary of the Company or any
entity in which the Company owns, beneficially or of record, a 10.0% or greater
equity interest, or (iii) an Affiliate of any Affiliate of the Company.
"IRA" means an Individual Retirement Account.
"IRS" means the Internal Revenue Service.
"Leases" means the (generally long-term triple-net) leases pursuant to
which the Existing Properties are, and the properties acquired by the Company in
the future (which may include some or all of the Acquisition Properties) will
be, leased to Lessees.
"Lessees" means the parties (generally operators of franchised and chain
restaurants and retailers) who operate the Existing Properties and the parties
who will operate any properties acquired by the Company in the future (which may
include some or all of the Acquisition Properties) pursuant to the Leases.
"LIBOR" means London Interbank Offered Rate.
80
<PAGE> 84
"Management Fee" means the fee payable by the Company to Captec Advisors
for management and advisory services pursuant to the Advisory Agreement and
described under the heading "Business -- The Advisor and the Advisory
Agreement".
"Market Capitalization" means the market value of the issued and
outstanding shares of the Company's capital stock plus the Company's total
consolidated debt.
"Master Note" means the master revolving note agreement between the Company
and Captec Financial which bears interest at the annual rate of 8.07% and is
payable on demand.
"NAREIT" means National Association of Real Estate Investment Trusts.
"NAREIT White Paper" means the March 1995 NAREIT White Paper on FFO.
"NASD" means the National Association of Securities Dealers, Inc.
"Net Lease Michigan" means Captec Net Lease Realty, Inc. a Michigan
Corporation.
"Noncustomary Services" means services furnished (whether or not rendered
by an independent contractor) that are not customarily provided to tenants of
properties of a similar class in the geographic market, in which the Company's
property is located.
"Non-Qualifying Income" means the sum of the income realized by the Company
which does not satisfy the requirements of the 75.0% Test and the 95.0% Test.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the offering of shares of the Common Stock pursuant to and
as described in this Prospectus.
"Ownership Limit" means the beneficial or constructive ownership of 9.8% of
the outstanding Common Stock of the Company.
"Partnership Agreement" means the limited partnership agreements of each
Affiliated Partnership.
"Plan" means the Company's Long-Term Incentive Plan.
"Preferred Stock" means the preferred stock, par value $.01 per share and
in such series and classes and with such powers, preferences, and rights as may
be designated by the Board of Directors pursuant to the power granted to it by
the Certificate from time to time and applicable law.
"Prohibited Owner" means the person or entity holding record or title to
shares of the Company's capital stock in excess of the Ownership Limit.
"Prohibited Transferee" means the transferee of a purported transfer of the
Company's capital stock which resulted in a violation of the Ownership Limit and
who will acquire no right or interest in the excess shares.
"Prospectus" means the final prospectus included in the Company's
Registration Statement filed with the Commission, pursuant to which the Company
will offer shares of Common Stock to the public, as the same may be amended or
supplemented from time to time after the effective date of such Registration
Statement.
"Qualified Plans" means qualified pension, profit-sharing, and stock bonus
plans, including Keogh plans and IRAs.
"Qualifying Services" means service of a type that a tax-exempt
organization can provide its tenants without causing its rental income to be
UBTI under the Code.
"Regulations" means the Income Tax Regulations promulgated by the U.S.
Department of the Treasury under the Code.
"REIT" means real estate investment trust, as defined pursuant to Sections
856 through 860 of the Code.
81
<PAGE> 85
"Related Party Tenant" means a tenant in which the Company or a direct or
indirect owner of 10.0% or more of the Company owns directly or constructively a
10.0% or greater interest in the assets or net profits of such tenant.
"Representatives" means collectively Credit Suisse First Boston Corporation
and McDonald & Company Securities, Inc.
"Revolving Loan Rate" means the Benchmark Rate plus 2.138% (1.70% upon
written notification from the Company to (SFBMC) of completion of the Offering).
"Rule 144" means Rule 144 of the Commission promulgated pursuant to the
Securities Act.
"SARs" means share appreciation rights granted under the Plan.
"Section 203" means Section 203 of the GCL.
"Securities Act" means the Securities Act of 1933, as amended.
"Tenant Ownership Limitation" means (i) the Company must not own, directly
or constructively, 10.0% or more of any tenant, (ii) where the REIT's shares are
owned by a partnership, no 25.0% or greater partner may own an interest in a
tenant, or (iii) where any of the Company's stockholders and the owners of a
tenant are partners in a partnership, neither the Company's stockholders nor the
owner of the tenant is a 25.0% a greater partner in a partnership.
"Treasury Regulations" means the Income Tax Regulations promulgated by the
U.S. Department of the Treasury under the Code.
"UBTI" means unrelated business taxable income as defined in Section 512(a)
of the Code.
"Underwriters" means the Underwriters named in this Prospectus.
"Underwriting Agreement" means the Underwriting Agreement dated
, 1997 between the Company and the Underwriters.
82
<PAGE> 86
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-------------
<S> <C>
Captec Net Lease Realty, Inc. Unaudited Pro Forma Financial Statements......... F-2
Unaudited Pro Forma Balance Sheet as of June 30, 1997........................ F-3
Unaudited Pro Forma Statement of Operations for
the Six Months Ended June 30, 1997........................................ F-4
Unaudited Pro Forma Statement of Operations for
the Year Ended December 31, 1996.......................................... F-5
Notes to Unaudited Pro Forma Financial Statements............................ F-6
Captec Net Lease Realty, Inc. Historical Financial Statements:
Report of Independent Accountants............................................ F-8
Balance Sheet as of June 30, 1997 (unaudited) and December 31, 1996 and
1995...................................................................... F-9
Statement of Operations for the Six Months Ended June 30, 1997 and 1996
(unaudited) and for the Years Ended December 31, 1996 and 1995............ F-10
Statement of Changes in Stockholders' Equity for the Years Ended December 31,
1995 and 1996 and the Six Months Ended June 30, 1997 (unaudited).......... F-11
Statement of Cash Flows for the Six Months Ended June 30, 1997 and 1996
(unaudited) and for the Years Ended December 31, 1996 and 1995............ F-12
Notes to Financial Statements................................................ F-13 to F-20
Report of Independent Accountants............................................ F-21
Schedule III -- Properties and Accumulated Depreciation as of December 31,
1996...................................................................... F-22 to F-23
</TABLE>
F-1
<PAGE> 87
CAPTEC NET LEASE REALTY, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following pro forma balance sheet as of June 30, 1997 and pro forma
statements of operations for the six months ended June 30, 1997 and for the year
ended December 31, 1996 have been prepared to reflect the transactions and the
adjustments described in the accompanying notes. The pro forma financial
information is based on the historical financial statements listed in the index
on page F-1 and should be read in conjunction with those financial statements
and the notes thereto. The pro forma balance sheet was prepared as if
transactions contemplated by this Prospectus, including the Offering and the
application of the proceeds therefrom, occurred on June 30, 1997. The pro forma
statements of operations were prepared as if transactions contemplated by this
Prospectus, including the Offering and the application of the proceeds
therefrom, occurred on January 1, 1996. The pro forma financial information is
unaudited and is not necessarily indicative of the results which actually would
have occurred if the transactions had been consummated on the dates described,
nor does it purport to represent the Company's future financial position or
results of operations.
F-2
<PAGE> 88
CAPTEC NET LEASE REALTY, INC.
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................... $ 1,544 $156,984(a) $ 33,765
(72,922)(b)
(48,526)(c)
(3,315)(e)
Investments:
Properties subject to operating leases, net........... 98,293 98,293
Loans to affiliate, collateralized by mortgage
loans.............................................. 11,684 11,684
Delinquent mortgage loans............................. 788 788
Other loans........................................... 1,185 1,185
Financing leases, net................................. 1,531 1,531
General partner interests............................. -- 3,315(e) 3,315
--------- --------- --------
Total investments............................. 113,481 3,315 116,796
Short-term loans to affiliates.......................... 5,155 5,155
Unbilled rent........................................... 1,420 1,420
Accounts receivable..................................... 429 429
Other assets............................................ 1,053 1,053
--------- --------- --------
Total assets.................................. $ 123,082 $ 35,536 $158,618
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable......................................... $ 72,922 $(72,922)(b) --
Accounts payable...................................... 703 $ 703
Due to affiliates..................................... 368 368
Federal income tax payable............................ 411 102(d) 513
Deferred income tax................................... 102 (102)(d) --
Security deposits held on leases...................... 146 146
--------- --------- --------
Total liabilities............................. 74,652 (72,922) 1,730
--------- --------- --------
Redeemable Preferred Stock (mandatory redemption
amount $58,026) (Note 1).............................. 48,429 (58,026)(c) --
9,597(c)
--------- --------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized (Note 1)................................... -- -- --
Common Stock, $.01 par value, 40,000,000 shares
authorized, 1,315,440 and 13,273,773 issued and
outstanding on a historical and pro forma basis,
respectively.......................................... 13 113(a) 132
6(c)
(Capital Deficit) Paid-In Capital....................... (12) 156,871(a) 156,756
9,494(c)
(9,597)(c)
Retained earnings....................................... -- --
--------- --------- --------
Total stockholders' equity.................... 1 156,887 $156,888
--------- --------- --------
Total liabilities and stockholders' equity.... $ 123,082 $ 35,536 $158,618
========= ========= ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
F-3
<PAGE> 89
CAPTEC NET LEASE REALTY, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS(2) PRO FORMA
----------- -------------- -----------
<S> <C> <C> <C>
Investments:
Rental income..................................... $ 4,996 $ 4,996
Interest income on investments.................... 585 585
Interest income on short-term loans............... 247 247
Other............................................. (3) $ 151(f) 148
----------- -------- -----------
Total investments......................... 5,825 151 5,976
----------- -------- -----------
Expenses:
Interest.......................................... 2,707 (2,707) (a) --
General and administrative........................ 1,075 (546) (c) 837
308(d)
Depreciation and amortization..................... 677 677
----------- -------- -----------
Total expenses............................ 4,459 (2,945) 1,514
----------- -------- -----------
Income before income tax.................. 1,366 3,096 4,462
Provision for income tax............................ (39) 39(b) --
----------- -------- -----------
Net income..................................... 1,405 3,057 4,462
Preferred stock dividend requirements............... 3,750 (3,750) (e) --
----------- -------- -----------
(Loss) income attributable to common stock..... $ (2,345) $ 6,807 $ 4,462
=========== ======== ===========
(Loss) income per common share...................... $ (1.78) $ .34
=========== ===========
Weighted average common shares outstanding.......... 1,315,440 13,273,773(g)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
F-4
<PAGE> 90
CAPTEC NET LEASE REALTY, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS(2) PRO FORMA
---------- -------------- -----------
<S> <C> <C> <C>
Investments:
Rental income..................................... $ 4,907 $ 4,907
Interest income on investments.................... 1,691 1,691
Interest income on short-term investments......... 302 302
Other............................................. 18 $ 468(f) 486
----------- -------- -----------
Total investments.............................. 6,918 468 7,386
----------- -------- -----------
Expenses:
Interest.......................................... 1,977 (1,977) (a) --
General and administrative........................ 1,218 (619) (c) 1,435
836(d)
Depreciation and amortization..................... 649 649
----------- -------- -----------
Total expenses................................. 3,844 (1,760) 2,084
----------- -------- -----------
Income before income tax....................... 3,074 2,228 5,302
Provision for income tax............................ 95 (95) (b) --
----------- -------- -----------
Net income..................................... 2,979 2,323 5,302
Preferred stock dividend requirements............... 7,495 (7,495) (e) --
----------- -------- -----------
(Loss) income attributable to common stock..... $ (4,516) $ 9,818 $ 5,302
=========== ======== ===========
(Loss) income per common share...................... $ (3.43) $ .40
=========== ===========
Weighted average common shares outstanding.......... 1,315,440 13,273,773(g)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
F-5
<PAGE> 91
CAPTEC NET LEASE REALTY, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. BALANCE SHEET:
The accompanying unaudited balance sheet as of June 30, 1997 has been
prepared as if the following transactions had been consummated as of June 30,
1997:
<TABLE>
<S> <C> <C>
(a) Sale of 11,325,000 shares of common stock in the Offering:
Proceeds from Offering...................................................... $169,875
Less, costs associated with the Offering.................................... (12,891)
--------
Net proceeds................................................................ $156,984
========
Par value of common stock to be issued in the Offering...................... $ 113
Additional paid-in capital from the net proceeds of the Offering............ 156,871
--------
$156,984
========
(b) Use of a portion of net proceeds of the Offering to retire debt as follows:
Credit Facility............................................................. $ 70,669
Other notes payable......................................................... 2,253
--------
$ 72,922
========
(c) Use of a portion of net proceeds of the Offering to redeem redeemable preferred stock
as follows:
Mandatory redemption amount................................................. $ 58,026
Less, preferred shares exchanged for common stock........................... (9,500)
--------
Cash redemption amount...................................................... $ 48,526
========
The excess of the mandatory redemption value of the Redeemable Preferred Stock over
its carrying value ($9,597 at June 30, 1997) was charged to paid-in capital.
At the Offering date, $9,500 of Redeemable Preferred Stock will be exchanged for
$9,500 of common stock at the offering price of $15 per share (633,333 shares).
Par value of common stock to be exchanged for Redeemable Preferred Stock.... $ 6
Additional paid-in capital from the exchange of Redeemable Preferred
Stock....................................................................... 9,494
--------
$ 9,500
========
(d) Reclassify net deferred tax liability as current as a result of conversion to REIT
status.
(e) Purchase of one percent general partner interest in Captec III and IV.
</TABLE>
On a historical basis, 50,000 Redeemable Preferred Stock shares were issued
and outstanding; on a pro forma basis, none were issued or outstanding. No
shares of Preferred Stock were issued or outstanding on either a historical or
pro forma basis.
F-6
<PAGE> 92
2. STATEMENTS OF OPERATIONS:
The accompanying unaudited pro forma statements of operations for the six
months ended June 30, 1997 and for the year ended December 31, 1996 presents
results as if the transactions described in Note 1 had been consummated on
January 1, 1996.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, 1997 DECEMBER 31, 1996
------------------- -----------------
<S> <C> <C>
(a) Eliminate interest expense on debt retired by the
Company............................................... $ 2,707 $ 1,977
(b) Eliminate the provision for income taxes to reflect
qualification and operation as a REIT................. 39 (95)
(c) Reduce management fees from $824 to $278 and $935 to
$316, respectively, to reflect Advisory Agreement..... (546) (619)
(d) Increase general and administrative expenses to
reflect commencement of salaries and benefits and
other incremental costs related to operating as a
public REIT........................................... 308 836
(e) Eliminate redeemable preferred stock dividend
requirements for preferred stock redeemed and
exchanged............................................. (3,750) (7,495)
(f) Record revenues from general partner interests........ 151 468
(g) Weighted average outstanding common shares are as
follows:
Historical shares..................... 1,315,440
Shares exchanged for $9,500 Redeemable
Preferred Stock.................... 633,333
Sale of shares in the Offering........ 11,325,000
-----------
13,273,773 13,273,773 13,273,773
=========
</TABLE>
F-7
<PAGE> 93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Captec Net Lease Realty, Inc.
We have audited the accompanying balance sheet of Captec Net Lease Realty, Inc.
as of December 31, 1996 and 1995, and the related statements of operations,
changes in stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting financial statement amounts and disclosures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Captec Net Lease Realty, Inc.
as of December 31, 1996 and 1995, and the results of its operations, changes in
stockholders' equity and cash flows for the years then ended, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Detroit, Michigan
March 25, 1997, except for the first
paragraph of Note 1, for which
the date is September 5, 1997
F-8
<PAGE> 94
CAPTEC NET LEASE REALTY, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------
1997 1996 1995
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 1,544,019 $ 3,862,159 $ 1,969,196
Investments:
Properties subject to operating leases, net...... 98,292,754 70,175,031 15,554,325
Loans to affiliate, collateralized by mortgage
loans......................................... 11,684,080 9,101,714 21,747,755
Delinquent mortgage loans........................ 788,479 4,066,168 --
Other loans...................................... 1,184,704 1,210,432 --
Financing leases, net............................ 1,530,760 1,181,900 --
------------ ----------- -----------
Total investments........................ 113,480,777 85,735,245 37,302,080
Short-term loans to affiliates..................... 5,155,464 6,637,537 2,215,391
Unbilled rent...................................... 1,419,955 622,354 58,468
Accounts receivable................................ 428,693 135,451 20,800
Due from affiliates................................ -- 269,780 479,242
Other assets....................................... 1,052,845 1,351,954 246,875
------------ ----------- -----------
Total Assets............................. $123,081,753 $98,614,480 $42,292,052
============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable.................................... $ 72,921,864 $48,160,231 $ 1,587,623
Accounts payable................................. 703,178 375,544 203
Due to affiliates................................ 368,029 -- --
Federal income tax payable....................... 411,000 268,000 268,000
Deferred income tax.............................. 102,000 284,000 189,000
Security deposits held on leases................. 145,850 126,769 76,634
------------ ----------- -----------
Total liabilities........................ 74,651,921 49,214,544 2,121,460
------------ ----------- -----------
Redeemable preferred stock (mandatory redemption
amount of $58,026,395, $56,651,395 and
$42,905,493, respectively) (Note 8).............. 48,428,832 49,398,936 40,000,000
------------ ----------- -----------
Stockholders' Equity:
Preferred stock; authorized: 10,000,000 shares
(Note 8) -- -- --
Common stock; authorized: 40,000,000 shares;
issued and outstanding: 1,315,440 shares...... 13,154 13,154 13,154
Capital deficit.................................. (12,154) (12,154) (12,154)
Retained earnings................................ -- -- 169,592
------------ ----------- -----------
Total stockholders' equity............... 1,000 1,000 170,592
------------ ----------- -----------
Total Liabilities and Stockholders'
Equity................................. $123,081,753 $98,614,480 $42,292,052
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE> 95
CAPTEC NET LEASE REALTY, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
--------------------------- ---------------------------
1997 1996 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Rental income........................ $ 4,996,677 $ 1,612,094 $ 4,907,324 $ 614,166
Interest income on investments....... 585,271 814,308 1,691,369 541,275
Interest income on short-term
loans............................. 246,971 246,221 302,147 713,772
Other................................ (3,447) 7,158 17,510 83
----------- ----------- ----------- -----------
Total revenue................ 5,825,472 2,679,781 6,918,350 1,869,296
----------- ----------- ----------- -----------
Expenses:
Interest............................. 2,707,201 423,116 1,976,634 112,091
General and administrative........... 1,074,726 511,218 1,218,025 329,496
Depreciation and amortization........ 677,649 262,741 649,347 88,117
----------- ----------- ----------- -----------
Total expenses............... 4,459,576 1,197,075 3,844,006 529,704
----------- ----------- ----------- -----------
Income before income tax..... 1,365,896 1,482,706 3,074,344 1,339,592
Provision for income tax............... (39,000) 372,000 95,000 457,000
----------- ----------- ----------- -----------
Net Income................... 1,404,896 1,110,706 2,979,344 882,592
Redeemable preferred stock dividend
requirements:
Paid dividends....................... 2,375,000 625,000 3,750,000 713,000
Accrued dividends.................... 1,375,000 3,125,000 3,745,902 2,905,493
----------- ----------- ----------- -----------
Loss attributable to common
stock........................... $(2,345,104) $(2,639,294) $(4,516,558) $(2,735,901)
=========== =========== =========== ===========
Loss per common share............. $ (1.78) $ (2.01) $ (3.43) $ (2.08)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding................... 1,315,440 1,315,440 1,315,440 1,315,440
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE> 96
CAPTEC NET LEASE REALTY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE SIX MONTHS ENDED JUNE 30,
1997 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
COMMON CAPITAL RETAINED STOCKHOLDERS'
STOCK DEFICIT EARNINGS EQUITY
------- -------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995..................... -- -- -- --
Issuance of 1,315,440 shares of common
stock...................................... $13,154 $(12,154) $ 1,000
Net income................................... $ 882,592 882,592
Redeemable preferred stock dividends paid
from retained earnings (Note 8)............ (713,000) (713,000)
------- -------- ---------- ------------
BALANCE, DECEMBER 31, 1995................... 13,154 (12,154) 169,592 170,592
Net income................................... 2,979,344 2,979,344
Redeemable preferred stock dividends paid
from retained earnings (Note 8)............ (3,148,936) (3,148,936)
------- -------- ---------- ------------
BALANCE, DECEMBER 31, 1996................... 13,154 (12,154) -- 1,000
Net income................................... 1,404,896 1,404,896
Redeemable preferred stock dividends paid
from retained earnings (Note 8)............ (1,404,896) (1,404,896)
------- -------- ---------- ------------
BALANCE, JUNE 30, 1997 (unaudited)........... $13,154 $(12,154) -- $ 1,000
======= ======== ========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE> 97
CAPTEC NET LEASE REALTY, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------------------- -----------------------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 1,404,896 $ 1,110,706 $ 2,979,344 $ 882,592
Adjustments to net income:
Depreciation and amortization........... 677,649 262,741 649,347 88,117
Amortization of debt issuance costs..... 262,500 175,000 437,500 --
(Loss) Gain on sale of leased
equipment............................. 58,688 -- (10,351) --
Deferred income tax provision........... (182,000) -- 95,000 189,000
Increase in unbilled rent............... (797,601) (178,529) (563,886) (58,468)
(Decrease) increase in receivables and
other assets.......................... 296,176 (1,352,459) 32,232 (500,042)
Increase in payables.................... 470,635 688,595 375,341 268,203
------------ ------------ ------------ ------------
Net cash provided by operating
activities............................ 2,190,943 706,054 3,994,527 869,402
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties................. (25,976,893) (25,269,921) (55,879,245) (41,281,845)
Acquisition of delinquent mortgage
loans................................... -- -- (171,168) --
Advances on loans to affiliate,
collateralized by mortgage loans........ (5,123,234) (7,134,146) (10,055,492)
Acquisition of other loans................ -- -- (1,219,305) --
Acquisition of financing leases........... (370,164) (410,259) (1,181,900) --
Advances on short-term loans to
affiliates.............................. -- (561,624) (9,677,570) (2,215,391)
Collections on short-term loans to
affiliates.............................. 1,767,705 -- 5,255,424 --
Proceeds from the sale of leased
equipment............................... 200,522 -- 789,543 --
Collections on loans to affiliate,
collateralized by mortgage loans........ 2,540,234 11,838,900 18,806,533 3,894,773
Collection of principal on other loans.... 25,729 -- 8,873 --
Collection of principal of financing
leases.................................. 21,305 -- -- --
Change in lease security deposits......... 19,081 39,781 50,135 76,634
------------ ------------ ------------ ------------
Net cash used in investing activities... (26,895,715) (21,497,269) (53,274,172) (39,525,829)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of redeemable
preferred shares........................ -- 10,000,000 10,000,000 40,000,000
Proceeds from the issuance of common
shares.................................. -- -- -- 1,000
Proceeds from issuance of notes payable... 24,803,825 12,880,750 46,607,525 1,617,845
Organization and offering costs........... -- (600,000) (600,000) (250,000)
Debt issuance costs....................... -- (1,050,000) (1,050,000)
Principal payments of notes payable....... (42,193) (17,030) (34,917) (30,222)
Dividends paid on redeemable preferred
shares.................................. (2,375,000) (625,000) (3,750,000) (713,000)
------------ ------------ ------------ ------------
Net cash paid by financing activities... 22,386,632 20,588,720 51,172,608 40,625,623
------------ ------------ ------------ ------------
NET CASH FLOWS.............................. (2,318,140) (202,495) 1,892,963 1,969,196
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR...................................... 3,862,159 1,969,196 1,969,196 --
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR...... $ 1,544,019 $ 1,766,701 $ 3,862,159 $ 1,969,196
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest.................... $ 2,292,606 $ 170,415 $ 1,240,620 $ 112,091
============ ============ ============ ============
Cash paid for taxes....................... $ -- 12,579 $ 12,579 --
============ ============ ============ ============
Noncash transfers: From loans to
affiliate, collateralized by mortgage
loans to investment in delinquent
mortgage loans.......................... $ -- $ -- $ 3,895,000 --
============ ============ ============ ============
From delinquent mortgage loans to
properties subject to operating
leases.................................. $ 3,277,689 -- -- --
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE> 98
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:
Captec Net Lease Realty, Inc., a Michigan corporation, ("Net Lease
Michigan") was formed in October 1994 for the purpose of investing in restaurant
and retail real estate throughout the United States and commenced operations in
February 1995. Captec Net Lease Realty Advisors, Inc., a Michigan corporation,
("Advisors Michigan") was formed in October 1994 for the purpose of providing
certain advisory services to Net Lease Michigan and also commenced operations in
February 1995. In connection with a proposed initial public offering of common
stock, Captec Net Lease Realty, Inc., a Delaware corporation ("CNLR" or the
"Company"), was formed in August 1997 and Net Lease Michigan and Advisors
Michigan were merged into the Company in September 1997 in exchange for
1,315,440 shares of common stock and 50,000 shares of Redeemable Preferred
Stock. The accompanying financial statements account for this reorganization of
affiliated entities in a manner similar to a pooling of interests. Transactions
between Net Lease Michigan and Advisors Michigan have been eliminated.
Following is a summary of CNLR's significant accounting policies:
a. CASH AND CASH EQUIVALENTS: Cash equivalents consists of
investments in government securities money funds which hold securities with
original maturities of less than 90 days.
b. PROPERTIES SUBJECT TO OPERATING LEASES: Properties subject to
operating leases are stated at cost less accumulated depreciation.
Buildings are depreciated on the straight-line method over their estimated
useful lives (40 years).
c. RENTAL INCOME FROM OPERATING LEASES: The Company's operating
leases have scheduled rent increases which occur at various dates
throughout the lease terms. CNLR recognizes the total rent, as stipulated
by the lease agreement, as income on a straight-line basis over the term of
each lease. To the extent rental income on the straight-line basis exceeds
rents billable per the lease agreement, an amount is recorded as unbilled
rent.
d. DELINQUENT MORTGAGE LOANS: Investments in delinquent mortgage
loans have been recorded at the lower of the current balance due or the
estimated fair value of the collateral.
e. AMORTIZATION OF ORGANIZATION COSTS: Organization costs are
recorded at cost and amortized using the straight-line method over a
five-year period.
f. INCOME TAXES: Deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Such differences arise principally from varying methods of
depreciating buildings and cash basis accounting for tax purposes. Deferred
tax liabilities and assets are recognized for the expected future tax
consequences of events that have been included in the financial statements
or tax returns, measured at the current tax rates. Deferred tax expense or
benefit represents the change in the deferred tax asset or liability
balance.
g. LOSS PER COMMON SHARE: Loss per common share is based on net
income reduced by redeemable preferred stock dividend requirements, divided
by the weighted average number of common shares outstanding.
h. ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
i. UNAUDITED INTERIM FINANCIAL INFORMATION: The balance sheet as of
June 30, 1997 and the statements of operations and cash flows for the six
months ended June 30, 1997 and 1996 have not been
F-13
<PAGE> 99
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
audited. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been reflected herein. Results of operations for interim periods are
not necessarily indicative of results expected for the full year.
2. PROPERTIES SUBJECT TO OPERATING LEASES:
CNLR's real estate portfolio is leased to tenants under long-term net
operating leases. The lease agreements generally provide for monthly rents based
upon a percentage of the property's cost. The initial term of the leases
typically ranges from 15 to 20 years, although the Company in certain cases will
enter into leases with terms that are shorter or longer. Most leases also
provide for one or more five-year renewal options. In addition, certain leases
provide the tenant one or more options to purchase the land and buildings at a
predetermined price, generally only during stated window periods during the
fifth to seventh lease years.
The net investment in real estate at December 31, 1996 and 1995 includes
capitalized acquisition and interest costs totaling approximately $3,250,000 and
$654,000, respectively, which costs have been allocated between land and
buildings and improvements on a pro rata basis. The net investment in real
estate under operating leases is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land........................................ $37,609,147 $25,647,078 $ 4,546,482
Buildings and improvements.................. 54,776,257 39,010,252 8,316,476
Construction draws on properties (including
land of $4,699,659, $4,861,012 and
$2,461,474 in 1997, 1996 and 1995,
respectively)............................. 7,097,653 6,071,689 2,776,359
----------- ----------- -----------
99,483,057 70,729,019 15,639,317
Less accumulated depreciation.......... (1,190,303) (553,988) (84,992)
----------- ----------- -----------
Total................................ $98,292,754 $70,175,031 $15,554,325
=========== =========== ===========
</TABLE>
CNLR periodically invests in properties under construction. All
construction draws are subject to the terms of a standard lease agreement with
the Company which fully obligates the tenant to the long-term lease of all
amounts advanced under construction draws. At December 31, 1996, the Company had
approximately $4,543,000 of unfunded commitments on properties under
construction.
The following is a schedule of future minimum lease payments to be received
on the noncancelable operating leases.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
1997............................................ $ 4,680,548 $ 7,095,915
1998............................................ 10,144,324 7,370,146
1999............................................ 10,334,826 7,502,744
2000............................................ 10,424,597 7,577,415
2001............................................ 10,619,120 7,759,721
Thereafter...................................... 151,858,987 115,133,118
------------ ------------
Total........................................... $198,062,402 $152,439,059
============ ============
</TABLE>
F-14
<PAGE> 100
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LOANS TO AFFILIATE, COLLATERALIZED BY MORTGAGE LOANS:
The Company has a master revolving note agreement with Captec Financial
Group, Inc. ("CFG"), an affiliate of the Company. The master revolving note
bears interest at a rate of 8.0 percent and 9.0 percent per annum at December
31, 1996 and 1995, respectively, and is payable on demand.
At December 31, 1996 and 1995, the Company held a loan under the master
revolving note collateralized by a senior interest totaling $3,274,876 and
$21,747,755, respectively, in a portfolio of loans under an assignment of
contracts agreement with CFG. Under the terms of the assignment, the Company has
taken a security interest in the underlying loan agreements, and further, has
the right to record an assignment of the related mortgages. At December 31,
1996, the underlying loan portfolio was comprised of 5 first mortgage loans. At
December 31, 1995, the underlying loan portfolio was comprised of 21 first
mortgage loans representing 79 percent of the loan balances, with the remainder
of the loans being collateralized by leasehold mortgages and/or general liens on
the obligor's business. The underlying loan portfolios at December 31, 1996 and
1995 bear fixed rates of interest at a weighted average of 10.31 percent and
10.06 percent, respectively, per annum and mature in 7 to 15 years from the date
of origination.
At December 31, 1996, the Company held a loan under the master revolving
note, collateralized by a subordinate interest totaling $3,826,838, in a
portfolio of loans owned by an affiliate, Captec Financial Group Funding
Corporation ("CFGFC"), which interest was equal to approximately 10 percent of
the face value of the underlying loans. CFGFC's interest in these mortgage loans
is subordinate to that of a senior lender. The Company has invested in these
loans under an assignment of contracts agreement with CFG, the parent company of
CFGFC. The Company has taken a security interest in the underlying loan
agreements, and further, has the right to record an assignment of the related
mortgage, subject to the priority interest of the senior lender. At December 31,
1996, the underlying loan portfolio was comprised of fifty loans, with 68
percent of the loan balance collateralized by first mortgage loans and the
remainder of the loans being collateralized by leasehold mortgages and/or
general liens on the obligor's business. The underlying loan portfolio at
December 31, 1996 bears fixed rates of interest at a weighted average of 9.95
percent per annum and mature in 3 months to 15 years from the date of
origination.
The Company is the holder of a $2,000,000 promissory note collateralized by
a subordinate class certificate issued by Captec Loan Receivables Trust 1996-A
(the "Trust"), an affiliate of the Company, bearing interest at a rate of 15.74
percent per annum. The Subordinate class certificate was issued in conjunction
with an asset-backed securitization of a pool of long-term, fixed rate mortgage
loans and other collateralized loans originated by CFG. As of December 31, 1996,
the subordinate class certificate, which interest was equal to approximately 6
percent of the fair value of the underlying loans, was collateralized by a
portfolio of 58 loans aggregating $35,350,424 with a weighted average term of
approximately 170 months and a weighted average yield of 10.02 percent. Monthly
installment payments from the underlying loans will be used to pay both
principal and interest on the all classes of certificates, including the
subordinated class certificate held as collateral by the Company.
4. DELINQUENT MORTGAGE LOANS:
At December 31, 1996, the Company's investment in delinquent mortgage loans
was comprised of five mortgage loans to a single restaurant obligor. The loans
bear fixed rates of interest ranging from 10.41 to 10.67 percent per annum and
mature 15 years from the dates of origination. All loans are fully amortizing
with level installments of principal and interest due monthly. Installment
payments on these loans are delinquent by more than 120 days and income accrual
has been suspended by the Company. These loans were purchased by the Company in
1996 from an affiliate at the then outstanding balance, in anticipation of a
settlement agreement with respect to the loans which will result in the title to
the underlying properties being transferred to the Company by deed in lieu of
foreclosure. In conjunction with that settlement, the properties are expected to
be leased to a new tenant, under long-term net operating leases.
F-15
<PAGE> 101
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to December 31, 1996, three of the properties, comprising
$2,426,548 of the balance, were leased to a new tenant under long-term operating
leases and the balances have been reclassified to properties subject to
operating leases in the accompanying balance sheet. The tenant is 50 percent
owned by an affiliate. Another of the properties, comprising $851,141 of the
balance, was leased to a non-related tenant under a long-term operating lease
and has also been reclassified.
5. OTHER LOANS:
The Company is the holder of a subordinated note with a principal balance
of $788,512 as of December 31, 1996, bearing interest at a rate of 12.5 percent
per annum. The loan is collateralized by a subordinate interest in nineteen real
estate properties, which properties are operated under the terms of long-term
net leases to a single tenant. The properties are being offered for sale to
third parties during a 24 month period. Monthly lease payments and proceeds from
the sale of individual properties will be used to pay both principal and
interest on the loan. The loan also provides for a participation interest in the
proceeds from the sale of individual properties which could result in a return
on the note in excess of the stated note rate. The Company also has a net
investment totaling $9,182,055 in four land and building properties subject to
operating leases with the same tenant.
As of December 31, 1996, the Company also has made a demand loan of
$421,920 collateralized by a first mortgage on a real estate property to a
related party. The loan bears interest at a rate of 9.0 percent per annum.
6. FINANCING LEASES:
The net investment in financing leases as of December 31, 1996 is comprised
of the following:
<TABLE>
<S> <C>
Minimum lease payments to be received.................................... $1,555,846
Estimated residual value................................................. 92,268
----------
Gross investment in financing leases................................... 1,648,114
Unamortized initial direct costs......................................... 16,984
Unearned income.......................................................... (483,198)
----------
Net investment in financing leases..................................... $1,181,900
==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on the financing leases as of December 31, 1996.
<TABLE>
<S> <C>
1997..................................................................... $ 491,401
1998..................................................................... 250,507
1999..................................................................... 250,507
2000..................................................................... 250,507
2001..................................................................... 234,184
Thereafter............................................................... 78,740
----------
Total............................................................... $1,555,846
==========
</TABLE>
The entire investment in financing leases is comprised of seven leases to a
single restaurant lessee. At December 31, 1996 rents on these leases are
delinquent by more than 120 days and income accrual has been suspended by the
Company. These leases were purchased by the Company in 1996 from an affiliate,
in anticipation of a settlement agreement with respect to the leases.
Subsequent to December 31, 1996, new leases were executed, replacing the
existing leases. The new leases, on which payments are current, are to an entity
which is 50 percent owned by an affiliate.
F-16
<PAGE> 102
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE:
In February 1996, CNLR entered into a $100 million revolving credit
agreement, which is used to provide funds for the acquisition of properties.
Borrowings under this facility are secured by a first mortgage on the properties
financed. The credit agreement requires monthly installments of interest only at
LIBOR plus 2.318 percent. The acquisition facility expires in February 1998, at
which time the Company may elect to extend the facility for one additional year,
subject to the payment of an extension fee equal to 0.5 percent of the loan
facility amount. In addition, the agreement provided for a commitment fee and
closing expenses totaling $1,050,000, which were paid in February 1996 and
capitalized in other assets. These capitalized fees and expenses are being
amortized and treated as interest expense on a straight-line basis over the
initial term of the facility. Amortization during 1996 totaled $437,500. The
credit agreement contains covenants which, among other restrictions, require
CNLR to maintain a capitalization, as defined in the agreement, of $40 million,
liquid assets equal to the greater of $2 million or 5 percent of the outstanding
borrowings under the facility, and a loan-to-value ratio of not more than 75
percent on the properties financed under the credit facility. Amounts borrowed
under the credit facility totaled $46,607,525 as of December 31, 1996.
In June, 1997, the Revolving Credit Agreement was increased to $150
million. Amounts borrowed under the credit facility totaled $70,668,295 at June
30, 1997.
CNLR has a note payable to a financial institution with a principal balance
of $1,552,706 and $1,587,623 as of December 31, 1996 and 1995, respectively.
This note bears interest at a fixed rate of 9.85 percent per annum and is
payable in equal monthly installments of $15,813, with a balloon payment for all
remaining principal, approximately $1,350,059, due in June 2001. This note is
collateralized by a mortgage in one of CNLR's real estate investments. At June
30, 1997, the principal balance was $2,252,938, reflecting an additional note
payable to the same financial institution.
At December 31, 1996, annual maturities of the notes payable are as
follows:
<TABLE>
<S> <C>
1997............................................................ $ 38,517
1998............................................................ 46,650,011
1999............................................................ 46,866
2000............................................................ 51,696
2001............................................................ 1,373,141
-----------
Total...................................................... $48,160,231
===========
</TABLE>
8. REDEEMABLE PREFERRED STOCK:
At December 31, 1996 and 1995, 50,000 and 40,000 shares of Redeemable
Preferred Stock ("RPS") were issued and outstanding, respectively. No Preferred
Stock shares were issued or outstanding at December 31, 1996 and 1995.
The RPS provides for mandatory redemption on December 31, 1999 at a price
of $1,000 per share plus all accrued dividends, whether or not then payable, and
any unpaid dividends. The Company has the right and option to redeem these
shares on or after December 31, 1996 at a price of $1,000 per share plus all
accrued and unpaid dividends.
The RPS provide for a cumulative, non-compounded dividend at the rate of
$37.50 per share per quarter, proportionally adjusted for any shares issued and
outstanding for less than a full calendar year. The preferred shareholders have
preferential liquidation rights which require the payment of all accrued and
unpaid dividends prior to the payment of any dividends or liquidation payments
to the common shareholders. Dividends are paid as declared by the Company's
Board of Directors based upon results of Company operations. Any dividend paid
in
F-17
<PAGE> 103
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
excess of retained earnings has been accounted for as a return of capital to the
holders of the RPS. RPS dividends paid through June 30, 1997 were as follows:
<TABLE>
<CAPTION>
RETURN
FROM OF CAPITAL
RETAINED (REDUCTION OF RPS
EARNINGS CARRYING VALUE) TOTAL
---------- ----------------- ----------
<S> <C> <C> <C>
Paid in 1995, $22.46 per share............. $ 713,000 -- $ 713,000
Paid in 1996, $75.00 per share............. 3,148,936 $ 601,064 3,750,000
Paid in 1997, $47.50 per share............. 1,404,896 970,104 2,375,000
---------- ---------- ----------
$5,266,832 $ 1,571,168 $6,838,000
========== ========== ==========
</TABLE>
Accumulated unpaid dividends were $8,026,395, $6,651,395 and $2,905,493 as
of June 30, 1997, and December 31, 1996 and 1995, respectively.
9. INCOME TAX:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
SIX
MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, --------------------
1997 1996 1995
-------- ------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current............................................. $143,000 $268,000
Deferred............................................ (182,000) $95,000 189,000
-------- ------- --------
$(39,000) $95,000 $457,000
======== ======= ========
</TABLE>
The reconciliation of the federal income tax provision to the amount
computed by applying the statutory federal income tax rate to income before
federal income taxes is summarized as follows:
<TABLE>
<CAPTION>
SIX
MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, -----------------------
1997 1996 1995
-------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C>
Federal income taxes at statutory rates........... $464,405 $1,045,276 $455,461
Preferred stock dividends deducted as interest
expense......................................... (503,500) (947,400) --
Other............................................. 95 (2,876) 1,539
-------- ---------- --------
$(39,000) $ 95,000 $457,000
======== ========== ========
</TABLE>
The provision for income taxes does not bear the usual relationship to
pretax income for the six months ended June 30, 1997 and for the year ended
December 31, 1996 principally as a result of the treatment of dividends paid on
the Redeemable Preferred Stock as deductible interest expense for income tax
purposes. If deduction as interest is challenged by the Internal Revenue
Service, the Company could be assessed and ultimately required to pay income and
withholding taxes aggregating up to approximately $3,400,000 and $3,035,000 for
deductions taken through June 30, 1997 and December 31, 1996, respectively. The
Company has provided an allowance, consisting of currently payable taxes and a
valuation allowance on deferred taxes, of approximately $875,000 and $570,000
through June 30, 1997 and December 31, 1996, respectively, to reflect its
estimate of the minimum settlement of this matter, should a claim by asserted by
the Internal Revenue Service. There is no assurance that if any claim is
asserted, it could be settled for the amounts provided as of June 30, 1997 and
December 31, 1996 or any amount less than the aggregate amounts.
F-18
<PAGE> 104
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of net deferred taxes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
JUNE 30,
1997 1996 1995
--------------------- --------------------- --------------------
ASSET LIABILITY ASSET LIABILITY ASSET LIABILITY
--------- --------- --------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net operating loss
carryforward......... $945,000 -- $602,000 -- -- --
Other.................. -- $583,000 -- $583,000 $40,000 $229,000
Less: valuation
allowance............ (464,000) -- (303,000) -- -- --
-------- -------- -------- -------- ------- --------
Total deferred
income taxes.... $481,000 $583,000 $299,000 $583,000 $40,000 $229,000
======== ======== ======== ======== ======= ========
</TABLE>
At December 31, 1996, the Company has a net loss carryforward for federal
income tax purposes of approximately $1,770,000 that will expire in 2011. Other
deferred assets and liabilities noted above arise principally from varying
methods of depreciating buildings and cash basis accounting for tax purposes.
10. FINANCIAL INSTRUMENTS:
The estimated fair value of financial instruments held by the Company at
December 31, 1996 and 1995, and the valuation techniques used to estimate the
fair value, were as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
ESTIMATED ESTIMATED
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents... $ 3,862,159 $ 3,862,159 $ 1,969,196 $ 1,969,196
Delinquent mortgage loans... 4,066,168 4,066,168 -- --
Loans to affiliate,
collateralized by
mortgage loans........... 9,101,714 9,101,714 21,747,755 21,747,755
Other loans................. 1,210,432 1,210,432 -- --
Short-term loans to
affiliates............... 6,637,537 6,637,537 2,215,391 2,215,391
Liabilities, notes payable.... 48,160,231 48,267,687 1,587,623 1,587,623
</TABLE>
- CASH AND CASH EQUIVALENTS. The book value approximates fair value because
of the short maturity of these instruments.
- DELINQUENT MORTGAGE LOANS. The fair value of the investment in mortgage
loans is estimated to be equal to the current balance due on the loans
since title to the real property collateralizing these loans is in the
process of being transferred to the Company and the estimated value of the
property exceeds the loan balances.
- LOANS TO AFFILIATE, COLLATERALIZED BY MORTGAGE LOANS. The book value
approximates fair value because the fixed interest rates charged under
these investments approximate market interest rates commensurate with
this type of instrument and due to the short maturity of these loans.
- OTHER LOANS. The book value approximates fair value because the fixed
interest rates charged under these investments approximates market
interest rates commensurate with this type of instrument.
- SHORT-TERM LOANS TO AFFILIATES. The book value approximates fair value
because the fixed interest rate charged under these investments
approximates market interest rates commensurate with this type of
instrument and due to the short maturity of these loans.
F-19
<PAGE> 105
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- NOTES PAYABLE. The fair value of floating rate debt approximates the
book value due to the short maturity of the pricing mechanism for this
debt. The fair value of fixed rate debt is estimated by discounting
future cash flows using an estimated discount rate which reflects the
rate at which the Company currently borrows under its credit facility.
11. RELATED PARTY TRANSACTIONS AND AGREEMENTS:
CNLR has an agreement which provides for the payment of an acquisition fee
equal to 5 percent of the aggregate purchase prices of properties originated on
behalf of the Company. During 1996 and 1995, CNLR incurred approximately
$2,630,000 and $654,000, respectively, in acquisition fees to CFG. The
acquisition fees were capitalized into the Company's investment in land and
building subject to operating leases.
The Company invested in mortgage loans held in the name of CFG and CFGFC
(see Note 3).
In addition, CNLR had the following short-term loans to affiliates at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Captec Financial Group, Inc......................................... $6,442,004 $1,970,000
Others.............................................................. 195,533 243,391
---------- ----------
Total............................................................. $6,637,537 $2,213,391
---------- ----------
</TABLE>
The above loans principally represent demand notes to affiliates, which
were entered into as a short-term investment by the Company. In particular, the
proceeds of the loans to Captec Financial Group, Inc. are principally used as
short-term warehouse financing for Captec's lending and leasing activities.
These loans bear interest at the rate of 8.0 percent per annum and are payable
on demand.
At December 31, 1996, the Company was owed interest accrued on the loans to
affiliates, collateralized by mortgage loans, and the investment in short-term
loans totaling approximately $873,000, which was offset by approximately
$603,000 of amounts payable to such affiliates, resulting in a net balance due
from affiliates of $269,780. Interest earned on the loans during 1996 and 1995
was $1,871,846 and $596,316, respectively.
F-20
<PAGE> 106
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Captec Net Lease Realty, Inc.:
In connection with our audits of the financial statements of Captec Net
Lease Realty, Inc., as of December 31, 1996 and 1995, and each of the two years
in the period ended December 31, 1996, which financial statements are included
in the Prospectus, we have also audited the financial statement schedule listed
in the Index to Financial Statements contained in the Prospectus.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND, L.L.P.
Detroit, Michigan
March 25, 1997
S-1
<PAGE> 107
CAPTEC NET LEASE REALTY, INC.
SCHEDULE III
PROPERTIES AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COST
CAPITALIZED
INITIAL SUBSEQUENT
TYPE OF STATE COST TO TO
CONCEPT NAME PROPERTY LOCATION ENCUMBRANCES COMPANY ACQUISITION
------------------------- ----------- -------- ------------ ----------- ----------
<C> <C> <S> <C> <C> <C> <C> <C>
COMMENCED LEASES
Golden Corral Restaurant TX $ 1,552,706 $ 1,926,149 --
Kenny Rogers Roasters Restaurant FL -- 338,310 --
Boston Market Restaurant SC -- 477,750 --
Kenny Rogers Roasters Restaurant NY -- 997,500 --
Denny's Restaurant TX 675,000 592,771 --
Denny's Restaurant TX 675,000 588,140 --
Denny's Restaurant NC 675,000 776,521 --
Denny's Restaurant NC 675,000 776,521 --
Kenny Rogers Roasters Restaurant CA -- 415,275 --
Denny's Restaurant TX 450,000 630,000 --
Taco Cabana Restaurant GA 675,000 1,016,000 --
Carrows Restaurant CA 825,000 1,155,000 --
Carrows Restaurant CA 825,000 1,155,000 --
Carrows Restaurant CA 900,000 1,260,000 --
Church's Restaurant GA 596,650 835,321 --
Boston Market Restaurant OH 750,000 892,500 --
Boston Market Restaurant WA 911,250 1,275,750 --
Boston Market Restaurant NJ 862,500 850,500 --
Boston Market Restaurant PA 697,500 682,500 --
Carrows Restaurant CA 750,000 1,050,000 --
Taco Cabana Restaurant GA 750,000 1,129,000 --
Blockbuster Video Retail TX 537,000 751,800 --
Blockbuster Video Retail TX 535,000 802,200 --
Stanford's Restaurant CO 1,650,000 2,310,000 --
Boston Market Restaurant IL 1,425,000 1,789,200 --
Red Line Burgers Restaurant TX -- 266,997 --
Red Line Burgers Restaurant TX -- 266,997 --
Red Line Burgers Restaurant TX -- 266,997 --
Boston Market Restaurant OR 885,000 1,159,616 --
Boston Market Restaurant PA 753,750 871,500 --
Red Robin Restaurant WA 2,302,500 3,000,667 --
Boston Market Restaurant IL 656,250 589,050 --
Applebees Restaurant WA 1,637,625 1,890,000 --
Applebees Restaurant MO 1,575,000 1,986,444 --
Boston Market Restaurant PA 862,500 844,200 --
Baby Superstore Retail MO 2,145,000 3,003,000 --
Black Angus Restaurant MN 1,931,250 2,698,500 --
Black Angus Restaurant MN 1,380,000 1,932,000 --
Black Angus Restaurant MN 1,597,500 2,236,500 --
Black Angus Restaurant MN 1,683,750 2,352,000 --
Boston Market Restaurant OR 967,500 1,295,700 --
Mountain Jack's Restaurant MI 1,042,500 1,459,500 --
Mountain Jack's Restaurant MI 765,000 1,071,000 --
Boston Market Restaurant IL 787,500 844,200 --
Red Robin Restaurant CO 2,250,000 3,123,750 --
Denny's Restaurant TX 825,000 1,155,000 --
Boston Market Restaurant OH 765,000 729,828 --
Boston Market Restaurant IN 1,117,500 1,564,500 --
Jack In The Box Restaurant CA 750,000 985,425 --
Boston Market Restaurant PA 862,500 787,500 --
Boston Market Restaurant WA 795,000 894,706 --
Boston Market Restaurant WA 870,000 982,886 --
Boston Market Restaurant WA 825,000 999,165 --
Boston Market Restaurant PA 735,000 925,994 --
------------ -----------
Subtotal -- Commenced Leases 48,160,231 64,657,330 --
------------ -----------
CONSTRUCTION DRAWS ON LEASES
Boston Market Restaurant WI -- 519,750 --
Boston Market Restaurant WI -- 577,500 --
Boston Market Restaurant PA -- 403,200 --
Denny's Restaurant LA -- 382,352 --
Boston Market Restaurant PA -- 455,700 --
Mountain Jack's Restaurant OH -- 1,383,144 --
Boston Market Restaurant IL -- 830,025 --
Boston Market Restaurant PA -- 643,650 --
Golden Corral Restaurant FL -- 876,368 --
-----------
Subtotal -- Construction Draws -- 6,071,689 --
------------ -----------
Grand Total -- All Real Estate Leases $48,160,231 $70,729,019 --
============ ===========
<CAPTION>
GROSS AMOUNT
AT WHICH
CARRIED AT DATE OF
CLOSE ACCUMULATED ACQUISITION/ ACQUISITION/
OF PERIOD DEPRECIATION CONSTRUCTION CONSTRUCTION DEPRECIATION
------------ ----------- ------------ ------------- ------------
<C> <C> <C> <C> <C> <C>
COMMENC
$ 1,926,149 41,400 1995 Acquisition 40 Years
338,310 -- 1995 Acquisition 40 Years
477,750 55,738 1995 Acquisition 40 Years
997,500 15,316 1995 Acquisition 40 Years
592,771 6,117 1995 Acquisition 40 Years
588,140 6,323 1995 Acquisition 40 Years
776,521 13,376 1995 Acquisition 40 Years
776,521 15,605 1995 Acquisition 40 Years
415,275 5,675 1995 Acquisition 40 Years
630,000 18,413 1995 Acquisition 40 Years
1,016,000 14,360 1995 Acquisition 40 Years
1,155,000 17,069 1996 Acquisition 40 Years
1,155,000 14,212 1996 Acquisition 40 Years
1,260,000 14,175 1996 Acquisition 40 Years
835,321 9,520 1996 Acquisition 40 Years
892,500 9,128 1996 Acquisition 40 Years
1,275,750 13,731 1996 Acquisition 40 Years
850,500 7,139 1996 Acquisition 40 Years
682,500 4,086 1996 Acquisition 40 Years
1,050,000 14,766 1996 Acquisition 40 Years
1,129,000 11,307 1996 Acquisition 40 Years
751,800 10,296 1996 Acquisition 40 Years
802,200 9,055 1996 Acquisition 40 Years
2,310,000 31,929 1996 Acquisition 40 Years
1,789,200 12,063 1996 Acquisition 40 Years
266,997 7,231 1995 Acquisition 40 Years
266,997 7,231 1995 Acquisition 40 Years
266,997 7,231 1995 Acquisition 40 Years
1,159,616 11,801 1996 Acquisition 40 Years
871,500 6,867 1996 Acquisition 40 Years
3,000,667 26,926 1996 Acquisition 40 Years
589,050 4,476 1996 Acquisition 40 Years
1,890,000 12,892 1996 Construction 40 Years
1,986,444 13,889 1996 Construction 40 Years
844,200 3,534 1996 Acquisition 40 Years
3,003,000 13,684 1996 Acquisition 40 Years
2,698,500 10,302 1996 Acquisition 40 Years
1,932,000 9,125 1996 Acquisition 40 Years
2,236,500 9,383 1996 Acquisition 40 Years
2,352,000 8,135 1996 Acquisition 40 Years
1,295,700 3,898 1996 Acquisition 40 Years
1,459,500 7,218 1996 Acquisition 40 Years
1,071,000 4,267 1996 Acquisition 40 Years
844,200 3,308 1996 Acquisition 40 Years
3,123,750 4,506 1996 Construction 40 Years
1,155,000 1,695 1996 Construction 40 Years
729,828 919 1996 Construction 40 Years
1,564,500 2,450 1996 Construction 40 Years
985,425 959 1996 Acquisition 40 Years
787,500 -- 1996 Acquisition 40 Years
894,706 -- 1996 Construction 40 Years
982,886 -- 1996 Construction 40 Years
999,165 -- 1996 Construction 40 Years
925,994 1,262 1996 Construction 40 Years
------------ -----------
Su 64,657,330 553,988
------------ -----------
CO
519,750 -- 1996 Construction --
577,500 -- 1996 Construction --
403,200 -- 1996 Construction --
382,352 -- 1996 Construction --
455,700 -- 1996 Construction --
1,383,144 -- 1996 Construction --
830,025 -- 1996 Construction --
643,650 -- 1996 Construction --
876,368 -- 1996 Construction --
------------
Su 6,071,689 --
------------ -----------
Gr $70,729,019 553,988
============ ===========
</TABLE>
S-2
<PAGE> 108
CAPTEC NET LEASE REALTY, INC.
PROPERTIES AND ACCUMULATED DEPRECIATION (CONTINUED)
AS OF DECEMBER 31, 1996
NOTES:
The changes in total properties for the years ended December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance, beginning of year........................ $15,639,317 $ --
Acquisitions...................................... 55,879,245 15,639,317
Dispositions and other............................ (789,543) --
-------------- --------------
Balance, end of year.............................. $70,729,019 $15,639,317
============== ==============
</TABLE>
The change in accumulated depreciation for the years ended December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance, beginning of year........................ $ 84,992 $ --
Depreciation for the period....................... 479,347 84,992
Disposition and other............................. (10,351) --
-------------- --------------
Balance, end of year.............................. $ 553,988 $ 84,992
============== ==============
</TABLE>
S-3
<PAGE> 109
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN AFFAIRS OF THE COMPANY
SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 1
Risk Factors............................. 12
Use of Proceeds.......................... 24
Distribution Policy...................... 24
Capitalization........................... 27
Dilution................................. 28
Selected Financial Data.................. 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 31
Industries............................... 35
Business................................. 36
Description of Properties and Leases..... 47
Management............................... 50
Certain Transactions..................... 54
Conflicts of Interest.................... 55
Principal Stockholders................... 57
Capital Stock of the Company............. 58
Shares Eligible for Future Sale.......... 61
Federal Income Tax Considerations........ 62
ERISA Considerations..................... 74
Underwriting............................. 75
Notice to Canadian Residents............. 76
Legal Matters............................ 77
Experts.................................. 77
Additional Information................... 77
Glossary................................. 78
Index to Financial Statements............ F-1
</TABLE>
------------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
CAPTEC NET LEASE
REALTY, INC.
11,325,000 Shares
Common Stock
($0.01 par value)
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
MCDONALD & COMPANY
SECURITIES, INC.
- ------------------------------------------------------
<PAGE> 110
PART II
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the approximate expenses (other than the
underwriting discounts and commission) expected to be incurred in connection
with the issuance and distribution of the Common Stock being registered.
<TABLE>
<S> <C>
SEC Registration Fee................................................... $ 59,194
NASD Fee............................................................... 20,036
NYSE Fee............................................................... 116,000
Printing and Engraving Expenses........................................ 200,000
Legal Fees and Expenses................................................ 400,000
Accounting Fees and Expenses........................................... 100,000
Blue Sky Fees and Expenses............................................. 6,500
Miscellaneous.......................................................... 98,270
------------
TOTAL........................................................ $1,000,000
============
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES.
Not Applicable.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has made the following sales of its Common Stock and Preferred
Stock within the past three years to the following persons for the cash or other
consideration indicated, which sales were not registered under the Securities
Act.
<TABLE>
<CAPTION>
CONSIDERATION
DATE OF ----------------------
NAME ISSUANCE TOTAL PER SHARE(2) # SHARES(3)
------------------------------------------ -------- ------ ------------ -----------
<S> <C> <C> <C> <C>
Patrick L. Beach (1)...................... 10-10-94 $ 470 $ 1.00 617,600
W. Ross Martin (1)........................ 10-10-94 214 1.00 281,833
George R. Beach........................... 10-10-94 15 1.00 19,738
H. Reid Sherard (1)....................... 10-10-94 34 1.00 44,396
Gary A. Bruder (1)........................ 10-10-94 20 1.00 26,282
Captec Financial Group, Inc............... 10-10-94 101 1.00 133,208
Michigan Corp............................. 10-10-94 146 1.00 192,383
---------
Totals............................... 10-10-94 $1,000 $1,000 1,315,440
=========
</TABLE>
- ---------------
(1) Director or officer.
(2) Represents consideration paid for original issuance.
(3) Pursuant to the terms of the mergers of Net Lease Michigan and Advisors
Michigan into the Company (which was approved unanimously by the
stockholders of Net Lease Michigan and Advisors Michigan) the common shares,
without par value, of each of Net Lease Michigan and Advisors Michigan
became, without further action or consideration by the stockholders of Net
Lease Michigan and Advisors Michigan, the shares of the Company's Common
Stock. The 50,000 issued and outstanding redeemable preferred shares,
without par value, of Net Lease Michigan (originally issued from December
18, 1995 to January 24, 1996 for $10.00 per share) were exchanged for 50,000
shares of the Preferred Stock and subject to the holder's obligation to
exchange 9,500 unredeemed shares of the Preferred Stock for shares of the
Common Stock upon the terms described in the Prospectus and subject only to
completion of the Offering. These transactions were made pro rata to the
existing shareholders of Net Lease Michigan and Net Lease Advisors, each of
whom either are officers or directors of those companies, have a prior
business relationship with those companies and/or are accredited investors.
These transactions did not involve any public offering and were exempt
pursuant to Section 4(2) of the Securities Act.
II-1
<PAGE> 111
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to the Certificate of Incorporation of the Company, as
amended from time to time (the "Certificate") (Exhibit 3.1) and the form of
Indemnification Agreement to be entered into with the Registrant's directors and
officers (Exhibit 10.7).
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate which provide that directors
of the Company shall not be personally liable for monetary damages to the
Company or its stockholders for a breach of fiduciary duty as a director, except
for liability as a result of (i) a breach of the director's duty of loyalty to
the Company or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of law, (iii) an act
related to the unlawful stock repurchase or redemption or payment of a dividend
under Section 174 of Delaware General Corporation Law, and (iv) transactions
from which the director derived an improper personal benefit.
The Company's Certificate and Bylaws also authorize the Company to
indemnify its officers, directors and persons who serve at the request of the
Company as a director, officer, employee, agent or trustee of another
corporation, partnership, joint venture, trust or other enterprise, to the
fullest extent permitted under Delaware law. The Company has entered into
separate indemnification agreements with its directors and officers which may,
in some cases, be broader than the specific indemnification provisions contained
in the Delaware General Corporation Law. The indemnification agreements require
the Company, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened or
proceeding which may result in a claim for such indemnification.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
See Item 37, "Undertakings."
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not Applicable.
ITEM 36. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a) EXHIBITS. The following is a list of exhibits in this Registration
Statement.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- --------------------------------------------------------------------- --------
<C> <S> <C>
1.1 Underwriting Agreement.**............................................
3.1 Certificate of Incorporation of the Company.*........................
3.2 Bylaws of the Company.*..............................................
5.1 Opinion of Baker & Hostetler LLP regarding legality.**...............
8.1 Opinion of Baker & Hostetler LLP regarding tax matters.**............
10.1 February 26, 1996 Credit Facility between Credit Suisse First Boston
Mortgage Capital L.L.C. and the Company, and amendment thereto.*.....
10.2 September , 1997 Employment Agreement between the Company and
Patrick L. Beach.*...................................................
10.3 September , 1997 Employment Agreement between the Company and W.
Ross Martin.*........................................................
</TABLE>
II-2
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- --------------------------------------------------------------------- --------
<C> <S> <C>
10.4 Agreement of Limited Partnership of Captec Franchise Capital Partners
L.P. III.*...........................................................
10.5 Amended and Restated Agreement of Limited Partnership of Captec
Franchise Capital Partners L.P. IV.*.................................
10.6 Advisory Agreement between the Company and Captec Net Lease Realty
Advisors, Inc.*......................................................
10.7 Form of Indemnification Agreement to be entered into by the Company's
directors and officers.**............................................
10.8 Form of Acquisition Agreement of General Partnership Interests in the
Affiliated Partnerships.*............................................
10.9 Long-Term Incentive Plan.*...........................................
10.10 Directors' Deferred Compensation Plan.*..............................
15.1 Letter regarding use of unaudited interim financial information.**...
23.1 September 2, 1997 Consent of Coopers & Lybrand, L.L.P.*..............
23.2 Consent of Baker & Hostetler LLP (included in Exhibit 5.1
hereto).**...........................................................
24.1 Powers of Attorney (included on page II-5 hereto).*..................
27.1 Financial Data Schedule.*............................................
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULE.
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION OF DOCUMENT PAGE NO.
------------ -------------------------------------------------------------------- --------
<C> <S> <C>
Independent Auditors Report on Financial Statement Schedule* S-1
III Properties and Accumulated Debt* S-2
</TABLE>
- ---------------
* Filed herewith.
** To be filed by Amendment.
ITEM 37. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue.
II-3
<PAGE> 113
(3) The undersigned Registrant hereby undertakes that:
(a) For determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4), or 497(h) under the Securities Act shall be deemed to be a part
of this registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed as the initial bona fide
offering thereof.
II-4
<PAGE> 114
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT, OR AMENDMENT THERETO, TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF ANN ARBOR, STATE OF MICHIGAN, ON
SEPTEMBER 4, 1997.
CAPTEC NET LEASE REALTY, INC.
By: /s/ PATRICK L. BEACH
------------------------------------
Patrick L. Beach
Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
By: /s/ W. ROSS MARTIN
------------------------------------
W. Ross Martin
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Accounting Officer)
II-5
<PAGE> 115
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW HEREBY SEVERALLY CONSTITUTES AND APPOINTS PATRICK L. BEACH AND W. ROSS
MARTIN, AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH
FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE
AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ALL DOCUMENTS
RELATING THERETO, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER
DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION,
GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, FULL POWER AND AUTHORITY TO DO
AND PERFORM EACH AND EVERY ACT AND THING NECESSARY OR ADVISABLE TO BE DONE IN
AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT OR
COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID
ATTORNEYS-IN-FACT AND AGENTS, OR HIS SUBSTITUTER SUBSTITUTES, MAY LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT, OR AMENDMENT THERETO, HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
DATE SIGNATURE TITLE
- ------------------ ---------------------------------------- --------------------------------
<S> <C> <C>
September 4, 1997 /s/ PATRICK L. BEACH Chairman of the Board of
---------------------------------------- Directors, President and Chief
Patrick L. Beach Executive Officer
September 4, 1997 /s/ W. ROSS MARTIN Director, Executive Vice
---------------------------------------- President, Chief Financial
W. Ross Martin Officer and Treasurer
September 4, 1997 /s/ H. REID SHERARD Director
----------------------------------------
H. Reid Sherard
</TABLE>
II-6
<PAGE> 116
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------- --------
<S> <C> <C>
1.1 Underwriting Agreement.**................................................
3.1 Certificate of Incorporation of the Company.*............................
3.2 Bylaws of the Company.*..................................................
5.1 Opinion of Baker & Hostetler LLP regarding legality.**...................
8.1 Opinion of Baker & Hostetler LLP regarding tax matters.**................
10.1 February 26, 1996 Credit Facility between Credit Suisse First Boston
Mortgage Capital L.L.C. and the Company, and amendment thereto.*.........
10.2 September , 1997 Employment Agreement between the Company and Patrick
L. Beach.*...............................................................
10.3 September , 1997 Employment Agreement between the Company and W. Ross
Martin.*.................................................................
10.4 Agreement of Limited Partnership of Captec Franchise Capital Partners
L.P. III.*...............................................................
10.5 Amended and Restated Agreement of Limited Partnership of Captec Franchise
Capital Partners L.P. IV.*...............................................
10.6 Advisory Agreement between the Company and Captec Net Lease Realty
Advisors, Inc.*..........................................................
10.7 Form of Indemnification Agreement to be entered into by the Company's
directors and officers.**................................................
10.8 Form of Acquisition Agreement of General Partnership Interests in the
Affiliated Partnerships.*................................................
10.9 Long-Term Incentive Plan.*...............................................
10.10 Directors' Deferred Compensation Plan.*..................................
15.1 Letter regarding use of unaudited interim financial information.**.......
23.1 September 2, 1997 Consent of Coopers & Lybrand, L.L.P.*..................
23.2 Consent of Baker & Hostetler LLP (included in Exhibit 5.1 hereto).**.....
24.1 Powers of Attorney (included on page II-5 hereto).*......................
27.1 Financial Data Schedule.*................................................
</TABLE>
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* Filed herewith.
** To be filed by Amendment.
II-7
<PAGE> 1
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
CAPTEC NET LEASE REALTY, INC.
FIRST: The name of the Corporation is Captec Net Lease Realty, Inc.
SECOND: The address of the Corporation's registered office in the
State of Delaware is 1013 Centre Road, Wilmington, Delaware 19805 in the
City of Wilmington, County of New Castle. The name of its registered agent at
such address is Corporation Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of all classes of capital stock that
the Corporation shall have authority to issue is Seventy Million (70,000,000)
shares, consisting of Forty Million (40,000,000) shares of Common Stock, $.01
par value per share (the "Common Stock"), Twenty Million (20,000,000) shares
of Excess Stock, $.01 par value per share (the "Excess Stock") and Ten Million
(10,000,000) shares of Preferred Stock, $.01 par value per share (the
"Preferred Stock").
The Common Stock and the Excess Stock (each subject to the rights,
preferences and terms of the Preferred Stock as established by the Board of
Directors from time to time) shall have the preferences, qualifications,
limitations, restrictions and rights set forth below:
A. COMMON STOCK:
(1) DIVIDEND RIGHTS. The holders of shares of Common Stock
shall be entitled to received, when, as and if declared by the Board of
Directors of the Corporation, out of the assets of the Corporation which are by
law available therefore, dividends or distributions payable in cash, in property
or in securities of the Corporation.
(2) RIGHTS UPON LIQUIDATION. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Corporation, each holder of shares of Common Stock shall be
entitled to receive, ratably with each other holder of Common Stock and Excess
Stock, that portion of the assets of the Corporation available for distribution
to its stockholders as the number of shares of Common Stock held by such holder
bears to the total number of shares of Common Stock and Excess Stock then
outstanding.
(3) VOTING RIGHTS. The holders of shares of Common Stock
shall be entitled to vote on all matters (for which holders of Common
Stock shall be entitled to vote thereon) at all meetings of the
stockholders of the Corporation and shall be entitled to one vote for each
share of Common Stock entitled to vote at such meeting.
<PAGE> 2
(4) RESTRICTIONS ON TRANSFER TO PRESERVE TAX BENEFIT; EXCHANGE
FOR EXCESS STOCK (a) DEFINITIONS. For the purposes of paragraphs A and B of this
Article FOURTH, the following terms shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Equity Stock by
a Person who would be treated as an owner of such shares of Equity Stock either
directly or constructively through the application of Section 544 of the Code,
as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner,"
"Beneficially Owns" and "Beneficially Owned" shall have the correlative
meanings.
"Beneficiary" shall mean the beneficiary of the Trust (as
defined herein) as determined pursuant to subparagraph B(5) of this Article
FOURTH.
"Board of Directors" shall mean the Board of Directors of the
Corporation.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
"Common Equity Stock" shall mean stock that is either Common
Stock or Excess Stock.
"Constructive Ownership" shall mean ownership of shares of
Equity Stock by a Person who would be treated as an owner of such shares of
Equity Stock either directly or constructively through the application of
Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms
"Constructive Owner," "Constructively Owns" and "Constructively Owned" shall
have the correlative meanings.
"Equity Stock" shall mean the Common Stock, the Excess Stock,
and the Preferred Stock of the Corporation.
"Initial Public Offering" means the sale of shares of Common
Stock pursuant to the Company's first effective registration statement for such
Common Stock filed under the Securities Act of 1933, as amended.
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<PAGE> 3
"Market Price" shall mean the last reported sales price of
Common Stock reported on the New York Stock Exchange on the trading day
immediately proceeding the relevant date or, if the Common Stock is not then
traded on the New York Stock Exchange, the last reported sales price of the
Common Stock on the trading day immediately preceding the relevant date as
reported on any exchange or quotation system over which the Common Stock may be
traded, or if the Common Stock is not then traded over any exchange or quotation
system, then the market price of the Common Stock on the relevant date as
determined in good faith by the Board of Directors.
"Ownership Limit" shall mean 9.8% of the number of outstanding
shares of any class of the Equity Stock.
"Person" shall mean an individual, corporation, partnership,
estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of
the Code), a portion of a trust permanently set aside for or to be used
exclusively for the purpose described in Section 642(c) of the Code, an
association, a private foundation within the meaning of Section 509(a) of the
Code, a joint stock company, other entity or a group as that term is used for
purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended;
provided, however, that a "person" does not mean an underwriter that
participates in a public offering of the Common Stock, for a period of 25 days
following the purchase by such underwriter of the Common Stock.
"Purported Beneficial Transferee" shall mean, with respect to
any purported Transfer which results in Excess Stock, the person that would have
been the purported beneficial transferee for whom the Purported Record
Transferee would have acquired shares of Equity Stock, if such Transfer had been
valid under subparagraph A(4)(b) of this Article FOURTH.
"Purported Record Transferee" shall mean, with respect to any
purported Transfer which results in Excess Stock, the record holder of the
Equity Stock if such Transfer had been valid under subparagraph A(4)(b) of this
Article FOURTH.
"REIT" shall mean a Real Estate Investment Trust under Section
856 of the Code.
"Related Party Limit" shall mean 9.8% of the outstanding
Equity Stock of the Corporation.
"Transfer" shall mean any sale, transfer, gift, assignment,
devise or other disposition of Equity Stock, (including, without limitation, (i)
the granting of any option or entering in to any agreement or the sale, transfer
or other disposition of Equity Stock or (ii) the sale, transfer, assignment or
other disposition of any securities or rights convertible into or
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<PAGE> 4
exchangeable for Equity Stock), whether voluntary or involuntary, whether of
record or beneficially and whether by operation of law or otherwise.
"Trust" shall mean the trust created pursuant to subparagraph
B(1) of this Article FOURTH.
"Trustee" shall mean the Corporation as trustee for the Trust,
and any successor trustee appointed by the Corporation.
(b) RESTRICTIONS ON TRANSFERS.
(i) From and after the date of the Initial Public Offering,
no Person shall Beneficially Own shares of Equity Stock in excess of the
Ownership Limit and no Person shall Constructively Own shares of Equity Stock in
excess of 9.8% of the outstanding Equity Stock.
(ii) From and after the date of the Initial Public Offering,
any Transfer that, if effective, would result in any Person Beneficially Owning
Equity Stock in excess of the Ownership Limit shall be void AB INITIO as to the
Transfer of such shares of Equity Stock which would be otherwise Beneficially
Owned by such Person in excess of the Ownership Limit; and the intended
transferee shall acquire no rights in such shares of Equity Stock.
(iii) From and after the date of the Initial Public Offering,
any transfer that, if effective, would result in any Person Constructively
Owning Equity Stock in excess of the Related Party Limit shall be void AB INITIO
as to the Transfer of such shares of Equity Stock which would be otherwise
Constructively Owned by such Person in excess of such amount; and the intended
transferee shall acquire no rights in such shares of Equity Stock.
(iv) From and after the date of the Initial Public Offering,
any Transfer that, if effective, would result in any class of Equity Stock being
beneficially owned by less than 100 Persons (determined without reference to any
rules of attribution) shall be void AB INITIO as to the Transfer of such shares
of Equity Stock which would be otherwise beneficially owned by the transferee;
and the intended transferee shall acquire no rights in such shares of Equity
Stock.
(v) From and after the date of the Initial Public Offering,
any Transfer that, if effective, would result in the Corporation being "closely
held" within the meaning of Section 856(h) of the Code shall be void AD INITIO
as to the Transfer of the shares of Common Stock which would cause the
Corporation to be "closely held' within the meaning of Section
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<PAGE> 5
856(h) of the Code; and the intended transferee shall acquire no rights in
such shares of Equity Stock.
(c) CONVERSION INTO EXCESS STOCK.
(i) If, notwithstanding the other provisions contained in
this Article FOURTH, at any time after the date of the Initial Public Offering,
there is a purported Transfer or other change in the capital structure of the
Corporation such that any Person would either (A) Beneficially Own Equity Stock
in excess of the applicable Ownership Limit, or (B) Constructively Own Equity
Stock in excess of the applicable Related Party Limit then, such shares of
Equity Stock in excess of such Ownership Limit (rounded up to the nearest whole
share) shall be automatically converted into, with no further action required,
an equal number of shares of Excess Stock. Such conversion shall be effective as
of the close of business on the business day prior to the date of the Transfer
or change in capital structure.
(ii) If, notwithstanding the other provisions contained in
this Article FOURTH, at any time after the date of the Initial Public Offering,
there is a purported Transfer or other change in the capital structure of the
Corporation such that any Person Constructively Owns shares of Equity Stock in
excess of 9.8% of the outstanding Equity Stock then, such shares of Equity Stock
in excess of such amount (rounded up to the nearest whole share) shall be
automatically converted into, with no further action required, an equal number
of shares of Excess Stock. Such conversion shall be effective as of the close of
business on the business day prior to the date of the Transfer or change in
capital structure.
(iii) If, notwithstanding the other provisions contained in
this Article FOURTH, at any time after the date of the Initial Public Offering,
there is a purported Transfer or other change in the capital structure of the
Corporation which, if effective, would cause the Corporation to become "closely
held" within the meaning of Section 856(h) of the Code, then the shares of
Equity Stock being Transferred which would cause the Corporation to be "closely
held" within the meaning of Section 856(h) of the Code (rounded up to the
nearest whole share) shall be automatically converted into, with no further
action required, an equal number of shares of Excess Stock. Such conversion
shall be effective as of the close of business on the business day prior to the
date of Transfer or change in capital structure.
(d) REMEDIES FOR BREACH. If the Board of Directors or its
designees shall at any time determine in good faith that a Transfer has taken
place in violation of subparagraph A(4)(b) of this Article FOURTH or that a
Person intends to acquire or has attempted to acquire beneficial ownership
(determined without reference to any rules or attribution), Beneficial Ownership
or Constructive Ownership of any shares of the Corporation in violation of
subparagraph A(4)(b) of this Article FOURTH, the Board of Directors or its
designees shall take such actions as it deems advisable to refuse to give effect
or to prevent such Transfer,
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<PAGE> 6
including, but not limited to, refusing to give effect to such Transfer on the
books of the Corporation or instituting proceedings to enjoin such Transfer;
provided, however, that any Transfer or attempted Transfer in violation of
subparagraphs A(4)((b)(ii), (iii) or (v) of this Article Fourth shall
automatically result in the conversion described in subparagraph A(4)(c),
irrespective of any action (or non-action) by the Board of Directors.
(e) NOTICE OF RESTRICTED TRANSFER. Any Person who acquires or
attempts to acquire shares in violation of subparagraph A(4)(b) of this Article
FOURTH, or any Person who is a transferee such that Excess Stock results under
subparagraph A(4)(c) of this Article FOURTH, shall immediately give written
notice to the Corporation of such event and shall provide to the Corporation
such other information as the Corporation may request in order to determine the
effect, if any, of such Transfer or attempted Transfer on the Corporation's
status as a REIT.
(f) OWNERS REQUIRED TO PROVIDE INFORMATION. From and after the
date of the Initial Public Offering:
(i) every Beneficial Owner of more than 5.0% (or such other
percentage, between 0.5% and 5.0%, as may be required from time to time by the
Treasury Regulations) of the outstanding shares of any class of the Equity Stock
of the Corporation shall, within 30 days after January 1 of each year, give
written notice to the Corporation stating the name and address of such
Beneficial Owner, the number of shares Beneficially Owned, and description of
how such shares are held. Each such Beneficial Owner shall provide to the
Corporation such additional information as the Corporation may require in order
to determine the effect, if any, of such Beneficial Ownership on the
Corporation's status as a REIT.
(ii) each Person who is a Beneficial Owner or Constructive
Owner of Equity Stock and each Person (including the stockholder of record) who
is holding Equity Stock for a Beneficial Owner or Constructive Owner shall
provide to the Corporation such information that the Corporation may request, in
good faith, in order to determine the Corporation's status as a REIT.
(g) REMEDIES NOT LIMITED. Nothing contained in this Article FOURTH
shall limit the authority of the Board of Directors to take such other action as
it deems necessary or advisable to protect the Corporation and the interests of
its stockholders by preservation of the Corporation's status as a REIT.
(h) AMBIGUITY. In the case of an ambiguity in the application of
any of the provisions of subparagraph A(4) of this Article FOURTH, including any
definition contained in subparagraph A(4)(a), the Board of Directors shall have
the power to determine the application of the provisions of this subparagraph
A(4) with respect to any situation based on the facts known to it.
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<PAGE> 7
(i) MODIFICATION OF OWNERSHIP LIMIT. Subject to the limitations
provided in subparagraph A(4)(j), the Board of Directors may from time to time
increase the Ownership Limit.
(j) LIMITATIONS ON MODIFICATIONS. Notwithstanding any other
provision of this Article FOURTH:
(i) The Ownership Limit may not be increased if, after
giving effect to such increase (or creation), five Beneficial Owners of Equity
Stock could Beneficial Own, in the aggregate, more than 49.6% of the outstanding
Equity Stock.
(ii) Prior to the modification of the Ownership Limit
pursuant to subparagraph A(4)(i) of this Article FOURTH, the Board of Directors
may require such opinions of counsel, affidavits, undertakings or agreements as
it may deem necessary or advisable in order to determine or ensure the
Corporation's status as a REIT.
(iii) The Ownership Limit may not be increased to a
percentage which his greater than 9.8%.
(k) EXCEPTIONS.
(i) The Board of Directors, with a ruling from the Internal
Revenue Service or an opinion of counsel, may exempt a Person from the Ownership
Limits if such Person is not an individual for purposes of Section 542(a)(2) of
the Code and the Board of Directors obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain that no
individual's Beneficial Ownership of such Equity Stock will violate the
Ownership Limit, and agrees that any violation or attempted violation will
result in such Equity Stock being converted into Excess Stock in accordance with
subparagraph A(4)(c) of this Article FOURTH.
(ii) The Board of Directors, with a ruling from the Internal
Revenue Service or an opinion of counsel, may exempt a Person from the
limitation on such Person Constructively Owning shares of Equity Stock in excess
of the Related Party Limit, if such person does not and represents that it will
not own, directly or constructively (by virtue of the application of Section 318
of the Code, as modified by Section 856(d)(5) of the Code, more than a 9.8%
interest (as set forth in Section 856(d)(2)(B) in a tenant of any real property
owned or leased by the Corporation and the Corporation obtains such
representations and undertakings from such Person as are reasonably
necessary to ascertain this fact and such Person agrees that any violation or
attempted violation would result in such shares of Equity Stock in excess of
9.8% of the outstanding Equity Stock being converted into Excess Shares in
accordance with subparagraph (4)(c) of this Article FOURTH.
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<PAGE> 8
(5) LEGEND. Each certificate for Equity Stock shall bear the
following legend:
"The shares of [Common Stock, Preferred Stock] represented by this
certificate are subject to restrictions on transfer for the purpose of the
Corporation's maintenance of its status as a Real Estate Investment Trust under
the Internal Revenue Code of 1986, as amended. Subject to certain provisions of
the Corporation's Certificate of Incorporation, no Person may Beneficially Own
or Constructively Own shares of Equity Stock in excess of 9.8% (or greater
percentage as may be determined by the Board of Directors of the Corporation) of
the outstanding Equity Stock of the Corporation. Any Person who attempts to
Beneficially Own or Constructively Own shares of Equity Stock in excess of the
above limitations must immediately notify the Corporation. All capitalized terms
in this legend have the meanings defined in the Corporation's Certificate of
Incorporation, a copy of which, including the restrictions on transfer, will be
sent without charge to each stockholder who so requests. If the restrictions on
transfer are violated, the shares of Equity Stock represented hereby will be
automatically converted into shares of Excess Stock which will be held in Trust
by the Corporation."
B. EXCESS STOCK.
(1) Ownership In Trust. Upon any purported Transfer that
results in Excess Stock pursuant to subparagraph A(4)(c) of this Article FOURTH,
such Excess Stock shall be deemed to have been transferred to the Corporation,
as Trustee of a Trust for the exclusive benefit of such Beneficiary or
Beneficiaries to whom an interest in such Excess Stock may later be transferred
pursuant to subparagraph B(5). Shares of Excess Stock so held in trust shall be
issued and outstanding stock of the Corporation. The Purported Beneficial
Transferee shall have no rights in such Excess Stock, except as provided in
subparagraph B(5).
(2) DIVIDEND RIGHTS. Excess Stock shall not be entitled to
any dividends. Any dividend or distribution paid prior to the discovery by the
Corporation that the shares of Equity Stock have been converted into Excess
Stock shall be repaid to the Corporation upon demand.
(3) RIGHTS UPON LIQUIDATION. In the event of any voluntary
or involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Corporation, each holder of shares of Excess Stock shall be
entitled to receive, ratably with each other holder of Common Stock and Excess
Stock, and subject to any preferences or rights of the Preferred Stock, that
portion of the assets of the Corporation available for distribution to its
stockholders as the number of shares of Excess Stock, held by such holder bears
to the total number of shares of Common Stock and Excess Stock then outstanding.
The Corporation, as holder of the Excess Stock in trust, or if the Corporation
shall have been dissolved, any trustee
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<PAGE> 9
appointed by the Corporation prior to its dissolution, shall distribute
ratably to the Beneficiaries of the Trust, when determined, any such assets
received in respect of Excess Stock in any liquidation, dissolution or winding
up of, or any distribution of the assets of the Corporation.
(4) VOTING RIGHTS. The holders of shares of Excess Stock
shall not be entitled to vote on any matters (except as required by law).
(5) RESTRICTIONS ON TRANSFER; DESIGNATION OF BENEFICIARY.
(a) Excess Stock shall not be transferrable. The Purported Record Transferee may
freely designate a Beneficiary of an interest in the Trust (representing the
number of shares of Excess Stock held by the Trust attributable to a purported
Transfer that resulted in the Excess Stock) if (i) the shares of Excess Stock
held in the Trust would not be Excess Stock in the hands of such Beneficiary and
(ii) the Purported Beneficial Transferee does not receive a price for
designating such Beneficiary that reflects a price per share for such Excess
Stock that exceeds (x) the price per share such Purported Beneficial Transferee
paid for the Equity Stock in the purported Transfer that resulted in the Excess
Shares, or (y) if the Purported Beneficial Transferee did not give value for
such Excess Shares (through a gift, devise or other transaction), a price per
share equal to the Market Price on the date of the purported Transfer that
resulted in the Excess Stock. Upon such transfer of an interest in the Trust,
the corresponding shares of Excess Stock in the Trust shall be automatically
exchanged for an equal number of shares of Equity Stock and such shares of
Equity Stock shall be transferred of record to the transferee of the interest in
the Trust if such Equity Stock would not be Excess Stock in the hands of such
transferee. Prior to any transfer of any interest in the Trust, the Purported
Record Transferee must give advance notice to the Corporation of the intended
transfer and the Corporation must have waived in writing its purchase rights
under subparagraph A(6) of this Article FOURTH.
(b) Notwithstanding the foregoing, if a Purported
Beneficial Transferee receives a price for designating a Beneficiary of an
interest in the Trust that exceeds the amounts allowable under subparagraph
B(5)(a) of this Article FOURTH, such Purported Beneficial Transferee shall pay,
or cause such Beneficiary to pay, such excess to the Corporation.
(6) PURCHASE RIGHT IN EXCESS STOCK. Beginning on the date
of the occurrence of a Transfer which results in Excess Shares, such shares of
Excess Stock shall be deemed to have been offered for sale to the Corporation,
or its designee, at a price per share equal to the lesser of (i) the price per
share in the transaction that created such Excess Stock (or, in the case of a
devise or gift, the Market Price at the time of such devise or gift) and (ii)
the Market Price on the date the Corporation, or its designee, accepts such
offer. The Corporation shall have the right to accept such offer for a period of
ninety days after the later of (i) the date of the Transfer which resulted in
such Excess Shares and (ii) the date the Board
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<PAGE> 10
of Directors determines in good faith that a Transfer which resulted in Excess
Shares has occurred, if the corporation does not receive a notice of such
Transfer pursuant to subparagraph A(4)(e) of this Article FOURTH.
(7) NEW YORK STOCK EXCHANGE TRANSACTIONS. Notwithstanding
any provision contained herein to the contrary, nothing in this Certificate of
Incorporation shall preclude the settlement of any transaction entered into
through the facilities of the New York Stock Exchange.
C. PREFERRED STOCK. Authority is hereby expressly granted to the Board
of Directors to issue from time to time the Preferred Stock as Preferred Stock
of any series and in connection with the creation of each such series, to fix by
the resolution or resolutions providing for the issue of shares thereof, the
number of shares of such series, and the designations, powers, preferences and
rights, and the qualifications, limitations and restrictions, of such series, to
the full extent now or hereafter permitted by the laws of the State of Delaware.
FIFTH: Election of directors need not be by written ballot unless
and to the extent that the Bylaws of the Corporation, so provide.
SIXTH: In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to make,
alter or repeal the Bylaws of the Corporation, except that any bylaw adopted by
the stockholders may be altered or repealed only by the stockholders if such
bylaw specifically so provides.
SEVENTH: At all times following the consummation of the Initial
Public Offering (as defined in Article FOURTH), at least a majority of the
members of the Board of Directors shall, except during the period of a vacancy
or vacancies therein, be Independent Directors. An "Independent Director" shall
mean a person who is not (i) employed by the Corporation or (ii) an "affiliate"
(as defined in Rule 405 under the Securities Act of 1933, as amended) of the
Corporation, any subsidiary of the Corporation or any entity in which the
Corporation owns, beneficially or of record, a 10% or greater equity interest,
or (C) or an affiliate (as defined above) of any entity described in this
Article SEVENTH.
EIGHTH: Whenever a compromise or arrangement is proposed between
this Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of Title 8
of the Delaware Code, order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this
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<PAGE> 11
Corporation, as the case may be, to be summoned in such manner as the said
court directs. If a majority in number representing three fourths in value
of the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise
or arrangement and to any reorganization of this Corporation as a consequence
of such compromise or arrangement, the said compromise or arrangement and the
said reorganization shall, if sanctioned by the court to which the said
application has been made, be binding on all the creditors or class of
creditors, and/or on all the stockholders or class of stockholders, of this
Corporation, as the case may be, and also on this Corporation.
NINTH: The personal liability of the directors to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a director
is hereby eliminated;
provided, however, that this Article NINTH shall not eliminate or limit the
liability of a director (i) for any breach of a director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the General Corporation Law of the State of Delaware,
or (iv) for any transaction from which the director derived an improper personal
benefit.
TENTH: The name and mailing address of the sole incorporator are as
follows: W. Ross Martin, Captec Net Lease Realty, Inc., 24 Frank Lloyd Wright
Drive, Ann Arbor, Michigan 48106.
ELEVENTH: In the event any provision (or portion thereof) of this
Certificate of Incorporation shall be found to be invalid, prohibited, or
unenforceable for any reason, the remaining provisions (or portions hereof) of
this Certificate of Incorporation shall be deemed to remain in full force and
effect, and shall be construed as if such invalid, prohibited, or unenforceable
provision had been stricken herefrom or otherwise rendered inapplicable it being
the intent of the Corporation and its stockholders that such remaining provision
(or portion thereof) of this Certificate of Incorporation remain, to the fullest
extent permitted by law, applicable and enforceable as to all stockholders,
notwithstanding any such finding.
TWELFTH: The Corporation reserves the right to amend, alter, change or
repeal and provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
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<PAGE> 12
THE UNDERSIGNED, being the incorporator above named for the purpose of
forming a Corporation pursuant to the General Corporation Law of the State of
Delaware, has executed this instrument this 29th day of August, 1997, and does
thereby acknowledge that it is his act and deed and that the facts stated
therein are true.
/s/ W. Ross Martin
----------------------------------
W. Ross Martin, Sole Incorporator
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<PAGE> 1
Exhibit 3.2
BYLAWS
OF
CAPTEC NET LEASE REALTY, INC.
ARTICLE I
STOCKHOLDERS
------------
Section 1. MEETINGS OF STOCKHOLDERS.
(a) ANNUAL MEETING. The annual meeting of the stockholders of the
Corporation for the election of directors and the receiving of reports shall be
held at such date and time as shall be determined by the Board of Directors.
Upon due notice, there may also be considered and acted upon at an annual
meeting any matter which could properly be considered and acted upon at a
special meeting.
(b) SPECIAL MEETINGS. Special meetings of the stockholders of the
Corporation for any purpose may be held on any day when called at any time by
the holders of shares entitling them to exercise twenty percent (20%) of the
voting power of the Corporation entitled to vote at such a meeting, the Board of
Directors, the Chairman of the Board, the President or by a committee of the
Board of Directors which has been duly designated by the Board of Directors and
whose powers and authority, as provided in a resolution of the Board of
Directors, include the power to call such meetings, but special meetings may not
be called by any other person or persons.
(c) PLACE OF MEETINGS. Any meeting of the stockholders may be held at
such place within or without the State of Delaware as may be determined by the
Board of Directors and stated in the notice of said meeting.
(d) NOTICE OF MEETING AND WAIVER OF NOTICE.
(1) NOTICE. Written notice of the place, date and hour of
every meeting of the stockholders, whether annual or special, shall be
given to each stockholder of record entitled to vote at the meeting not
less than 10 nor more than 60 days before the date of the meeting.
Every notice of a special meeting shall state the purpose or purposes
thereof. Such notice shall be given in writing to each stockholder
entitled thereto by mail, addressed to the stockholder at his address
as it appears on the records of the Corporation. Notice shall be deemed
to have been given at the time when it was deposited in the mail.
(2) RECORD HOLDER OF SHARES. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner,
and to hold liable for calls and assessments a person registered on
its books as the owner of shares, and shall not be bound to recognize
any equitable or other claims to or
<PAGE> 2
interests in such share or shares on the part of any other person,
whether or not the Corporation shall have express or other notice
thereof, except as otherwise provided by the laws of Delaware.
(3) WAIVER. Whenever any written notice is required to be
given under the provisions of the Certificate of Incorporation, these
Bylaws, or by statute, a waiver thereof in writing, signed by the
person or persons entitled to such notice, whether before or after the
time stated therein, shall be deemed equivalent to the giving of such
notice. Neither the business to be transacted at nor the purpose of
any meeting of the stockholders need be specified in any written
waiver of notice of such meeting. Attendance of a person, either in
person or by proxy, at any meeting, shall constitute a waiver of
notice of such meeting, except where a person attends a meeting for
the express purpose of objecting to the transaction of any business
because the meeting was not lawfully called or convened.
(e) QUORUM, MANNER OF ACTING AND ADJOURNMENT. The holders of record
of shares entitled to cast a majority of the votes entitled to vote at any
meeting, present in person or represented by proxy, shall constitute a quorum
for the transaction of business thereat, except as otherwise provided by
statute, by the Certificate of Incorporation, or by these Bylaws. Whether or not
a quorum is present, the holders of shares entitled to cast a majority of the
votes present in person or represented by proxy at the meeting shall have the
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
any such adjourned meeting at which a quorum shall be present or represented,
any business may be transacted which might have been transacted at the meeting
as originally noticed. If the adjournment is for more than 30 days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting. When a quorum is present at any meeting, the vote of a
majority of the votes entitled to be cast by the holders of all issued and
outstanding shares present in person or represented by proxy shall decide any
question brought before such meeting, unless the question is one upon which, by
express provision of the applicable statute or the Certificate of Incorporation
or these Bylaws, a different vote is required, in which case such express
provision shall govern. Except upon those questions governed by the aforesaid
express provisions, the stockholders present in person or by proxy at a meeting
at which a quorum is at any time present or represented shall have the power to
continue to do business until adjournment, notwithstanding a subsequent
reduction in the number of shares present or represented to leave less than
would constitute a quorum.
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<PAGE> 3
(f) ORGANIZATION OF MEETINGS.
(1) PRESIDING OFFICER. Any "executive officer" of the
Corporation, as that term is defined in section 3(g) of Article III of
these Bylaws, may call meetings of the stockholders to order and act as
Chairman thereof.
(2) MINUTES. The Secretary of the Corporation, or, in his
absence or by his designation, an Assistant Secretary, or, in the
absence of both, a person appointed by the Chairman of the meeting,
which person need not be an officer of the Corporation, shall act as
Secretary of the meeting and shall make and keep a record of the
proceedings thereat.
(3) STOCKHOLDERS' LIST. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least 10
days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting. The list shall be
arranged in alphabetical order showing the address of each stockholder
and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder for any
purpose germane to the meeting, during ordinary business hours, for a
period of at least 10 days prior to the meeting either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced
and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
(4) VOTING PROCEDURES AND INSPECTORS OF ELECTIONS.
(A) The Board of Directors shall, in advance of any
meeting of stockholders, appoint one or more inspectors to act
at the meeting and make a written report thereof. The Board of
Directors may designate one or more persons as alternate
inspectors to replace any inspector who fails to act at such
meeting. If no inspector or alternate is able to act at a
meeting of stockholders, the Chairman of the meeting shall
appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties
of inspector with strict impartiality and according to the
best of his ability.
(B) The inspectors shall (i) determine those
stockholders entitled to vote at the meeting, (ii) ascertain
the number of shares outstanding and the voting power of each,
(iii) determine the shares represented at a meeting and the
validity of proxies and ballots, (iv) count all votes and
ballots, (v) determine and retain for a reasonable period a
record of the disposition of any challenges made to any
determination by the inspectors, and (vi) certify their
determination of the number of shares represented at the
meeting and their count of all votes and ballots. The
inspectors may appoint or retain other persons or entities to
assist the inspectors in the performance of the duties of the
inspectors.
(C) The date and time of the opening and the
closing of the polls for each matter upon which the
stockholders will vote at a meeting shall be announced at the
meeting. No ballot, proxies or votes, nor any revocations
thereof or changes
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<PAGE> 4
thereto, shall be accepted by the inspectors after the closing
of the polls unless the Court of Chancery of the State of
Delaware upon application by a stockholder shall determine
otherwise.
(D) In determining the validity and counting of
proxies and ballots, the inspectors shall be limited to an
examination of the proxies, any envelopes submitted with those
proxies, any information provided in accordance with Section
212 (c) (2) of the General Corporation Law of the State of
Delaware, ballots and the regular books and records of the
Corporation, except that the inspector may consider other
reliable information for the limited purpose of reconciling
proxies and ballots submitted by or on behalf of banks,
brokers, their nominees or similar persons which represent
more votes than the holder of proxy is authorized by the
record owner to cast or more votes than the stockholder holds
of record. If the inspectors consider other reliable
information for the limited purpose permitted herein, the
inspectors at the time they make their certification pursuant
to clause (B) (vi) of this subsection 1 (f) (4) shall specify
the precise information considered by them, including the
person or persons from whom they obtained the information,
when the information was obtained, the means by which the
information was obtained and the basis for the inspectors'
belief that such information is accurate and reliable.
(E) The provisions of subsections l(f)(4)(A)
through (D) of this Article I shall not apply at any time that
the Corporation does not have a class of voting stock that is
(i) listed on a national securities exchange, (ii) authorized
for quotation on an interdealer quotation system, or (iii)
held of record by more than 2,000 stockholders.
(5) ORDER OF BUSINESS. Unless otherwise determined by the
Board of Directors prior to the meeting, the Chairman of any meeting of
stockholders shall determine the order of business and shall have the
authority in his discretion to regulate the conduct of any such
meeting, including, without limitation, by imposing restrictions on the
persons (other than stockholders of the Corporation or their duly
appointed proxies) who may attend any such meeting of stockholders,
whether any stockholder or his proxy may be excluded from any
stockholders' meeting based upon any determination by the Chairman, in
his sole discretion, that any such person has unduly disrupted or is
likely to disrupt the proceedings thereat, and the circumstances in
which any person may make a statement or ask questions at any meeting
of stockholders.
(g) VOTING. Except as otherwise provided by statute or the
Certificate of Incorporation, every stockholder entitled to vote shall be
entitled to cast the vote per share to which such share is entitled, in person
or by proxy, on each proposal submitted to the meeting for each share held of
record by him on the record date for the determination of the stockholders
entitled to vote at the meeting. At any meeting at which a quorum is present,
all questions and business which may come before the meeting shall be determined
by a majority of votes cast, except when a greater proportion is required by
law, the Certificate of Incorporation, or these Bylaws.
(h) PROXIES. A person who is entitled to attend a meeting of
stockholders, to vote thereat, and execute consents, waivers and releases, may
be represented at such meeting or vote thereat, and execute consents, waivers
and releases and exercise any of his rights by proxy or proxies appointed by a
legally sufficient
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<PAGE> 5
writing signed by such person, or by his duly authorized attorney, as provided
by the laws of the State of Delaware.
Section 2. DETERMINATION OF STOCKHOLDERS OF RECORD.
In order that the.Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than 60 or less than 10 days before the date of such meeting, or
more than 60 days prior to any other action.
If no record date is fixed:
(1) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders or entitled to
receive payment of any dividend or other distribution or allotment of
any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other
lawful action shall be at the close of business on the day next
preceding the day on which notice is given.
(2) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
ARTICLE II
DIRECTORS
---------
Section 1. GENERAL POWERS.
The business and affairs, power and authority of the
Corporation shall be exercised, conducted and controlled by the Board of
Directors, except where the law, the Certificate of Incorporation, or these
Bylaws require any power or action to be authorized or taken by the
stockholders. In addition to the powers and authorities expressly conferred by
these Bylaws, the Board may do all such lawful things and acts as are not by
statute, the Certificate of Incorporation or these Bylaws directed or required
to be done by the stockholders.
Section 2. NUMBER, NOMINATION AND ELECTION OF DIRECTORS.
(a) NUMBER. The Board of Directors from time to time shall consist
of not less than three nor more than fifteen members. The initial Board of
Directors shall consist of seven members. Each director shall be elected by the
holders of shares entitled to vote thereon at the annual meeting of
stockholders, to serve until his respective sucesor is elected and qualified.
The Board of Directors may increase or decrease the number of the members of the
Board of Directors within the limitations set forth above. No reduction in the
number of directors shall of itself have
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<PAGE> 6
the effect of shortening the term of any incumbent director.
(b) ELECTION. The directors shall be elected at the annual meeting
of stockholders, or if not so elected, at a special meeting of stockholders
called for that purpose. At any meeting of stockholders at which directors are
to be elected (an "Election Meeting"), only persons nominated as candidates
shall be eligible for election, and the candidates receiving the greatest number
of votes entitled to be cast shall be elected.
(c) NOMINATIONS.
(1) QUALIFICATION. Directors of the Corporation need not be
stockholders or residents of Delaware. No person shall be appointed
or elected a director of the Corporation unless:
(A) such person is elected to fill a vacancy in the
Board of Directors pursuant to section 3 (d) of this Article
II; or
(B) such person is nominated for election as a director
of the Corporation in accordance with this section.
(2) ELIGIBILITY TO MAKE NOMINATIONS. Nominations of
candidates for election as directors at any Election Meeting may be
made by the Board of Directors or a committee thereof.
(3) PROCEDURE FOR NOMINATIONS. Nominations shall be made not
fewer than 30 days prior to the date of an Election Meeting. At the
request of the Secretary or, in his absence, an Assistant Secretary,
each proposed nominee shall provide the Corporation with such
information concerning himself as is required under the rules of the
Securities and Exchange Commission (the "Commission") to be included in
the Corporation's proxy statement soliciting proxies for the election
of such nominee as a director.
(4) SUBSTITUTION OF NOMINEES. In the event that a person is
validly designated as a nominee in accordance with these Bylaws and
shall thereafter become unable or unwilling to stand for election to
the Board of Directors, the Board of Directors or a committee thereof
may designate a substitute nominee upon delivery, not fewer than five
days prior to the date of an Election Meeting, of a written notice to
the Secretary setting forth such information regarding such substitute
nominee as would have been required to be delivered to the Secretary
pursuant to these Bylaws had such substitute nominee been initially
proposed as a nominee. Such notice shall include a signed consent to
serve as a director of the Corporation, if elected, of each such
substitute nominee.
(5) COMPLIANCE WITH PROCEDURES. If the Chairman of the
Election Meeting determines that a nomination of any candidate for
election as a director was not made in accordance with the applicable
provisions of these Bylaws he shall so declare to the meeting and such
nomination shall be void.
Section 3. TERM OF OFFICE OF DIRECTORS.
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<PAGE> 7
(a) TERM. Each director shall hold office until the annual meeting
next succeeding his election and until his successor is elected and qualified,
or until his earlier resignation, removal from office or death.
(b) REMOVAL. Any director or the entire Board of Directors may be
removed with or without cause, by a vote of a majority of the votes entitled to
be cast at any meeting of stockholders properly called for that purpose.
(c) RESIGNATION. Any director of the Corporation may resign at any
time by giving written notice to the Chairman of the Board of Directors or to
the President or the Secretary of the Corporation. A resignation from the Board
of Directors shall be deemed to take effect immediately or at such other time as
the director may specify.
(d) VACANCY. If there shall be any vacancy in the Board of Directors
for any reason, including, but not limited to, death, resignation or as provided
by law, the Certificate of Incorporation or these Bylaws (including any increase
in the authorized number of directors), the remaining directors shall constitute
the Board of Directors until such vacancy is filled. The remaining directors may
fill any vacancy in the Board for the unexpired term.
Section 4. MEETINGS OF DIRECTORS.
(a) MEETINGS. Meetings of the Board of Directors may be held at any
time upon call by the Chairman of the Board, or by the President, or by any two
directors. Unless otherwise indicated in the notice thereof, any business may be
transacted at any such meeting.
(b) PLACE OF MEETING. Any meeting of directors may be held at such
place within or without the State of Delaware as may be designated in the notice
of said meeting.
(c) NOTICE OF MEETING AND WAIVER OF NOTICE. No notice of regular
meetings of the Board need be given. Special meetings of the Board may be called
by the Chairman or the President on notice to each director, given either in
person or by mail, telephone, facsimile, telegram, telex or similar medium of
communication; special meetings shall be called on like notice by the Chairman,
the President or the Secretary, on the written request of three directors. At
least 24 hours' notice of special meetings shall be given to each director.
Section 5. QUORUM AND VOTING.
Except as otherwise provided in the Certificate of Incorporation, at
any meeting of directors, not less than one-half (1/2) of the directors then in
office (or, in the event that the directors then in office are an uneven number,
the nearest full number of directors less than one-half (1/2) of such number) is
necessary to constitute a quorum for such meeting, except that any meeting duly
called, whether a quorum is present or otherwise, may, by vote of a majority of
the directors present, be adjourned from time to time. At any meeting at which a
quorum is present, all acts, questions and business which may come before the
meeting shall be determined by a majority of votes cast by the directors present
at such meeting, unless the vote of a greater number is required by statute, the
Certificate of Incorporation or these Bylaws.
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Section 6. ACTION OF BOARD OF DIRECTORS WITHOUT A MEETING.
Any action which may be authorized or taken at a meeting of the Board
of Directors maybe authorized or taken without a meeting if approved and
authorized by a writing or writings, signed by all of the directors, which are
filed with the minutes of proceedings of the Board.
Section 7. COMPENSATION.
The Board of Directors is authorized to fix a reasonable salary for
directors or a reasonable fee for attendance at any meeting of the Board, the
Executive or Audit Committee, or other committees appointed by the Board of
Directors, or any combination of salary and attendance fee. In addition,
directors may be reimbursed for any expenses incurred by them in traveling to
and from such meetings.
Section 8. COMMITTEES.
(a) APPOINTMENT. The Board of Directors, by resolution passed by a
majority of the whole Board of Directors, may, from time to time, appoint one or
more of its members to act as a committee of the Board of Directors. A committee
shall have and exercise the powers of the Board in the direction of the
management of the business and affairs of the Corporation to the extent provided
in the resolution appointing such committee. Each committee shall have such name
as may be determined by the Board of Directors. A committee shall keep minutes
of its proceedings and shall report its proceedings to the Board when required
or when requested by a director to do so. Each such committee and each member
thereof shall serve at the pleasure of the Board of Directors. Vacancies
occurring in any such committee may be filled by the Board of Directors.
(b) EXECUTIVE COMMITTEE. In particular, the Board of Directors may
create from its membership an Executive Committee, the members of which shall
hold office during the pleasure of the Board of Directors, and may be removed at
any time, with or without cause, by action thereof. During the intervals between
meetings of the Board of Directors, the Executive Committee shall possess and
may exercise all of the powers and authority of the Board of Directors in the
management and control of the business and affairs of the Corporation to the
extent permitted by law. All action taken by the Executive Committee shall be
reported to the Board of Directors.
(c) COMMITTEE ACTION. Unless otherwise provided by the Board of
Directors, a majority of the members of any committee appointed by the Board of
Directors pursuant to this section shall constitute a quorum at any meeting
thereof, and the act of a majority of the members present at a meeting at which
a quorum is present shall be the act of such committee. Action may also be taken
by any such committee without a meeting by a writing or writings, signed by all
of its members, which is filed with the minutes of proceedings of the committee.
Any such committee shall appoint one of its members as Chairman (provided that
the Chairman of the Board, or the President if there is no Chairman of the
Board, shall be the Chairman of any Executive Committee), who shall preside at
all meetings and may appoint a Secretary (who need not be a member of the
committee) who shall hold office at the pleasure of such committee. Meetings of
any such committee may be held without notice of the time, place or purposes
thereof and may be held at such times and places within or without the State of
Delaware, as the committee may from time to time determine, at the call of the
Chairman or any members thereof. Any such committee may prescribe such other
rules as it shall determine for calling and holding meetings and its method of
procedure, subject to any rules prescribed by the Board of Directors.
Section 9. CONFERENCE TELEPHONE MEETINGS.
One or more directors may participate in a meeting of the Board, or of
a committee of the Board, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in a meeting pursuant to
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this section shall constitute presence in person at such meeting.
ARTICLE III
TRANSACTIONS WITH CERTAIN AFFILIATES
------------------------------------
Following the sale of shares of Common Stock, $.01 par value per share
of the Corporation, pursuant to the Corporation's first effective registration
statement for such Common Stock filed under the Securities Act of 1933, as
amended (the "Securities Act"), the Corporation shall not, nor shall it permit
its subsidiaries to, (i) lend money to, or borrow money from, any employee of
the Corporation or any "affiliate" (as defined in Rule 405 under the Securities
Act) or (ii) enter into any transactions or agreement with any such affiliate,
unless such transaction or agreement is approved by a majority of the Directors
of the Corporation who are "Independent Directors" (as defined in the
Corporation's Certificate of Incorporation).
ARTICLE IV
OFFICERS
--------
Section 1. GENERAL PROVISIONS.
The Board of Directors at such time as it determines may elect such
executive officers, as defined in section 3(g) of this Article IV, as the Board
deems necessary. The Chairman shall be, and the other executive officers may,
but need not, be chosen from the members of the Board. Any two or more executive
offices may be held by the same person. Other officers may be appointed in the
manner provided for in these Bylaws. The election or appointment of an officer
for a given term, or a general provision in the Certificate of Incorporation or
in these Bylaws with respect to term of office, shall not be deemed to create
any contract rights.
Section 2. TERM OF OFFICE, REMOVAL, AND VACANCIES.
(a) TERM. Each executive officer of the Corporation shall hold office
during the pleasure of the Board of Directors and until his successor is elected
and qualified, unless he sooner dies or resigns or is removed by the Board of
Directors or the Chairman.
(b) REMOVAL. Subject to the terms of any agreement relating to the
employment or service of any officer of the Corporation, the Board of Directors
by a vote of two-thirds of the members present at a meeting at which a quorum is
present may remove any executive officer at any time, with or without cause.
(c) VACANCIES. Any vacancy in any executive office may be filled by
the Board of Directors or by the Chairman.
Section 3. POWERS AND DUTIES.
(a) IN GENERAL. All officers, as between themselves and the
Corporation, shall respectively have such authority and perform such duties as
are customarily incident to their
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respective offices, and as may be specified from time to time by the Board of
Directors, regardless of whether such authority and duties are customarily
incident to such office. In the absence of any officer of the Corporation, or
for any other reason the Board of Directors may deem sufficient, the Board of
Directors may delegate from time to time the powers or duties of such officer,
or any of them, to any other officer or to any Director.
(b) CHAIRMAN. The Chairman, if any is elected, shall, subject to the
provisions of these Bylaws, preside at all meetings of the stockholders, of the
Board of Directors, and of the Executive Committee. The Chairman of the Board
shall be the chief executive officer of the Corporation and shall have general
supervision over its property, business and affairs, and perform all the duties
usually incident to such office, subject to the direction of the Board of
Directors. He may execute all authorized deeds, mortgages, bonds, contracts and
other obligations, in the name of the Corporation and shall have such other
powers and duties as may be prescribed by the Board of Directors.
(c) PRESIDENT. In the absence of the Chairman, and subject to the
provisions of these Bylaws, the President shall preside at all meetings of the
stockholders. The President shall perform all duties usually incident to such
offices, subject to the direction of the Board of Directors. He shall also
perform such other powers and duties as may be prescribed by the Board of
Directors. In case of the absence or disability of the Chairman, or when
circumstances prevent the Chairman from acting, the President shall perform the
duties of the Chairman. In such case and in any other case the President may
execute all authorized deeds, mortgages, bonds, contracts and other obligations
in the name of the Corporation.
(d) VICE PRESIDENTS. The Vice Presidents shall have such powers,
duties and titles as may be prescribed by the Board of Directors or as may be
delegated by the Chairman or by the President.
(e) SECRETARY. The Secretary shall attend and shall keep the minutes
of all meetings of the stockholders and the Board of Directors (and perform
similar duties for the committees of the Board when required). He shall keep
such books as may be required by the Board of Directors, shall have charge of
the seal, if any, of the Corporation and shall be permitted, subject to the
provisions of these Bylaws, to give notices of stockholders' and directors'
meetings required by law or by these Bylaws, or otherwise, and have such other
powers and duties as may be prescribed by the Board of Directors or the
Chairman.
(f) TREASURER. The Treasurer shall receive and have charge of all
money, bills, notes, bonds, stock in other corporations and similar property
belonging to the Corporation, and shall do with the same as shall be ordered by
the Board of Directors. He shall disburse the funds and pledge the credit of the
Corporation as may be directed by the Board. He shall keep accurate financial
accounts and hold the same open for inspection and examination by the directors.
On the expiration of his term of office, he shall turn over to his successors,
or the Board of Directors, all property, books, papers and money of the
Corporation, and shall possess such other powers and duties as may be prescribed
by the Board of Directors or the Chairman.
(g) EXECUTIVE OFFICERS. The officers referred to in subparagraphs (b)
, (c) , (d) , (e) , and (f) of this section and such other officers as the Board
of Directors may by resolution identify shall be executive officers of the
Corporation and may be referred to as such.
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(h) OTHER OFFICERS. The Assistant Secretaries, Assistant Treasurers,
if any, and any other subordinate officers shall be appointed and removed by the
Chairman or the President at whose pleasure each shall serve and shall have such
powers and duties as such executive officer may prescribe.
Section 4. COMPENSATION.
The Board of Directors is authorized to determine or to provide the
method of determining the compensation of all officers.
Section 5. BONDS.
If required by the Board of Directors, any and every officer or agent
shall give the Corporation a bond in a sum and with one or more sureties
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
ARTICLE V
SECURITIES HELD BY CORPORATION
------------------------------
Section 1. TRANSFER OF SECURITIES OWNED BY THE
CORPORATION.
All endorsements, assignments, transfers, share powers or other
instruments of transfer of securities standing in the name of the Corporation
shall be executed for and in the name of the Corporation by the Chairman, or by
the President, or by any Vice President, or by the Secretary or Treasurer or by
any additional person or persons as may be thereunto authorized by the Board of
Directors.
Section 2. VOTING SECURITIES HELD BY THE CORPORATION.
The Chairman, the President, any Vice President, or the Secretary or
Treasurer, in person or by another person thereunto authorized by the Board of
Directors, in person or by proxy or proxies appointed by him, shall have full
power and authority on behalf of the Corporation to vote, act and execute
consents, waivers and releases with respect to any securities issued by other
corporations which the Corporation may own.
ARTICLE VI
SHARE CERTIFICATES
------------------
Section 1. TRANSFER AND REGISTRATION OF CERTIFICATES.
The Board of Directors shall have authority to make such rules and
regulations, not inconsistent with law, the Certificate of Incorporation or
these Bylaws, as it deems expedient concerning the issuance, transfer and
registration of certificates for shares and the shares represented thereby.
Section 2. CERTIFICATES FOR SHARES.
Each holder of shares is entitled to one or more certificates for
shares of the Corporation in such form not inconsistent with law and the
Certificate of Incorporation as shall be approved by the Board of Directors.
Each such certificate shall be signed by the Chairman, the President or any Vice
President, and by the Secretary, an Assistant Secretary, the Treasurer, or an
Assistant Treasurer of the Corporation, which certificate shall certify the
number and class of shares held by such stockholder in the Corporation, but no
certificates for shares shall be executed or delivered until such shares are
fully paid. Any or all of the signatures upon such certificate may be a
facsimile, engraved or printed. In case any officer, transfer agent or registrar
who has signed, or whose facsimile signature has been placed upon, any share
certificate shall have ceased to be such officer, transfer agent or registrar,
before the certificate is issued, it may be issued with the same effect as if he
were such officer, transfer agent or registrar at the date of its issue.
Section 3. TRANSFER AGENTS, REGISTRARS AND DIVIDEND
DISBURSING AGENTS.
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<PAGE> 12
The Board of Directors may from time to time by resolution appoint one
or more incorporated transfer agents and registrars (which may or may not be the
same corporation) for the shares of the Corporation, and the Board of Directors
from time to time by resolutions may appoint a dividend disbursing agent to
disburse any and all dividends authorized by the Board of Directors payable upon
the shares of the Corporation.
Section 4. TRANSFERS.
Subject to restrictions on the transfer of stock, upon surrender to the
Corporation or the duly appointed transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books. No transfer shall
be made which would be inconsistent with the provisions of Article 8, Title 6 of
the Delaware Uniform Commercial Code--Investment Securities.
Section 5. LOST, STOLEN OR DESTROYED CERTIFICATES.
The Corporation may issue a new certificate for shares in place of any
certificate or certificates heretofore issued by the Corporation alleged to have
been lost, stolen or destroyed upon the making of an affidavit of that fact by
the person claiming the certificate of stock to have been lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
Board of Directors or any duly authorized executive officer may, in its or his
discretion, and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representatives, to attest the same in such manner as it shall require and
to indemnify the Corporation, its directors, officers, employees, agents and
representatives, and in connection therewith to give the Corporation a bond in
such sum and containing such terms as the Board or such officer may direct,
against any claim that may be made against the Corporation with respect to the
certificate or certificates alleged to have been lost, stolen or destroyed or
the issuance of the new certificate.
Section 6. PROTECTION OF THE CORPORATION.
The Corporation may treat a fiduciary as having capacity and authority
to exercise all rights of ownership in respect of shares of record in the name
of the decedent holder, person, firm or corporation in conservation,
receivership or bankruptcy, minor, incompetent person, or person under
disability, as the case may be, for whom he is acting, or a fiduciary acting as
such, and the Corporation, its transfer agent and registrar, upon presentation
of evidence of appointment of such fiduciary shall be under no duty to inquire
as to the powers of such fiduciary and shall not be liable to any firm, person
or corporation for loss caused by any act done or omitted to be done by the
Corporation or its transfer agent or registrar in reliance thereon.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS, OFFICERS
--------------------------------------
AND OTHER AUTHORIZED REPRESENTATIVES
------------------------------------
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<PAGE> 13
Section 1.INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES
IN THIRD PARTY PROCEEDINGS.
The Corporation shall indemnify any person who was or is an "authorized
representative" of the Corporation (which shall mean for purposes of this
Article a director or officer of the Corporation, or a person serving at the
request of the Corporation as a director, officer, employee, agent or trustee,
of another corporation, partnership, joint venture, trust or other enterprise,
including employee benefit plans) and who was or is a "party" (which shall
include, for purposes of this Article, the giving of testimony or similar
involvement) or is threatened to be made a party to any "third party proceeding"
(which shall mean for purposes of this Article any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative, other than an action by or in the right of the Corporation) by
reason of the fact that such person was or is an authorized representative of
the Corporation, from and against expenses (which shall include, for purposes of
this Article, attorneys' fees), judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such third party proceeding if such person acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the best interests of
the Corporation and, with respect to any criminal third party proceedings (which
could or does lead to a criminal third party proceeding) had no reasonable cause
to believe such conduct was unlawful. The termination of any third party
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the authorized representative did not act in good faith and in a manner which
such person reasonably believed to be in, or not opposed to, the best interests
of the Corporation, and, with respect to any criminal third party proceeding,
had reasonable cause to believe that such conduct was unlawful.
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<PAGE> 14
Section 2.INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES
IN CORPORATE PROCEEDINGS.
The Corporation shall indemnify any person who was or is an authorized
representative of the Corporation and who was or is a party or is threatened to
be made a party to any "corporate proceeding" (which shall mean, for purposes of
this Article, any threatened, pending or completed action or suit by or in the
right of the Corporation to procure a judgment in its favor or investigative
proceeding by the Corporation) by reason of the fact that such person was or is
an authorized representative of the Corporation, against expenses actually and
reasonably incurred by such person in connection with the defense or settlement
of such corporate proceeding if such person acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the best interests of
the Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such corporate proceeding was pending shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such authorized representative is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 3.MANDATORY INDEMNIFICATION OF AUTHORIZED
REPRESENTATIVES.
To the extent that an authorized representative of the Corporation has
been successful on the merits or otherwise in defense of any third party or
corporate proceedings or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses actually and reasonably incurred by
such person in connection therewith.
Section 4. DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.
Any indemnification under section 1, 2 or 3 of this Article VII (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the authorized
representative is proper in the circumstances because such person has either met
the applicable standard of conduct set forth in section 1 or 2 or has been
successful on the merits or otherwise as set forth in section 3 and that the
amount requested has been actually and reasonably incurred. Such determination
shall be made:
(1) by the Board of Directors by a majority of a quorum
consisting of directors who were not parties to such third party or
corporate proceedings; or
(2) if such a quorum is not obtainable, or, even if
obtainable, a majority vote of such a quorum so directs, by independent
legal counsel in a written opinion; or
(3) by the stockholders.
Section 5. ADVANCING EXPENSES.
Expenses actually and reasonably incurred in defending a third party or
corporate proceeding shall be paid on behalf of an authorized representative by
the Corporation in advance of the final disposition of such third party or
corporate proceeding upon receipt of an undertaking by
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<PAGE> 15
or on behalf of the authorized representative to repay such amount if it shall
ultimately be determined that such person is not entitled to be indemnified by
the Corporation as authorized in this Article VII.
Section 6. EMPLOYEE BENEFIT PLANS.
For purposes of this Article, the Corporation shall be deemed to have
requested an authorized representative to serve an employee benefit plan where
the performance by such person of duties to the Corporation also imposes duties
on, or otherwise involves services by, such person to the plan or participants
or beneficiaries of the plan; excise taxes assessed on an authorized
representative with respect to an employee benefit plan pursuant to applicable
law shall be deemed "fines"; and action taken or omitted by such person with
respect to an employee benefit plan in the performance of duties for a purpose
reasonably believed to be in the interest of the participants and beneficiaries
of the plan shall be deemed to be for a purpose which is not opposed to the best
interests of the Corporation.
Section 7. SCOPE OF ARTICLE.
The indemnification of and the advancement of expenses to authorized
representatives, provided by, or granted pursuant to, this Article, shall (1)
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any statute,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in an official capacity and as to action in other capacities, (2)
continue as to a person who has ceased to be an authorized representative, and
(3) inure to the benefit of the heirs, personal representatives, executors, and
administrators of such person.
Section 8. RELIANCE ON PROVISIONS.
Each person who shall act as an authorized representative of the
Corporation shall be deemed to be doing so in reliance upon rights of
indemnification provided by this Article VII.
Section 9. INSURANCE.
The Corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee, trustee or
agent of or for the Corporation, or is or was serving at the request or with the
prior approval of the Corporation as a director, officer, employee, trustee or
agent of another corporation, partnership, joint venture, trust or other
enterprise (including employee benefit plans), against any liability asserted
against him and incurred by him in any capacity or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of these Bylaws.
ARTICLE VIII
GENERAL
-------
Section 1. CONTRACTS, CHECKS, ETC.
All contracts, agreements, checks, drafts, notes, bonds, bills of
exchange and orders for the payment of money shall be signed or endorsed by the
persons whom the Board of Directors
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<PAGE> 16
prescribes therefor.
Section 2. FISCAL YEAR.
The fiscal year of the Corporation shall commence on January 1 and end
on December 31 of each year, unless otherwise determined by the Board of
Directors.
Section 3. FORM OF NOTICES.
Whenever notice is required to be given to any director or officer or
stockholder, such notice may be given either in person or by mail, telephone or
telegram, facsimile, telex or similar medium of communication, except as
expressly provided otherwise in these Bylaws. Except as provided in Article II,
Section 4(c), if mailed, the notice will be deemed given when deposited in the
United States mail, postage prepaid, addressed to the stockholder, officer or
director at such address as appears on the books of the Corporation. If given in
person or by telephone, notice will be deemed given when communicated. If given
by telegram, facsimile, telex or similar medium of communication, notice will be
deemed given when properly dispatched.
Section 4. SEAL.
The Corporation may, but shall not be required to, have a corporate
seal, which shall have inscribed thereon the name of the Corporation, the year
of its organization and the words "Corporate Seal, Delaware." The seal may be
used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. The Secretary shall have custody of the corporate seal
of the Company and shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by the Secretary's
signature. The Board of Directors may give general authority to any other
officer to affix the seal of the Company and to attest the affixing by his
signature.
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<PAGE> 17
Section 5. CONSISTENCY WITH CERTIFICATE OF INCORPORATION.
If any provision of these Bylaws shall be inconsistent with the
Corporation's Certificate of Incorporation (and as amended from time to time),
the Certificate of Incorporation shall govern.
ARTICLE IX
AMENDMENTS
----------
Except as otherwise provided in the Certificate of Incorporation, these
Bylaws may be altered, amended, or repealed or new bylaws may be adopted by the
affirmative vote of the directors of the Company or by the affirmative vote of
the holders of a majority of the shares of the Company entitled to vote in the
election of directors, voting as one class at any regular meeting of the
stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting.
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<PAGE> 1
Exhibit 10.1
AMENDMENT TO THE CREDIT AGREEMENT DATED FEBRUARY 26, 1996 BY AND
BETWEEN CS FIRST BOSTON MORTGAGE CAPITAL CORP. AND CAPTEC NET
LEASE REALTY, INC.
This Amendment (this "Amendment") dated as of December 1, 1996 by and
between CS FIRST BOSTON MORTGAGE CAPITAL CORP., a Delaware corporation
("Lender"), whose address is 55 East 52nd Street, New York, New York 10055, and
CAPTEC NET LEASE REALTY, INC., a Michigan corporation ("Borrower"), whose
address is 24 Frank Lloyd Wright Drive, Lobby L, 4th Floor, P.O. Box 544, Ann
Arbor, Michigan 48106-0544 (hereinafter the "Agreement").
WITNESSETH
WHEREAS, Lender and Borrower have entered into a certain Credit
Agreement (the "Credit Agreement") in the principal amount of up to
$100,000,000; and
WHEREAS, the Borrower has requested to use a portion of the proceeds of
the funding under the Credit Agreement be used for the purpose of financing
Improvements to the Properties; and
WHEREAS, Lender is willing to modify the terms of the Credit Agreement
under this Amendment on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing, the benefits
accruing to Borrower and for other good and valuable consideration, the receipt
and sufficiency of which Borrower hereby acknowledges, Borrower hereby makes the
following representations and warranties to Lender and covenants and agrees with
Lender as follows, and the Lender is willing to make available to Borrower the
credit facilities provided for herein as follows:
1. RECITALS; CAPITALIZED TERMS. The foregoing recitals are
incorporated herein by reference. Capitalized terms not defined herein shall
have the same meaning as same are defined in the Credit Agreement.
2. AMENDMENTS TO THE CREDIT AGREEMENT.
(a) Section 1(e) (i) of the Credit Agreement is hereby amended as
follows:
"Borrower agrees to pay interest in respect of the unpaid
principal amount of each Revolving Loan from the date the
proceeds thereof are made available to Borrower until the
maturity thereof (whether by acceleration or otherwise) at a
rate
1
<PAGE> 2
per annum which shall be the Revolving Loan Rate in effect
from time to time. In the event that the Loan proceeds are
used to finance any and all construction, resurfacing or
refacing of Improvements (the "Improvements") then the
Revolving Loan Rate with respect to the Revolving Loan
related to such Improvements shall be increased by 50 Basis
Points over the rate otherwise charged for the Revolving
Loans (the "Improvement Loans")."
(b) Section 1(f) of the Credit Agreement is hereby amended as
follows:
"The proceeds of the Revolving Loans shall be used by
Borrower exclusively to finance the acquisition or lease by
Borrower, and for no other purpose whatsoever. The proceeds
of the Improvement Loans shall be used for the construction,
resurfacing or refacing of such Improvements of such
Properties, and for no other purpose whatsoever."
(c) Section 3(e) (ii) of the Credit Agreement is hereby amended as
follows:
"(A) The amount of each Revolving Loan shall not exceed the
sum of seventy-five (75%) percent of the Appraised Value of
each of the Properties being financed with such Revolving
Loan, (B) the principal amount outstanding of all Revolving
Loans, which shall not include Improvement Loans, shall not
exceed seventy-five (75%) percent of the Appraised Value of
all Properties financed with the Loans (the "Loan to Value
Requirement"), (C) the amount of each Improvement Loan
advanced for the purpose of constructing, resurfacing or
refacing of such Improvements upon each such Property shall
not exceed the sum of fifty-six (56%) percent of the
Appraised Value of each such Property together with said
Improvements thereon, and (D) Improvement Loans advanced
under the Amendment for each such Property shall not exceed
twenty (20%) percent of the total funds available under the
Credit Agreement at any given time.
3. CONDITIONS PRECEDENT TO LENDER'S OBLIGATIONS TO MAKE
ADVANCES UNDER THIS AMENDMENT.
In addition to Section 4 and Section 11 of the Credit Agreement,
Lender's obligation to make Loan advances pursuant to
2
<PAGE> 3
this Amendment shall be subject to the satisfaction of the following
conditions:
(a) All conditions of the Amendment hereunder shall have
been and remain satisfied as of the date of such advances;
(b) The representations and warranties made in this
Amendment shall be true and correct on and as of the date of the
advance with the same effect as if made on such date;
(c) Borrower shall not advance any draw for Improvements
unless (i) the Tenant has executed a valid, legal and binding lease
agreement and (ii) the franchisor has executed and the Lender has
received a short form franchisor estoppel certificate attached hereto
as Exhibit A;
(d) Upon completion of the Improvements, the Borrower may
request that the Improvement Loans be converted to a Revolving Loan
Rate, PROVIDED HOWEVER, that all requirements regarding both the
Credit Agreement and this Amendment are performed and completed,
which shall be determined solely by the Lender in its sole and
absolute discretion, and among other things that the Lender receive
either a fully executed Franchise Agreement or a long form franchisor
estoppel certificate attached hereto as Exhibit B;
(e) Borrower's first draw regarding the funds advanced by
Lender under this Amendment must include the purchase of the
Property, such that title transfers to Borrower simultaneously, a
copy of such title shall be forwarded to Lender; and
(f) Borrower's Tenant shall be obligated, under the lease,
to Borrower for all rental payments due under the lease agreement for
the entire term of the lease which duration shall not be less than
ten (10) years.
Lender shall also have received each such item listed below upon the
completion of the Improvements:
(a) Evidence that construction, resurfacing or refacing of
the Improvements have been completed and that Borrower has received
satisfactory evidence of the approval by all relevant governmental
authorities including but not limited to the United States, the state
in which each such Property is located and any political subdivision,
agency, department, commission, board, bureau or instrumentality of
either of them, including any local authorities, which exercises
jurisdiction over each such Property or the Improvements thereon
(hereinafter the "Governmental
3
<PAGE> 4
Authorities") of the Improvements in their entirety for permanent
occupancy, and of the contemplated uses thereof, to the extent any
such approval is a condition of the lawful use and occupancy thereof;
(b) A final survey of each such Property, certified to
Lender and the Title Insurer, showing the completed Improvements;
(c) Evidence that Borrower has filed the notice, if any, of
completion of the Improvements necessary to establish commencement
of the shortest statutory period for the filing of mechanics' and
materialmen's liens; and
(d) Certificates of Occupancy and Zoning Letters from the
city stating that each such Property complies with all regulations
and codes of each such Governmental Authority.
4. BORROWER REPRESENTS, WARRANTS AND COVENANTS
Borrower represents and warrants that:
(a) The plans for such construction, resurfacing or refacing
of such Improvements have been reviewed and approved by the tenants
under any Leases which require approval of the plans and, to the
extent required by applicable law or any effective restrictive
covenant, by all Governmental Authorities. The planned use of the
Improvements complies with applicable zoning ordinances, regulations
and restrictive covenants affecting each such Property as well as all
environmental, ecological, landmark, and other applicable laws and
regulations; and all requirements for such use have been satisfied;
(b) The Leases are unmodified and in full force and effect,
there are no defaults under any thereof and all conditions to the
effectiveness and continuing effectiveness thereof required to be
satisfied as of the date hereof have been satisfied;
Borrower shall also:
(a) Promptly comply with all laws, ordinances, orders,
rules, statutes and regulations of Governmental Authorities and
promptly furnish Lender with reports of any official searches made by
Governmental Authorities and any claims of violations thereof with
regard to the Improvements;
(b) Pay all Costs and expenses required for completion of
the Improvements and the satisfaction of the conditions of this
Agreement, including, without limitation:
4
<PAGE> 5
(i) all document and stamp taxes, recording and
filing expenses and fees and commissions lawfully due to
brokers in connection with the transactions contemplated
hereby,
(ii) the fees and expenses in connection with the
preparation for and consummation of the transactions
contemplated hereby, and for any services of such parties
which may be required in addition to those normally and
reasonably contemplated hereby,
(iii) any taxes, insurance premiums, liens,
security interests or other claims or charges against each
such Property or the Improvements thereon, and
(iv) all costs of completion of the work to be
performed by Borrower regarding the Improvements, (including
public space) to permit the lawful occupancy thereof for the
purposes contemplated by actual or prospective lessees of
such space as set forth in the individual leases to the
level of building standard in accordance with industry
practices;
(c) Commence construction of the Improvements no later than
thirty (30) days from the date of advancement of the funds under this
Amendment; cause construction thus begun to be prosecuted with
diligence and continuity in a good and workmanlike manner and
complete construction of the Improvements, in accordance with the
plans, free and clear of defects and liens or claims for liens for
material supplied or labor or services performed in connection with
the construction, resurfacing or refacing of the Improvements; time
being of the essence as to this paragraph (c); and
(d) Indemnify Lender against claims of brokers arising by
reason of the execution hereof or the consummation of the
transactions contemplated hereby.
5. Providing that the Borrower is in full compliance with this
Amendment, which shall be decided at the sole and absolute discretion
of the Lender, and each such Property meets the criteria for
receiving the lower interest rate provided to the Revolving Loan
amounts under the Credit Agreement (which shall include that the
Improvements have been completed and certificates of occupancy shall
have been issued therefore and the tenants under the Lease shall have
accepted the Improvements, have taken possession thereof and are
paying base rent), the Borrower shall request from the Lender that
the Improvement Loan be converted to a Revolving Loan under the
Credit Agreement for each such Property
5
<PAGE> 6
pursuant to the same terms and conditions as provided for under the
Credit Agreement.
6. All terms and provisions of the Credit Agreement remain in full
force and effect except as expressly set forth herein and the Credit
Agreement shall not be further modified or amended except at the sole
and absolute discretion of the Lender.
7. This Amendment shall be governed by the laws of the State of New
York and shall be binding upon and enuring to the benefit of its
successors and/or assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
CAPTEC NET LEASE REALTY, INC.
Witnesses:
/s/ Margaret K. Rivera
- ---------------------------------
Margaret K. Rivera By /s/ Gary A. Bruder
---------------------------------
Name: Gary A. Bruder
/s/ David A. Ebys Its: Vice President
- ---------------------------------
David A. Ebys
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
Witnesses:
/s/ Chris LaVallee
- ---------------------------------
Chris LaVallee By /s/ Emily Yassauf
---------------------------------
Name:
Its:
6
<PAGE> 7
EXHIBIT A
MASTER FORM: 11/12/96
(CONSTRUCTION LOAN)
Date :______________, 199___
Captec Financial Group Funding Corporation
24 Frank Lloyd Wright Drive
Lobby L, 4th Floor
P.O. Box 544
Ann Arbor, Michigan 48106-0544
RE: ________________________
Ladies and Gentlemen:
The undersigned certifies to Captec Financial Group Funding
Corporation, a Michigan corporation (together with it successors, assigns and
transferees, "Lender") as follows:
1. As of the date hereof, ______________(the "Franchisee") is a
licensed franchisee of _____________, a ______________________ (the
"Franchisor"), and is in good standing with said Franchisor.
2. Franchisor has approved, for development as a [TYPE OF
FRANCHISE] restaurant site, the real property located at [ADDRESS OF PREMISES]
(the "Premises"), and has approved Franchisee to operate the [TYPE OF
FRANCHISE] restaurant to be constructed on the Premises upon the completion of
construction.
3. Upon the completion of construction of the [TYPE OF FRANCHISE]
restaurant on the Premises, Franchisor shall confirm that Franchisor has
selected and approved Franchisee to operate the [TYPE OF FRANCHISE] restaurant
on the Premises and shall certify to Lender that Franchisor and Franchisee have
entered into a written Franchise Agreement with respect to same.
The provisions of this certificate shall be binding upon and insure to
the benefit of the Franchisor, Franchisee, Lender, and their respective
successors and assigns.
___________________________________________
By_________________________________________
Its_______________________________________
<PAGE> 8
STATE OF ______________________ )
) ss
COUNTY OF _____________________ )
The foregoing instrument was acknowledged before me this ____ day of
____________, 199___, by ___________________, the ______________________ of
______________________________, a __________________________, on behalf of the
_______________________.
____________________________________
Notary Public
_______________County,______________
My Commission Expires:______________
[Notary Public's Seal]
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<PAGE> 9
EXHIBIT B
MASTER FORM (LOAN): 10/3/96
Date: ___________, 199___
Captec Financial Group Funding Corporation
24 Frank Lloyd Wright Drive
Lobby L, 4th Floor
P.O. Box 544
Ann Arbor, Michigan 48106-0544
RE: __________________________
Ladies and Gentlemen:
The undersigned certifies to Captec Financial Group Funding
Corporation, a Michigan corporation (together with it successors, assigns and
transferees, "Lender") as follows:
1. _________________________, a ________________________
("Franchisee"), and _______________________, a ___________________________
("Franchisor"), entered into a [Franchise Agreement], dated __________________,
[as amended on ________________________________] ("Franchise Agreement") in
which Franchisor granted to Franchisee a license to use ____________________
(as defined in the Franchise Agreement) at __________________________________
("Premises").
2. Franchisor has approved the Premises for development as a
__________________ restaurant. The Premises is open and oeprating as a
_______________________ restaurant in accordance with the terms of the
Franchise Agreements.
3. The Franchise Agreement constitutes the only agreement between
Franchisor and Franchisee with respect to the Premises and a true copy of the
Franchise Agreement is attached hereto as Exhibit A.
4. The Franchise Agreement is in full force and effect; Franchisee
is currently operating under the Franchise Agreement and is paying all sums due
and owing to Franchisor under the Franchise Agreement.
5. As of the date hereof, Franchisee is not in default in the
performance of any of its duties and obligations under the Franchise Agreement,
Franchisee has not committed any breach of the Franchise Agreement, Franchisor
has not waived any breach of the Franchise Agreement by Franchisee, and no
notice of default has been given to Franchisee.
6. Franchisee commenced operations under the Franchise Agreement
on ________________ and the Franchise Agreement terminates (excluding renewal
periods) on ______________________. [There are ____________ renewal periods of
_____________ years each for the Franchise Agreement.]
The provisions of this certificate shall be binding upon and insure to
the benefit of the Franchisor, Franchisee, Lender, and their respective
successors and assigns.
___________________________
By_________________________
Its_______________________
<PAGE> 10
STATE OF ______________________ )
) ss
COUNTY OF _____________________ )
The foregoing instrument was acknowledged before me this ____ day of
____________, 199___, by ___________________, the ______________________ of
______________________________, a __________________________, on behalf of the
_______________________.
____________________________________
Notary Public
_______________County,______________
My Commission Expires:______________
[Notary Public's Seal]
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<PAGE> 11
AMENDMENT
to
CREDIT AGREEMENT
between
CAPTEC NET LEASE REALTY, INC.
a Michigan corporation, as borrower
and
CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC
a Delaware limited liability company
(as successor to CS First Boston Mortgage Capital Corp.,
its successors and assigns),
as lender
JUNE __, 1997
<PAGE> 12
AMENDMENT TO CREDIT AGREEMENT
-----------------------------
This Amendment ("Amendment") to that certain Credit Agreement dated
February 26, 1996, as previously amended (the "Credit Agreement"), by and
between Captec Net Lease Realty, Inc., a Michigan corporation, as borrower
("Borrower") and Credit Suisse First Boston Mortgage Capital LLC, a Delaware
limited liability company (successor to CS First Boston Mortgage Capital
Corp., a Delaware corporation), its successors and assigns, as lender
("Lender") is entered into as of the ___ day of June, 1997. Capitalized terms
used and not defined herein shall have the meanings attributed to them in the
Credit Agreement.
This Amendment is being entered into for good and valuable
consideration, the sufficiency and receipt of which are hereby acknowledged,
and subject to the following conditions and limitations, the parties hereto
hereby agree to amend the Credit Agreement as follows:
1. The defined term "Credit Facility Amount" is hereby amended as
follows:
"CREDIT FACILITY AMOUNT" shall mean $100,000,000, as such amount
may be increased from time to time by a Notice of Borrowing, in
increments of not less than $10,000,000 (each increment
referred to herein as "CFA Increase"), and up to a maximum
aggregate amount of $150,000,000. In such notice, Borrower shall
certify that no Default has occurred and is continuing.
2. SECTION 1 The second and third sentences of Section 1(a) are
hereby amended as follows:
Not more than one Revolving Loan may be incurred within
any seven (7) day period. The principal amount of such
Revolving Loan shall not be less than $250,000.
SECTION 1 Section 1(a) is hereby further amended by inserting at
the end thereof the following:
; PROVIDED, HOWEVER, upon the conversion of the Revolving Loan
Rate to the "Adjusted Revolving Loan Rate", as defined in Section
1(e)(i), below, the Expiry Date shall, upon request in writing
by Borrower to Lender, be extended to the second anniversary of
the effective date of the Adjusted Revolving
<PAGE> 13
Rate, unless such date shall be extended in accordance with the
provisions of Section 12(b) hereof. In such notice, Borrower
shall certify that no Default has occurred and is continuing.
For purposes of this Section 1(a) the effective date of the
Adjusted Revolving Rate shall be the date upon which the
Adjusted Revolving Rate is first payable pursuant to the Credit
Facility Documents.
3. SECTION 1 The last sentence of Section 1(b) is hereby amended as
follows: the phrase "fourteen (14) days" is deleted and the
phrase "seven (7) days" is substituted therefor.
4. SECTION 1 Section 1(e)(i) is hereby amended by inserting at the
end thereof the following:
PROVIDED, HOWEVER, upon (i) the completion by Borrower of a
S.E.C.-registered public offering of common stock representing
100% ownership interest in Borrower (in accordance with
applicable provisions of the Credit Facility Documents) and (ii)
written certification of same by Borrower to Lender, the
Revolving Loan Rate shall be reduced to a rate per annum equal
to the LIBOR Rate plus 1.750% (the "Adjusted Revolving Loan
Rate").
5. SECTION 3(e)(ii) Section 3(e)(ii) is hereby amended as follows:
(ii) (A) The principal amount outstanding of all Revolving Loans
and Improvement Loans shall not exceed 71.5% of the Eligible
Borrowing Base (the "Loan to Value Requirement").
6. The Credit Agreement is amended to add the following
definitions:
(a) ELIGIBLE BORROWING BASE shall mean an amount (excluding
Exempted Loan Investments) equal to the sum of the following
loan asset ("Loan Asset") values: (i) the Appraised Value of all
of Borrower's Properties not subject to current Improvements;
(ii) seventy-five (75%) percent of the Appraised Value of all
of Borrower's Properties subject to Improvement Loans which, as
a fraction of Revolving Loans shall not exceed twenty (20%)
percent thereof in the aggregate; (ili) the outstanding
principal amount of all Loan Investments held by the Borrower as
a fraction of Revolving Loans
2
<PAGE> 14
which shall not exceed 25% in the aggregate, provided however,
in no event shall the value of each Loan Asset in (i) through
(vi) of this Section 6(a) includible in the Eligible Borrowing
Base exceed the specific limitation for each such Loan Asset
Category, as defined below, contained therein; (iv) seventy-five
(75%) percent of the outstanding principal amount of Secondary
Loan Investments held by the Borrower which shall not exceed
Five Million ($5,000,000) Dollars in the aggregate; (v)
seventy-five (75%) percent of the outstanding principal amount
of Subordinated Loan Investments held by the Borrower and which
shall not exceed Three Million ($3,000,000) Dollars in the
aggregate; and (vi) Borrower's net investment (as defined in the
Borrower's annual financial statements) in all Financing Leases
held by Borrower as a fraction of Revolving Loans which shall
not exceed 15% thereof in the aggregate, LESS the Appraised
Value of any Property which is either (A) encumbered by a
superior mortgage or deed of trust in favor of a party other
than Lender or (B) for which a payment is overdue by a period of
sixty (60) days pursuant to a loan held by Borrower or for which
a payment is overdue by a period of sixty (60) days pursuant to
a Lease between Borrower, as Lessor, and Lessee (each of (i)
through (vi) referred to as a "Loan Asset Category" and
collectively as "Loan Asset Categories"); PROVIDED, HOWEVER,
such Eligible Borrowing Base shall remain in effect subject to
receipt by Lender of (i) a Monthly Loan Asset Performance
Information Report, as defined below; and (ii) a Notice of
Borrowing which shall be accompanied by (A) a Transactional Loan
Asset Performance Information Report, as defined below; and (B) a
certificate, executed by Borrower, in which Borrower (a)
represents and warrants that the creditworthiness of the Loan
Asset is consistent with the Borrower's Underwriting Guidelines
pursuant to Exhibit Q of the Credit Facility; (b) represents and
warrants that no event of default has occurred and is still
occurring with respect to any obligor of Borrower with respect
to any Loan Asset Category except payment defaults by any
obligor of Borrower and which payment defaults are for a period
of less than sixty (60) days and (c) certifies the accurateness
and completeness in all material respects of the information
provided.
(b) LOAN INVESTMENT shall mean any loan held by Borrower and
secured by a mortgage or leasehold mortgage held by Borrower or
any Business Value Loan which shall be assessed at the lesser of
either (A) the purchase price; or (B) 100% of the real estate
valuation (as determined by Deloitte & Touche LLP or such other
valuation expert satisfactory to Borrower and Lender) in the
case of a loan secured by a fee mortgage or seventy (70%) of the
combined real estate and business valuations (as determined by
Deloitte & Touche LLP or such other
3
<PAGE> 15
EXHIBIT H-1
-----------
<PAGE> 16
QUARTERLY COMPLIANCE CERTIFICATE
The undersigned, the Chief Financial Officer of Captec Net Lease Realty,
Inc., a Michigan corporation, ("Captec"), pursuant to Section 4(c)(ii) of the
Credit Agreement ("Agreement"), dated February 26, 1996, by and between Captec,
as borrower, and CS First Boston Mortgage Capital Corp., a Delaware corporation,
its successors and assigns, as lender ("Lender"), hereby certifies to Lender as
follows:
(i) all representations and warranties made by Captec in the Agreement
are true and accurate in all material respects as if made on the date hereof;
and
(ii) attached hereto as Exhibit A are quarterly financial statements of
Captec, which statements fairly present in all material respects Captec's
financial condition and results of operations for the quarterly period as
indicated thereon and which are prepared in accordance with GAAP applied on a
consistent basis.
IN WITNESS WHEREOF, the undersigned has executed this
Certificate the day of ____________ 199__.
CAPTEC NET LEASE REALTY, INC.
By:
----------------------------------
Name:
Title: Chief Financial Officer
<PAGE> 17
EXHIBIT H-2
-----------
<PAGE> 18
ANNUAL COMPLIANCE CERTifICATE
The undersigned, the Chief Financial Officer of Captec Net Lease Realty,
Inc., a Michigan corporation, ("Captec"), pursuant to Section 4(c)(ii) of the
Credit Agreement ("Agreement"), dated February 26, 1996, by and between Captec,
as borrower, and CS First Boston Mortgage Capital Corp., a Delaware corporation,
its successors and assigns, as lender ("Lender"), hereby certifies to Lender as
follows:
(i) all representations and warranties made by Captec in the Agreement
are true and accurate in all material respects as if made on the date hereof;
and
(ii) attached hereto as Exhibit A are the audited financial statements
of Captec for the fiscal year indicated thereon, which are prepared in
accordance with GAAP applied on a consistent basis together with the report
thereon by Captec's Independent Accountants.
IN WITNESS WHEREOF, the undersigned has executed this Certificate the __
day of ____________ 199__.
CAPTEC NET LEASE REALTY, INC.
By:
---------------------------
Name:
Title: Chief Financial Officer
<PAGE> 19
EXHIBIT I
---------
SERVICING PROVISIONS
1. The Borrower shall take any and all actions, or refrain from taking
any such actions, and do any and all things in connection with the servicing and
administration of the Properties and the Leases which it may deem necessary or
desirable, provided, however, that (i) its servicing of the Leases shall be
carried out as provided in the Operations Policy Manual and the Management
Agreement in accordance with the procedures which the Borrower uses in
connection with Leases which are owned by it and not pledged or collateralized,
and (ii) to the extent more exacting, in accordance with prudent, customary and
usual procedures of financial institutions which service leases similar to the
Leases .
2. The Borrower shall calculate and compile such information as is
required to enable it to provide the information in connection with the reports
in the forms attached hereto, and shall deliver such reports to the lender no
later than the tenth day of each month.
<PAGE> 20
CAPTEC NET LEASE REALTY, INC.
SERVICING REPORTS TO BE PROVIDED UNDER THE CREDIT AGREEMENT
Within 20 days of the end of each month, the Company shall deliver to the Lender
the following servicing reports (the "Servicing Reports"), certified to the
Lender by the President or any Vice President of the Company:
1. a Lockbox Compliance Certificate for the preceding month, indicating the
total number of payments of Rents received, the number and percentage of
such payments received directly in the Lockbox Account, and the number and
percentage of such payments not received directly in the Lockbox Account.
2. a Liquid Assets Compliance Certificate for the preceding month, indicating
the total Liquid Assets held by the Company as of the the last day of the
preceding month and certifying that the Company is in compliance with the
Liquid Assets covenant described in Section 4(c)(xxii) of the Agreement.
3. a copy of the Lockbox Account bank: statements and bank reconciliations for
the preceding month.
4. a Net Investment Trial Balance for the Leases, as of the last day of the
preceding month, which report shall indicate the gross balance and net
balance due under each Lease and the gross balance and net balance due
under all Leases in aggregate, as of the date of the report.
5. a Summary Past Due Report for the Leases, as of the last day of the
preceding month, which report shall indicate the amount delinquent and the
gross balance due under each and every Lease which is delinquent for more
than five days, as of the date of the report, and shall indicate totals for
the gross balances for all such delinquent Leases, sorted by the following
delinquency categories: 5-30 days delinquent; 31-60 days delinquent; 61-90
days delinquent; and over 90 days delinquent.
6. a Portfolio Activity Report setting forth the details of the occurrence
during the preceding month of any of the following activities: (A) any
amendment to a Lease or the Collateral; (B) any insurance claims made with
respect to any Collateral; (C) any insurance proceeds received with respect
to any Collateral; (D) any proceeds received from the sale of Leases and/or
the related Collateral; (E) any prepayments of a Lease by a Lessee; (F) any
voluntary prepayments made by the Company in accordance with Section 2(a)
of the Agreement; (G) any mandatory prepayments made by the Company in
accordance with Section 2(b) of the Agreement; and (11) any purchase of a
Lease by the Company.
<PAGE> 21
EXHIBIT J
---------
<PAGE> 22
valuation expert satisfactory to Borrower and Lender) in the
case of a loan secured by a leasehold mortgage or in the case of
a Business Value Loan, and (ii) which is currently neither a
Revolving Loan nor an Improvement Loan under the Credit
Facility.
(c) SECOND LOAN INVESTMENT shall mean loan(s) to an Affiliate of
Borrower which is/are collateralized by a pledge of an
underlying mortgage loan, leasehold mortgage loan or a Business
Value Loan held by an Affiliate of Borrower.
(d) SUBORDINATED LOAN INVESTMENT(S) shall mean subordinated
loan(s) held by Borrower, issued by unaffiliated third parties.
(e) FINANCING LEASE(S) shall mean lease(s) of equipment, held by
Borrower, which lease is defined as a financing lease pursuant to
Generally Accepted Accounting Principles ("GAAP").
(f) BUSINESS VALUE LOAN(S) shall mean loan(s) held by Borrower
and secured by the income stream and certain tangible personal
property from properties encumbered by either a superior
mortgage or leasehold mortgage whether held by Borrower or an
Affiliate thereof or a third party and shall not exceed seventy
(70%) percent of the combined real estate and business valuation
of such property (as determined by Deloitte & Touche LLP or such
other valuation expert satisfactory to Borrower and Lender).
(g) EXEMPTED LOAN INVESTMENT(S) shall mean loan(s) incurred by
the Borrower prior to the date hereinabove that are listed on
Exhibit C annexed hereto.
(h) MONTHLY LOAN ASSET PEIFONNANCE INFORMATION REPORT shall mean
a report submitted by Borrower, both on hardcopy and on a
computer diskette in spreadsheet format, no later than the
fifteenth (15th) day of each month (the "Report Date") from and
after the date of this Amendment for the duration of the term of
the Revolving Loan, setting forth each Loan Asset (including
Exempted Loan Investments) by Loan Asset Category, together with
the following information:
(i) type of Loan Asset (i.e. Revolving Loan, Improvement
Loan, Loan Investment, Secondary Loan Investment,
Subordinated Loan Investment, Financing Leases and
Exempted Loan Investment);
4
<PAGE> 23
(ii) type of property comprising the Loan Asset (i.e.
mortgage, leasehold mortgage, Business Value Loan, Lease
of Equipment);
(iii) Current Payment of Delinquency Status (i.e. thirty
(30) days delinquent, sixty (60) days delinquent, ninety
(90) days delinquent, one hundred twenty (120) days
delinquent, one hundred eighty (180) days delinquent,
etc.) of the Lease or Loan Payment; and
(iv) Borrower's calculation of the Eligible Borrowing
Base, in detail as of the last day of the month prior to
the Report Date, together with a representation and
warranty by Borrower that the calculation complies with
the Eligible Borrow Base definition set forth in Section
5(a).
7. TRANSACTIONAL LOAN ASSET PERFORMANCE INFORMATION REPORT. A
report submitted by Borrower with every Notice of Borrowing and
the Required Due Diligence Materials pursuant to Exhibit B of
the Credit Facility, which lists each new Revolving Loan or
Improvement Loans by Loan Asset Category (including Exempted
Loan Investments) together with the following information: (i) a
representation and warranty by Borrower that the Eligible
Borrowing Base calculation as of date of the funding of the
current Revolving Loan under any Asset Loan Category complies
with the Eligible Borrowing Base definition set forth in Section
5(a) and (ii) no event of default has occurred and is continuing
with respect to the Credit Facility as amended.
8. RIGHT OF INSPECTION. Lender shall have the right to receive and
inspect the Required Due Diligence Materials as well as any
other documents that the Lender deems necessary pursuant to its
review, in its sole and absolute discretion, pertaning to the
asset from any Category of Loan, listed above, which is being
considered as a candidate for funding under the Credit Facility.
9. UCC-1 FINANCING STATEMENTS. Borrower shall prepare and file
simultaneously with the recording of the Loan Documents, at its
own cost and expense, for each Property or Lease of Equipment to
be financed under the Credit Facility a UCC-1 Financing Statement
at the Office of the Secretary of State, if applicable, and the
County where the property or the equipment is located, if
applicable.
5
<PAGE> 24
10. SCHEDULE B. SCHEDULE B is hereby amended by inserting at the end
thereof the following:
STRUCTURING ADVISORY FEE UPON CFA INCREASE. As a condition
precedent to each CFA Increase, Borrower shall (i) execute and
deliver to Lender a Structuring Advisory Fee Agreement in the
form of Exhibit A hereto, confirming the structuring advisory
fee payable by Borrower to Lender pursuant to (ii), below, and
(ii) pay to Lender a structuring advisory fee equal to 0.5% of
each CFA Increase, which structuring advisory fee shall be
payable and non-refundable on the date Borrower provides a
Notice of Borrowing to Lender in connection therewith.
STRUCTURING ADVISORY FEE UPON EXPIRY DATE EXTENSION. As a
condition precedent to the extension of the Expiry Date in
accordance with Section 1(a) hereof, Borrower shall (i)
execute and deliver to Lender a Structuring Advisory Fee
Agreement in the form of Exhibit A hereto, confirming the
structuring advisory fee payable by Borrower to Lender pursuant
to (ii), below, and (ii) pay to Lender a structuring advisory
fee equal to 0.5% of the Credit Facility Amount, which
structuring advisory fee shall be payable and non-refundable on
the date Borrower provides notice to extend the Expiry Date
pursuant to Section 1(a) hereof.
11. REPRESENTATIONS. Borrower represents and warrants as follows:
(i) this Amendment has been duly anthorized, executed and
delivered by Borrower and the Credit Agreement, as
amended hereby, constitutes the legal, valid and binding
obligation of Borrower enforceable in accordance with its
terms;
(ii) the representations and warranties contained in Section 4
of the Credit Agreement are true and correct in all
material respects as of the date hereof as if made on the
date hereof.
12. CREDIT AGREEMENT IN FULL FORCE AND EFFECT; NO NOVATION. This
Amendment is expressly made supplemental to and a part of the
Credit Agreement and the Credit Agreement is in all respects
ratified and confirmed, and all of the terms, conditions and
provisions thereof, as amended hereby, are and shall continue to
be and remain in full force and effect. The modifications of the
terms of the Credit Agreement and the execution and delivery of
6
<PAGE> 25
this Amendment are not intended to constitute, and shall not be
deemed to be, a novation.
13. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which, when executed, are and shall
continue to be an original, but all of which together shall
constitute one and the same instrument.
7
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
LENDER BORROWER
CREDIT SUISSE FIRST BOSTON CAPTEC NET LEASE REALTY, INC.,
MORTGAGE CAPITAL LLC (as a Michigan corporation
successor to CS First Boston
Mortgage Capital Corp.), a
Delaware limited liability company
By: /s/ Emily Yassouf By: /s/ W. Ross Martin
----------------------- -----------------------
Name: Emily Yassouf Name: W. Ross Martin
Title: Vice President Title: Vice President
8
<PAGE> 27
CREDIT AGREEMENT
between
CAPTEC NET LEASE REALTY, INC.
a Michigan corporation, as borrower
and
CS FIRST BOSTON MORTGAGE CAPITAL CORP.,
a Delaware corporation, its successors and assigns,
as lender
FEBRUARY 26, 1996
<PAGE> 28
TABLE OF CONTENTS
Page
----
Preliminary Statement .................................................. 1
1. AMOUNT AND TERMS OF CREDIT ........................................ 1
(a) The Revolving Loans .................................... 1
(b) Notice of Borrowing .................................... 2
(c) Disbursement of funds .................................. 2
(d) Revolving Note ......................................... 2
(e) Interest ............................................... 3
(f) Use of Proceeds ........................................ 3
2. PREPAYMENTS; PAYMENTS .......................................... 3
(a) Voluntary Prepayments .................................. 3
(b) Mandatory Prepayments .................................. 4
(c) Net Payments ........................................... 4
3. CONDITIONS PRECEDENT ........................................... 4
(a) Revolving Note ......................................... 4
(b) Representations and Warranties ......................... 4
(c) No Default ............................................. 5
(d) Corporate Proceedings .................................. 5
(e) Collateral ............................................. 5
(f) Capitalization of Borrower ............................. 6
(g) Opinions ............................................... 6
(h) No Material Adverse Change ............................. 6
(i) Fees ................................................... 6
4. REPRESENTATIONS, WARRANTIES AND COVENANTS ...................... 6
(a) REPRESENTATIONS AND WARRANTIES REGARDING BORROWER ...... 6
(i) Borrower's Name ................................ 6
(ii) Location of Borrower ........................... 7
(iii) Organization, Chief Executive Office or
Residence ...................................... 7
(iv) Power and Authority ............................ 7
(v) Due Execution and Delivery, Enforceability ..... 7
(vi) Indebtedness; No Liens, Claims or
Encumbrances ................................... 8
(vii) Financing Statements; Perfected Security
Interest ....................................... 8
(viii) No Conflict; No Default ........................ 8
(ix) No Consent Required ............................ 9
(x) Purpose for Revolving Loans .................... 10
(xi) Financial Statements ........................... 10
(xii) Accuracy of Information ........................ 10
(xiii) ERISA Compliance ............................... 11
(xiv) Borrower Status ................................ 11
(xv) No Brokers ..................................... 11
(xvi) No Usury ....................................... 12
-i-
<PAGE> 29
Page
----
(xvii) Compliance with Laws; No Violation;
Indemnity ...................................... 12
(xviii) Subsidiaries ................................... 13
(xix) Tax Returns .................................... 13
(xx) Litigation ..................................... 13
(xxi) Capitalization ................................. 14
(b) REPRESENTATIONS AND WARRANTIES REGARDING THE
PROPERTIES AND THE LEASES .............................. 14
(c) PARTICULAR COVENANTS OF BORROWER ....................... 20
(i) Maintenance of Collateral and Business . ....... 20
(ii) Compliance Certificates; Reports;
Communications ................................. 20
(iii) Encumbrances ................................... 20
(iv) Distributions .................................. 21
(v) Insurance ...................................... 22
(vi) Maintenance of Existence; Prior Notice of
Change in Name or Location ..................... 22
(vii) Notice of Material Adverse Changes ............. 22
(viii) Sale of Assets, Consolidation, Merger,
Dissolution, Etc ............................... 23
(ix) Transactions with Affiliates ................... 23
(x) Costs and Expenses ............................. 24
(xi) Access to Premises ............................. 24
(xii) Origination and Servicing Leases ............... 25
(xiii) Loan to Value Requirement ...................... 25
(xiv) Updated Appraisals ............................. 25
(xv) Sale of Revolving Loans ........................ 26
(xvi) Management ..................................... 26
(xvii) Ineligible Leases; Substitution ................ 26
(xviii) Refinancing .................................... 27
(xix) Underwriting Guidelines; Operations Policy
Manual ......................................... 27
(xx) Notification of Defaulted Leases ............... 27
(xxi) Payment of Fees ................................ 27
(xxii) Liquid Assets .................................. 28
5. LOCKBOX ACCOUNT ................................................ 28
6. EVENTS OF DEFAULT .............................................. 29
(a) Nonpayment, default, breach, etc ....................... 29
(b) Other defaults of Borrower and other liable
parties ................................................ 29
7. REMEDIES ....................................................... 30
(a) Cumulative Rights and Remedies ......................... 30
(b) Acceleration of Obligations ............................ 30
8. INDEMNIFICATION ................................................ 31
-ii-
<PAGE> 30
Page
----
9. OBLIGATIONS ABSOLUTE ........................................... 32
10. ASSIGNMENT ..................................................... 32
11. FURTHER ASSURANCES ............................................. 33
12. TERM ........................................................... 33
13. MISCELLANEOUS .................................................. 34
(a) Final Agreement; Amendments, Consents,
Authorizations ......................................... 34
(b) Notices ................................................ 34
(c) Reasonableness ......................................... 35
(d) Recovery of Sums Required To Be Paid ................... 36
(e) Waivers ................................................ 36
(f) Waiver of Trial by Jury ................................ 36
(g) Waiver of Notices ...................................... 36
(h) Relationship ........................................... 37
(i) Waiver of Counterclaims ................................ 37
(j) Time is of the Essence ................................. 37
(k) Limitation on Interest ................................. 37
(l) Governing Law; Binding Effect .......................... 38
(m) Severability ........................................... 39
(n) Captions; Construction ................................. 39
-iii-
<PAGE> 31
CREDIT AGREEMENT
CREDIT AGREEMENT ("Agreement"), dated February 26, 1996, by and between
CAPTEC NET LEASE REALTY, INC., a Michigan corporation, as borrower
("Borrower"), and CS FIRST BOSTON MORTGAGE CAPITAL CORP., a Delaware
corporation, its successors and assigns, as lender ("Lender").
Preliminary Statement
---------------------
Borrower is a Michigan corporation formed for the purpose of acquiring
or leasing Properties (as hereinafter defined) and leasing or subleasing such
Properties to Eligible Tenants (as hereinafter defined) for use by such
Eligible Tenants in the operation of specialty retail businesses or businesses
under one or more of the franchise and restaurant concepts listed on Schedule
A hereto (each a "Franchise System") or such other specialty retail businesses
or franchise concepts as Borrower and Lender shall mutually agree upon in
writing from time to time. Capitalized terms used herein have the meanings
accorded such terms in the text hereof and in Appendix A hereto, and, to the
extent not inconsistent therewith, the UCC.
To enable Borrower to fund the acquisition and or leasing of the
Properties, Borrower has requested that Lender extend, and Lender is willing
to extend, to Borrower a credit facility on the terms and conditions set forth
herein.
As a condition to extending credit hereunder, Lender has requested and
Borrower has agreed to execute and deliver to Lender the Collateral Documents
for the purpose of, among other things, providing security for the Revolving
Loans.
NOW, THEREFORE, in consideration of the foregoing, the benefits
accruing to Borrower and for other good and valuable consideration, the
receipt and sufficiency of which Borrower hereby acknowledges, Borrower hereby
makes the following representations and warranties to Lender and covenants and
agrees with Lender as follows, and Lender is willing to make available to
Borrower the credit facilities provided for herein as follows:
1. AMOUNT AND TERMS OF CREDIT.
---------------------------
(a) THE REVOLVING LOANS. Subject to and upon the terms and conditions
set forth herein, Lender agrees to make, at any time and from time to time, on
and after the Effective Date and prior to the Expiry Date, one or more loans
(each a "Revolving Loan" and collectively, the "Revolving Loans") to Borrower,
which Revolving Loans may be prepaid and reborrowed in accordance with the
provisions hereof, PROVIDED, HOWEVER, that the aggregate principal
<PAGE> 32
amount of Revolving Loans outstanding at any time shall not exceed the Credit
Facility Amount at such time. Not more than one Revolving Loan may be incurred
within any fifteen (15) day period. The principal amount of each Revolving
Loan shall not be less than $1,000,000. Lender shall have no obligation to
make any Revolving Loans on or after the Expiry Date. All Revolving Loans
shall mature on the Expiry Date.
(b) NOTICE OF BORROWING. Whenever Borrower desires to incur a Revolving
Loan, it shall give Lender at least two (2) Business Days' prior written
notice of such Revolving Loan to be made hereunder (each a "Notice of
Borrowing"), provided that any such Notice of Borrowing shall be deemed to
have been given only if given before 12:00 Noon (New York time) on such day.
Each Notice of Borrowing shall be in the form of Exhibit A hereto,
appropriately completed to specify the principal amount of the Revolving Loan
to be made, the date of such Revolving Loan (which shall be a Business Day),
the purposes for which such Revolving Loan is requested (which purposes shall
be limited to the permitted purposes set forth in paragraph (f) of this
Section 1), and shall identify the Properties and Leases to be financed with
the proceeds of the Revolving Loan. Borrower shall deliver to the Custodian
the Collateral Schedule and the Required Due Diligence Materials (in
accordance with the requirements set forth in Exhibit B and this Agreement)
relating to the Properties and Leases to be financed with the proceeds of a
Revolving Loan as soon as practicable after completion thereof but in no event
less than fourteen (14) days prior to the date specified in the Notice of
Borrowing for the funding of such Revolving Loan.
(c) DISBURSEMENT OF FUNDS. Subject to the satisfaction of all
conditions precedent contained herein, no later than 12:00 Noon (New York
time) on the date specified in each Notice of Borrowing, Lender will make
available to Borrower the amount of the Revolving Loan requested to be made on
such date in immediately available funds. Such funds will be made available to
Borrower by wire transfer if Borrower has provided written wire transfer
instructions to Lender in the related Notice of Borrowing.
(d) REVOLVING NOTE. (i) Borrower's obligation to pay the principal of,
and interest on, all the Revolving Loans made by Lender hereunder shall be
evidenced by a promissory note duly executed and delivered by Borrower
substantially in the form of Exhibit C hereto, with blanks appropriately
completed in conformity herewith (the "Revolving Note").
(ii) The Revolving Note issued to Lender shall (A) be payable to the
order of Lender and be dated the Initial Borrowing Date, (B) be in a stated
amount equal to the Credit Facility Amount and be payable in the principal
amount of the Revolving Loans evidenced thereby, (C) mature, with respect to
each Revolving Loan evidenced thereby, on the Expiry Date, (D) bear
-2-
<PAGE> 33
interest as provided in paragraph (e) of this Section 1, (E) be entitled to
the benefits of this Agreement and the other Credit Facility Documents and (F)
be secured by the Collateral.
(e) INTEREST. (i) Borrower agrees to pay interest in respect of the
unpaid principal amount of each Revolving Loan from the date the proceeds
thereof are made available to Borrower until the maturity thereof (whether by
acceleration or otherwise) at a rate per annum which shall be the Revolving
Loan Rate in effect from time to time.
(ii) Overdue principal and, to the extent permitted by law, overdue
interest in respect of each Revolving Loan and any other overdue amount
payable by Borrower hereunder shall bear interest at a rate equal to 2% in
excess of the Revolving Loan Rate in effect from time to time (the "Default
Rate"); PROVIDED, HOWEVER, that no Revolving Loan shall bear interest after
maturity at a rate per annum less than 2% in excess of the rate of interest
applicable thereto at maturity.
(iii) Accrued (and theretofore unpaid) interest shall be payable in
respect of each Revolving Loan, (A) on the 15th day of each month in an amount
equal to all interest accrued in the preceding Monthly Interest Period, and
(B) on any prepayment (on the amount prepaid) on the date prepaid, at maturity
(whether by acceleration or otherwise) and, after such maturity, on demand. On
or before the 10th day of each month, Lender shall deliver to Borrower an
invoice setting forth the interest due and payable by Borrower in respect of
the preceding Monthly Interest Period.
(f) USE OF PROCEEDS. The proceeds of the Revolving Loans shall be used
by Borrower exclusively to finance the acquisition or lease by Borrower of
Properties, and for no other purpose whatsoever .
2. PREPAYMENTS; PAYMENTS.
----------------------
(a) VOLUNTARY PREPAYMENTS. Borrower shall have the right to prepay the
Revolving Loans without premium or penalty, in whole or in part from time to
time on the following terms and conditions: (i) Borrower shall give Lender at
least three (3) Business Days' prior written notice of its intent to prepay
the Revolving Loans and the amount of such prepayment and (ii) each prepayment
shall be in an aggregate principal amount of at least $500,000. In addition,
Borrower shall have the right to prepay the Revolving Loans in part without
premium or penalty from time to time for the purpose of reducing Accrued
Margin. Any such prepayment shall be upon one (1) Business Day's prior notice.
Any notice of prepayment by Borrower shall be irrevocable.
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(b) MANDATORY PREPAYMENTS. Borrower shall be required to repay the
Revolving Loans at such times and in such amounts as shall be required
pursuant to Sections 4(c)(xiii) and 4(c)(xvii) hereof.
(c) NET PAYMENTS. All payments made by Borrower hereunder or under the
Revolving Note will be made without setoff, counterclaim, or other defense.
All such payments will be made free and clear of, and without deduction or
withholding for, any present or future taxes, levies, imposts, duties, fees,
assessments, or other charges of whatever nature now or hereafter imposed by
any jurisdiction or by any political subdivision or taxing authority thereof
or therein (but excluding, except as provided below, any tax imposed on or
measured by the net income of Lender pursuant to the laws of the jurisdiction
(or any political subdivision or taxing authority thereof or therein) in which
the principal executive office of Lender is located) and all interest,
penalties or similar liabilities with respect thereto (collectively, "Taxes").
Borrower shall also reimburse Lender, upon the written request of Lender, for
taxes imposed on or measured by the net income of Lender pursuant to the laws
of the jurisdiction (or any political subdivision or taxing authority thereof
or therein) in which the principal executive office of Lender is located as
Lender shall determine are payable by Lender in respect of amounts paid to or
on behalf of Lender pursuant to the preceding sentence. If any Taxes are so
levied or imposed, Borrower agrees to pay the full amount of such Taxes and
such additional amounts as may be necessary so that every payment of all
amounts due hereunder or under the Revolving Note, after withholding or
deduction for or on account of any taxes, will not be less than the amount
provided for herein or in such Revolving Note. Borrower will furnish to Lender
within 45 days after the date the payment of any Taxes is due pursuant to
applicable law certified copies of tax receipts evidencing such payment by
Borrower. Borrower will indemnify and hold harmless Lender, and reimburse
Lender upon its written request, for the amount of any Taxes so levied or
imposed and paid by Lender.
3. CONDITIONS PRECEDENT. The obligation of Lender to make any Revolving
Loan is subject, at the time of each Credit Event (except as hereinafter
indicated), to the satisfaction of the following conditions:
(a) REVOLVING NOTE. On the Initial Borrowing Date, there shall have
been delivered to Lender the Revolving Note executed by Borrower in the
amount, with the maturity, and as otherwise provided herein.
(b) REPRESENTATIONS AND WARRANTIES. At the time of each Credit Event
and also after giving effect thereto, all representations and warranties
contained herein and in the other
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Credit Facility Documents shall be true and correct in all material respects
as though such representations and warranties had been made on and as of the
date of such Credit Event.
(c) NO DEFAULT. At the time of each Credit Event and also after giving
effect thereto, no Event of Default and no event or condition which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing.
(d) CORPORATE PROCEEDINGS. (i) On the Initial Borrowing Date, Lender
shall have received a certificate, dated the Initial Borrowing Date, signed by
the President or any Vice President of Borrower, and attested to by the
Secretary or any Assistant Secretary of Borrower, together with the
certificate of incorporation and By-Laws of Borrower and the resolutions of
the board of directors of Borrower authorizing the execution and delivery of
this Agreement and the other Credit Facility Documents by Borrower and
consummation by Borrower of the transactions contemplated by this Agreement
and the other Credit Facility Documents.
(ii) On the Initial Borrowing Date, all requisite action and
proceedings (including all requisite corporate action and proceedings) in
connection with this Agreement and the other Credit Facility Documents shall
be satisfactory in form and substance to Lender, and Lender shall have
received all information and copies of all documents, including, without
limitation, records of requisite corporate action and proceedings required (or
which Lender may have reasonably requested) in connection therewith, such
documents where requested by Lender or its counsel to be certified by
appropriate corporate officers or governmental authorities;
(e) COLLATERAL. (i) Lender or the Custodian shall have received (A) a
Notice of Borrowing and a complete Collateral Schedule relating to the
Properties and Leases to be financed with the proceeds of the Revolving Loan
in accordance with Section 1(b) hereof, (B) with respect to each Property to
be financed with the proceeds of the Revolving Loan, (i) Lender shall have
received the Required Due Diligence Materials set forth on Exhibit B on or
before the date required under Section 1(b) of this Agreement, (ii) the
Revolving Loan Conditions set forth on Exhibit D hereto shall have been
satisfied and (iii) the Lender or the Custodian shall have received the
Closing Documents set forth on Exhibit E and such other documents and
instruments as Lender shall reasonably request, each in form and substance
satisfactory to Lender; and
(ii) (A) The amount of each Revolving Loan shall not exceed the sum
of 75% of the Appraised Value of each of the Properties being financed with
such Revolving Loan and (B) the principal amount outstanding of all Revolving
Loans shall not
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exceed 75% of the Appraised Value of all Properties financed with the Loans
(the "Loan to Value Requirement").
(f) CAPITALIZATION OF BORROWER. Lender shall have received evidence, in
form and substance satisfactory to Lender, of satisfaction of the
capitalization requirements of Borrower which Lender may have requested in
connection herewith, including the capital contribution to Borrower in the
amount of not less than $50,000,000.
(g) OPINIONS. On the Initial Borrowing Date, Lender shall have received
from Miller, Canfield, Paddock and Stone, P.L.C., counsel to Borrower, an
opinion addressed to Lender and dated the Initial Borrowing Date in form and
substance satisfactory to Lender and its counsel.
(h) NO MATERIAL ADVERSE CHANGE. No material adverse change shall have
occurred in the assets, business or prospects of Borrower since the date
hereof and in the determination of Lender no change or event shall have
occurred which could materially impair the ability of Borrower to perform its
obligations hereunder or under any of the other Credit Facility Documents to
which it is a party or of Lender to enforce the Obligations or realize upon
the Collateral ("Material Adverse Change").
(i) FEES. Lender shall have received from Borrower all fees specified
on Schedule B hereto which are then due and payable.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS. In order to induce Lender
to enter into this Agreement and to make Revolving Loans hereunder, Borrower
makes the following representations, warranties and covenants to Lender.
Lender shall be under no obligation to make any investigation of the matters
covered by the representations and warranties contained in this Section 4. All
representations and warranties contained in this Agreement or any of the other
Credit Facility Documents shall survive the execution and delivery of this
Agreement, shall be deemed to have been made again to Lender on the date of
each Credit Event hereunder and shall continue and be continuing thereafter
and shall be conclusively presumed to have been relied on by Lender regardless
of any investigation made or information possessed by Lender. The
representations and warranties set forth herein shall be cumulative and in
addition to any other representations or warranties which Borrower shall now
or hereafter give, or cause to be given, to Lender.
(a) REPRESENTATIONS AND WARRANTIES REGARDING BORROWER.
(i) BORROWER'S NAME. Each of Borrower's legal name, federal taxpayer
identification number, and mailing address is accurately set forth on Exhibit
F hereto (the "Information
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Certificate"). Borrower has not merged, consolidated, acquired all or
substantially all of the assets of any Person, or except as disclosed on the
Information Certificate, used any other name (whether in connection with the
Properties, the Leases, the Lease Documents, the Collateral or for business,
obtaining credit or financing or otherwise) in the last twelve years.
(ii) LOCATION OF BORROWER. Under its legal name, Borrower conducts
its business solely at the addresses set forth on the Information Certificate.
All personal property of Borrower owned, acquired, held, used, sold or
consumed in its business including General Intangibles, Accounts, chattel
paper, instruments, documents, certificates of title, fixtures, securities and
money, and all writings relating thereto and records thereof, books of record
or account, employees, business, offices and operations are located at and
conducted out of such addresses or at its chief executive office.
(iii) ORGANIZATION, CHIEF EXECUTIVE OFFICE OR RESIDENCE. Borrower is
and will continue to be a duly organized and validly existing corporation in
good standing in the State of Michigan. Borrower is and will continue to be
duly qualified to do business and is and will be in good standing in each
jurisdiction where it conducts its business. Borrower has not and shall not
fail to qualify to do business and be and remain in good standing in any
jurisdiction where such qualification or standing is necessary, required or
proper in connection with Borrower's origination, ownership or servicing of
Properties or the Leases or the conduct of its business. Borrower shall not
take any action or permit any action to be taken in breach of any such
requirements, and Borrower shall not fail to take or permit others to fail to
take any action required to be taken pursuant to such requirements. Borrower's
chief executive office address is accurately set forth on the Information
Certificate.
(iv) POWER AND AUTHORITY. Borrower has full power, authority and the
legal right and all necessary permits, consents, licenses and authorizations
to own its property and assets, including the Properties, the Leases, and the
Lease Documents and to conduct the business in which it is engaged, including
the origination and servicing of the Loans. Borrower has full power, authority
and the legal right and all necessary permits, consents, licenses and
authorizations to execute, deliver and perform its obligations under this
Agreement, the Revolving Note and the other Credit Facility Documents.
(v) DUE EXECUTION AND DELIVERY, ENFORCEABILITY. This Agreement, the
Revolving Note and the other Credit Facility Documents have been duly and
validly executed and delivered by Borrower. Each of this Agreement, the
Revolving Note and other Credit Facility Documents constitutes a legal, valid
and binding obligation of Borrower, enforceable against Borrower in accordance
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with its terms (except as such enforceability may be limited by bankruptcy law
and by general principles of equity, regardless of whether such enforceability
shall be considered in a proceeding in equity or at law).
(vi) INDEBTEDNESS; NO LIENS, CLAIMS OR ENCUMBRANCES. As reflected on
the UCC Search attached hereto as Exhibit G, there is no financing statement
(or similar statement, agreement, pledge, mortgage, notice or registration),
lien (including any federal or state tax lien), suit (including any action,
proceeding, or other litigation pending, or to Borrower's knowledge,
threatened) or judgment (including any award, injunction, order) filed with,
registered, indexed or recorded in any public office, court, arbitration
panel, administrative agency or regulatory authority (or intended so to be),
directly or indirectly, identifying or encumbering or covering or involving
the Properties, the Leases, the Lease Documents or the Collateral or which
could materially affect Borrower, its business, or its ability to perform its
Obligations.
(vii) FINANCING STATEMENTS; PERFECTED SECURITY INTEREST. To secure
the Obligations, Borrower hereby grants, pledges and assigns unto Lender a
security interest in all of its rights, titles and interests in and to the
Collateral, whether now owned or hereafter acquired. The execution and filing
of the Financing Statements has been duly authorized by all appropriate action
on the part of Borrower and Borrower has duly executed the Financing
Statements. The execution and delivery of this Agreement and the grant and
transfer of the Collateral hereunder and the Collateral Documents creates a
valid security interest in the Collateral which has attached and is
enforceable. The filing offices set forth on Schedule C hereto ("Filing
Offices") and made a part hereof are the only offices where financing
statements are required to be filed in order to perfect such security interest
in the Collateral to the extent such Collateral constitutes General
Intangibles, Accounts, fixtures and chattel paper ("Filing Collateral").
Lender's security interest in all Filing Collateral is a first priority
security interest in all Filing Collateral. The jurisdictions set forth on
Schedule D hereto ("Recording Jurisdictions") and made a part hereof are the
only jurisdictions where Mortgages are required to be recorded in order to
perfect a valid lien on any Property included in the Collateral. Lender's lien
in all Properties is a first lien. Upon (i) filing of the Financing
Statements, (ii) recordation of the Mortgages and (iii) delivery into Lender's
possession of any Collateral other than Filing Collateral and the Properties,
Lender's security interest in all Collateral will be a perfected first
priority security interest or lien subject to no other security interest,
liens or encumbrances.
(viii) NO CONFLICT; NO DEFAULT. (A) Borrower's execution, delivery
and performance by Borrower of this Agreement,
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the Revolving Note and other Credit Facility Documents do not and will not
(with the passage of time or otherwise) (1) conflict with, violate, breach or
constitute a default under any law, rule, regulation, order, writ, judgment,
decree, contract, agreement, note, mortgage, bond, indenture, lease, license,
organizational documents, or obligation of or applicable to Borrower or its
business, properties or assets (including the Properties, the Leases, the
Lease Documents and the Collateral) or (2) grant, create or result in any
lien, claim, encumbrance or right in favor of any Person (other than Lender as
contemplated hereby) on or to Borrower, or its business, property or assets
(including the Properties, the Leases, the Lease Documents and the Collateral).
(B) Borrower is not in default in any respect under or in respect of
any contract, agreement or other instrument to which it is a party or by which
it or its property or assets may be bound, except in cases where such default
has no materially adverse effect on the Properties, the Leases, the Lease
Documents or the Collateral or on the business, assets, operations, property
or financial or other condition of Borrower. No Event of Default has occurred
and is continuing and no event has occurred which but for notice, lapse of
time, or both, would constitute an Event of Default. Borrower is not in
default under any order, judgment, award or decree of any court, arbitrator or
other governmental authority binding upon or affecting it or by which any of
its property or assets may be bound or affected, except in cases where such
default has no materially adverse effect on the Properties, the Leases, the
Lease Documents or the Collateral or on the business, assets, operations,
property or financial or other condition of Borrower, and no such order,
judgment, award or decree materially adversely affects the ability of Borrower
to carry on its business as now conducted or the ability of Borrower to
perform its respective obligations under this Agreement, the Revolving Note
and the other Credit Facility Documents.
(C) The origination and servicing of the Leases and financing of the
acquisition of the Properties hereunder and pursuant to the Credit Facility
Documents are in the ordinary course of business for Borrower and are not
subject to the bulk transfer or any other similar statutory provisions in
effect in any jurisdiction.
(ix) NO CONSENT REQUIRED. Except for the filing of the Financing
Statements with the Filing Offices and the recording of the Mortgages, no
consent, authorization, approval, license, permit, registration, exemption,
filing, notice or declaration of, from, with or to any other party or any
court, government, agency or regulatory authority is required prior to or
otherwise in connection with Borrower's execution, delivery and performance of
this Agreement, the Revolving Note and other Credit Facility Documents.
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(x) PURPOSE FOR REVOLVING LOANS. Borrower does not intend to (and
will not) use all or any portion of the Revolving Loans to purchase or carry
any securities, including, without limitation, Margin Stock. None of the
proceeds of the Revolving Loans will be used, directly or indirectly, for the
purposes of reducing or retiring any indebtedness which was originally
incurred to purchase or carry any Margin Stock or other security or for any
other purpose which might cause any of the Revolving Loans to be considered a
"purpose credit" within the meaning of Regulations G, U, T or X of the Board
of Governors of the Federal Reserve System, as amended. Borrower intends to
and agrees to use the proceeds of the Revolving Loans solely for lawful,
proper business or commercial purposes. Borrower shall use the proceeds of the
Revolving Loans provided by Lender to Borrower for the purposes set forth in
Section 1(f) hereof and for no other purpose whatsoever.
(xi) FINANCIAL STATEMENTS. (A) The audited consolidated financial
statements of CAPTEC Financial Group, Inc., a Michigan corporation ("Captec"),
dated March 31, 1995 and previously delivered by Borrower to Lender are
correct in all material respects and fairly set forth the financial condition
of Captec as of March 31, 1995 and 1994, and the results of Captec's
operations and changes in Captec's financial position for the periods then
ended, all in accordance with GAAP. Since March 31, 1995, there has not
occurred any material adverse change in the business, assets, operations,
property or financial or other condition of Captec.
(B) All quarterly consolidated and consolidating unaudited financial
statements for the calendar quarter ending June 30, 1995 and September 30,
1995 of Borrower previously delivered by Borrower to Lender are correct in all
material respects and fairly set forth the financial condition of Borrower as
of the dates set forth therein, and the results of Borrower's operations and
changes in Borrower's financial position for the period then ended, all in
accordance with GAAP. Since the date of such statements delivered by Borrower
to Lender, there has not occurred any Material Adverse Change in the business,
assets, operations, property or financial or other condition of Borrower.
(xii) ACCURACY OF INFORMATION. All information contained in this
Agreement (including the Schedules hereto), all the other Credit Facility
Documents and all information, reports, notices, statements and financial and
other data furnished (or hereafter furnished) by Borrower or its Affiliates,
agents or representatives to Lender, its agents or representatives hereunder
or in connection with the Properties, the Leases, the Lease Documents, the
Revolving Loans, the Collateral and the Obligations, are (and shall be on the
date so furnished) true, complete and correct in all material respects, and do
not and will not contain any untrue statement of material fact or omit to
state any fact necessary in order to make the statements contained therein not
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materially misleading in light of the circumstances under which such
statements are made. All financial projections that have been or are hereafter
prepared by or on behalf of Borrower, Captec, their respective Affiliates or
their respective agents or representatives have been and shall be prepared in
good faith and based upon reasonable assumptions. Borrower shall endeavor
promptly to advise Lender, from time to time, when any assumptions made in
connection with any projections previously provided to Lender prove to be
incorrect or untrue in any material respect. To Borrower's knowledge, no event
or circumstance has occurred which has had or could reasonably be expected to
have a material adverse effect on the business, assets or prospects of
Borrower, Captec or their respective Affiliates, which has not been fully and
accurately disclosed to Lender in writing.
(xiii) ERISA COMPLIANCE. Borrower has not taken any action which
would cause it to become an "employee benefit plan" as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended from time
to time ("ERISA"), or a "governmental plan" as defined in Section 3(32) of
ERISA, or a "plan" as defined in Section 4975(e)(1) of the Internal Revenue
Code, or which would cause its assets to become "plan assets" as defined in 29
C.F.R. Section 2510.3-101.
(xiv) BORROWER STATUS. (A) Borrower is not, and will by such acts as
may be necessary, continue not to be, an investment company within the meaning
of the Investment Company Act of 1940.
(B) Borrower is not a "holding company" or a "subsidiary company" of
a "holding company," or an "affiliate" of a "holding company," or of a
"subsidiary company" of a "holding company," within the definitions of the
Public Utility Holding Company Act of 1935, as amended.
(C) Borrower is not a "foreign person" within the meaning of Section
1445 or 7701 of the Internal Revenue Code.
(xv) NO BROKERS. Borrower has not dealt with any brokers in
connection with this Agreement and the credit facility contained herein, and
no brokerage fees or commissions are payable by or to any Person in connection
with this Agreement or such credit facility. Lender shall not be responsible
for the payment of any fees or commissions to any broker and Borrower shall
indemnify, defend and hold Lender harmless from and against any claims,
liabilities, obligations, damages, costs and expenses (including reasonable
attorneys' fees and disbursements) made against or incurred by Lender as a
result of claims made or actions instituted by any broker or Person claiming
by, through or under Borrower in connection with this Agreement and the credit
facility contained herein.
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(xvi) NO USURY. No aspect of any of the transactions contemplated
herein violate or will violate any usury laws or laws regarding the validity
of agreements to pay interest in effect on the date hereof.
(xvii) COMPLIANCE WITH LAWS; NO VIOLATION; INDEMNITY. Borrower is and
shall continue to be in compliance in all material respects with the
requirements of all applicable laws, rules, regulations, licenses, permits,
approvals and order of any governmental authority relating to its business,
including, without limitation, those set forth in or promulgated pursuant to
the Occupational Safety and Health Act of 1970, as amended, the Fair Labor
Standards Act of 1938, as amended, the Internal Revenue Code of 1986, as
amended, and the rules and regulations thereunder, all federal, state and
local statutes, regulations, rules and orders relating to consumer credit, all
federal, state and local statutes, regulations, rules and orders pertaining to
sales of consumer goods (including, without limitation, the Consumer Products
Safety Act of 1972, as amended, and the Federal Trade Commission Act of 1914,
as amended and all regulations, rules and orders promulgated thereunder).
Borrower has obtained all material permits, licenses, approvals, consents,
certificates, orders or authorizations of any governmental agency required for
the lawful conduct of its business and is in compliance in all material
respects with the requirements of all applicable laws, rules, regulations,
orders, permits, approvals and stipulations of any governmental agency
(including, but not limited to, the Department of State, the Department of
Commerce, the Bureau of Alcohol, Tobacco and Firearms, and the Environmental
Protection Agency) relating to its business (including, without limitation,
those set forth in or promulgated pursuant to ERISA and those related to
environmental pollution and employee health and safety (including the
Occupational Safety and Health Act of 1970, as amended, the Fair Labor
Standards Act of 1938, as amended, the Code, and the Environmental Laws).
Borrower has not and shall not acquire, obtain, make, manufacture, produce,
operate, hold, possess, maintain, use, sell, transfer, grant, pledge, or
dispose of (for purposes of this Section, collectively "Borrower's use") any
of its business, securities, property or assets (including any proceeds of the
Revolving Loans, any Collateral, the Properties, the Leases and the Lease
Documents) in violation of any statute, law, rule, ordinance, regulation,
policy, procedure, injunction, award, decree, judgment, contract, agreement,
understanding, or right or interest of any other Person (for purposes of this
Section collectively "violation"), and to Borrower's knowledge no such
violation has been made by any other Person and no basis for a claim of any
such violation exists. Borrower shall indemnify and hold Lender harmless from
and against any such violation, and any other loss, liability, damage, cost or
expense whatsoever (including attorneys fees and disbursements) arising out of
or in connection with Borrower's use of any of its business, securities,
property or assets (including any proceeds of the Revolving Loans, any
Collateral, the Properties, the Leases
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and the Lease Documents). The indemnification provisions of this Section
shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement until the expiration of the applicable Statute
of Limitations relating to the claim giving rise to indemnification under this
Section.
(xviii) SUBSIDIARIES. Borrower does not have any subsidiaries on the
date hereof and shall not, during the term hereof, have any subsidiaries
without prior notice to and written consent of Lender.
(xix) TAX RETURNS. Borrower has filed, or caused to be filed, and
will continue to file in a timely manner all tax returns, reports and
declarations which are required to be filed by it (without requests for
extension). All information in such tax returns, reports and declarations is
complete and accurate in all material respects. Borrower has paid or caused to
be paid all taxes due and payable or claimed due and payable in any assessment
received by it, and has collected, deposited and remitted in accordance with
all applicable laws all sales and/or use taxes applicable to the conduct of
its business, except taxes the validity of which are being contested in good
faith by appropriate proceedings diligently pursued and available to Borrower
and with respect to which adequate reserves have been set aside on its books.
Adequate provision has been made for the payment of all accrued and unpaid
Federal, State, county, local, foreign and other taxes whether or not yet due
and payable and whether or not disputed. Borrower has remitted to the
appropriate tax authority all sales and/or use taxes applicable to its
business required to be collected under the laws of the United States and each
possession or territory thereof, and each State or political subdivision
thereof, including any State in which Borrower owns any Inventory or owns or
leases any other property. Borrower shall be liable for any tax or penalties
imposed on Lender as a result of the financing arrangements provided for
herein and Borrower agrees to indemnify and hold Lender harmless with respect
to the foregoing, and to repay to Lender on demand the amount thereof, and
until paid by Borrower such amount shall be added and deemed part of the
Revolving Loans. The foregoing indemnity shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
(xx) LITIGATION. There is no present investigation by any
governmental agency pending, or to the best of Borrower's knowledge
threatened, against or affecting Borrower or its properties, assets or
business and there is no action, suit, proceeding or claim by any Person
pending before any court or governmental agency or regulatory authority, or to
the best of Borrower's knowledge, threatened, against Borrower or its
properties, assets or business, or against or affecting any transactions
contemplated by this Agreement.
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(xxi) CAPITALIZATION. (A) Borrower has, and as of the Initial
Borrowing Date will have, a capitalization of not less than $50,000,000. From
and after the Initial Borrowing Date, Borrower will maintain a capitalization
of not less than $40,000,000.
(B) Schedule E sets forth the direct and beneficial owners of all of
the issued and outstanding stock of Borrower.
(C) Borrower (and each Affiliate executing any Credit Facility
Document) is solvent and will continue to be solvent after giving effect to
the Obligations, the security interests of Lender and the other transactions
contemplated hereunder, is able to pay its debts as they mature and has (and
has reason to believe it will continue to have) sufficient capital (and not
unreasonably small capital) to carry on its business and all businesses in
which it is about to engage. The assets and properties of Borrower at a fair
valuation and at their present fair salable value are, and will be, greater
than the indebtedness of Borrower, and including any subordinated and
contingent liabilities computed at the amount which, to the best of Borrower's
knowledge, represents an amount which can reasonably be expected to become an
actual or matured liability.
(b) REPRESENTATIONS AND WARRANTIES REGARDING THE PROPERTIES AND THE
LEASES.
(i) The information pertaining to the Properties and the Leases set
forth on Collateral Schedule is true and correct in all material respects at
the date or dates respecting which such information was furnished.
(ii) The Borrower owns fee title to all of the Properties (other than
the Properties with respect to which Borrower's interest is a leasehold
estate) and all other Collateral free and clear of all liens, claims,
participations or ownership interests, encumbrances or rights of others (other
than the interests of Lender hereunder and pursuant to the Credit Facility
Documents). The fee title to and leasehold estates in the Properties are and
will continue to be owned and held by the Borrower free and clear of all liens
and monetary encumbrances of any nature whatsoever (except for the Permitted
Title Exceptions). For those parcels constituting part of the Properties with
respect to which the Borrower holds leasehold estates, true, correct and
complete copies of the ground leases (and any amendments or modifications
thereof) have been delivered to Lender, the ground leases are in full force
and effect and no event has occurred, which but for the passage of time or
notice, or both, would constitute a default under any ground lease, and no
action has commenced and no notice has been given or received for the purposes
of terminating any ground lease. All non-monetary encumbrances affecting the
Properties will either benefit the Properties or will
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enhance the integrated use, operation and management of the Properties or will
not otherwise have a materially adverse affect on the title, ownership, value,
use or operation of any of the Properties.
(iii) Each of the Properties and their use comply and will continue
to comply in all material respects with all applicable zoning resolutions,
building codes, fire safety, Environmental Laws, subdivision and other
applicable laws, rules and regulations including, without limitation, the
Americans with Disabilities Act;
(iv) No portion of any Property nor any improvements located on any
premises which are material to the operation, use or value of a Property are
damaged or injured in any material respect as a result of any fire, explosion,
accident, flood or other casualty;
(v) No condemnation or eminent domain proceeding has been commenced
or to the knowledge of Borrower is threatened against any Property.
(vi) Each Mortgage has been duly filed to be recorded with all
appropriate governmental authorities in all jurisdictions in which such
Mortgage is required to be filed and recorded to create a valid, binding and
enforceable lien on the related Property, and each Mortgage creates a valid,
binding and enforceable first lien on the related Property (except as such
enforceability may be limited by bankruptcy law and by general principles of
equity, regardless of whether such enforceability shall be considered in a
proceeding in equity or at law).
(vii) All federal, state and local laws, rules and regulations,
including, without limitation, those relating to usury, truth-in-lending, real
estate settlement procedure, land sales, the offer and sale of securities,
consumer credit protection and equal credit opportunity or disclosure,
applicable to Borrower with respect to each Lease have been complied with in
all material respects.
(viii) Borrower has and will maintain full legal, equitable and
marketable title to each Lease, the Lease Documents and all other Collateral,
free and clear of all liens, claims, participation or ownership interests,
encumbrances or rights of others (other than the security interest granted to
Lender hereunder and the Credit Facility Documents).
(ix) Each Lease Document relating to each Lease is genuine, has not
been impaired, altered or modified in any respect and is the legal, valid and
binding obligation of the Lessee thereunder, enforceable in accordance with
its terms (except as such enforceability may be limited by bankruptcy law and
by general
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principles of equity, regardless of whether such enforceability shall be
considered in a proceeding in equity or at law), and is not subject to any
dispute, right of setoff, counterclaim or defense of any kind.
(x) All parties to each Lease Document relating to each Lease had
the legal capacity to enter into such Lease and to execute and deliver such
Lease Documents, and such Lease Documents have been duly and properly executed
by such parties. Each Lessee is an Eligible Tenant.
(xi) Each Lease Document contains customary and enforceable
provisions so as to render the rights and remedies of the holder thereof
adequate for the practical realization against the Lessee thereunder. There is
no exemption under existing law available to the related Lessee which would
interfere with Borrower's or Lender's right to enforce any such Lease Document
other than which may be available under applicable bankruptcy law or debt
relief.
(xii) Borrower has not taken (or omitted to take), and has no notice
that the related Lessee has taken (or omitted to take), any action that would
impair or invalidate the coverage provided by any existing Insurance Policy
relating to any Property or Lease.
(xiii) All applicable intangible taxes, documentary stamp taxes and
occupancy or similar taxes were paid and are being paid under each Lease
Document.
(xiv) Each Lease gives the lessor the right to receive and direct the
application of Insurance Proceeds and Condemnation Proceeds received in
respect of the related Property.
(xv) There are no delinquent taxes, ground rents, water charges,
sewer rents or assessments outstanding with respect to any Property or Lease
other than those which are being contested in good faith and which have been
consented to by Lender.
(xvi) The Property for each Lease is free of material damage and
waste and there is no proceeding pending or, to the best knowledge of
Borrower, threatened for the total or partial condemnation or taking of any of
the Property by eminent domain.
(xvii) Each Lease is a Lease originated by Borrower pursuant to and
in conformity with the qualitative and quantitative underwriting standards
contained in the Underwriting Guidelines and on the terms identified on the
Schedule of Collateral. The Lease Documents for each Lease are in
substantially the form attached hereto as the Standard Form Documents with no
material exceptions.
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<PAGE> 47
(xviii) At the time each Lease was originated, the related Business
FCCR was in compliance with the Underwriting Guidelines.
(xix) No Lessee or ground lessor or any officer, director, employee,
shareholder, partner or Affiliate thereof is an officer, director, employee,
shareholder, partner or Affiliate of Borrower.
(xx) No instrument of release or waiver has been executed in
connection with any Lease or ground lease, and no Lessee or ground lessor has
been released in whole or in part.
(xxi) No Lease is a Defaulted Lease.
(xxii) Each material Lease Document for each Lease has been delivered
to Lender or the Custodian.
(xxiii) Each Lease has a remaining term of no longer than the term of
the related Franchise Agreement. On the date of origination of the Lease, and,
to the best knowledge of Borrower, on the date of each Credit Event, the
Lessee is current on all franchise payments. Additionally, on the date of
origination of the Lease, Borrower received an affidavit from the related
franchisee certifying, and, to the best knowledge of Borrower on the date of
each Credit Event: (i) the Lessee is in full compliance with the terms of the
Franchise Agreement and (ii) the Lessee is in good standing with the
franchisor.
(xxiv) Borrower has notified each Lessee, and each Lessee is
required, to remit payments in respect to the Leases to the Lockbox Account.
(xxv) Borrower has caused all of its records to be marked to
indicate that the Leases and Lease Documents have been pledged by Borrower to
Lender.
(xxvi) To Borrower's knowledge, except as otherwise disclosed in any
environmental site assessment obtained by Borrower with respect to any
Property and which environmental site assessment has been delivered to and
accepted and approved by Lender, each Property subject to a Mortgage is free
from any and all Hazardous Substances and there exists no violation of
Environmental Laws with respect to such Property. For this purpose, the term
"Hazardous Substance" shall have the meaning specified in the Mortgages.
(xxvii) No Lease contains any landlord obligation to (A) fund or
perform any tenant improvements or to incur or reimburse Lessee for any other
expenditures, or (B) indemnify any Lessee for any liabilities, including,
without limitation, liabilities incurred in connection with environmental
matters.
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(xxviii) With respect to any Revolving Loan which is primarily
secured by Borrower' s interest as lessee under a ground lease (a "Ground
Lease"), which Ground Lease shall be in form and substance acceptable to
Lender:
(A) The Ground Lease or a memorandum thereof has been recorded and
the Ground Lease does not prohibit the leasehold estate to be mortgaged and
does not restrict the use of the Property by Borrower, its successors or
assigns in a manner that would materially adversely affect the security
provided by the related Mortgage; the lessee's interest in the Ground Lease
may be assigned at foreclosure or by Lender subsequent to foreclosure and may
be assigned by the lessee in other instances; and there has been no material
change in the terms of such Ground Lease since its recordation, except by
written instruments all of which have been recorded, and copies of which have
been delivered to Lender;
(B) The lessor under such Ground Lease has agreed in such Ground
Lease or in another writing delivered to Lender and its successors and
assigns that such Ground Lease may not be amended, modified, surrendered,
cancelled or terminated in any manner that would be materially adverse to the
Lender without the prior written consent of Lender, and that any such action
without such consent is not binding on Lender, its successors or assigns;
(C) Each Revolving Loan secured by a leasehold estate pursuant to a
Ground Lease provides for an amortization schedule which, were the loan to be
fully amortized from scheduled payments made in accordance with such
amortization schedule regardless of the stated maturity date, provides for
full repayment of such Revolving Loan within no more than 75% of the original
term of the related ground lease (plus all consecutive renewal terms which may
be exercised, and which under all circumstances would be enforceable, by
Lender); further, the original term of the related Ground Lease (plus all
consecutive renewal terms which may be exercised, and which under all
circumstances would be enforceable, by Lender) extends for at least ten years
beyond the stated maturity date for such Revolving Loan, it being agreed and
understood that Borrower shall exercise all renewal rights under the Ground
Lease at least ninety (90) days prior to the expiration thereof, it being
further agreed and understood that if Borrower fails to duly exercise its
renewal rights as required hereby, Lender shall be entitled to exercise such
rights as Borrower's attorney in fact, which power of attorney shall be
irrevocable and deemed coupled with an interest;
(D) Such Ground Lease is and shall remain prior to any mortgage or
other lien upon the fee interest of the ground lessor;
(E) Such Ground Lease does not permit any increase in the amount of
rent payable by the lessee thereunder or any
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assignee thereof other than an increase which was considered in the appraisal
made in connection with the related Property;
(F) Such Ground Lease requires the lessor thereunder to give notice
of any default by the lessee to Lender;
(G) Lender is permitted a reasonable opportunity (including, where
necessary, sufficient time to gain possession of the interest of the lessee
under such Ground Lease through legal proceedings or to take other action so
long as Lender is proceeding diligently) to cure any default under such Ground
Lease which is curable after the receipt of notice of any such default before
the lessor thereunder may terminate such Ground Lease; all rights of the
lessee under such Ground Lease and the related Mortgage (insofar as it relates
to the Ground Lease) may be exercised by or on behalf of Lender; and in the
event of the bankruptcy or insolvency of the lessee under such Ground Lease,
or other default which is not reasonably susceptible to cure by Lender, such
default is deemed cured or waived as to Lender and its successors and assigns,
or Lender has the right, following termination of the existing Ground Lease or
rejection thereof by a bankruptcy trustee or otherwise, to enter into a new
Ground Lease with the lessor on identical financial terms and substantially
identical other terms and with the same priority as the existing Ground Lease.
(H) Under the terms of the Ground Lease and the related Mortgage,
taken together, any related insurance proceeds or condemnation award (other
than in respect of a total or substantially total loss or taking) will be
applied (1) to the repair or restoration of all or part of the related
Property, with Lender or a trustee appointed by it having the right to hold
and disburse such proceeds as repair or restoration progresses (except in
cases where a provision entitling another party to hold and disburse such
proceeds would not be viewed as commercially unreasonable by an institutional
investor), with any balance of such insurance proceeds payable to Borrower or
the ground lessor and any balance of such condemnation award payable in the
manner described in subparagraph (I) below; or (2) to the payment of the
outstanding principal balance of the Revolving Loan, together with any accrued
interest thereon; or (3) with respect to any total loss, in the manner
described in subparagraph (I) below; and
(I) Under the terms of such Ground Lease and the related Mortgage,
taken together, any related insurance proceeds or condemnation award in
respect of a total or substantially total loss or taking of the related
Property will be applied first to the payment of the outstanding principal
balance of the Revolving Loan, together with any accrued interest thereon; and
until such principal balance and accrued interest are paid in full, neither
the lessee nor the lessor under such Ground Lease will have the right to
terminate or modify such Ground Lease without the prior
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written consent of Lender as a result of any casualty or partial condemnation,
except to provide for an abatement of the rent.
(xxix) No Lessee is obligated to Borrower under any Lease(s) having
aggregate cost to Borrower, less Borrower's accumulated depreciation thereon,
in excess of $15,000,000.
(c) PARTICULAR COVENANTS OF BORROWER. In addition to the
representations, warranties and covenants contained in paragraphs (a) and (b)
of this Section 4, Borrower hereby makes the following particular covenants to
Lender:
(i) MAINTENANCE OF COLLATERAL AND BUSINESS. At Borrower's sole
cost and expense, Borrower shall (A) service the Collateral in accordance with
this Agreement and all applicable laws, rules and regulations and (B) not do
or suffer to be done any act whereby the value of the Collateral or any part
or interest therein may be lessened in any material respect. Borrower shall
notify Lender promptly of any material change or impairment in the value of
any of the Collateral.
(ii) COMPLIANCE CERTIFICATES; REPORTS; COMMUNICATIONS. Borrower
agrees to provide to Lender: (A) within 45 days of March 31, June 30 and
September 30 of each calendar year during the term of this Agreement, a
compliance certificate (in the form attached hereto as Exhibit H-l) and
quarterly financial statements of Borrower certified by Borrower's chief
financial officer to fairly present in all material respects Borrower's
financial condition and results of operations for such period; and (B) within
90 days of December 31 of each calendar year during the term of this
Agreement, a compliance certificate (in the form attached hereto as Exhibit
H-2) and audited financial statements of Borrower together with the report
thereon by Borrower's Independent Accountants. Borrower further agrees to
provide to Lender (A) promptly following receipt by Borrower, complete copies
of any communications that are or may be materially adverse to, or which
reflect information which is or may be materially adverse to Borrower, its
business or the Collateral, and (B) copies of such other reports and
information as Lender may from time to time reasonably request promptly
following any such request. The financial statements furnished to Lender
hereunder shall be prepared in accordance with GAAP applied on a consistent
basis and shall be sufficiently detailed to allow Lender to calculate Borrower
FCCR and determine compliance with other financial covenants.
(iii) ENCUMBRANCES. Borrower shall not create, incur, assume or
suffer to exist any security interest, mortgage, pledge, lien, charge or other
encumbrance of any nature whatsoever on the Properties, the Leases, the Ground
Leases or any other Collateral, EXCEPT the following permitted encumbrances
("Permitted Encumbrances"):
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(A) liens and security interests of Lender;
(B) liens securing the payment of taxes, either not yet overdue
or the validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to Borrower and with respect to
which adequate reserves have been set aside on its books;
(C) non-consensual statutory liens (other than liens securing
the payment of taxes) arising in the ordinary course of Borrower's business to
the extent: (1) such liens secure indebtedness which is not overdue or (2)
such liens secure indebtedness relating to claims or liabilities which are
fully insured and being defended at the sole cost and expense and at the sole
risk of the insurer or being contested in good faith by appropriate
proceedings diligently pursued and available to Borrower, in each case prior
to the commencement of foreclosure or other similar proceedings and with
respect to which adequate reserves have been set aside on its books;
(D) deposits of cash with the owner or lessor of premises leased
and operated by Borrower in the ordinary course of the business of Borrower to
secure the performance by Borrower of its obligations under the terms of the
lease for such premises;
(E) liens in favor of lessors that are expressly subordinate to
the security interest of Lender; and
(F) those matters set forth in the title insurance policies
insuring the respective liens of the Mortgages which are approved by Lender in
its sole discretion ("Permitted Title Exceptions").
(iv) DISTRIBUTIONS AND REDEMPTIONS. Borrower shall not, directly
or indirectly, declare, or pay or make any distributions on account of any of
its stock now or hereafter outstanding, or set aside or otherwise deposit or
invest any sums for such purpose, or redeem, retire, defease, purchase or
otherwise acquire any membership interests (or set aside or otherwise deposit
or invest any sums for such purpose) for any consideration or apply or set
apart any sum, or make any other distribution (by reduction of capital or
otherwise) in respect of any such shares or agree to do any of the foregoing,
either (A) following the occurrence of and during the continuation of an Event
of Default or an event which with the passage of time or giving of notice or
both would be or result in an Event of Default, (B) following the occurrence
of and during the continuation of any event of default or an event which with
the passage of time or giving of notice or both would be or result in an event
of default, under any agreement, instrument or document to which any Affiliate
of Borrower and Lender are parties or (C) if an Event of Default, or an event
which with the passage of time or giving of notice or both would be or result
in an Event
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of Default would exist after giving effect to such distribution.
Notwithstanding anything herein to the contrary, Borrower shall not be
restricted in the payment of the dividends it is required to pay to the
holders of the redeemable preferred stock of the Borrower in existence on the
date hereof as provided in the Borrower's certificate of incorporation.
(v) INSURANCE. At Borrower's sole cost and expense, Borrower
shall:
(A) (1) maintain liability insurance of not less than an amount
reasonably satisfactory to Lender, (2) maintain, independently or in a group
plan with Captec, errors and omissions insurance of not less than an amount
reasonably satisfactory to Lender and (3) maintain such other insurance
(including certain minimum levels of acceptable workers' compensation,
property damage, general public liability insurance) as may be reasonably
required by Lender, in each case maintained by providers either (x) having
ratings of not less than A- from A.M. Best Company Inc. (or comparable ratings
from a comparable rating agency) or (y) who, if not so rated, have been
approved by Lender;
(B) timely pay all premiums, fees and charges required in
connection with all of its insurance policies and otherwise continue to
maintain such policies in full force and effect; and
(C) promptly deliver the insurance policies, certificates (and
renewals) thereof or other evidence of compliance herewith to Lender.
(vi) MAINTENANCE OF EXISTENCE; PRIOR NOTICE OF CHANGE IN NAME OR
LOCATION. (A) Borrower shall at all times preserve, renew and keep in full
force and effect its existence and rights and franchises with respect thereto
and maintain in full force and effect all permits, licenses, trademarks,
tradenames, approvals, authorizations, leases and contracts necessary to carry
on the Borrower's business as presently or proposed to be conducted.
(B) Borrower will neither change its name, federal taxpayer
identification number, nor assume a different name, nor conduct its business
or affairs under any other name, nor merge, consolidate, or change its
structure (whether by equity sale, issuance, purchase or otherwise) during the
term hereof. Borrower may move its chief executive office to another location
provided that it provides Lender with forty-five (45) days prior written
notice.
(vii) NOTICE OF MATERIAL ADVERSE CHANGES. Borrower shall
promptly notify Lender in writing of the details of (A) any material loss,
damage, investigation, action, suit, proceeding or
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claim relating to the Properties, the Leases, the Lease Documents or the
Collateral or any other property which is security for the Obligations or
which would result in any Material Adverse Change in Borrower's business,
properties, assets (including goodwill) or condition, financial or otherwise
and (B) the occurrence of any Event of Default or act, condition or event
which, with the passage of time or giving of notice or both, would constitute
an Event of Default. Borrower shall furnish or cause to be furnished to Lender
such budgets, forecasts, projections and other information respecting the
Properties, the Leases, the Lease Documents and the Collateral and the
business of Borrower, as Lender may, from time to time, reasonably request.
Lender is hereby authorized to deliver a copy of any financial statement or
any other information relating to the business of Borrower to any court or
other government agency or to any participant or assignee or prospective
participant or assignee. Borrower hereby agrees to deliver to Lender, at
Borrower's expense, copies of the financial statements of Borrower and any
reports or management letters prepared by its accountants or auditors on
behalf of Borrower. Any documents, schedules, invoices or other papers
delivered to Lender may be destroyed or otherwise disposed of by Lender one
(1) year after the same are delivered to Lender, except as otherwise
designated by Borrower to Lender in writing.
(viii) SALE OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ETC.
Borrower shall not, directly or indirectly, without the prior written consent
of the Lender, which consent shall not be unreasonably withheld:
(A) merge into or with or consolidate with any other Person or
permit any other Person to merge into or with or consolidate with it, or
(B) sell, assign, lease, transfer, abandon or otherwise dispose
of any Properties, Leases or other Collateral to any other Person;
(C) wind up, liquidate or dissolve; or
(D) agree to do any of the foregoing.
(ix) TRANSACTIONS WITH AFFILIATES. Borrower shall not directly
or indirectly, with respect to the Properties, the Leases or the other
Collateral (i) purchase, acquire or lease any property from, or sell, transfer
or lease any property to, any Affiliate or any officer, employee, member,
manager, director, or agent of any Affiliate or Borrower or (ii) make any
payments of management, consulting or other fees for management or similar
services, or of any indebtedness owing to any Affiliate or any officer,
employee, member, manager, director, agent or any Affiliate or Borrower, or
any other Payments to Affiliates; provided, however, that no Event of Default
shall exist, Borrower
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<PAGE> 54
may (i) pay fees to Captec Net Lease Realty Advisors, Inc. in consideration
for servicing of the Leases and reimburse Captec Net Lease Realty Advisors,
Inc. for all reasonable direct out-of-pocket expenses incurred by Captec Net
Lease Realty Advisors, Inc. in servicing the Leases and (ii) extend credit to
Captec provided that the aggregate principal amount of all such indebtedness
shall not at any time exceed $15,000,000 and the terms of such indebtedness
shall be fair and reasonable and on the same terms as would have been obtained
in an arm's length transaction between unrelated parties.
(x) COSTS AND EXPENSES. Borrower shall pay to Lender on demand
all reasonable costs, expenses, filing fees and taxes (other than income and
franchise taxes of Lender) paid or payable in connection with the preparation,
negotiation, execution, delivery, recording, administration, collection,
liquidation, enforcement and defense of the Obligations, Lender's rights in
the Collateral, this Agreement, the other Credit Facility Documents and all
other documents related hereto or thereto, including any amendments,
supplements, restatements or consents which may hereafter be contemplated
(whether or not executed) or entered into in respect hereof and thereof,
including, but not limited to: (A) all costs and expenses of filing or
recording (including UCC financing statement filing taxes and fees,
documentary taxes, intangibles taxes and mortgage recording taxes and fees, if
applicable); (B) all title insurance and other insurance premiums, appraisal
fees and search fees; (C) costs and expenses of remitting loan proceeds,
collecting checks and other items of payment, together with customary charges
and fees with respect thereto; (D) costs and expenses of preserving and
protecting the Collateral; (E) costs and expenses paid or incurred in
connection with obtaining payment of the Obligations, enforcing the security
interests and liens of Lender, selling or otherwise realizing upon the
Collateral, and otherwise enforcing the provisions of this Agreement and the
other Credit Facility Documents or defending any claims made or threatened
against Lender arising out of the transactions contemplated hereby and thereby
(including, without limitation, preparations for and consultations concerning
any such matters); (F) all out-of-pocket expenses and costs heretofore and
from time to time hereafter incurred by Lender during the course of periodic
field examinations of the Collateral and Borrower's operations, plus a
customary per diem charge at the rate of $60 per person per day for Lender's
examiners in the field and office; and (G) the actual and reasonable fees and
disbursements of counsel (including legal assistants) to Lender in connection
with any of the foregoing.
(xi) ACCESS TO PREMISES. From time to time as reasonably
requested by Lender, at the cost and expense of Borrower:
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(A) Borrower shall allow Lender, its agents and representatives,
from time to time, to inspect during normal business hours the Borrower's
books and records pertaining to the Collateral, the Properties, the Leases,
the Lease Documents, the Collateral or otherwise to Borrower's business, and
Borrower will assist (and permit abstracts and photocopies of Borrower's books
and records to be taken and retained by) Lender, its agents and
representatives in making any such inspection;
(B) Borrower shall promptly furnish to Lender such copies of
such books and records or extracts therefrom as Lender may request in good
faith; and
(C) Lender or its designee shall have use during normal
business hours of such of Borrower's personnel, equipment, supplies and
premises as may be reasonably necessary for the foregoing, provided that such
use does not materially interfere with Borrower's ordinary business
operations, and, if an Event of Default exists or has occurred and is
continuing, for the collection of and realization of the Collateral.
(xii) ORIGINATION AND SERVICING LEASES. Borrower shall not enter
into any Lease with any Person other than an Eligible Tenant. Each Lease shall
be originated by Borrower pursuant to and in conformity with the quantitative
and qualitative underwriting standards contained in the Underwriting
Guidelines. Borrower or Captec shall at all times service the Leases in
conformity with the provisions of Borrower's Operations Policy Manual. In
addition, Borrower (or an Affiliate of Borrower) shall service the Leases in
conformity with the Servicing Provisions set forth in Exhibit I hereto.
(xiii) LOAN TO VALUE REQUIREMENT. Borrower shall at all times
satisfy the Loan to Value Requirement. If at any time the Loan to Value
Requirement shall, in the determination of Lender, cease to be satisfied,
Borrower shall within five (5) business days either (ii) prepay the
outstanding principal balance of the Revolving Loans by an amount sufficient
to restore compliance with the Loan to Value Requirement, or (ii) deliver to
Lender additional collateral for the Revolving Loans, including, without
limitation, cash or any cash equivalent which is satisfactory in all respects
to Lender and sufficient in the opinion of Lender to restore compliance with
the Loan to Value Requirement.
(xiv) UPDATED APPRAISALS. Lender shall have the right in its
discretion to commission updated Appraisals with respect to any Property
constituting Collateral (i) with respect to any particular Property, if
Lender, in the exercise of its sole and absolute discretion, believes that
there has been a reduction in the value of such Property (including, without
limitation, by reason of fire or other casualty or by reason of condemnation)
and
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(ii) upon the occurrence of an Event of Default. All costs incurred in
connection with any updated appraisal required under this paragraph shall be
borne by Borrower, shall be paid by Borrower within ten (10) days after
request by Lender, and shall constitute part of the Obligations. The
obligation of Borrower to pay the aforementioned appraisal costs pursuant to
this paragraph shall be secured by the Credit Facility Documents.
(xv) SALE OF REVOLVING LOANS. Borrower will cooperate with
Lender in connection with any sale or other disposition of the Revolving Loans
by Lender. In this regard, Borrower hereby covenants and agrees to execute and
deliver in connection with the sale or other disposition of the Revolving
Loans, or any interest therein, at such time and from time to time, as
required by Lender, such agreements, documents or instruments as Lender may,
from time to time, reasonably request, in connection with any such disposition
including certificates reaffirming the representations and covenants of
Borrower hereunder as if made on the date of any such reaffirmation. Borrower
hereby consents to the distribution of disclosure information concerning
Borrower in connection with the foregoing, provided, that Lender provides
Borrower with a copy of the disclosure and an opportunity to comment thereon
prior to the distribution of such disclosure information.
(xvi) MANAGEMENT. At least two (2) of the following persons
shall at all times be members of the management and/or the credit committee
of, Borrower: Patrick L. Beach, W. Ross Martin, H. Reid Sherard and Gary
Bruder.
(xvii) INELIGIBLE LEASES; SUBSTITUTION: In the event that any of
the foregoing representations and warranties of Borrower contained in
paragraph (b) of this Section 4 shall prove to have been untrue in any
material and adverse respect on and as of the date made (a "Breached
Representation") with respect to any Lease or any Ground Lease, or any Lease
shall become a Defaulted Lease or any default under any Ground Lease shall
occur and be continuing after any applicable grace period (each, an
"Ineligible Lease"), Borrower shall, within five (5) Business Days of the date
a Lease or Ground Lease becomes an Ineligible Lease, either (i) prepay the
Revolving Loans in an amount equal to 75% of the Appraised Value of the
Property relating to such Ineligible Lease at the time of the funding of the
Revolving Loan pursuant to which such Ineligible Lease was financed, or (ii)
deliver to Lender additional collateral for the Revolving Loans, including,
without limitation, cash or any cash equivalent plus all accrued and unpaid
interest thereon, which is satisfactory in all respects to Lender and having a
value, in the opinion of Lender, at least equal to the Appraised Value of the
Property relating to such Ineligible Lease and in all other respects
satisfactory to Lender. Upon the payment by Borrower of the repurchase price
for an Ineligible Lease, Lender shall (or shall cause the Custodian to)
execute and deliver to
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Borrower such endorsements or releases necessary to release Lender's lien on
and interest in such Ineligible Lease and related Facility Collateral and
shall (or shall cause the Custodian to) deliver to Borrower the Lease
Documents relating to such Ineligible Lease.
(xviii) REFINANCING. (A) Borrower hereby undertakes to use its
best efforts to refinance the credit facility provided herein on or before the
Expiry Date. Lender shall assist Borrower in arranging such refinancing to the
extent such refinancing involves (i) the sale, pledge, grant of a security
interest, collateral assignment, transfer and delivery or other encumbrance or
disposition by Borrower of all or a portion of the Properties or the Leases,
from time to time, to one or more of its Affiliates or to other Persons,
whereby such Person or Affiliate will issue debt instruments or equity
certificates backed by the Properties or Leases and the servicing of the
Properties or the Leases by a Person appointed as servicer in connection
therewith (a "Securitization") or (ii) an initial public offering of equity
securities of Borrower or an Affiliate of Borrower (an "IPO"), the proceeds of
either of which are used to repay the Revolving Loans. In the event that
Borrower is unable to complete a Securitization or and IPO prior to the Expiry
Date, Lender agrees to negotiate with Borrower for the conversion of all then
outstanding Revolving Loans to a fixed rate term loan. Any such term loan
shall be on commercially reasonable terms acceptable to Lender in its sole
discretion, including the rate of interest (which would be then prevailing
market rates as determined by Lender). Any such term loan will have a term of
ten (10) years and will provide for amortization at the lesser of fifteen (15)
years or the weighted average term of the Leases.
(B) Borrower shall pay the Exit Fee to Lender at the times and
upon the terms provided in Schedule B hereto.
(xix) UNDERWRITING GUIDELINES; OPERATIONS POLICY MANUAL.
Borrower shall not modify, revise, amend or alter the Underwriting Guidelines
or the Operations Policy Manual, or originate and Lease that would have the
effect of doing so, without the written consent of Lender.
(xx) NOTIFICATION OF DEFAULTED LEASES. Borrower shall notify
Lender in writing within two (2) Business Days of any Lease that becomes a
Defaulted Lease or any Ground Lease under which there is a default. In
addition, Borrower shall deliver to Lender copies of all written
communications with the Lessees or ground lessor concerning any default,
breach, violation or event of acceleration under any related Lease Documents
(by Borrower or Lessee) or the Ground Lease or any waiver thereof.
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(xxi) PAYMENT OF FEES. Borrower shall pay to Lender the
Structuring Fee, the Extension Fee and the Exit Fee in the amounts and at the
times specified on Schedule B hereto.
(xxii) LIQUID ASSETS. Borrower shall at all times maintain
Liquid Assets equal to the greater of (a) $2,000,000 and (b) five percent (5%)
of the then outstanding principal balance of the Revolving Loans.
5. LOCKBOX ACCOUNT:
----------------
(i) On or prior to the Initial Borrowing Date, Borrower shall
establish and thereafter maintain with the Custodian a segregated trust
account under the sole control of Lender pursuant to the Lockbox Agreement,
which shall be entitled "Captec Net Lease Realty, Inc.--Lockbox Account" and
referred to herein as the "Lockbox Account." Amounts on deposit in the Lockbox
Account shall be invested, disbursed, and otherwise maintained pursuant to the
Lockbox Agreement.
(ii) Borrower shall cause all payments by Lessees in respect of
the Leases to be paid directly to the Lockbox Account. On each Business Day,
Borrower shall deposit into the Lockbox Account any funds received by Borrower
on such Business Day from any Lessee.
(iii) On the fifteenth day of each month during the term of the
Revolving Loans, Lender shall be paid from the Lockbox Account a sum
sufficient to pay all amounts due and owing to Lender hereunder and pursuant
to the Credit Facility Documents. To the extent that funds then on deposit in
the Lockbox Account are insufficient to cover all such due and owing amounts,
Borrower shall immediately pay to Lender the difference between the amounts
due and owing to Lender and the amounts then on deposit in the Lockbox
Account. To the extent funds remain on deposit in the Lockbox Account on the
fifteenth day of any month after payment to Lender of all amounts then due and
owing to Lender hereunder and pursuant to the Credit Facility Documents
(including, without limitation, all mandatory prepayments required by Section
2(b) hereof), such remaining amounts shall be applied as follows: (i) in the
event no Event of Default then exists and is continuing, all remaining
accounts shall be distributed to Borrower and (ii) in the event an Event of
Default then exists and is continuing, all remaining amounts shall be retained
in the Lockbox Account. No payment shall be made to Borrower pursuant to this
Section if Lender has delivered a Demand Letter (as defined in the Lockbox
Agreement) to the Custodian pursuant to the Lockbox Agreement.
(iv) The Custodian shall promptly pay to Borrower all amounts
deposited into the Lockbox Account which do not
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constitute payments of rent by Lessees in respect of the Leases upon delivery
of a certificate in the form of Exhibit J hereto.
(v) In the event that Accrued Margin at any time during any
Monthly Interest Period shall exceed $500,000 in the aggregate (as evidenced
by a certificate delivered by Lender to the Custodian and the Borrower), the
Custodian shall, on the date it receives any such Certificate from Lender,
withdraw an amount equal to such Accrued Margin from the Lockbox Account and
pay such amount to the Lender. Any such payments made to the Lender shall be
credited against payments to be made to the Lender pursuant to paragraph (iii)
of this Section 5.
6. EVENTS OF DEFAULT: The happening of any one or more of the
following events shall constitute an "Event of Default" hereunder:
(a) Nonpayment, default, breach, etc.
---------------------------------
(i) BORROWER DEFAULT: (A) Borrower's failure to make any
payment when due under this Agreement, the Revolving Note or any Credit
Facility Document, which failure continues for one (1) Business Day, or
Borrower's disclaimer of liability under or enforceability of any Credit
Facility Document; (B) Borrower's default under, failure to perform or observe
any covenant or condition of or agreement in, or breach of, or the material
inaccuracy of or omission from, any representation or warranty under or in,
this Agreement, the Revolving Note, any other Credit Facility Document, any
financial or other statement delivered to Lender, and such default, failure,
breach, inaccuracy or omission shall continue unremedied for the earliest of
(x) fifteen (15) days following the date that notice of such default, failure,
breach, inaccuracy or omission is given to Borrower by Lender or (y) fifteen
(15) days following the date ("Discovery Date") that Borrower first obtains
knowledge of such default, failure, breach, inaccuracy or omission; PROVIDED,
THAT, no such fifteen (15) day period shall apply in the case of: (A) any
failure to observe any such term, covenant, condition or provision which is
not capable of being cured at all or within such fifteen (15) day period or
which has been the subject of a prior failure within a three (3) month period
or (B) an intentional breach by Borrower of any such term, covenant, condition
or provision, or (C) the failure to observe or perform any of the covenants or
provisions contained in Sections 4(c)(i), (iii)-(vi), (x) and (xxii) of this
Agreement; or
(b) OTHER DEFAULTS OF BORROWER AND OTHER LIABLE PARTIES: If
Borrower or any of Borrower's Affiliates who is a maker, drawer, acceptor,
endorser, guarantor, surety, accommodation party or otherwise liable for any
of the Obligations or Collateral (each hereinafter called an "other liable
party") shall die, dissolve, merge or consolidate, suspend the transaction of
business or incur
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any material adverse change in its financial condition or prospects; or any
proceeding, procedure or remedy supplementary to or in enforcement of judgment
(involving an amount in excess of $100,000 in the aggregate) shall be resorted
to or commenced against, or with respect to any property of, Borrower or any
other liable party; or if Borrower or any other liable party shall make an
assignment for the benefit of, or composition with, creditors, or shall be or
become insolvent or unable, or generally fail, to pay its debts when due, or
shall be or become a party or subject to any bankruptcy, reorganization,
insolvency or other similar proceeding, or a receiver or liquidator, custodian
or trustee shall be appointed for Borrower or any other liable party, or a
substantial portion of any of Borrower's or their respective assets and, if
any of the foregoing shall occur involuntarily as to Borrower and any other
liable party, it shall not be dismissed with prejudice, stayed or discharged
within 60 days; or if Borrower or any other liable party shall take any action
to effect, or which indicates its acquiescence in, any of the foregoing.
7. REMEDIES.
(a) CUMULATIVE RIGHTS AND REMEDIES. Upon the occurrence of
an Event of Default, Lender shall have the rights, powers and remedies (i)
granted to secured parties under the UCC or other applicable Uniform
Commercial Code; (ii) granted to Lender under any other applicable statute,
law, rule or regulation; and (iii) granted to Lender under this Agreement, the
Revolving Note or any other Credit Facility Document or any other agreement
between Borrower and Lender. In addition, all such rights, powers and remedies
shall be cumulative and not alternative and enforceable, in Lender's
discretion, alternatively, successively, or concurrently on any one or more
occasions, and shall include, without limitation, the right to apply to a
court of equity for an injunction to restrain a breach or threatened breach by
Borrower of this Agreement or any of the other Credit Facility Documents. Any
single or partial exercise of, or forbearance, failure or delay in exercising
any right, power or remedy shall not be, nor shall any such single or partial
exercise of, or forbearance, failure or delay be deemed to be a limitation,
modification or waiver of any right, power or remedy and shall not preclude
the further exercise thereof; and every right, power and remedy of Lender
shall continue in full force and effect until such right, power and remedy is
specifically waived by an instrument in writing executed and delivered with
respect to each such waiver by Lender.
(b) ACCELERATION OF OBLIGATIONS. Upon the occurrence of an
Event of Default, and at any time thereafter if any Event of Default shall
then be continuing, Lender may, from time to time in its discretion, by
written notice to Borrower declare the Revolving Note and any other
Obligations to be immediately due and payable whereupon (and, ipso facto,
without the need for any notice or
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other action by any Person, upon the occurrence of any Event of Default of the
type referred to in Section 6(c) hereof) such principal, interest and other
Obligations shall be immediately due and payable, without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by
Borrower to the maximum extent permitted by law and thereafter shall bear
interest until paid at the Default Rate.
8. INDEMNIFICATION: Borrower hereby saves, indemnifies and
holds Lender harmless from and against all expense, cost, liability, loss or
damage, including attorney's fees and expenses, suffered or incurred by Lender
arising out of or in connection with this Agreement, the Credit Facility
Documents or the transactions contemplated hereby or thereby. Without limiting
the foregoing, Borrower will pay to Lender all reasonable expenses (including
reasonable expenses for legal services of every kind) of, or incidental to,
the negotiation of, entering into and enforcement of any of the provisions
hereof and of any of the Obligations, and any actual or attempted sale, lease
or other disposition of, and any exchange, enforcement, collection, compromise
or settlement of any of the Collateral and receipt of the proceeds thereof,
and for the care of the Collateral and defending or asserting the rights and
claims of Lender in respect thereof, by litigation or otherwise, including
expense of insurance, and all such expenses shall be Borrower's Obligations.
Borrower shall indemnify and hold Lender, and its directors, agents, employees
and counsel, harmless from and against any and all losses, claims, damages,
liabilities, costs or expenses imposed on, incurred by or asserted against any
of them in connection with any litigation, investigation, claim or proceeding
commenced or threatened related to the negotiation, preparation, execution,
delivery, enforcement, performance or administration of this Agreement, any
other Credit Facility Documents, or any undertaking or proceeding related to
any of the transactions contemplated hereby or any act, omission, event or
transaction related or attendant thereto, including, without limitation,
amounts paid in settlement, court costs, and the reasonable fees and expenses
of counsel, but excluding any such losses, claims, damages, liabilities, costs
and expenses directly caused to be incurred by reason of the gross negligence
or willful misconduct of the person otherwise to be indemnified and held
harmless under this Section, as determined by a final, non-appealable judgment
of a court of competent jurisdiction. To the extent that the undertaking to
indemnify, pay and hold harmless set forth in this Section may be
unenforceable because it violates any law or public policy, Borrower shall pay
the maximum portion which it is permitted to pay under applicable law to
Lender in satisfaction of indemnified matters under this Section. The
foregoing indemnity shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement until the expiration of the
applicable statute of limitations relating to the claims giving rise to
indemnification under this Section.
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9. OBLIGATIONS ABSOLUTE: Borrower's Obligations will be
absolute, unconditional and irrevocable and will be paid or satisfied strictly
in accordance with their respective terms under all circumstances whatsoever,
including: (i) the invalidity or unenforceability of all or any of, or any
part of, this Agreement, the Revolving Note or any other Credit Facility
Document, or any consent, waiver, amendment or modification thereof; (ii) the
existence of any claim, setoff, defense or other right which Borrower may have
at any time against Lender, or any other Person, whether in connection with
this Agreement, any other Credit Facility Documents, the transactions
contemplated hereby, thereby or otherwise all of which Borrower hereby waives
to the maximum extent permitted by law; or (iii) the loss, theft, damage,
destruction or unavailability of the Collateral to Borrower for any reason
whatsoever, it being understood and agreed that Borrower retains all liability
and responsibility with respect to the Collateral.
10. ASSIGNMENT: This Agreement (and each other Credit
Facility Document) is freely assignable, in whole or in part, by Lender to any
Affiliate of Lender (provided that Lender certifies to Borrower that such
Affiliate has adequate assets to enable it to comply with the funding
obligations of Lender hereunder) and, to the extent of any such assignment,
Lender shall be fully discharged from all responsibility. This Agreement (and
each other Credit Facility Document) shall not be assignable to any other
Person without the prior consent of Borrower, unless an Event of Default shall
then be existing and continuing, in which case no such consent shall be
required. Lender's assignee shall, to the extent of the assignment, be vested
with all the powers and rights of Lender hereunder, and to the extent of such
assignment the assignee may fully enforce such rights and powers as secured
party and all references to Lender shall mean and refer to such assignee. In
addition to the foregoing, Lender may assign, by bookkeeping entry on Lender's
records or otherwise, all or any part of, or any interest in, Lender's rights
and benefits under the Revolving Note, including, without limitation, its
rights to payments of principal and interest thereunder, for the purpose of
financing Lender's provision of credit hereunder, provided that no such
assignment shall terminate or diminish Lender's obligations hereunder. To the
extent of such assignment, such assignee shall have the same rights and
benefits against Borrower under the Revolving Note as it would have had if it
were Lender thereunder. Lender shall retain all rights and powers hereby given
not so assigned, transferred and/or delivered. Without limiting the foregoing,
Borrower understands and agrees that Lender may, from time to time, sell,
pledge, grant a security interest in and collaterally assign, transfer and
deliver or otherwise encumber or dispose of the Revolving Note, this Agreement
and the other Credit Facility Documents and its rights and powers hereunder
and thereunder, in whole or in part, in
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connection with the a securitization or any other assignment or other
disposition of the Revolving Note and the Loans. Borrower may not, in whole or
in part, directly or indirectly, assign this Agreement or any Credit Facility
Document or its rights hereunder or thereunder or delegate its duties
hereunder or thereunder without, in each instance, the specific prior written
consent of Lender, which consent may be withheld or delayed in Lender's sole
discretion. For purposes of this Agreement, a change in control (whether by
stock sale, issuance or otherwise) shall constitute an assignment hereof.
11. FURTHER ASSURANCES: Borrower agrees at any time and from
time to time, at Borrower's sole cost and expense, to obtain, procure, execute
and deliver, file and affix or cause to be obtained, procured, executed,
delivered, filed and affixed such further agreements, bills of sale and
assignments, instruments, documents, warehouse receipts, bills of lading,
vouchers, invoices, notices, statements, writings (including financing
statements, and writings to correct any error or ambiguity in any Credit
Facility Document), powers (including stock and bond powers, and powers of
attorney), tax stamps and information, and to do or cause to be done all such
further acts and things (including the execution, delivery and filing of
financing statements, payment of filing fees and transfer, gains and recording
taxes) and do and cause to be done all such other acts as Lender may
reasonably request, from time to time, in its discretion. Without limiting the
foregoing, Borrower authorizes Lender to the extent permitted under the UCC to
execute and file, or file without Borrower's signature, any and all financing
statements, amendments thereto and continuations thereof as Lender deems
necessary or appropriate and Borrower shall pay and indemnify Lender for and
hold Lender harmless from any and all costs and expenses in connection
therewith. Borrower further agrees that it will promptly notify Lender of, and
agrees to correct, any defect, error or omission in the contents of any of the
Credit Facility Documents or in the execution, delivery or acknowledgement
thereof.
12. TERM: (a) This Agreement shall be binding upon and
enforceable against Borrower and Lender when executed by both such parties.
Upon indefeasible payment in full of the Obligations in accordance with the
terms thereof, this Agreement shall terminate and Lender, at Borrower's
expense, will transfer (without recourse, representation or warranty) such
Collateral as may be in Lender's possession, and not to be retained, sold, or
otherwise applied or released pursuant to this Agreement or any other Credit
Facility Document, to Borrower, except that the indemnification provisions of
Sections 2(c), 4(a)(xv) and 4(a)(xix) and the provisions of Sections 4(c)(x)
and 4(c)(xxi) shall survive indefinitely and the indemnification provisions of
Section 4(a)(xvii) and the provisions of Section 8 shall survive for the
periods specified therein. No
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termination of this Agreement or any other Credit Facility Document shall
relieve or discharge Borrower of its respective duties, obligations and
covenants under this Agreement or any other Credit Facility Documents until
all Obligations have been fully and finally discharged and paid, and Lender's
continuing security interest in the Collateral and the rights and remedies of
Lender hereunder, under the other Credit Facility Documents and applicable
law, shall remain in effect until all such Obligations have been fully and
finally discharged and paid.
(b) Not later than 45 days prior to the Expiry Date,
Borrower, at its option, may notify Lender in writing that Borrower desires to
extend the Expiry Date for a period of 12 months from the original Expiry
Date. In such notice, Borrower shall certify that no Default has occurred and
is continuing. The Expiry Date shall be extended pursuant to Borrower's
request provided (i) Lender shall have received the Extension Fee on or before
the date Borrower notifies Lender of its desire to extend the Expiry Date,
(ii) no Material Adverse Change or any event which is reasonably likely to
result in a Material Adverse Change shall have occurred and (iii) no Event of
Default shall have occurred and be continuing.
13. MISCELLANEOUS.
(a) FINAL AGREEMENT; AMENDMENTS, CONSENTS, AUTHORIZATIONS. THIS
AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN BORROWER AND LENDER AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF BORROWER AND LENDER. BORROWER UNDERSTANDS AND AGREES THAT ORAL
AGREEMENTS AND ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE. BORROWER ACKNOWLEDGES
AND AGREES THERE ARE NO ORAL AGREEMENTS BETWEEN BORROWER AND LENDER. This
Agreement and the Credit Facility Documents represent the entire understanding
of Lender and Borrower with respect to the transactions contemplated hereby
and thereby. None of the terms or provisions of this Agreement or any other
Credit Facility Document may be waived, altered, modified, or amended except
in each instance by a specific written instrument duly executed by Lender. Any
such waiver shall be enforceable only to the extent specifically set forth
therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future occasion,
whether similar in kind or otherwise. Without limiting the foregoing, no
action or omission to act shall be deemed to be a consent, authorization,
representation or agreement of Lender, under the UCC or otherwise, unless, in
each instance, the same is in a specific writing signed by Lender.
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6 (b) NOTICES. All notices and other communications given
pursuant to or in connection with this Agreement shall be in duly executed
writing delivered to the parties at the addresses set forth below (or such
other address as may be provided by one party in a notice to the other):
If to Lender:
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
55 East 52nd Street
New York, New York 10055
Attention: Laura Goldberg
(with a copy of each legal notice to:
Walter Fekula, Credit Department)
with a copy to:
BATTLE FOWLER LLP
75 East 55th Street
New York, New York 10022
Attn: Charles J. Hamilton, Jr., Esq.
If to Borrower, to Borrower's chief executive office (or
residence),
as represented to by Borrower herein:
Captec Net Lease Realty, Inc.
24 Frank Lloyd Wright Drive
Lobby L, 4th Floor
Ann Arbor, Michigan 48106-0544
Attention: W. Ross Martin
Notice delivered in accordance with the foregoing shall be effective (i) when
delivered, if delivered personally or by receipted-for telex, telecopier, or
facsimile transmission, (ii) two days after being delivered in the United
States (properly addressed and all fees paid) for overnight delivery service
to a courier (such as Federal Express) which regularly provides such service
and regularly obtains executed receipts evidencing delivery or (iii) five days
after being deposited (properly addressed and stamped for first-class
delivery) in a daily serviced United States mail box.
(c) REASONABLENESS. If at any time Borrower believes that Lender
has not acted reasonably in granting or withholding any approval or consent
under the Revolving Note, this Agreement, or any other Credit Facility
Document or otherwise with respect to the Obligations, as to which approval or
consent either Lender has expressly agreed to act reasonably, or absent such
agreement, a court of law having jurisdiction over the subject matter would
require Lender to act reasonably, then Borrower's sole remedy shall be to seek
injunctive relief or specific performance and no action
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for monetary damages or punitive damages shall in any event or under any
circumstance be maintained by Borrower against Lender. Lender shall not have
any liability to Borrower (whether in tort, contract, equity or otherwise) for
losses suffered by Borrower in connection with, arising out of, or in any way
related to the transactions or relationships contemplated by this Agreement,
or any act, omission or event occurring in connection herewith, unless and
only to the extent that it is determined by a final and non-appealable
judgment or court order binding on Lender, that the losses were the result of
acts or omissions constituting gross negligence or willful misconduct. In any
such litigation, Lender shall be entitled to the benefit of the rebuttable
presumption that it acted in good faith and with the exercise of ordinary care
in the performance by it of the terms of this Agreement.
(d) RECOVERY OF SUMS REQUIRED TO BE PAID. Lender shall have the
right from time to time to take action to recover any sum or sums which
constitute a part of the Obligations as the same become due, without regard to
whether or not the balance of the Obligations shall be due, and without
prejudice to the right of Lender thereafter to bring an action of foreclosure,
or any other action, for a default or defaults by Borrower existing at the
time such earlier action was commenced.
(e) WAIVERS. BORROWER HEREBY MAKES AND ACKNOWLEDGES THAT IT
MAKES ALL OF THE WAIVERS SET FORTH IN THIS AGREEMENT, THE Revolving Note AND
THE OTHER CREDIT FACILITY DOCUMENTS KNOWINGLY, INTENTIONALLY, VOLUNTARILY,
WITHOUT DURESS, AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF
SUCH WAIVERS WITH ITS ATTORNEY; BORROWER FURTHER ACKNOWLEDGES THAT SUCH
WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER TO MAKE THE LOAN TO BORROWER AND
THAT LENDER WOULD NOT HAVE MADE THE LOAN WITHOUT SUCH WAIVERS; AND BORROWER
HEREBY MAKES AND ACKNOWLEDGES THAT IT MAKES SUCH WAIVERS WITH RESPECT TO EACH
OTHER CREDIT FACILITY DOCUMENT.
(f) WAIVER OF TRIAL BY JURY. BORROWER HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES, AND LENDER BY ITS ACCEPTANCE OF THE Revolving Note AND
THIS AGREEMENT AND OTHER CREDIT FACILITY DOCUMENTS IRREVOCABLY AND
UNCONDITIONALLY WAIVES, ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION,
SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE RELATING
TO THE Revolving Note, THIS AGREEMENT, OR ANY OTHER CREDIT FACILITY DOCUMENT
OR THE OBLIGATIONS.
(g) WAIVER OF NOTICES. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and
notices of any kind or nature whatsoever with respect to the Obligations, the
Collateral and this Agreement and any Credit Facility Documents, except such
as are expressly provided for herein. No notice to or
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demand on Borrower which Lender may elect to give shall entitle Borrower to
any other or further notice or demand in the same, similar or other
circumstances. Without limiting the generality of the foregoing, Borrower
waives (A) notice prior to Lender's taking possession or control of any of the
Collateral or any bond or security which might be required by any court prior
to allowing Lender to exercise any of Lender's remedies, including the
issuance of an immediate writ of possession and (B) the benefit of all
valuation, appraisement and exemption laws.
(h) RELATIONSHIP. The relationship of Lender to Borrower hereunder is
strictly and solely that of secured commercial lender on the one hand and
commercial borrower on the other in a commercial transaction and nothing
contained in the Revolving Note, this Agreement or any other Credit Facility
Document or otherwise in connection with the Obligations is intended to
create, or shall in any event or under any circumstance be construed as
creating, a partnership, joint venture, tenancy-in-common, joint tenancy or
other relationship of any nature whatsoever between Lender and Borrower other
than as secured commercial lender on the one hand and commercial borrower and
guarantor on the other in a commercial transaction.
(i) WAIVER OF COUNTERCLAIMS. Borrower waives all rights to interpose
any claims, deductions, setoffs or counterclaims of any nature (other then
compulsory counterclaims) in any action or proceeding brought by Lender with
respect to the Revolving Note, this Agreement, any Credit Facility Documents,
the Obligations, the Collateral or any matter arising therefrom or relating
hereto or thereto.
(j) TIME IS OF THE ESSENCE. For all payments to be made and all
obligations to be performed under the Revolving Note, this Agreement and the
other Credit Facility Documents, time is of the essence.
(k) LIMITATION ON INTEREST. (1) NOTWITHSTANDING ANY OTHER PROVISION
HEREOF, IN NO EVENT SHALL THE AMOUNT OR RATE OF INTEREST (INCLUDING TO THE
EXTENT APPLICABLE ANY DEFAULT RATE INTEREST OR LATE PAYMENT CHARGE) PAYABLE,
CONTRACTED FOR, CHARGED OR RECEIVED UNDER OR IN CONNECTION WITH THE REVOLVING
NOTE OR ANY OTHER CREDIT FACILITY DOCUMENT, FROM TIME TO TIME OR FOR WHATEVER
REASON, EXCEED THE MAXIMUM RATE OR AMOUNT, IF ANY, SPECIFIED BY APPLICABLE LAW
("MAXIMUM INTEREST RATE"). In the event any interest is charged or received in
excess of the Maximum Interest Rate ("Excess"), Borrower acknowledges and
stipulates that any such charge or receipt shall be the result of an accident
and BONA FIDE error, and that any Excess received by Lender shall be applied,
first, to the payment of the then outstanding and unpaid principal hereunder;
second to the payment of the other Obligations then outstanding and unpaid;
and third, returned to Borrower, it being the intent of the parties hereto not
to enter into a usurious or
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otherwise illegal relationship. Borrower recognizes that such an unintentional
result could inadvertently occur. All monies paid to Lender under the
Revolving Note, hereunder or under any of the other Credit Facility Documents,
whether at maturity or by prepayment, shall be subject to any rebate of
unearned interest as and to the extent required by applicable law.
(2) By the execution of this Agreement, Borrower agrees that (i)
the credit or return of any Excess shall constitute the acceptance by Borrower
of such Excess, and (ii) Borrower shall not seek or pursue any other remedy,
legal or equitable, against Lender, based in whole or in part upon contracting
for, charging or receiving any interest or such amounts which are deemed to
constitute interest in excess of the Maximum Interest Rate. For the purpose of
determining whether or not any Excess has been contracted for, charged or
received by Lender, all interest at any time contracted for, charged or
received from Borrower in connection with the Revolving Note, this Agreement
or any of the other Credit Facility Documents shall, to the extent permitted
by applicable law, be amortized, prorated, allocated and spread during the
entire term of this Agreement in accordance with the amounts outstanding from
time to time hereunder and the Maximum Interest Rate from time to time in
effect in order to lawfully charge the maximum amount of interest permitted
under applicable laws.
(3) The provisions of this Section 13(k) shall be deemed to be
incorporated into each of the other Credit Facility Documents (whether or not
any provision of this Section is referred to therein). Each of the Credit
Facility Documents and communications relating to any interest owed by
Borrower and all figures set forth therein shall, for the sole purpose of
computing the extent of the Obligations, be automatically recomputed by
Borrower, and by any court considering the same, to give effect to the
adjustments or credits required by this Section.
(1) GOVERNING LAW; BINDING EFFECT. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York;
provided, however, the parties agree that the states listed on Schedule C are
the proper places to file financing statements with respect to the Collateral
and the laws of such states governing perfection and effect of perfection or
non-perfection of security interests in all collateral in which a security
interest is perfected by filing a financial statement under the UCC. This
Agreement shall be binding upon Borrower, and the heirs, devisees,
administrators, executives, personal representatives, successors, receivers,
trustees, and (without limiting Section 9 hereof) assigns, including all
successors in interest of Borrower in and to all or any part of the
Collateral, and shall inure to the benefit of Lender, and the successors and
assigns of Lender. Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the Supreme Court for New York County, New York
and the United States District Court for
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the Southern District of New York and waive any objection based on venue or
forum non conveniens with respect to any action instituted therein arising
under the Revolving Note, this Agreement or any of the other Credit Facility
Documents or in any way connected with or related or incidental to the
dealings of the parties hereto in respect of this Agreement or any of the
other Credit Facility Documents or the transactions related hereto or thereto,
in each case whether now existing or hereafter arising, and whether in
contract, tort, equity or otherwise, and agree that any dispute with respect
to any such matters shall be heard only in the courts described above (except
that Lender shall have the right to bring any action or proceeding against
Borrower or its property in the courts of any other jurisdiction which Lender
deems necessary or appropriate in order to realize on the Collateral or to
otherwise enforce its rights against Borrower or its property) . Borrower
hereby waives personal service of any and all process upon it and consents
that all such service of process may be made by certified mail (return receipt
requested) directed to its address set forth on the signature pages hereof and
service so made shall be deemed to be completed five (5) days after the same
shall have been so deposited in the U.S. mails, properly addressed and postage
prepaid, or, at Lender's option, by service upon Borrower in any other manner
provided under the rules of any such courts. Within thirty (30) days after
such service, Borrower shall appear in answer to such process, failing which
Borrower shall be deemed in default and judgment may be entered by Lender
against Borrower for the amount of the claim and other relief requested.
(m) SEVERABILITY. Whenever possible this Agreement, the Revolving
Note and each Credit Facility Document and each provision hereof and thereof
shall be interpreted in such manner as to be effective, valid and enforceable
under applicable law. If and to the extent that any such provision shall be
held invalid and unenforceable by any court of competent jurisdiction, such
holding shall not invalidate or render unenforceable any other provisions
hereof or thereof, and any determination that the application of any provision
hereof or thereof to any person or under any circumstance is illegal and
unenforceable shall not affect the legality, validity and enforceability of
such provision as it may be applied to any other person or in any other
circumstance.
(n) CAPTIONS; CONSTRUCTION. The headings, titles and captions used
herein are for convenience only and shall not affect the construction of this
Agreement or any term or provision hereof. The inclusion of an example by way
of illustration such as a parenthetical ("including . . .") shall not be
construed as or deemed a limitation on the generality of the general text to
which it refers. The terms Borrower and Lender shall include heirs, devisees,
executors, administrators, personal representatives,
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successors, receivers, trustees and assigns. The term Borrower as used in
Section 4 hereof shall refer to Borrower and its Affiliates.
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IN WITNESS WHEREOF, Lender and Borrower have caused these
presents to be duly executed as of the day and year first above
written.
Lender BORROWER
- ------ --------
CS FIRST BOSTON MORTGAGE CAPTEC NET LEASE
CAPITAL CORP. REALTY, INC.
By: /s/ Joy Margolies By:
----------------------- -----------------------
Name: Joy Margolies Name:
Title: Vice President Title:
Address: Chief Executive Office:
-------- -----------------------
55 East 52nd Street 24 Frank Lloyd Wright Drive
New York, New York 10055 Lobby L, 4th Floor
Ann Arbor, Michigan 48106
<PAGE> 72
IN WITNESS WHEREOF, Lender and Borrower have caused these
presents to be duly executed as of the day and year first above
written.
Lender BORROWER
- ------ --------
CS FIRST BOSTON MORTGAGE CAPTEC NET LEASE
CAPITAL CORP. REALTY, INC.
By: By: /s/ W. Ross Martin
----------------------- -----------------------
Name: Name: W. Ross Martin
Title: Title: Vice President
Address: Chief Executive Office:
- -------- -----------------------
55 East 52nd Street 24 Frank Lloyd Wright Drive
New York, New York 10055 Lobby L, 4th Floor
Ann Arbor, Michigan 48106
<PAGE> 73
APPENDIX A
DEFINED TERMS
-------------
"ACCOUNTS" shall have the meaning accorded to such term in the UCC
and shall include all present and future rights of Borrower in respect of the
Properties and the Leases to payment for goods sold or leased or for services
rendered, which are not evidenced by instruments or chattel paper, and whether
or not earned by performance.
"ACCRUED MARGIN" shall mean for any period the amount of accrued and
unpaid interest on the Revolving Loans equal to the positive difference, if
any, of (i) the aggregate unpaid interest on the Revolving Loans accrued
during such period at the Revolving Loan Rate, less (ii) the aggregate
scheduled Lease payments due in respect of the Leases during such period.
"AFFILIATE" means when used with any specified Person, (i) any Person
who controls, is controlled by, or is under common control with such Person,
(ii) any Person who is a director or officer of, partner in, trustee of, or
blood or legal relative, guardian or representative of the specified Person,
or any Person who acts or serves in a similar capacity with respect to the
specified Person, (iii) any Person of which or whom the specified Person is a
director or officer, partner, trustee, or blood or legal relative, guardian or
representative, or with respect to which or whom, the specified Person acts or
serves in a similar capacity; (iv) any Person, who, directly or indirectly, is
the legal or beneficial owner of or controls 5% or more of any class of equity
securities of the specified Person, and (v) any Person who is an Affiliate as
defined in clauses (i), (ii) , (iii) or (iv) of an Affiliate of the specified
Person.
"APPRAISAL" shall mean, with respect to a Property, an appraisal of
such Property prepared by the Appraisers.
"APPRAISED VALUE" shall mean, with respect to a Property, the value
of such Property as set forth in the Appraisal.
"APPRAISERS" shall mean any MAI certified appraiser approved by
Lender, which consent shall not be unreasonably withheld.
"ASSIGNMENT OF LEASES AND RENTS" means the Assignment of Leases and
Rents to be executed by Borrower and delivered to Lender as security for the
payment of the Obligations and constituting a first lien on all of Borrower's
right, title and interest now owned or hereafter acquired in and to all Leases
and all Rents, receipts, revenues and accounts pertaining to or derived from
the Properties, the form of which is attached hereto as Exhibit K.
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"BORROWER" means Captec Net Lease Realty, Inc., a Michigan
corporation.
"BUSINESS DAY" means any day except any Saturday, Sunday or any day
which shall be a legal holiday in New York City or a day on which banking
institutions in New York City are authorized or required by law or other
governmental action to close.
"BUSINESS FCCR" means, with respect to a Lessee, as of the date of
determination for any period, the quotient of (x) the Lessee's Cash Flow for
such period divided by (y) the sum of the Lessee's Indebtedness plus the
Lessee's Lease Obligations for such period. As used herein:
(i) "Lessee's Cash Flow" shall mean for any period an amount
equal to the difference of (1) the sum of (a) net income, plus (b)
depreciation, plus (c) amortization, plus (d) interest expense, plus
(e) Non-Recurring Expenses, minus (2) Non-Recurring Income, all as
reflected on the financial statement for the Lessee;
(ii) "Non-Recurring Expenses" and "Non-Recurring Income"
shall mean for any period expenses or income, as the case may be,
that is extraordinary and generally not reflected in any prior period
or reasonably anticipated to be incurred or received in any
subsequent period; and
(iii) "Lessee's Indebtedness" shall mean for any period the
payments of Indebtedness of the Lessee.
"CAPTEC" shall mean CAPTEC Financial Group, Inc., a Michigan
corporation.
"CLOSING DOCUMENTS" shall mean those documents set forth on Exhibit E
attached hereto and made a part hereof.
"COLLATERAL" means all of the now existing or hereafter acquired
right, title and interest of Borrower in and to (a) the Properties, (b) the
Leases, Lease Documents and Franchise Agreements, (c) all Rents, revenues,
receivables, other leases, easements, options, personal property and other
rights or property related to Borrower's ownership or operation of the
Properties and all other collateral pledged pursuant to any Collateral
Documents, (d) all General Intangibles, Accounts, certificates of title,
fixtures, money, instruments, securities, documents, chattel paper, credit
balances, deposits, deposit accounts, letters of credit, bankers' acceptances,
guaranties, credits, claims, choses in action, demands, and all present and
future liens, security interests, rights, insurance, remedies, title and
interest in, to and in respect of the property described in clauses (a), (b)
and (c) above, and all other personal property, now or hereafter owned,
acquired, held, used, sold or consumed in connection with the
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property described in clauses (a), (b) and (c) above, and any other property,
rights and interests of Borrower which at any time relate to, arise out of or
in connection with the property described in clauses (a), (b) and (c) above or
which shall come into the possession or custody or under the control of Lender
or any of its agents, representatives, associates or correspondents, for any
purpose; all additions thereto, substitutions therefor and replacements
thereof, all interest, income, dividends, distributions and earnings thereon
or other monies or revenues derived from the property described in clauses
(a), (b) and (c) above, including any such property received in connection
with any disposition thereof and all moneys which may become payable under any
policy insuring the Collateral or otherwise required to be maintained
hereunder (including return of unearned premium) ("Collateral Revenues"); and
all products and proceeds of the foregoing.
"COLLATERAL DOCUMENTS" shall mean the Closing Documents, the
Custodial Agreement, the Lockbox Agreement, and any other mortgage, deed of
trust, assignment of lease or other instrument, agreement, guaranty document,
certificate or other writing, now or hereafter executed and delivered to
secure the Obligations, as the same may be modified, amended, consolidated,
continued or extended, from time to time.
"COLLATERAL REVENUES" shall have the meaning ascribed to such term in
the definition of Collateral.
"COLLATERAL SCHEDULE" shall mean a schedule prepared by Borrower
listing all of the Properties and Leases constituting a part of the
Collateral, which schedule shall set forth or include for each Property listed
thereon the location and appraised value of the Property and for each Lease
listed thereon (i) the name of the Lessee and any guarantor under such Lease,
(ii) the original and remaining term of the Lease, (iii) a list of the Lease
Documents relating to such Lease and any amendments or modifications thereto.
"CONDEMNATION PROCEEDS" shall mean all compensation, awards, proceeds
received by the Borrower or on behalf of any Person as a result of
condemnation (which term shall include any damage or taking by any
governmental or quasi-governmental authority and any transfer by private sale
in lieu thereof), net of direct fees, costs (exclusive of overhead) and
disbursements incurred in connection with the collection thereof.
"COUNTY" means the county, parish, city or recording district where
financing statements are filed under the UCC with respect to security
interests in personal property (including fixtures).
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"Credit Event" shall mean the making of each Revolving Loan.
"CREDIT FACILITY AMOUNT" shall mean $100,000,000.
"CREDIT FACILITY DOCUMENTS" means the Revolving Note, this Agreement,
the Collateral Documents and any other instrument, agreement, guaranty
document, certificate or other writing, now or hereafter executed and
delivered in connection with the Obligations, as the same may be modified,
amended, consolidated, continued or extended, from time to time.
"CUSTODIAL AGREEMENT" shall mean the Custodial Agreement, dated as of
February 26, 1996, between Lender and the Custodian.
"CUSTODIAN" means Bankers Trust Company acting as Custodian and
Collateral Agent for Lender pursuant to the Custodial Agreement.
"DEFAULT RATE" shall have the meaning ascribed to such term in
Section 1(e) (iii) hereof.
"DEFAULTED LEASE" shall mean a Lease (a) as to which Borrower has
determined that eventual payment of amounts due thereunder is unlikely or (b)
which is a Delinquent Lease for which any amount due thereunder is overdue
(without taking into account any extension of the due date) for a period of
more than sixty (60) consecutive days.
"DISCOVERY DATE" shall have the meaning ascribed to such term in
Section 6(a) (i) hereof.
"EFFECTIVE DATE" shall mean the date on which each of Borrower and
Lender shall have executed and delivered this Agreement .
"ELIGIBLE TENANT" shall mean a Person operating under the tradename
of a Franchise System meeting the standards for a lease applicant set forth in
the Underwriting Guidelines.
"ENVIRONMENTAL LAWS" shall mean all federal, state, district, local
and foreign laws, rules, regulations, ordinances, and consent decrees relating
to health, safety, hazardous substances, pollution and environmental matters,
as now or at any time hereafter in effect, applicable to Borrower's business
and facilities (whether or not owned by it), including laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contamination, chemicals, or hazardous, toxic or dangerous substances,
materials or wastes into the environment (including, without limitation,
ambient air, surface water, ground water, land surface or subsurface strata)
or otherwise relating to the generation, manufacture, processing,
distribution, use,
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treatment, storage, disposal, transport or handling of pollutants,
contaminants, chemicals, or hazardous, toxic or dangerous substances,
materials or wastes.
"ERISA" shall have the meaning ascribed to such term in Section 4(a)
(xiii) hereof.
"EVENT OF DEFAULT" shall have the meaning ascribed to such term in
Section 6 hereof.
"EXCESS" shall have the meaning ascribed to such term in Section
13(k) hereof.
"EXIT FEE" shall have the meaning ascribed to such term on Schedule B
hereto.
"EXPIRY DATE" shall mean the second anniversary of the date of this
Agreement, unless such date shall be extended in accordance with the
provisions of Section 12(b) hereof.
"EXTENSION FEE" shall have the meaning ascribed to such term on
Schedule B hereof.
"FILING COLLATERAL" shall have the meaning ascribed to such term in
Section 4(a) (vii) hereof.
"FILING OFFICES" shall have the meaning ascribed to such term in
Section 4(a) (vii) hereof.
"FINANCING STATEMENTS" mean the financing statements on Form UCC-1
copies of which are attached hereto as Exhibit H.
"FRANCHISE AGREEMENT" means a Franchise Agreement between an Eligible
Tenant and a Franchise System.
"FRANCHISE SYSTEM" shall have the meaning ascribed to such term in
the Preliminary Statement.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the
American Institute of Certified Public Accountants and the statements and
pronouncements of the Financial Accounting Standards Boards which are
applicable to the circumstances as of the date of determination consistently
applied on and after the date hereof.
"GENERAL INTANGIBLES" shall have the meaning accorded to such term in
the UCC and with respect to the Borrower shall be limited to the property
described in clauses (a), (b) and (c) of the definition of Collateral and
shall include Borrower's interest in any agreements, contracts, writings,
memoranda, confirmations, passbooks, signature cards, acknowledgements,
understandings,
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contract rights, licenses, leases, permits, filings, consents, and approvals,
and all puts, calls, options, warrants, and securities, and all tax and duty
refunds, and all security interests, patents, inventions, processes, lists
(including customer and suppliers lists), methods, l and information
(including proprietary information, member lists and information concerning
members, sales, business, financial, accounting, forecasts, projections,
media, and other information), know how, software, programs, plans, data,
blueprints, designs, drawings, surveys, notices, copyrights, trademarks, trade
names, trade secrets, service marks, service names, logos and goodwill, going
concern value, and market share value and all recordings and registrations
thereof, applications for recording or registration, renewals, modifications,
supplements, reissues, continuations, extensions, divisions thereof and rights
corresponding thereto, and all manuals, standards, practices, mail,
advertisements, files, reports, books, catalogs, records, journals, invoices,
and bills, and all rights (including voting rights, rights to receive notice
or to consent, rights to payment, interest, dividends, distributions or
earnings, rights to sue and enforce), powers (including powers of attorney),
privileges, benefits, and remedies relating thereto or arising in connection
with the property described above.
"HAZARDOUS MATERIAL INDEMNIFICATION" shall mean the hazardous
material indemnification agreement to be executed and delivered by Borrower,
the form of which is attached hereto as Exhibit L.
"INDEBTEDNESS" means all indebtedness (including reimbursement,
subrogation, or contribution obligations and any other indebtedness assumed or
guaranteed) in respect of money borrowed, whether evidenced by a note
(including the Revolving Note) or other like written obligation to pay money,
or deferred purchase price or constituting an capitalized lease obligation or
otherwise and will include all obligations and accruals to the extent due and
payable or incurred outside the ordinary course of business)
"INDEPENDENT ACCOUNTANT" shall mean Coopers & Lybrand or such other
firm of independent accountants approved by Lender.
"INFORMATION CERTIFICATE" shall mean the Information Certificate of
Borrower constituting Exhibit F hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and
the other Credit Facility Documents and the financing arrangements provided
for herein.
"INITIAL BORROWING DATE" means the date on which the initial
Revolving Loan is made.
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"INSURANCE PROCEEDS" shall mean any amounts received upon settlement
of a claim filed with an Insurance Policy (including proceeds of title
insurance), net of direct fees, costs (inclusive of overhead) and
disbursements incurred in connection with the collection thereof.
"LEASE" means a lease between Borrower and a Lessee for leasing of a
Property.
"LEASE DOCUMENTS" shall mean with respect to a Lease, the Lease and
those other instruments, agreements, guarantys, documents, certificates or
other writings, now or hereafter executed and delivered by a Lessee in respect
of such Lease, as the same may be modified, amended, consolidated, continued
or extended from time to time.
"LENDER" shall mean CS First Boston Mortgage Capital Corp., a
Delaware corporation, its successors and assigns.
"LESSEE" shall mean an Eligible Tenant under a Lease, and its
successors and assigns.
"LIBOR RATE" means, at any time, a rate per annum equal to the rate
for U.S. dollar deposits with 30-day maturities which appears on Telerate Page
5 as of the last Business Day of the preceding month. The term "Telerate Page
5" means the display designated as "Page 5" on the Associated Press-Dow Jones
Telerate Service (or such other page as may replace Page 5 on the Associated
Press-Dow Jones Telerate Service or such other service as may be nominated by
the British Bankers' Association as the information vendor for the purpose of
displaying British Bankers' Association interest settlement rates for U.S.
dollar deposits). Any LIBOR Rate determined on the basis of the rate displayed
on Telerate Page 5 in accordance with the foregoing provisions of this
subparagraph shall be subject to corrections, if any, made in such rate and
displayed by the Associated Press-Dow Jones Telerate Service within one hour
of the time when such rate is first displayed by such Service. Each
determination of the LIBOR Rate made by Lender shall be conclusive and binding
upon Borrower absent manifest error. Interest at the applicable LIBOR Rate
from time to time shall be calculated for the actual number of days elapsed on
the basis of a 360-day year.
"LIQUID ASSETS" shall mean (i) cash or (ii) negotiable securities or
trade receivables having a maturity of not greater than 90 days.
"LOAN" shall mean and include each Revolving Loan and the Term Loan.
"LOAN TO VALUE REQUIREMENT" shall have the meaning ascribed to such
term in Section 3(e) (ii) hereof.
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"LOCKBOX ACCOUNT" shall mean the account by that name created,
maintained and disbursed, from time to time, in accordance with Section 5
hereof.
"LOCKBOX AGREEMENT" shall mean the Lockbox Agreement, dated as of the
date hereof, between Borrower, Lender and the Custodian.
"MANAGEMENT AGREEMENT" shall mean the Management Agreement, dated
October 10, 1994, by and between Borrower and Captec Net Lease Realty
Advisors, Inc.
"MARGIN STOCK" shall have the meaning accorded to such term in
Regulation U, T or X of the Federal Reserve Board.
"MATERIAL ADVERSE CHANGE" shall have the meaning ascribed to such
term in Section 3(i) hereof.
"MAXIMUM INTEREST RATE" shall have the meaning ascribed to such term
in Section 13(k) hereof.
"MONTHLY INTEREST PERIOD" shall mean for each month the period
commencing on the first day of such month and ending on the last day of such
month.
"MORTGAGES" shall mean the fully cross defaulted and cross
collateralized blanket mortgages and deeds of trust constituting a first lien
on the fee and leasehold estates of Borrower in all Properties to be executed
and delivered by Borrower from time to time to or for the benefit of Lender as
security for the payment of the Obligations, the form of which is attached
hereto as Exhibit M.
"NOTICE OF BORROWING" shall have the meaning ascribed to such term in
Section 1(b) hereof.
"OBLIGATIONS" mean all of Borrower's Indebtedness, obligations and
liabilities of every kind, nature and description now or hereafter owing by
Borrower to Lender, including those evidenced by, arising under or in
connection with the Revolving Note (including indebtedness, obligations and
liabilities in respect of principal, interest, this Agreement, or any other
Credit Facility Document, and any future advances thereon, renewals,
extensions, modifications, amendments, substitutions and consolidations
thereof, or any other agreement with Lender, including Borrower's obligations
to pay (or reimburse Lender for) all costs and expenses (including attorneys
fees and disbursements) incurred by Lender in obtaining, maintaining,
protecting and preserving its interest in the Collateral or its security
interest therein, foreclosing, retaking, holding, preparing for sale or lease,
selling or otherwise disposing or realizing on the Collateral or in exercising
its rights hereunder or as secured
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party under the UCC, any other applicable law, regulation or rule or this
Agreement and all other indebtedness, obligations and liabilities of any kind
of Borrower to Lender, now or hereafter existing (including future advances
whether or not pursuant to commitment), arising directly between Borrower and
Lender or acquired outright, conditionally or as collateral security from
another, absolute or contingent, joint and/or several, secured, due or not
due, contractual or tortious, liquidated or unliquidated, arising by operation
of law or otherwise, or direct or indirect, including Borrower's liabilities
to Lender as a member of any partnership, syndicate, association or other
group, and whether incurred by Borrower as principal, surety, indorser,
guarantor, accommodation party or otherwise.
"OPERATIONS POLICY MANUAL" means Borrower's policies for servicing
leases and loans attached hereto as Exhibit N, as the same may be modified
from time to time with the approval of Lender.
"PAYMENTS TO AFFILIATES" shall mean all all salaries, fees and other
compensation, and all reimbursement or indemnification, directly or
indirectly, paid or payable to (or for the benefit of) any Affiliate of
Borrower, other than a Person who is an officer of Borrower and is not
otherwise an Affiliate of Borrower. Payments to Affiliates shall include any
payment or reimbursement of travel and entertainment expenses, automobiles
expenses, and premiums or expenses associated with any insurance policy other
than those expressly required to be maintained hereby. Payments to Affiliates
shall exclude payments to Captec Net Lease Realty Advisors, Inc. pursuant to
the Management Agreement.
"PERMITTED ENCUMBRANCES" has the meaning ascribed to such term in
Section 4(c) (iii) hereof.
"PERMITTED TITLE EXCEPTIONS" shall have the meaning ascribed to such
term in Section 4(c) (iii) hereof.
"PERSON" shall mean any natural person, corporation, partnership,
association, firm, trust, limited liability company, or other entity or any
government, governmental agency or regulatory authority or instrumentality or
any subdivision thereof.
"PRELIMINARY STATEMENT" shall mean the paragraphs of this Agreement
preceding Section 1 hereof and captioned "Preliminary Statement."
"PROPERTY" shall mean all now owned and hereafter acquired real
property of Borrower which Borrower encumbers with a Mortgage in favor of
Lender pursuant to this Agreement, including leasehold interests, together
with all buildings, structures, and other improvements located thereon and all
licenses, easements, appurtenances and related assets relating thereto.
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"RENTS" shall mean, with respect to a Property, all rents, income and
profits arising from the related Lease and renewals thereof and together with
all rents, income and profits for the use and occupation of the Property.
"REQUIRED DUE DILIGENCE MATERIALS" shall mean, with respect to a
Property, all materials specified on Exhibit B hereto.
"REVOLVING LOAN" shall have the meaning ascribed to such term in
Section 1(a) hereof.
"REVOLVING LOAN RATE" means an rate per annum equal to the LIBOR Rate
plus 2.318%.
"REVOLVING NOTE" shall have the meaning ascribed to such term in
Section 1(d) (i) hereof.
"SECURITIZATION" shall have the meaning ascribed to such term in
Section 4(c) (xviii) hereof.
"STANDARD FORM DOCUMENTS" shall mean the standard form of Lease and
other Lease Documents used by Borrower when originating Leases and attached
hereto as Exhibit O.
"STATE" shall mean each state from which Borrower operates its
business.
"STRUCTURING FEE" shall have the meaning ascribed to such term on
Schedule B hereto.
"SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT" shall mean,
with respect to each Lease, a Subordination, Non-Disturbance and Attornment
Agreement, executed and delivered by the Borrower and the Lessee for the
benefit of Lender in substantially the form attached hereto as Exhibit P.
"UCC" means the Uniform Commercial Code of the State.
"UCC SEARCH" means the security interest, tax lien, suit and judgment
search of Borrower conducted in the State and the County.
"UNDERWRITING GUIDELINES" means the Borrower's guidelines for
originating leases and loans attached hereto as Exhibit Q, as the same may be
modified from time to time with the approval of Lender.
A-10
<PAGE> 83
LIST OF SCHEDULES
-----------------
Schedule A - List of Franchise Systems
Schedule B - Fees
Schedule C - List of Filing Offices
Schedule D - Recording Jurisdictions
Schedule E - Capitalization of Borrower
Schedule F - List of Borrower Affiliates
<PAGE> 84
SCHEDULE A
LIST OF FRANCHISE SYSTEMS
-------------------------
Tier I Tier II
------ -------
Applebee's Carl's Jr.
Arby's Carrow's
Boston Market Church's
Burger King Coco's
Chili's Eastside Mario's
Denny's Golden Corral
Hardees Houlihan's
Jack In The Box Kenny Rogers Roasters
KFC Parkins
Pizza Hut Popeye's
Red Robin Shoney's
Taco Bell Sonic
TGI Friday's Taco Cabana
Wendy's
In addition to the concepts named above, as amended from time to time,
Eligible Tenants may fall outside of the named concepts in an amount in
aggregate equal to up to 10% of the Credit Facility Amount.
<PAGE> 85
SCHEDULE A (Continued)
LIST OF SPECIALTY RETAIL AND NON-FRANCHISED RESTAURANT
------------------------------------------------------
CONCEPTS
--------
Specialty Retail Non-Franchised Restaurant
- ---------------- -------------------------
Aaron Rents Roadhouse Grill
Barnes & Noble Stanford's
Best Buy
Blockbuster Video
Borders Group, mc
Circuit City
CompUSA
Hastings Bookstores
Hollywood Video
Just For Feet
Michael's Crafts
Office Depot
OfficeMax
Pier 1 Imports
Rite Aid/Revco
7-Eleven
Sports Authority
Staples, Inc.
Walgreens
Winn Dixie
In addition to the concepts named above, as amended from time to time,
Eligible Tenants may fall outside of the named concepts in an amount in
aggregate equal to up to 10% of the Credit Facility Amount.
<PAGE> 86
SCHEDULE B
FEES
----
STRUCTURING FEE. In consideration of Lender structuring and
originating the financing effected by Borrower pursuant to this Agreement,
Borrower shall pay to Lender a non-refundable structuring fee (the
"Structuring Fee") equal to 1% of the Credit Facility Amount, less any good
faith deposit delivered by Borrower to Lender. The Structuring Fee shall be
payable and non-refundable on the Effective Date.
EXTENSION FEE. Borrower shall pay to Lender, as a condition precedent
to any extension of the Expiry Date in accordance with Section 12(b) hereof, a
fee (the "Extension Fee") equal to 0.5% of the Credit Facility Amount, which
Extension Fee shall be payable and non-refundable on each date Borrower
provides notice to extend the Expiry Date pursuant to Section 12(b) hereof.
EXIT FEE. On the date on which Borrower or any of its Affiliates
completes an initial public offering (the assets of which company includes any
Properties or Leases) or any refinancing, Securitization or other disposition
of the Properties or the Leases, including the assignment of the Properties or
the Leases to any Affiliate upon prepayment of the Revolving Loans (any of the
foregoing a "Refinancing"), in which Borrower does not utilize Lender or an
Affiliate of Lender as the lead or managing underwriter or investment banker
(other than after a Refinancing structured and marketed by Lender or any of
its Affiliates and which Refinancing has failed to close due to the inability
of Lender or an Affiliate of Lender to complete such Refinancing), Borrower
shall pay to Lender a fee (the "Exit Fee") equal to 1.4% of the Credit
Facility Amount.
-1-
<PAGE> 87
SCHEDULE C
----------
FILING OFFICES
Michigan Secretary of State's Office
Michigan Department of State
UCC Unit
P.O. Box 30197
Lansing, MI 48909-7697
For overnight delivery:
Michigan Department of State
Secondary Complex
7064 Crowner Dr.
Dimondale, MI 48821
517/322-1144
517/322-5434 - Fax
Washtenaw County, Michigan - County Clerk's Office
County Courthouse
P.O. Box 8645
Ann Arbor, MI 48107-8645
313/994-2506
313/994-2592 - Fax
<PAGE> 88
SCHEDULE D
----------
RECORDING JURISDICTIONS
[TO BE DETERMINED]
<PAGE> 89
SCHEDULE E
----------
BORROWER'S SHAREHOLDERS
Common Stock (Voting)
- ---------------------
Captec Financial Group, Inc.
Patrick L. Beach
W. Ross Martin
George R. Beach
Michigan Corp.
Redeemable Preferred Stock (Non-Voting Stock)
- ---------------------------------------------
The Public Institution for Social Security
<PAGE> 90
SCHEDULE F
----------
AFFILIATES
Captec Financial Group, Inc.
<PAGE> 91
LIST OF EXHIBITS
----------------
Exhibit A - Notice of Borrowing
Exhibit B - Required Due Diligence Materials
Exhibit C - Form of Revolving Note
Exhibit D - Revolving Loan Conditions
Exhibit E - Closing Documents
Exhibit F - Information Certificate
Exhibit G - UCC Searches
Exhibit H-1 - Form of Quarterly Compliance Certificate
Exhibit H-2 - Form of Annual Compliance Certificate
Exhibit I - Servicing Provisions
Exhibit J - Release Certificate
Exhibit K - Form of Assignment of Leases and Rents
Exhibit L - Form of Hazardous Material Indemnification
Exhibit M - Form of Mortgages
Exhibit N - Operations Policy Manual
Exhibit O - Standard Form Documents
Exhibit P - Form of Subordination, Non-Disturbance and
Attornment Agreement
Exhibit Q - Underwriting Guidelines
<PAGE> 92
EXHIBIT A
---------
NOTICE OF BORROWING
CS First Boston Mortgage Capital Corp.
55 East 52nd Street, 6th Floor
New York, New York 10055
___________, 199_
Ladies and Gentlemen:
The undersigned, Captec Net Lease Realty, Inc., a Michigan corporation
(the "Borrower") refers to the Credit Agreement (the "Credit Agreement"), dated
as of February 26, 1996, between the Borrower and CS First Boston Mortgage
Capital Corp. ("Lender") and hereby gives you notice pursuant to Section 1(b) of
the Credit Agreement that the undersigned hereby requests a loan under the
Credit Agreement, and in that connection sets forth below the information
relating to such Loan (the "Revolving Loan") as required by Section 1(b) of the
Credit Agreement. Capitalized terms used but not defined herein shall have the
definitions attributed to such terms in the Credit Agreement.
(i) The funding date of the Revolving Loan is _______________ __,
19__.
(ii) The aggregate principal amount of the Revolving Loan is $________.
(iii) The proceeds of the Revolving Loan are to be advanced to the
undersigned in connection with the origination by Borrower of the following
Leases:
Lessee Amount
------ ------
<PAGE> 93
The undersigned hereby certifies that the representations and warranties
contained in Sections 4(a) and (b) of the Credit Agreement and in the other
Credit Facility Documents, certificates or other writings delivered to Lender
pursuant thereto are correct in all material respects and no Event of Default or
event which with the giving of notice or lapse of time or both, would constitute
an Event of Default has occurred or is continuing as of the date first written
above.
The proceeds of the Revolving Loan shall be wire transferred to Borrower
in accordance with the following instructions:
Michigan National Bank
395 Briarwood Circle
Ann Arbor, Michigan 48108
ABA# 072000805
Captec Net Lease Realty, Inc.
Account# 4825-17708-4
Very truly yours,
CAPTEC NET LEASE REALTY, INC.
By:
-----------------------
Name:
Title:
<PAGE> 94
EXHIBIT B*
----------
(REQUIRED DUE DILIGENCE MATERIALS)
1. Certified copy of the tease.
2. *** [Certified copy of the Ground Lease]***1
3. ***[Certified copy of sublease under the Ground Lease (the "Sublease")]
***1
4. Any Guaranty in respect to the Lease or Ground Lease.
5. ***[Certified copy of the Franchise Agmeement]***1
6. Estoppel Certificate from Lessee ***[ground lessor under the Ground
Lease; sublessee under the Sublease]***1 to Lender.
7. Phase I environmental audit.
8. ***[Phase II environmental audit and remediation plan.] ***1
9. Evidence of compliance with zoning and other land use requirements,
ordinances, rules, regulations and restrictions.
10. Permanent or temporary certificate(s) of occupancy and all other
licenses, permits and approvals required for the use and operation of
the Property.
11. ***[Report of independent inspecting engineer with respect to the
building.]***1
12. The Survey.
13. The Appraisal.
14. Commitment for a Title Policy (as defined hereafter) issued by Title
Companies (as defined hereafter) to Lender, together with copies of all
exceptions to title and all required endorsements.
- -----------------
* All terms used in this Exhibit but not defined in this Exhibit have the
meaning given to them in the Agreement.
1 If applicable.
B-1
<PAGE> 95
15. Form of certificates of property and liability insurance showing Lender
as "additional insured" or "loss payee" in connection with the
Property.
16. Evidence satisfactory to Lender that the Property is not located in a
federally designated special flood hazard area (i.e., certificate in
satisfactory form from a licensed surveyor, appraiser, professional
engineer or other qualified person or party) or in the alternative an
acceptable flood insurance policy.
17. UCC-l Financing Statement Searches.
18. Satisfaction and termination of existing lien and encumbrances on the
Property, including UCC-3 Termination Statements, as applicable.
19. Form of opinion letter of Borrower's in-house counsel to Lender.
20. Form of opinion letter of local counsel for Borrower to Lender.
21. Material agreements, instruments, documents, certificates or other
items relating to the Lease or the Property.
B-2
<PAGE> 96
EXHIBIT C
---------
<PAGE> 97
REVOLVING NOTE
--------------
$100,00,00 February 26, 1996
New York, New York
FOR VALUE RECEIVED, CAPTEC NET LEASE REALTY, INC., a Michigan
corporation, having an address and principal place of business located at 24
Frank Lloyd Wright Dr., Lobby L, 4th Floor, Ann Arbor, Michigan 48106-0544
("Borrower") promises to pay to the order of CS FIRST BOSTON MORTGAGE CAPITAL
CORP., a Delaware corporation having an address and principal place of business
located at 55 East 52nd Street, 6th Floor, New York, NY 10055, its successors
and assigns, ("Lender"), at such address or at such other place as may be
designated in writing by the holder of this Revolving Note, the principal sum of
ONE HUNDRED MILLION and xx/100 ($100,000,000.00) DOLLARS, or so much thereof as
shall be advanced from time to time pursuant to that certain Credit Agreement
(the "CREDIT AGREEMENT") between Borrower and Lender dated as of the date hereof
(the "PRINCIPAL AMOUNT"), which sum shall be payable in lawful money of the
United States of America, as hereinafter set forth, and to pay to Lender all
other Obligations when and as due pursuant to the Credit Facility Documents. All
terms used herein and not otherwise defined shall have the meaning accorded to
such terms in the Credit Agreement. This Revolving Note is entitled to the
benefits of and is secured by the pledge, liens, security, title, rights and
security interests in the Collateral as granted under the other Credit Facility
Documents, as the same may be amended, supplemented or renewed, from time to
time.
I. PAYMENTS OF PRINCIPAL AND INTEREST. A. PRINCIPAL PAYMENTS.
Borrower shall pay to Lender the entire amount of indebtedness evidenced by this
Revolving Note on the Expiry Date.
B. INTEREST PAYMENTS. Borrower shall pay to Lender interest on the
aggregate Principal Amount outstanding from time to time hereunder computed at
the Revolving Loan Rate. Such interest shall be calculated on the basis of the
actual number of days elapsed over a year of 360 days and shall be paid, for as
long as any amount is outstanding hereunder, (i) on the fifteenth day of each
calendar month (or, if such day is not a Business Day, the next succeeding
Business Day) commencing March 15, 1996 in an amount equal to all interest
accrued in the preceding Monthly Interest Period and (ii) on any prepayment
hereof (on the amount prepaid), at maturity (whether on the Expiry Date, by
acceleration or otherwise) and, after such maturity, on demand. Immediately upon
and during the continuation of an Event of Default, interest will accrue on the
unpaid Principal Amount outstanding hereunder at a rate of 2% in excess of the
Revolving Loan Rate (the "DEFAULT
<PAGE> 98
RATE"), but in no event shall Borrower's interest payment obligations exceed the
limitations set forth in paragraph 7 below.
C. TIMING OF PAYMENTS. Whenever a payment to be made under this
Revolving Note becomes due and payable on a day which is not a Business Day such
payment shall be made on the next succeeding Business Day, with such extension
of time being included in the computation and payment of interest with respect
to such date.
D. LATE PAYMENT CHARGE. If Lender has not received within ten (10) days
of any Payment Date or the Expiry Date, or on any other date on which any
payment is due (whether be acceleration or otherwise) the full amount due on
such Payment Date, Expiry Date or other date, as the case may be, Borrower shall
pay to the order of Lender, promptly on demand, a late payment charge in the
amount of the product of (x) the difference between the (1) the amount due on
any such due date and (2) the amount actually received on such due date
multiplied by (y) 0.02.
E. PREPAYMENT. Borrower shall have the right to prepay all or a portion
of the principal indebtedness in accordance with the terms and provisions of
Section 2(a) of the Credit Agreement and shall be required to prepay principal
indebtedness in accordance with the terms and provisions of Sections 4(c)(xiii)
and 4(c)(xvii) of the Credit Agreement.
F. APPLICATION OF PAYMENTS. Payments made under this Revolving Note
shall be applied in the following order: (i) to accrued and unpaid interest,
(ii) to the unpaid and outstanding Principal Amount.
II. FEES. Borrower acknowledges and confirms that certain fees,
including, but not limited to, a Structuring Fee, an Extension Fee and an Exit
Fee, are (or may be) owing and are (or may become) payable in accordance with
the Credit Agreement. Borrower hereby acknowledges and agrees to pay,
immediately, with or without demand, all such fees (as the same may be increased
or decreased from time to time), and any additional fees of a similar type or
nature which may be imposed by Lender from time to time, upon the occurrence of
any event which entitles Lender to any such fees.
III. SECURED NOTE. This Revolving Note is secured by the Credit
Facility Documents and the Collateral.
IV. TRANSFER. This Revolving Note is assignable by Lender subject
to the terms set forth in Section 10 of the Credit Agreement. Upon the
assignment of this Revolving Note, Lender may deliver all the collateral
security therefor, or any part thereof, to the transferee who shall thereupon
become vested with all the rights herein or under applicable law given to Lender
with respect thereto, and Lender shall thereafter forever be relieved and fully
discharged from any liability or responsibility in the matter; but Lender shall
retain all fights hereby given to it with respect to any Obligations and such
collateral not so transferred.
2
<PAGE> 99
V. LIMITATION ON INTEREST. NOTWITHSTANDING ANY OTHER PROVISION
HEREOF, IN NO EVENT SHALL THE AMOUNT OR RATE OF INTEREST (INCLUDING TO THE
EXTENT APPLICABLE ANY DEFAULT RATE INTEREST OR LATE PAYMENT CHARGE) PAYABLE,
CONTRACTED FOR, CHARGED OR RECEIVED UNDER OR IN CONNECTION WITH THIS REVOLVING
NOTE, FROM TIME TO TIME OR FOR WHATEVER REASON, EXCEED THE MAXIMUM RATE OR
AMOUNT, IF ANY, SPECIFIED BY APPLICABLE LAW. If from any circumstance whatsoever
fulfillment of any provision hereof or of such other Credit Facility Documents
or other documents or Obligations at the time performance of such provision
shall be due, shall involve transcending the limit of such validity, and if from
any such circumstance Lender shall ever receive an amount deemed interest by
applicable law which shall exceed the highest lawful rate, such amount which
would be excessive interest shall be applied to the reduction of the Principal
Amount owing hereunder or on account of any other principal indebtedness of the
undersigned to Lender, and not to payment of interest or if such excessive
interest exceeds the unpaid balance of principal hereof and such other
indebtedness, the excess shall be refunded to Borrower. All sums paid or agreed
to be paid by the Borrower for the use, forbearance or detention of the
indebtedness of the Borrower to Lender shall, to the extent permitted by
applicable law, be amortized, prorated, allocated and spread throughout the full
term of such indebtedness until payment in full so that the actual rate of
interest on account of such indebtedness is uniform through the term hereof. The
terms and provisions of this paragraph shall control and supersede every other
provision of all agreements between the Borrower and Lender and all Obligations
of Borrower to Lender.
VI. SET OFF. In addition to any right available to Lender under
applicable law or any other agreement, Borrower hereby gives to Lender a lien
on, security interest in and right of set-off of all moneys, securities and
other property of Borrower and the proceeds thereof, now or hereafter delivered
to remain with or in transit in any manner to Lender, its correspondents or its
agents from or for Borrower, whether for safekeeping, custody, pledge,
transmission, collection or otherwise or coming into possession of Lender in any
way, and also, any balance of any deposit account and credits of Borrower with,
and any and all claims of Borrower against, Lender at any time existing, as
collateral security for the payment of this Revolving Note and of all
Obligations now or hereafter owed by Borrower to Lender in connection therewith,
including fees contracted with or acquired by Lender, whether joint, several,
direct, indirect, absolute, contingent, secured, matured or unmatured (all of
which are hereafter collectively called "LIABILITIES"), hereby authorizing
Lender at any time or times, without prior notice, to apply such balances,
credits or claims, or any part thereof, to such Liabilities in such amounts as
it may select, whether contingent, unmatured or otherwise and whether any
collateral security therefore is deemed adequate or not. The collateral security
described herein shall be in addition to any collateral security described in
any separate agreement executed by Borrower. Lender, in addition to any right
available to it under applicable law or any other agreement, shall have the
right, at its option, to immediately set off against this Revolving Note and/or
any Liabilities all monies owed by Lender in any capacity to Borrower, whether
or not due, and Lender shall, at its option, be deemed to have exercised such
right to set off and to have made a charge against any such
3
<PAGE> 100
money immediately upon the occurrence of any events of default set
forth below, even though such charge is made or entered on the books of Lender
subsequent to those events.
VII. WAIVERS AND SPECIAL AGREEMENTS: BORROWER HEREBY MAKES AND
ACKNOWLEDGES THAT IT MAKES ALL OF THE WAIVERS AND SPECIAL AGREEMENTS ("WAIVERS")
SET FORTH IN THIS REVOLVING NOTE KNOWINGLY, INTENTIONALLY, VOLUNTARILY, WITHOUT
DURESS, AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF SUCH
WAIVERS WITH ITS ATTORNEY; BORROWER FURTHER ACKNOWLEDGES THAT BORROWER
UNDERSTANDS THE RIGHTS BEING WAIVED AND THAT THE WAIVERS ARE A MATERIAL
INDUCEMENT TO LENDER TO MAKE THE LOAN TO BORROWER; THAT THE TERMS OF THE LOAN
ARE FAVORABLE TO BORROWER AND THAT LENDER WOULD NOT HAVE MADE THE LOAN ON SUCH
TERMS WITHOUT SUCH WAIVERS. Borrower and any and all obligors, sureties,
guarantors and endorsers of this Revolving Note and all other parties now or
hereafter liable hereon jointly and severally, with respect to this Revolving
Note and all other Credit Facility Documents (i) acknowledge that the
transaction of which this Revolving Note is a part is part of a commercial
transaction, (ii) waive any and all (from time to time) (a) rights to notice and
hearing under any state or federal law with respect to any prejudgment remedy
which the desire to use, from time to time, and (b) grace, diligence, demand,
presentment for payment, protest, notice of any kind (including, notice to
sureties, disclosure of facts which materially increase risks, notice of
protest, acceptance, liability, suit, demand, or action, dishonor, payment or
nonpayment, protest, intention to accelerate or acceleration, extension or
renewal) except as otherwise expressly required in the Credit Facility
Documents, surety defenses of any kind (including defenses relating to
impairment of recourse, release or modification of underlying obligation,
extension of time, impairment of collateral, nondisclosure), rights of appraisal
of any security or collateral for any Obligation or guaranteed obligation and
diligence in collecting and bringing suit against any party; and (iii) agree (a)
to all extensions of any Obligation or guaranteed obligations (including
rescheduling and recalculation of amortization), in whole or in part, from time
to time, or any partial payments, with or without notice, before or after
maturity, (b) to any one or more substitutions, exchanges or releases of any or
all security, now or hereafter given for any Obligation, (c) to any and all
releases, from time to time, of any and all parties primarily, secondarily or
otherwise liable for any Obligation or guaranteed obligation, (d) that it is not
(and at no time will be) necessary for Lender, or any other holder, transferee,
obligee or beneficiary of any note or Obligation or guaranteed obligation (or
any interest therein) (collectively, "OBLIGEE"), in order to enforce such note
or Obligation, to first institute or exhaust such Person's remedies against any
borrower or other Person or against any collateral or other security for such
note or Obligation, and (e) any delay in exercising, failure to exercise, or
non-exercise (or partial exercise), from time to time, by Lender or any Obligee
of any Obligation or guaranteed obligation of any rights or remedies (or to
insist upon strict performance) in any one or more instances shall not
constitute a waiver thereof (or preclude full exercise or insistence upon strict
performance thereof) in that or any other
5
<PAGE> 101
instance, and any single exercise of any such Person's right or remedies in any
one or more instances shall not preclude full exercise in any other instance.
VIII. AUTHORITY. Borrower represents that Borrower has full
power, authority and legal right to execute and deliver this Revolving Note and
that the Loan constitutes a valid and binding obligation of Borrower.
IX.. CALCULATIONS OF AMOUNTS DUE. All calculations of amounts due
on any date, whether by acceleration or otherwise, will be made by Lender (or
its agent or representative) and Borrower agrees that all such calculations will
be conclusive and binding absent manifest error.
X. MISCELLANEOUS. This Revolving Note is assignable by Lender as
provided in the Credit Agreement. Without limiting the foregoing, Lender may
assign, by bookkeeping entry on Lender's records or otherwise, all or part of,
or any interest in, Lender's rights and benefits under this Revolving Note,
including, without limitation, its right to payments of principal and interest
hereunder, for the purpose of financing Lender's provision of credit pursuant to
the Credit Agreement, provided no such assignment shall terminate or diminish
Lender's obligations under the Credit Agreement. To the extent of such
assignment, such assignee shall have the same rights and benefits against
Borrower under this Revolving Note as it would have had if it were the initial
Lender hereunder. This Revolving Note and the rights and Obligations under this
Revolving Note are not assignable or delegatable, directly or indirectly, in
whole or in part, by Borrower. This Revolving Note shall be binding upon
Borrower, its successors and assigns. For all payments to be made and
obligations to be performed under this Revolving Note, time is of the essence.
Whenever possible this Revolving Note and each provision hereof shall be
interpreted in such manner as to be effective, valid and enforceable under
applicable law. If and to the extent that any such provision shall be held
invalid and unenforceable by any court of competent jurisdiction, such holding
shall not invalidate or render unenforceable any other provisions hereof, and
any determination that the application of any provision hereof to any person or
under any circumstance is illegal and unenforceable shall not affect the
legality, validity and enforceability of such provision as it may be applied to
any other person or in any other circumstance. All rights and remedies provided
in this Revolving Note, any Credit Facility Document or any law shall be
available to Lender and shall be cumulative.
XI. ENFORCEABILITY. Borrower acknowledges that this Revolving
Note and Borrower's Obligations under this Revolving Note are and shall at all
times continue to be absolute and unconditional in all respects, and shall at
all times be valid and enforceable irrespective of any other agreements or
circumstances of any nature whatsoever which might otherwise constitute a
defense to this Revolving Note and the Obligations of Borrower under this
Revolving Note or the obligations of any other person or party relating to this
Revolving Note or the Obligations of Borrower hereunder or otherwise with
respect to the Revolving Loans. This Revolving Note sets forth the entire
agreement and understanding of Lender and Borrower, and Borrower absolutely,
unconditionally and irrevocably waives any and all right
5
<PAGE> 102
to assert any setoff, counterclaim or crossclaim of any nature whatsoever with
respect to this Revolving Note or the Obligations of Borrower under this
Revolving Note or the obligations of any other person or party relating to this
Revolving Note or the Obligations of Borrower hereunder or otherwise with
respect to the Revolving Loans, in any action or proceeding brought by Lender to
collect the Revolving Loans, or any portion thereof or to enforce, foreclose and
realize upon the liens and security interests of Lender in any Collateral
therefor created by the Credit Facility Documents; provided, however, that the
foregoing shall not be deemed a waiver of Borrower's right to assert any
compulsory counterclaim maintained in a court of the United States, or of the
State of New York if such counterclaim is compelled under local law or rule of
procedure, nor shall the foregoing be deemed a waiver of Borrower's right to
assert any claim which would constitute a defense, setoff, counterclaim or
crossclaim of any nature whatsoever against Lender in any separate action or
proceeding. Borrower acknowledges that no oral or other agreements, conditions,
promises, understandings, representations or warranties exist with respect to
this Revolving Note or with respect to the Obligations of Borrower under this
Revolving Note, except those specifically set forth in this Revolving Note.
XII. AMENDMENTS. This Revolving Note may not be modified,
amended, changed or terminated orally, but only by an agreement in writing
signed by Borrower and Lender. No waiver of any term, covenant or provision of
this Revolving Note shall be effective unless given in writing by Lender and, if
so given by Lender, shall only be effective in the specific instance in which
given.
XIII. GOVERNING LAW. This Revolving Note is and shall be deemed
entered into in the State of New York and shall be governed by and construed in
accordance with the laws of the State of New York and no defense given or
allowed by the laws of any state or country shall be interposed in any action or
proceeding hereon unless such defense is either given or allowed by the laws of
the State of New York. Borrower acknowledges and agrees that this Revolving Note
is, and is intended to be, an instrument for the payment of money only, as such
phrase is used in Section 3213 of the Civil Practice Law and Rules of the State
of New York, and Borrower has been fully advised by its counsel of Lender's
rights and remedies pursuant to said Section 3213.
XIV. VENUE AND JURISDICTION. Borrower agrees to submit to
personal jurisdiction in the State of New York in any action or proceeding
arising out of this Revolving Note. In furtherance of such agreement, Borrower
hereby agrees and consents that without limiting other methods of obtaining
jurisdiction, personal jurisdiction over Borrower in any such action or
proceeding may be obtained within or without the jurisdiction of any court
located in New York and that any process or notice of motion or other
application to any such court in connection with any such action or proceeding
may be served upon Borrower by registered or certified mail to, or by personal
service at, the last known address of Borrower, whether such address be within
or without the jurisdiction of any such court. Borrower hereby agrees that the
venue of any litigation arising in connection with the
6
<PAGE> 103
indebtedness, or in respect of any of the Obligations of Borrower under this
Revolving Note, shall to the extent permitted by law, be in New York County.
XV. INDEMNITY. Anything in this Revolving Note or any other Credit
Facility Document to the contrary notwithstanding, Borrower shall indemnify and
hold Lender harmless and defend Lender at Borrower's sole cost and expense
against any loss or liability, cost or expense (including, without limitation,
reasonable attorneys' fees and disbursements of Lender's counsel, whether
in-house staff, retained firms or otherwise), and all claims, actions,
procedures and suits arising out of or in connection with (i) any ongoing
matters arising out of this Revolving Note, any other Credit Facility Document
or the transaction contemplated hereby, including, but not limited to, all costs
of appraisal or reappraisal of all or any portion of any collateral for the
Revolving Loans, (ii) any amendment to, or restructuring of, the Revolving
Loans, this Revolving Note or any other Credit Facility Document, and (iii) any
and all lawful action that may be taken by Lender in connection with the
enforcement of the provisions of this Revolving Note or any other Credit
Facility Document, whether or not suit is filed in connection with the same, or
in connection with Borrower, any guarantor of the Revolving Loans and/or any
partner, joint venturer or shareholder thereof becoming a party to a voluntary
or involuntary federal or state bankruptcy, insolvency or similar proceeding,
but excluding any such losses, claims, damages, liabilities, costs and expenses
directly caused to be incurred by reason of the gross negligence or willful
misconduct of the person otherwise to be indemnified and held harmless under
this Section. All sums expended by Lender shall be payable on demand, and until
reimbursed by Borrower pursuant hereto, shall be deemed additional principal
evidenced hereby and shall bear interest at the default interest rate
hereinabove set forth.
7
<PAGE> 104
XVI. WAIVER OF TRIAL BY JURY. BORROWER HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES, AND LENDER, BY ITS ACCEPTANCE OF THIS REVOLVING NOTE,
IRREVOCABLY AND UNCONDITIONALLY WAIVES, ANY AND ALL RIGHT TO TRIAL BY JURY IN
ANY LITIGATION WHATSOEVER ARISING OUT OF OR IN CONNECTION WITH THE REVOLVING
LOANS, THIS REVOLVING NOTE, ALL OTHER CREDIT FACILITY DOCUMENTS AND ANY
OBLIGATIONS RELATED THERETO.
IN WITNESS WHEREOF, Borrower has duly executed this Revolving
Note the day and year first above written.
CAPTEC NET LEASE REALTY, INC.
By: _______________________
Name: W. Ross Martin
Title: Vice President
Attest: ___________________
Name: Gary A. Bruder
Title: Assistant Secretary
<PAGE> 105
Corporate Acknowledgement
-------------------------
STATE OF MICHIGAN )
:ss.:
COUNTY OF WASHTENAW )
On the 26th day of February, 1996, before me personally came W. Ross
Martin, to me known, who, being by me duly sworn, did depose and say that he
resides at Ann Arbor, Michigan; that he is Vice President of CAPTEC NET LEASE
REALTY, INC., the corporation described in and which executed the above
instrument; and that he signed his name thereto by authority of the Board of
Directors of said corporation.
Notary Public
<PAGE> 106
EXHIBIT D *
-----------
(REVOLVING LOAN CONDITIONS)
All of the following shall be delivered to Lender and shall be
satisfactory in all respects to Lender in Lender's sole and absolute discretion:
1. An as-built survey (the "Survey") of the Property satisfactory to
Lender and its counsel, which survey shall be certified to the Title
Companies. The Survey shall show dimensions and locations of any
improvements, easements, rights of way, encroachments and the extent
thereof, established building lines and street lines, the distance to, and
names of the nearest intersecting streets and such other details as Lender
may request. The surveyors shall provide a surveyors' certification in form
and substance satisfactory in all respects to Lender, its counsel and the
Title Companies.
2. The Appraisal.
3. The Lease Documents.
4. Valid and effective policies of mortgage title insurance (the
"Title Policies") insuring the lien of the Mortgage as a first lien subject
only to the Permitted Title Exceptions, and with affirmative insurance on
such matters as Lender or its counsel may require (it being agreed and
understood that Borrower shall be obligated as a condition precedent to
each Credit Event to deliver to Lender such continuations of title and
endorsement to the Title Policies insuring the respective liens of the
Mortgages as may be required by Lender, it being further agreed and
understood that Lender shall not require any continuations of title if the
Title Companies issue a "clean" revolving credit endorsement). The Title
Policies shall be issued by a company or companies (the "Title Companies")
designated by Lender and shall be in amounts specified by Lender, shall
contain such terms and coverage as Lender and its counsel shall deem
acceptable, and shall name Lender as the insured party. If required by
Lender, Borrower shall cause to be delivered to Lender facultative
reinsurance agreements with direct access in amounts and issued by
companies satisfactory to Lender and otherwise in form and substance
satisfactory in all respects to Lender and its counsel.
- -------------------
* All terms used in this Exhibit but not defined in this Exhibit have the
meaning given to them in the Agreement.
D-l
<PAGE> 107
5. Executed copies of all material agreements, instruments, documents,
certificates or items of any nature whatsoever affecting or relating to the
use or operation of the Property which shall be satisfactory in all
respects to Lender and its counsel.
6. All releases, terminations and such other documents as Lender may
reasonably request to evidence and effectuate the termination by each and
every other Person of all financing and guarantee arrangements, if any,
with Borrower and the termination and release by each and every other
Person of any interest in and to any of the Collateral except to the extent
of the Permitted Title Exceptions or Permitted Encumbrances, including, but
not limited to, (i) UCC termination statements for all UCC financing
statements previously filed by any such Person or its predecessors, as
secured party and Borrower or its predecessors, as debtor, and including
all or any of the Collateral as collateral and (ii) satisfactions and
discharges of any mortgages, deeds of trust or deeds to secure debt by
Borrower or with respect to any of the Properties, in form acceptable for
recording in the appropriate governmental office.
7. Evidence of compliance with all zoning and land use requirements,
ordinances, rules, regulations and restrictions affecting the Property.
8. Permanent certificate of occupancy (or temporary certificate of
occupancy provided that no material condition remains to be satisfied
before issuance of a permanent certificate of occupancy) and all other
licenses, permits and approvals required for the use and operation of the
Property.
9. All consents, waivers, acknowledgments and other agreements from
third persons which Lender may deem necessary or desirable in order to
permit, protect and perfect its security interests in and liens upon the
Collateral or to effectuate the provisions or purposes of this Agreement
and the other Credit Facility Documents.
10. Property and liability insurance acceptable in all respects to
Lender and in an amount equal to 100% of the replacement value of the
Property, excluding land, foundations and footings, naming Lender as a
"loss payee" or "additional insured", as appropriate, it being agreed and
understood that the aggregate of all property insurance on all of the
Properties shall be in an amount equal to or greater than the outstanding
Indebtedness. Blanket insurance policies shall not be acceptable unless
otherwise agreed to by Lender in its sole and absolute discretion. If the
Property or any portion thereof, are located in a federally designated
"special flood hazard area", a flood insurance policy shall be delivered to
D-2
<PAGE> 108
Lender. If any of the Properties are not located in a federally designated
"special flood hazard area" such fact shall be substantiated by a
certificate in form satisfactory to Lender from licensed surveyors,
appraisers or professional engineers or other qualified persons, parties or
entities.
11. With respect to any ground lease financings, the ground lease
shall contain terms which shall cause such ground lease to be "financable"
as determined by Lender in its sole and absolute discretion such that all
representations and warranties made by Borrower with respect to the Ground
Lease are true, current and complete in all material respects, it being
agreed and understood, however, that in all events shall the remaining term
of the Ground Lease be for a period acceptable to Lender.
12. Estoppel certificates from any and all tenants and ground lessors,
as applicable, that state (i) that the respective Leases are currently in
full force and effect, (ii) that no defaults exist under such Leases, (iii)
the expiration dates of such Leases (iv) that all rent, however
denominated, payable under the Leases, has been paid, (v) any renewal
rights and/or cancellation rights of Lessees, (vi) any free rent period, or
other tenant concessions and (vii) all landlord's construction or
reimbursement obligations thereunder.
13. Environmental reports and assessments with respect to each
Property and such other information with respect to matters concerning
compliance with Environmental Laws as Lender shall require.
14. Opinion of local counsel to Borrower regarding the enforceability
of the Mortgage, Assignment of Leases and Rents, Hazardous Material
Indemnification and Subordination, Non-Disturbance and Attornment Agreement
executed in connection with the Property, that the Mortgage create a valid
lien on the Property and are legal, valid and binding and that the
Mortgage, Assignment of Leases and Rents and Subordination, Non-Disturbance
and Attornment Agreement are in recordable form.
15. Opinion from in-house counsel of Borrower as to organizational
matters regarding Borrower and due execution and delivery by Borrower of
the Mortgage, Assignment of Leases and Rents, Hazardous Material
Indemnification and Subordination, Non-Disturbance and Attornment
Agreement.
16. Report of independent inspecting engineer, satisfactory in all
respects to Lender with request for the structural integrity and soundness
of the building located on
D-3
<PAGE> 109
the Property, the roof and all building systems, if the same has been
previously obtained by Borrower.
17. Such other documents, instruments, certificates, opinions,
assurances, consents, or approvals as Lender or its counsel may require.
D-4
<PAGE> 110
EXHIBIT E *
-----------
(CLOSING DOCUMENTS)
1. Duly executed and acknowledged Mortgage.
2. Duly executed and acknowledged Assignment of Leases and Rents.
3. Duly executed and acknowledged Hazardous Material Indemnification
Agreement.
4. Duly executed and acknowledged Subordination, Non-Disturbance and
Attornment Agreement.
5. Certified copy of the Lease.
6. ***[Certified copy of the Ground Lease]***(1)
7. ***[Certified copy of sublease under the Ground Lease (the
"Sublease")]***(1)
8. Any Guaranty in respect to the Lease or Ground Lease.
9. ***[Certified copy of the Franchise Agreement]***(1)
10. Estoppel Certificate from Lessee ***[ground lessor under the Ground
Lease; sublessee under the Sublease]***(1) to Lender.
11. Phase I environmental audit.
12. ***[Phase II environmental audit and remediation plan.] ***{1)
13. Evidence of compliance with zoning and other land use requirements,
ordinances, rules, regulations and restrictions.
14. Permanent or temporary certificate(s) of occupancy and all other
licenses, permits and approvals required for the use and operation of
the Property.
- -----------------------
* All terms used in this Exhibit but not defined in this Exhibit have the
meaning given to them in the Agreement.
l If applicable.
E-l
<PAGE> 111
15. ***[Report of independent inspecting engineer with respect to the
building.]***(1)
16. The Survey.
17. The Appraisal.
18. Title Policy issued by Title Companies to Lender, together with copies
of all exceptions to title and all required endorsements.
19. Certificates of property and liability insurance showing Lender as
"additional insured" or "loss payee" in connection with the Property.
20. Evidence satisfactory to Lender that the Property is not located in a
federally designated special flood hazard area (i.e., certificate in
satisfactory form from a licensed surveyor, appraiser, professional
engineer or other qualified person or party) OR IN THE ALTERNATIVE an
acceptable flood insurance policy.
21. Satisfaction and termination of existing liens and encumbrances,
including UCC-3 Termination Statements, as applicable on the Property.
22. Opinion Letter of Borrower's in-house counsel to Lender.
23. Opinion of local counsel for Borrower to Lender.
24. Material agreements, instruments, documents, certificates or other
items relating to the Lease or the Property.
E-2
<PAGE> 112
EXHIBIT F
<PAGE> 113
INFORMATION CERTIFICATE
OF
CAPTEC NET LEASE REALTY, INC.
Dated: February 22, 1996
CS First Boston Mortgage Capital Corp.
55 East 52nd St., 6th Floor
New York, NY 10055
In order to assist you in the continuing evaluation of the financing you are
considering of Captec Net Lease Realty, Inc. (the "Corporation") and to expedite
the preparation of any documentation which may be required and to induce you to
provide such financing to the Corporation, we represent and warrant to you the
following information about the Corporation, its organizational structure, the
assets being purchased by the Corporation and other matters of interest to you:
1. The full and exact name of the Corporation as set forth in its
Certificate of Incorporation is:
Captec Net Lease Realty, Inc.
2. The Corporation uses and owns the following trade name(s) in the
operation of its business (e.g. billing, advertising, etc.; note: Do not include
names which are product names only):
Same as Section 1 above
In the event any trade name appears on an invoice, a sample copy of such
invoice is annexed.
3. The date of incorporation of the Corporation was October 18, 1994,
under the laws of the State of Michigan, and the Corporation is in good
standing under those laws.
4. The Corporation is duly qualified and authorized to transact business as
a foreign corporation in the following states and is in good standing in such
states:
New York
5. Since the date of incorporation, the name of the Corporation has been
changed as follows:
Date Prior Name
---- ----------
No changes
<PAGE> 114
6. Since the date of incorporation, the Corporation has made or entered
into the following mergers or acquisitions:
None
7. The chief executive office of the Corporation is located at:
24 Frank Lloyd Wright Dr.
Lobby L, 4th Floor
Ann Arbor, MI Washtenaw County
8. The books and records of the Corporation pertaining to accounts,
contract rights, inventory, etc. are located at (if other than the chief
executive office referred to in Section 7 above):
Same as Section 7 above.
9. The premises listed below are leased or sub-leased by the Corporation
(state name and address of lessor and record owner if other than lessor),
monthly lease payment and term of lease, including renewal options:
Location Monthly Lease Payment Lease Term
-------- --------------------- ----------
None
10. The places of business or other locations of any assets used by the
Corporation during the last four (4) months other than those listed above are as
follows:
None, except for the Properties which are located throughout the United
States.
11. The Federal Employer Identification Number of the Corporation is as
follows:
38-3206305
12. There is no provision in the Certificate of Incorporation or By-Laws of
the Corporation or in the laws of the State of its organization requiring any
vote or consent of stockholders to borrow or to authorize the mortgage or pledge
of or creation of a security interest in any assets of the Corporation or any
subsidiary. Such power is vested exclusively in its board of directors and, as
delegated thereby, its officers.
<PAGE> 115
13. The Corporation is affiliated with, or has ownership in, the following
entities (including subsidiaries):
Chief Executive Jurisdiction of Ownership Percentage
Name Office Organization or Relationship
---- ------ ------------ ---------------
Captec Same Michigan 15% of the voting stock
Financial (common stock) of the
Group, Inc. Corporation is owned
by this affiliate
14. The officers and directors of the Corporation and their respective
titles are as follows:
Title Name
----- ----
President and Director Patrick L. Beach
Vice President, Treasurer and Director W. Ross Martin
Secretary and Director George R. Beach
Assistant Secretary Gary A. Bruder
Director Taleb A. Ali
Director Abbas Al-Qattan
The following will have signatory powers as to all of your transactions
with the Corporation:
Patrick L. Beach, W. Ross Martin, George R. Beach, Gary A. Bruder
15. With respect to the officers noted above, such officers are affiliated
with or have ownership in the following entities (indicate name and address of
affiliated companies, type of operations, ownership percentage or other
relationship):
See attached Exhibit A
16. The names of the stockholders of the Corporation and their share
holdings are as follows:
Name No. of Shares Ownership Percentage
---- ------------- --------------------
See attached Exhibit B
17. Neither the Corporation nor any of its affiliates, officers, directors
or stockholders has ever been involved in a bankruptcy or reorganization except:
(explain)
None
<PAGE> 116
18. There are no judgments and there is no litigation, arbitration or
mediation procedure or investigation pending or threatened by or against the
Corporation, any of its properties, assets, subsidiaries and/or affiliates or
any of its officers, directors or stockholders, except as follows:
None
19. At the present time, there are no delinquent taxes owing by the
Corporation (including, but not limited to, all payroll taxes, personal property
taxes, real estate taxes or income taxes) except as follows:
None
20. The Corporation's assets are owned and held free and clear of any
security interests, liens or attachments, except as follows:
Lienholder Assets Amount of Debt Secured
---------- ------ ----------------------
Heller Financial, Inc. Lease #5656 and $1,587,623 as of 12/31/95
related property
and collateral
21. The Corporation has not guaranteed and is not otherwise liable for the
obligations of others, except as follows:
Debtor Creditor Amount of Obligation
------ -------- --------------------
None
22. The Corporation does not own or license any trademarks, patents,
copyrights or other intellectual property, except as follows (indicate type of
intellectual property and whether owned or licensed, registration number, date
of registration, and, if licensed, the name and address of the licensor):
None
- ----------------
l. The term "affiliate" means a person or entity that directly or
indirectly, through one or more intermediaries, controls or is controlled by, or
is under common control with, the Corporation.
<PAGE> 117
23. The Corporation's fiscal year ends:
December 31
24. With regard to any pension or profit sharing plan: N/A
(a) A determination as to qualification has been issued.
(b) Funding is on a current basis and in compliance with established
requirements.
25. Certified Public Accountants for the Corporation is the firm of:
Coopers & Lybrand
400 Renaissance Center
Detroit, MI 48243-1507
Gary Stein - Partner Handling Relationship
There was an uncertified statement for fiscal year 1994.
26. The following documents are attached hereto and incorporated herein in
their entirety: (i) Exhibit C - Statements of Personal Information with respect
to certain of the officers of the Corporation.
27. Prompt written notice will be given you of any change or amendment with
respect to any of the foregoing. Until such notice is received by you, you shall
be entitled to rely upon the foregoing in all respects.
Very truly yours,
[SEAL] CAPTEC NET LEASE
REALTY, INC.
By: /s/ W. Ross Martin
-----------------------
Name: W. Ross Martin
Title: Vice President
<PAGE> 118
EXHIBIT A
TO
INFORMATION CERTIFICATE OF CAPTEC NET LEASE REALTY, INC.
1. Captec Financial Group, Inc. commercial finance business
24 Frank Lloyd Wright Dr.
Lobby L, 4th Floor
Ann Arbor, Michigan 48106-0544
Patrick L. Beach 61.32% of voting stock (12,150 common shs) *
W. Ross Martin 7.70% of voting stock (1,525 common shs) **
George R. Beach 18.32% of voting stock (3,630 common shs) ***
* - Patrick L. Beach also holds options for the issuance of 2,250
additional shares.
** - W. Ross Martin also holds options for the issuance of 2,025
additional shares.
*** - George R. Beach also holds options for the issuance of 100
additional shares.
2. Captec Net Lease Realty Advisors, Inc. commercial fmance business
24 Frank Lloyd Wright Dr.
Lobby L, 4th Floor
Ann Arbor, Michigan 48106-0544
Patrick L. Beach 58% of voting stock (31,320 common shs)
W. Ross Martin 25% of voting stock (13,500 common shs)
Gary A. Bruder 2% of voting stock (1,080 common shs)
3. Captec Acceptance Leasing Corporation commercial finance business
24 Frank Lloyd Wright Dr.
Lobby L, 4th Floor
Ann Arbor, Michigan 48106-0544
Patrick L. Beach 67.8% of voting stock (5,100 common shs)
W. Ross Martin 13.0% of voting stock (978 common shs)
George R. Beach 19.2% of voting stock (1,444 common shs)
4. Captec Merchant Capital Corporation merchant banking business
24 Frank Lloyd Wright Dr.
Lobby L, 4th Floor
Ann Arbor, Michigan 48106-0544
Patrick L. Beach 20% of voting stock (10,000 common shs)
W. Ross Martin 10% of voting stock (5,000 common shs)
<PAGE> 119
EXHIBIT B
TO
INFORMATION CERTIFICATE OF CAPTEC NET LEASE REALTY, INC.
1. Common Shares (Voting Stock):
Patrick L. Beach 24.0% of voting stock (240 common shs)
W. Ross Martin 14.0% of voting stock (140 common shs)
George R. Beach 2.0% of voting stock (20 common shs)
Michigan Corp. 45.0% of voting stock (450 common shs)
Captec Financial Group, Inc. 15.0% of voting stock (150 common shs)
2. Redeemable Preferred Stock (Non-Voting Stock):
The Public Institution for Social Security holds 50,000 Redeemable
Preferred Shares, which shares represent 100% of the issued and outstanding
shares of this class of stock.
<PAGE> 120
EXHIBIT C
TO
INFORMATION CERTIFICATE OF CAPTEC NET LEASE REALTY, INC.
STATEMENTS OF PERSONAL INFORMATION
WITH RESPECT TO
CERTAIN OFFICERS OF
CAPTEC NET LEASE REALTY, INC.
<PAGE> 121
I. STATEMENT OF PERSONAL INFORMATION
---------------------------------
1. Identification
--------------
* (a) State your name, address (residence and business) and social
security number.
Patrick L. Beach Captec Financial Group, Inc.
440 High Orchard Dr. 24 Frank Lloyd Wright Dr.
Ann Arbor, MI 48105 Lobby L, 4th Floor
Ann Arbor, MI 48106
###-##-####
(b) State your date of birth.
April 26, 1956
(c) Have you been elected as a director and/or executive officer
pursuant to any arrangement or understanding between you and any other person?
No X Yes
--- ---
If yes, please name the person and describe the arrangement or understanding.
Describe any arrangement which may result in a change in your status as an
executive officer or director.
Captec Financial Group, Inc. - Director and Executive Officer
Captec Net Lease Realty, Inc. - Director and Executive Officer
Captec Net Lease Realty Advisors, Inc. - Director and Executive Officer
Captec Receivables Financing Corporation I - Director and Executive Officer
Captec Financial Group Funding Corporation - Director and Executive Officer
Captec Franchise Capital Corporation II - Director and Executive Officer
Captec Franchise Capital Corporation III - Director and Executive Officer
Captec Acceptance Leasing Corporation - Director and Executive Officer
<PAGE> 122
2. Business Experience
-------------------
State your principal occupation or employment, the name of the
company or other organization, if any, in which your occupation or employment is
carried on, and the principal business of that corporation or other
organization. In addition, please list all positions and offices held by you
with the company, and all of your principal occupations and employments with any
other corporation or organization during the past FIFTEEN years beginning with
all of your present positions and offices. Include the name and principal
business of any other corporation or organization in which your prior
occupations and employment were carried on. If you are a director or appointee
to the Board of Directors of the Company, please specify the term of your
position.
Dates of Employment
or Terms of Office Name and Address Principal Nature Position
Mo./Yr. to Mo./Yr. of Business of Business Held
- ------------------ ---------------- ---------------- --------
Captec Financial
2/81 to Present Group, Inc. Finance Chairman & CEO
- ------------------ ---------------- ---------------- --------------
Wendy's of
8/86 to 1/90 (?) San Diego Restaurants Chairman
- ------------------ ---------------- ---------------- --------------
12/89 to 7/91 Illiana Printing Printing Franchise Chairman
- ------------------ ---------------- ---------------- --------------
- ------------------ ---------------- ---------------- --------------
-2-
<PAGE> 123
3. Other Directorships
-------------------
(a) Are you a director of any company?
No X Yes
--- ---
If yes, please describe.
4. Legal Proceedings
-----------------
(a) Are you or have you been in [or is any associate (see Note E
attached herto) of yours or has any associate of yours been] at any time in the
last FIFTEEN years a defendant in a legal proceeding?
No Yes X
--- ---
If yes, please list the name of the court or agency in which the proceeding is
pending or was adjudicated, the date instituted, the principal parties, a
description of the factual basis alleged to underlie the proceeding, the relief
sought and the disposition, if any.
Comerica V. Beach V. Comerica
Goldrath, et al v. Beach
(b) During the past FIFTEEN years, have you been convicted in any
criminal proceeding or been the named subject of a pending criminal proceeding?
No X Yes
--- ---
If yes, state the court in which you were tried, the offense for which
you were convicted, and the date of conviction or, as the case may be, state
the court, cause of action, status of the case and the date that the complaint
was filed.
(c) During the past FIFTEEN years, has a petition under United States
federal bankruptcy laws or any state insolvency law been filed by or against you
or any business or property of yours, any partnership of which you were a
general partner at or within two years before the time of the appointment or
filing, or any corporation or business association of which you were an
executive officer at or within two years before the time of the appointment or
filing?
No X Yes
--- ---
If yes, state the nature of the petition or appointment, the date it was issued,
the name and address of the person or entity against whom the petition was filed
and the position you held and your length of service with the entity.
Language indicated as being shown by strikeout in the typset document is
enclosed in bracket "[" and "]" in the electronic format.
-3-
<PAGE> 124
(d) During the past FIFTEEN years, have you been the subject of any
order, judgment or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction or any federal, state or local authority,
permanently or temporarily enjoining you from, or otherwise limiting your
participation in any type of business activity or practice
No
If yes, state the court, federal, state or local authority, the nature of the
order, judgment or decree, the date thereof and, if appropriate, the activities
covered thereby and the name(s) of the person(s) engaged in the activity.
(f) During the past FIFTEEN years, have you been found by a court of
competent jurisdiction in a civil action or by the SEC to have violated any
federal or state securities law, where the judgment in the civil action or
finding by the SEC has not been subsequently reversed, suspended or vacated?
No X Yes
--- ---
If yes, state the civil action or finding by the SEC, the date thereof and the
judgment rendered.
-4-
<PAGE> 125
THE FOREGOING RESPONSES ARE TRUE AND ACCURATE TO THE BEST OF MY
INFORMATION AND BELIEF, AND I WILL NOTIFY THE FIRST BOSTON CORPORATION AND ITS
COUNSEL PROMPTLY OF ANY CHANGES IN THE FOREGOING RESPONSES.
Patrick L. Beach
----------------------------------
(Print Name)
/s/ Patrick L. Beach
----------------------------------
(Signature)
Address: 440 High Orchard Dr.
----------------------------------
Ann Arbor, MI 48105
----------------------------------
----------------------------------
Dated: 2/20 , 1996
----------
-5-
<PAGE> 126
Exhibit A
NOTES TO QUESTIONNAIRE
A. If, while responding to the questionnaire, you feel that additional
information may be required to clarify an answer, please include all facts
you may consider relevant. If insufficient space is provided, you may
attach additional pages, as necessary.
B. "Beneficial Ownership" is interpreted in its broadest sense. You should
consider yourself to be the beneficial owner of securities held
beneficially by your spouse or minor children or any other relative who
shares the same home as you or securities held in the name of another
person if by reason of any contract, understanding, relationship, agreement
or other arrangement you obtain therefrom benefits substantially equivalent
to those of ownership.
You should consider yourself to "beneficially own" a security if you,
directly or indirectly, have or share voting power (i.e., the power to vote
or to direct the voting) or investment power (i.e., the power to dispose or
to direct disposition) of the security, whether through any contract,
arrangement, understanding, relationship, or otherwise and if you have the
right to acquire beneficial ownership at any time within 60 days through
the exercise of any option or right, or pursuant to the power to revoke, or
on termination of, a trust, discretionary account or similar arrangement.
Please note that for this purpose, the same security may be "beneficially
owned" by more than one person. For example, several co-trustees may share
the power to vote or dispose of shares. In any applicable question, please
furnish sufficient details to cross-reference any over-lapping beneficial
ownership by you and another director or officer.
Also, where applicable, if you do not have sole voting and investment power
over all shares beneficially owned by you, indicate the shares over which
you have shared voting power and/or shared investment power.
C. Include any beneficial interest in securities through partnerships, joint
accounts, trusts, or controlled corporations and any securities held in the
name of any person if the power to re-vest title to the securities in
yourself exists now or in the future.
Include all securities entirely owned, including shares held by brokers or
banks in custodian accounts or by other nominees.
D. For purposes of this questionnaire, your "immediate family" shall include
your spouse, parents, siblings, mothers and fathers-in-law, sons and
daughters-in-law and brothers and sisters-in-law.
E. The term "associates" means (i) any member of your immediate family, (ii)
any corporation or organization (other than the Company) of which you or
any member of your immediate family is an executive officer or partner or
is, directly or indirectly, the beneficial owner of 1O% or more of any
class of equity securities
-1-
<PAGE> 127
and any trust or other estate in which you or any member of your immediate
family has a substantial beneficial interest or as to which you serve as
trustee or in a similar fiduciary capacity.
F. (i) The terms "affiliate" or "affiliated with" mean a person that directly
or indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with, the person specified.
(ii) The term "parent" means an affiliate controlling that person directly
or indirectly through one or more intermediaries.
-2-
<PAGE> 128
I. STATEMENT OF PERSONAL INFORMATION
---------------------------------
1. Identification
--------------
* (a) State your name, address (residence and business) and social
security number.
W. Ross Martin Captec Financial Group, Inc.
6399 Huron Creek Ct. 24 Frank Lloyd Wright Dr.
Dexter, MI 48130 Lobby L, 4th Floor
Ann Arbor, MI 48106
###-##-####
(b) State your date of birth.
September 8, 1960
(c) Have you been elected as a director and/or executive officer
pursuant to any arrangement or understanding between you and any other person?
No X Yes
--- ---
If yes, please name the person and describe the arrangement or understanding.
Describe any arrangement which may result in a change in your status as an
executive officer or director.
Captec Financial Group, Inc. - Director and Executive Officer
Captec Net Lease Realty, Inc. - Director and Executive Officer
Captec Net Lease Realty Advisors, Inc. - Director and Executive Officer
Captec Receivables Financing Corporation I - Director and Executive Officer
Captec Financial Group Funding Corporation - Director and Executive Officer
Captec Franchise Capital Corporation II - Director and Executive Officer
Captec Franchise Capital Corporation III - Director and Executive Officer
Captec Acceptance Leasing Corporation - Director and Executive Officer
<PAGE> 129
2. Business Experience
-------------------
State your principal occupation or employment, the name of the
company or other organization, if any, in which your occupation or employment is
carried on, and the principal business of that corporation or other
organization. In addition, please list all positions and offices held by you
with the Company, and all of your principal occupations and employments with any
other corporation or organization during the past FIFTEEN years beginning with
all of your present positions and offices. Include the name and principal
business of any other corporation or organization in which your prior
occupations and employment were carried on. If you are a director or appointee
to the Board of Directors of the Company, please specify the term of your
position.
<TABLE>
<CAPTION>
Dates of Employment
or Terms of Office Name and Address Principal Nature Position
Mo./Yr. to Mo./Yr. of Business of Business Held
- ------------------ ------------------- ------------------ --------------
<S> <C> <C> <C>
Captec Financial Director, Vice
10/85 to Present Group, Inc. Commercial Finance President and CFO
- ------------------ ------------------- ------------------ --------------
Deloitte Haskins
& Sells
5/82 - 10/85 Detroit, MI Accountants Senior Consultant
- ------------------ ------------------- ------------------ --------------
- ------------------ ------------------- ------------------ --------------
</TABLE>
-2-
<PAGE> 130
3. Other Directorships
-------------------
(a) Are you a director of any company?
[ ] No [X] Yes
If yes, please describe.
As disclosed in item 1 above.
4. Legal Proceedings
-----------------
(a) Are you or have you been in [or is any associate (see Note E
attached hereto) of yours or has any associate of yours been] at any time in the
last FIFTEEN years a defendant in a legal proceeding?
[X] No [] Yes
If yes, please list the name of the court or agency in which the proceeding is
pending or was adjudicated, the date instituted, the principal parties, a
description of the factual basis alleged to underlie the proceeding, the relief
sought and the disposition, if any.
(b) During the past FIFTEEN years, have you been convicted in any
criminal proceeding or been the named subject of a pending criminal proceeding?
[X] No [X] Yes
If yes, state the court in which you were tried, the offense for which you were
convicted, and the date of conviction or, as the case may be, state the court,
cause of action, status of the case and the date that the complaint was filed.
(c) During the past FIFTEEN years, has a petition under United States
federal bankruptcy laws or any state insolvency law been filed by or against you
or any business or property of yours, any partnership of which you were a
general partner at or within two years before the time of the appointment or
filing, or any corporation or business association of which you were an
executive officer at or within two years before the time of the appointment or
filing?
[X] No [ ] Yes
If yes, state the nature of the petition or appointment, the date it was issued,
the name and address of the person or entity against whom the petition was filed
and the position you held and your length of service with the entity.
Language indicated as being shown by strikeout in the typset document is
enclosed in bracket "[" and "]" in the electronic format.
-3-
<PAGE> 131
(d) During the past FIFTEEN years, have you been the subject of any
order, judgment or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction or any federal, state or local authority,
permanently or temporarily enjoining you from, or otherwise limiting your
participation in any type of business activity or practice?
No
If yes, state the court, federal, state or local authority, the nature of the
order, judgment or decree, the date thereof and, if appropriate, the activities
covered thereby and the name(s) of the person(s) engaged in the activity.
(f) During the past FIFTEEN years, have you been found by a court of
competent jurisdiction in a civil action or by the SEC to have violated any
federal or state securities law, where the judgment in the civil action or
finding by the SEC has not been subsequently reversed, suspended or vacated?
[X] No [ ] Yes
If yes, state the civil action or finding by the SEC, the date thereof and the
judgment rendered.
-4-
<PAGE> 132
THE FOREGOING RESPONSES ARE TRUE AND ACCURATE TO THE BEST OF MY
INFORMATION AND BELIEF, AND I WILL NOTIFY THE FIRST BOSTON CORPORATION AND ITS
COUNSEL PROMPTLY OF ANY CHANGES IN THE FOREGOING RESPONSES.
W. Ross Martin
----------------------------------
(Print Name)
/s/ W. Ross Martin
----------------------------------
(Signature)
Address: 6399 Huron Creek Ct.
--------------------------
Dexter, MI 48106
----------------------------------
----------------------------------
Dated: 2/20 , 1996
----------
-5-
<PAGE> 133
Exhibit A
---------
NOTES TO QUESTIONNAIRE
A. If, while responding to the questionnaire, you feel that additional
information may be required to clarify an answer, please include all facts
you may consider relevant. If insufficient space is provided, you may
attach additional pages, as necessary.
B. "Beneficial Ownership" is interpreted in its broadest sense. You should
consider yourself to be the beneficial owner of securities held
beneficially by your spouse or minor children or any other relative who
shares the same home as you or securities held in the name of another
person if by reason of any contract, understanding, relationship, agreement
or other arrangement you obtain therefrom benefits substantially equivalent
to those of ownership.
You should consider yourself to "beneficially own" a security if you,
directly or indirectly, have or share voting power (i.e., the power to vote
or to direct the voting) or investment power (i.e., the power to dispose or
to direct disposition) of the security, whether through any contract,
arrangement, understanding, relationship, or otherwise and if you have the
right to acquire beneficial ownership at any time within 60 days through
the exercise of any option or right, or pursuant to the power to revoke, or
on termination of, a trust, discretionary account or similar arrangement.
Please note that for this purpose, the same security may be "beneficially
owned" by more than one person. For example, several co-trustees may share
the power to vote or dispose of shares. In any applicable question, please
furnish sufficient details to cross-reference any over-lapping beneficial
ownership by you and another director or officer.
Also, where applicable, if you do not have sole voting and investment power
over all shares beneficially owned by you, indicate the shares over which
you have shared voting power and/or shared investment power.
C. Include any beneficial interest in securities through partnerships, joint
accounts, trusts, or controlled corporations and any securities held in the
name of any person if the power to re-vest title to the securities in
yourself exists now or in the future.
Include all securities entirely owned, including shares held by brokers or
banks in custodian accounts or by other nominees.
D. For purposes of this questionnaire, your "immediate family" shall include
your spouse, parents, siblings, mothers and fathers-in-law, sons and
daughters-in-law and brothers and sisters-in-law.
E. The term "associates" means (i) any member of your immediate family, (ii)
any corporation or organization (other than the Company) of which you or
any member of your immediate family is an executive officer or partner or
is, directly or indirectly, the beneficial owner of 10% or more of any
class of equity securities
-1-
<PAGE> 134
and any trust or other estate in which you or any member of your immediate
family has a substantial beneficial interest or as to which you serve as
trustee or in a similar fiduciary capacity.
F. (i) The terms "affiliate" or "affiliated with" mean a person that directly
or indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with, the person specified.
(ii) The term "parent" means an affiliate controlling that person directly
or indirectly through one or more intermediaries.
-2-
<PAGE> 135
I. STATEMENT OF PERSONAL INFORMATION
------------------------------------
1. Identification
--------------
* (a) State your name, address (residence and business)
and social security number.
Hamilton Reid Sherard Captec Financial Group, Inc.
870 Arlington Blvd. 24 Frank Lloyd Wright Dr.
Ann Arbor, MI 48104-2730 Lobby L, 4th Floor
Ann Arbor, MI 48106
###-##-####
(b) State your date of birth.
3/26/48
(c) Have you been elected as a director and/or executive
officer pursuant to any arrangement or understanding between you and any other
person?
[X] No [ ] Yes
If yes, please name the person and describe the arrangement or understanding.
Describe any arrangement which may result in a change in your status as an
executive officer or director.
<PAGE> 136
2. Business Experience
-------------------
State your principal occupation or employment, the name of the
company or other organization, if any, in which your occupation or employment is
carried on, and the principal business of that corporation or other
organization. In addition, please list all positions and offices held by you
with the Company, and all of your principal occupations and employments with any
other corporation or organization during the past FIFTEEN years beginning with
all of your present positions and offices. Include the name and principal
business of any other corporation or organization in which your prior
occupations and employment were carried on. If you are a director or appointee
to the Board of Directors of the Company, please specify the term of your
position.
<TABLE>
<CAPTION>
Dates of Employment
or Terms of Office Name and Address Principal Nature Position
Mo./Yr. to Mo./Yr. of Business of Business Held
- ------------------ ----------------------- ---------------- --------------------
<S> <C> <C> <C>
Captec Financial Group, Senior Vice President,
7/94 to Present Inc. Finance Sales
- ------------------ ----------------------- ---------------- --------------------
1/86 to 6/94 FFCA (1) Finance Vice President,
Acquisitions
- ------------------ ----------------------- ---------------- --------------------
6/82 to 12/85 National Bank of Georgia(2)National Bank Vice President,
Regional Manager
- ------------------ ----------------------- ---------------- --------------------
South Carolina Vice President,
1974 to 5/82 National Bank (3) National Bank Business Development
- ------------------ ----------------------- ---------------- --------------------
(1) 17207 N. Perimeter Dr., Scottsdale, AZ 85254
(2) Atlanta, GA
(3) Greenville, SC
</TABLE>
-2-
<PAGE> 137
3. Other Directorships
-------------------
(a) Are you a director of any company?
[ ] No [X] Yes
If yes, please describe.
Director - Captec Financial Group, Inc.
4. Legal Proceedings
-----------------
(a) Are you or have you been in [or is any associate (see Note E
attached herto) of yours or has any associate of yours been] at any time in the
last FIFTEEN years a defendant in a legal proceeding?
[X] No [ ] Yes
If yes, please list the name of the court or agency in which the proceeding is
pending or was adjudicated, the date instituted, the principal parties, a
description of the factual basis alleged to underlie the proceeding, the relief
sought and the disposition, if any.
(b) During the past FIFTEEN years, have you been convicted in any
criminal proceeding or been the named subject of a pending criminal proceeding?
[X] No [ ] Yes
If yes, state the court in which you were tried, the offense for which you were
convicted, and the date of conviction or, as the case may be, state the court,
cause of action, status of the case and the date that the complaint was filed.
(c) During the past FIFTEEN years, has a petition under United States
federal bankruptcy laws or any state insolvency law been filed by or against you
or any business or property of yours, any partnership of which you were a
general partner at or within two years before the time of the appointment or
filing, or any corporation or business association of which you were an
executive officer at or within two years before the time of the appointment or
filing?
[X] No [ ] Yes
If yes, state the nature of the petition or appointment, the date it was issued,
the name and address of the person or entity against whom the petition was filed
and the position you held and your length of service with the entity.
Language indicated as being shown by strikeout in the typset document is
enclosed in bracket "[" and "]" in the electronic format.
-3-
<PAGE> 138
(d) During the past FIFTEEN years, have you been the subject of any
order, judgment or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction or any federal, state or local authority,
permanently or temporarily enjoining you from, or otherwise limiting your
participation in any type of business activity or practice
No
If yes, state the court, federal, state or local authority, the nature of the
order, judgment or decree, the date thereof and, if appropriate, the activities
covered thereby and the name(s) of the person(s) engaged in the activity.
(f) During the past FIFTEEN years, have you been found by a court of
competent jurisdiction in a civil action or by the SEC to have violated any
federal or state securities law, where the judgment in the civil action or
finding by the SEC has not been subsequently reversed, suspended or vacated?
[X] No [ ] Yes
If yes, state the civil action or finding by the SEC, the date thereof and the
judgment rendered.
-4-
<PAGE> 139
THE FOREGOING RESPONSES ARE TRUE AND ACCURATE TO THE BEST OF MY
INFORMATION AND BELIEF, AND I WILL NOTIFY THE FIRST BOSTON CORPORATION AND ITS
COUNSEL PROMPTLY OF ANY CHANGES IN THE FOREGOING RESPONSES.
Hamilton Reid Sherard
--------------------------------------------
(Print Name)
--------------------------------------------
(Signature)
Address: Captec Financial Group, Inc.
--------------------------------------------
24 Frank Lloyd Wright Dr., Lobby L, 4th Floor
--------------------------------------------
Ann Arbor, MI 48106
--------------------------------------------
Dated: 2/20 , 1996
------------
-5-
<PAGE> 140
Exhibit A
---------
NOTES TO QUESTIONNAIRE
A. If, while responding to the questionnaire, you feel that additional
information may be required to clarify an answer, please include all
facts you may consider relevant. If insufficient space is provided, you
may attach additional pages, as necessary.
B. "Beneficial Ownership" is interpreted in its broadest sense. You should
consider yourself to be the beneficial owner of securities held
beneficially by your spouse or minor children or any other relative who
shares the same home as you or securities held in the name of another
person if by reason of any contract, understanding, relationship,
agreement or other arrangement you obtain therefrom benefits
substantially equivalent to those of ownership.
You should consider yourself to "beneficially own" a security if you,
directly or indirectly, have or share voting power (i.e., the power to
vote or to direct the voting) or investment power (i.e., the power to
dispose or to direct disposition) of the security, whether through any
contract, arrangement, understanding, relationship, or otherwise and if
you have the right to acquire beneficial ownership at any time within 60
days through the exercise of any option or right, or pursuant to the
power to revoke, or on termination of, a trust, discretionary account or
similar arrangement.
Please note that for this purpose, the same security may be "beneficially
owned" by more than one person. For example, several co-trustees may
share the power to vote or dispose of shares. In any applicable question,
please furnish sufficient details to cross-reference any over-lapping
beneficial ownership by you and another director or officer.
Also, where applicable, if you do not have sole voting and investment
power over all shares beneficially owned by you, indicate the shares over
which you have shared voting power and/or shared investment power.
C. Include any beneficial interest in securities through partnerships, joint
accounts, trusts, or controlled corporations and any securities held in
the name of any person if the power to re-vest title to the securities in
yourself exists now or in the future.
Include all securities entirely owned, including shares held by brokers
or banks in custodian accounts or by other nominees.
D. For purposes of this questionnaire, your "immediate family" shall include
your spouse, parents, siblings, mothers and fathers-in-law, sons and
daughters-in-law and brothers and sisters-in-law.
E. The term "associates" means (i) any member of your immediate family, (ii)
any corporation or organization (other than the Company) of which you or
any member of your immediate family is an executive officer or partner or
is, directly or indirectly, the beneficial owner of l0% or more of any
class of equity securities
-1-
<PAGE> 141
and any trust or other estate in which you or any member of your
immediate family has a substantial beneficial interest or as to which you
serve as trustee or in a similar fiduciary capacity.
F. (i) The terms "affiliate" or "affiliated with" mean a person that
directly or indirectly, through one or more intermediaries, controls or
is controlled by, or is under common control with, the person specified.
(ii) The term "parent" means an affiliate controlling that person
directly or indirectly through one or more intermediaries.
-2-
<PAGE> 142
I. STATEMENT OF PERSONAL INFORMATION
---------------------------------
1. Identification
--------------
* (a) State your name, address (residence and business) and social
security number.
Gary A. Bruder Captec Financial Group, Inc.
3945 Loch Alpine Dr. East 24 Frank Lloyd Wright Dr.
Ann Arbor, MI 48103 Lobby L, 4th Floor
Ann Arbor, MI 48106
###-##-####
(b) State your date of birth.
3/3/54
(c) Have you been elected as a director and/or executive officer
pursuant to any arrangement or understanding between you and any other person?
[X] No [ ] Yes
If yes, please name the person and describe the arrangement or understanding.
Describe any arrangement which may result in a change in your status as an
executive officer or director.
<PAGE> 143
2. Business Experience
-------------------
State your principal occupation or employment, the name of the company
or other organization, if any, in which your occupation or employment is carried
on, and the principal business of that corporation or other organization. In
addition, please list all positions and offices held by you with the Company,
and all of your principal occupations and employments with any other corporation
or organization during the past FIFTEEN years beginning with all of your present
positions and offices. Include the name and principal business of any other
corporation or organization in which your prior occupations and employment were
carried on. If you are a director or appointee to the Board of Directors of the
Company, please specify the term of your position.
<TABLE>
<CAPTION>
Dates of Employment
or Terms of Office Name and Address Principal Nature Position
Mo./Yr. to Mo./Yr. of Business of Business Held
- ------------------- --------------------- ------------------ ---------------
<S> <C> <C> <C>
Captec Financial Group, Inc. Senior Vice
5/95 to Present (See above) Financial Services President
- ------------------- --------------------- ------------------ ---------------
Miller, Canfield, Senior
6/80 to 4/95 Paddock, and Stone * Law Firm Principal
- ------------------- --------------------- ------------------ ---------------
- ------------------- --------------------- ------------------ ---------------
- ------------------- --------------------- ------------------ ---------------
</TABLE>
* 101 N. Main St., 7th Floor, Ann Arbor, MI 48104
-2-
<PAGE> 144
3. Other Directorships
-------------------
(a) Are you a director of any company?
[ ] No [X] Yes
If yes, please describe.
Captec Financial Group, Inc.
Food Gatherers (Non-Profit Organization)
4. Legal Proceedings
-------------------
(a) Are you or have you been in [or is any associate (see Note E
attached hereto) of yours or has any associate of yours been] at any time in the
last FIFTEEN years a defendant in a legal proceeding?
[X] No [ ] Yes
If yes, please list the name of the court or agency in which the proceeding is
pending or was adjudicated, the date instituted, the principal parties, a
description of the factual basis alleged to underlie the proceeding, the relief
sought and the disposition, if any.
(b) During the past FIFTEEN years, have you been convicted in any
criminal proceeding or been the named subject of a pending criminal proceeding?
[X] No [ ] Yes
If yes, state the court in which you were tried, the offense for which
you were convicted, and the date of conviction or, as the case may be, state the
court, cause of action, status of the case and the date that the complaint was
filed.
(c) During the past FIFTEEN years, has a petition under United States
federal bankruptcy laws or any state insolvency law been filed by or against you
or any business or property of yours, any partnership of which you were a
general partner at or within two years before the time of the appointment or
filing, or any corporation or business association of which you were an
executive officer at or within two years before the time of the appointment or
filing?
[X] No [ ] Yes
If yes, state the nature of the petition or appointment, the date it was issued,
the name and address of the person or entity against whom the petition was filed
and the position you held and your length of service with the entity.
Language indicated as being shown by strikeout in the typset document is
enclosed in brackets "[" and "]" in the electronic format.
-3-
<PAGE> 145
(d) During the past FIFTEEN years, have you been the subject of any
order, judgment or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction or any federal, state or local authority,
permanently or temporarily enjoining you from, or otherwise limiting your
participation in any type of business activity or practice
No
If yes, state the court, federal, state or local authority, the nature of the
order, judgment or decree, the date thereof and, if appropriate, the activities
covered thereby and the name(s) of the person(s) engaged in the activity.
(f) During the past FIFTEEN years, have you been found by a court of
competent jurisdiction in a civil action or by the SEC to have violated any
federal or state securities law, where the judgment in the civil action or
finding by the SEC has not been subsequently reversed, suspended or vacated?
[X] No [ ] Yes
If yes, state the civil action or finding by the SEC, the date thereof and the
judgment rendered.
-4-
<PAGE> 146
THE FOREGOING RESPONSES ARE TRUE AND ACCURATE TO THE BEST OF MY
INFORMATION AND BELIEF, AND I WILL NOTIFY THE FIRST BOSTON CORPORATION AND ITS
COUNSEL PROMPTLY OF ANY CHANGES IN THE FOREGOING RESPONSES.
Gary A. Bruder
---------------------------------------------
(Print Name)
/s/ Gary A. Bruder
---------------------------------------------
(Signature)
Address: 3945 Loch Alpine Drive East
---------------------------------------------
Ann Arbor, MI 48103
---------------------------------------------
---------------------------------------------
Dated: 2/20 , 1996
-------------------
-5-
<PAGE> 147
Exhibit A
NOTES TO QUESTIONNAIRE
A. If, while responding to the questionnaire, you feel that additional
information may be required to clarify an answer, please include all
facts you may consider relevant. If insufficient space is provided,
you may attach additional pages, as necessary.
B. "Beneficial Ownership" is interpreted in its broadest sense. You
should consider yourself to be the beneficial owner of securities held
beneficially by your spouse or minor children or any other relative
who shares the same home as you or securities held in the name of
another person if by reason of any contract, understanding,
relationship, agreement or other arrangement you obtain therefrom
benefits substantially equivalent to those of ownership.
You should consider yourself to "beneficially own" a security if you,
directly or indirectly, have or share voting power (i.e., the power to
vote or to direct the voting) or investment power (i.e., the power to
dispose or to direct disposition) of the security, whether through any
contract, arrangement, understanding, relationship, or otherwise and
if you have the right to acquire beneficial ownership at any time
within 60 days through the exercise of any option or right, or
pursuant to the power to revoke, or on termination of, a trust,
discretionary account or similar arrangement.
Please note that for this purpose, the same security may be
"beneficially owned" by more than one person. For example, several
co-trustees may share the power to vote or dispose of shares. In any
applicable question, please furnish sufficient details to
cross-reference any over-lapping beneficial ownership by you and
another director or officer.
Also, where applicable, if you do not have sole voting and investment
power over all shares beneficially owned by you, indicate the shares
over which you have shared voting power and/or shared investment
power.
C. Include any beneficial interest in securities through partnerships,
joint accounts, trusts, or controlled corporations and any securities
held in the name of any person if the power to re-vest title to the
securities in yourself exists now or in the future.
Include all securities entirely owned, including shares held by
brokers or banks in custodian accounts or by other nominees.
D. For purposes of this questionnaire, your "immediate family" shall
include your spouse, parents, siblings, mothers and fathers-in-law,
sons and daughters-in-law and brothers and sisters-in-law.
E. The term "associates" means (i) any member of your immediate family,
(ii) any corporation or organization (other than the Company) of which
you or any member of your immediate family is an executive officer or
partner or is, directly or indirectly, the beneficial owner of l0% or
more of any class of equity securities
-1-
<PAGE> 148
and any trust or other estate in which you or any member of your
immediate family has a substantial beneficial interest or as to which
you serve as trustee or in a similar fiduciary capacity.
F. (i) The terms "affiliate" or "affiliated with" mean a person that
directly or indirectly, through one or more intermediaries, controls
or is controlled by, or is under common control with, the person
specified.
(ii) The term "parent" means an affiliate controlling that person
directly or indirectly through one or more intermediaries.
-2-
<PAGE> 149
<TABLE>
<CAPTION>
<S> <C> <C> <C>
EXPEDITED SERVICE REQUESTED Form UCC-11
FOR STATE OFFICE INFORMATION
EXHIBIT G
---------
SUBMIT THIS FORM IN DUPLICATE AND MAIL TO: STATE OF MICHIGAN
- ------------------------------------------
Uniform Commercial Code
Michigan Department of State State
Lansing, Michigan 48918 INFORMATION OR COPY REQUEST Billing
Account No. NA
-------------------
==========================================================================================================================
DEBTORS REQUESTING PARTY
==========================================================================================================================
Name Soc. Sec. No. - Tax I.D. No. Name
CAPTEC NET LEASE REALTY, INC. #38-3206305 CAPTEC FINANCIAL GROUP, INC.
- --------------------------------------------------------------------------------------------------------------------------
Address Attn.:
24 FRANK LLOYD WRIGHT DR, ANN ARBOR MI 48106 MARGARET RIVERA
- --------------------------------------------------------------------------------------------------------------------------
Name Soc. Sec. No. - Tax I.D. No. Street Address
24 FRANK LLOYD WRIGHT DR LOBBY L 4TH FL
- --------------------------------------------------------------------------------------------------------------------------
Address City State Zip Code
ANN ARBOR MI 48106-0544
==========================================================================================================================
Requesting Party Telephone: (313 ) 994-5505
Area -----------
CHECK ONE BELOW: INFORMATION GIVEN IS EXACTLY AS REQUESTED
----------------
INFORMATION Furnish certificate showing whether there is on file as of the date shown below, any
REQUEST presently effective financing statement and tax lien naming the above debtors and any
[X] assignment thereof. Provide information on each statement filed. The undersigned agrees to
pay the sum of $3.00 for each name requested.
Furnish copies of each page of financing statements, tax liens and assignments. The
COPY undersigned agrees to pay $1.00 for each page furnished ($3.00 for Federal Tax Liens) in
REQUEST [X] addition to the sum of $3.00 for each name requested.
- --------------------------------------------------------------------------------------------------------------------------
CHECK ( ) FURNISH FILING INFORMATION DATED: From to
ONE BOX --------------------------- -------------------------------
ONLY (X ) PROVIDE FULL SEARCH Beginning Date Ending Date
- --------------------------------------------------------------------------------------------------------------------------
Date of Request 2/20/96 Signature of Requesting Party /s/ Margaret Rivera
----------- ------------------------------
==========================================================================================================================
FILE NO. DATE AND HOUR FILED NAME AND ADDRESS OF SECURED PARTIES
==========================================================================================================================
NO DOCUMENTS ON FILE
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
==========================================================================================================================
==========================================================FOR OFFICE USE ONLY ============================================
FEES
For Filing Officer Use Only CERTIFICATE
Special 25.00 The Undersigned Filing Officer Certifies that the above is a record of
-------------------------- all presently effective financing statements, tax liens and assignments
which name the above debtors and which are on file as of: 5 pm 2-8-96 19 .
Form ----------------- ---
--------------------------
Regular 3.00 The attached photo copies are true copies of the requested financing statements,
tax liens and assignments on file.
--------------------------
Total 28.00
-------------------------- 2-21-96 ml [ILLEGIBLE SIGNATURE]
------------------- ---------------------------------------------------------
Amt. Paid 28.00 0212001 Typing Date Signature of Filing Officer
--------------------------
UCC-11
(1) Filing Officer Copy (Filing Officer keep this page and file
Rev. 12-86 numerically or chronologically in Information File)
FORM UCC-11-UNIFORM COMMERCIAL CODE
</TABLE>
<PAGE> 150
<TABLE>
<CAPTION>
<S> <C> <C> <C>
WASHTENAW COUNTY REGISTER OF DEEDS Form UCC-11
FOR STATE OFFICE INFORMATION
SUBMIT THIS FORM IN DUPLICATE AND MAIL TO: STATE OF MICHIGAN
- ------------------------------------------
Uniform Commercial Code
Michigan Department of State State
Lansing, Michigan 48918 INFORMATION OR COPY REQUEST Billing
Account No.
-------------------
==========================================================================================================================
DEBTORS REQUESTING PARTY
==========================================================================================================================
Name Soc. Sec. No. - Tax I.D. No. Name
CAPTEC NET LEASE REALTY, INC. #38-3206305 CAPTEC FINANCIAL GROUP, INC.
- --------------------------------------------------------------------------------------------------------------------------
Address Attn.:
24 FRANK LLOYD WRIGHT DRIVE ANN ARBOR MI 48106 MARGARET RIVERA
- --------------------------------------------------------------------------------------------------------------------------
Name Soc. Sec. No. - Tax I.D. No. Street Address
24 FRANK LLOYD WRIGHT DRIVE LOBBY L 4TH FL
- --------------------------------------------------------------------------------------------------------------------------
Address City State Zip Code
ANN ARBOR MI 48106-0544
==========================================================================================================================
Requesting Party Telephone: (313 ) 994-5505
Area -----------
CHECK ONE BELOW: INFORMATION GIVEN IS EXACTLY AS REQUESTED
---------------- UCC ONLY
INFORMATION Furnish certificate showing whether there is on file as of the date shown below, any
REQUEST presently effective financing statement and naming the above debtors and any
[X] assignment thereof. Provide information on each statement filed. The undersigned agrees to
pay the sum of $3.00 for each name requested.
Furnish copies of each page of financing statements, tax liens and assignments. The
COPY undersigned agrees to pay $1.00 for each page furnished ($3.00 for Federal Tax Liens) in
REQUEST [X] addition to the sum of $3.00 for each name requested.
- --------------------------------------------------------------------------------------------------------------------------
CHECK ( ) FURNISH FILING INFORMATION DATED: From to
ONE BOX --------------------------- -------------------------------
ONLY (X ) PROVIDE FULL SEARCH Beginning Date Ending Date
- --------------------------------------------------------------------------------------------------------------------------
Date of Request 2/20/96 Signature of Requesting Party /s/ Margaret Rivera
----------- ------------------------------
==========================================================================================================================
FILE NO. DATE AND HOUR FILED NAME AND ADDRESS OF SECURED PARTIES
==========================================================================================================================
NONE NONE NONE
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
==========================================================================================================================
========================================================= FOR OFFICE USE ONLY ============================================
FEES
For Filing Officer Use Only CERTIFICATE
Special The Undersigned Filing Officer Certifies that the above is a record of
-------------------------- all presently effective financing statements, tax liens and assignments
which name the above debtors and which are on file as of: February 21, 1996 .
Form ----------------- ---
--------------------------
Regular The attached photo copies are true copies of the requested financing statements,
-------------------------- tax liens and assignments on file.
Total Peggy M. Haines, County Clerk/Register
-------------------------- February 22, 1996 By: /s/ Peggy M. Haines
------------------- ---------------------------------------------------------
Amt. Paid Typing Date Deputy Signature of Filing Officer
--------------------------
UCC-11 (1) Filing Officer Copy (Filing Officer keep this page and file
Rev. 12-86 numerically or chronologically in Information File)
FORM UCC-11-UNIFORM COMMERCIAL CODE
</TABLE>
<PAGE> 151
EXHIBIT H-1
-----------
<PAGE> 152
QUARTERLY COMPLIANCE CERTIFICATE
The undersigned, the Chief Financial Officer of Captec Net Lease Realty,
Inc., a Michigan corporation, ("Captec"), pursuant to Section 4(c)(ii) of the
Credit Agreement ("Agreement"), dated February 26, 1996, by and between Captec,
as borrower, and CS First Boston Mortgage Capital Corp., a Delaware corporation,
its successors and assigns, as lender ("Lender"), hereby certifies to Lender as
follows:
(i) all representations and warranties made by Captec in the Agreement
are true and accurate in all material respects as if made on the date hereof;
and
(ii) attached hereto as Exhibit A are quarterly financial statements of
Captec, which statements fairly present in all material respects Captec's
financial condition and results of operations for the quarterly period as
indicated thereon and which are prepared in accordance with GAAP applied on a
consistent basis.
IN WITNESS WHEREOF, the undersigned has executed this
Certificate the _______ day of ____________ 199__.
CAPTEC NET LEASE REALTY, INC.
By:
----------------------------------
Name:
Title: Chief Financial Officer
<PAGE> 153
EXHIBIT H-2
-----------
<PAGE> 154
ANNUAL COMPLIANCE CERTIFICATE
The undersigned, the Chief Financial Officer of Captec Net Lease Realty,
Inc., a Michigan corporation, ("Captec"), pursuant to Section 4(c)(ii) of the
Credit Agreement ("Agreement"), dated February 26, 1996, by and between Captec,
as borrower, and CS First Boston Mortgage Capital Corp., a Delaware corporation,
its successors and assigns, as lender ("Lender"), hereby certifies to Lender as
follows:
(i) all representations and warranties made by Captec in the Agreement
are true and accurate in all material respects as if made on the date hereof;
and
(ii) attached hereto as Exhibit A are the audited financial statements
of Captec for the fiscal year indicated thereon, which are prepared in
accordance with GAAP applied on a consistent basis together with the report
thereon by Captec's Independent Accountants.
IN WITNESS WHEREOF, the undersigned has executed this Certificate the __
day of ____________ 199__.
CAPTEC NET LEASE REALTY, INC.
By:
---------------------------
Name:
Title: Chief Financial Officer
<PAGE> 155
EXHIBIT I
---------
SERVICING PROVISIONS
1. The Borrower shall take any and all actions, or refrain from taking
any such actions, and do any and all things in connection with the servicing and
administration of the Properties and the Leases which it may deem necessary or
desirable, provided, however, that (i) its servicing of the Leases shall be
carried out as provided in the Operations Policy Manual and the Management
Agreement in accordance with the procedures which the Borrower uses in
connection with Leases which are owned by it and not pledged or collateralized,
and (ii) to the extent more exacting, in accordance with prudent, customary and
usual procedures of financial institutions which service leases similar to the
Leases.
2. The Borrower shall calculate and compile such information as is
required to enable it to provide the information in connection with the reports
in the forms attached hereto, and shall deliver such reports to the lender no
later than the tenth day of each month.
<PAGE> 156
CAPTEC NET LEASE REALTY, INC.
SERVICING REPORTS TO BE PROVIDED UNDER THE CREDIT AGREEMENT
Within 20 days of the end of each month, the Company shall deliver to the Lender
the following servicing reports (the "Servicing Reports"), certified to the
Lender by the President or any Vice President of the Company:
1. a Lockbox Compliance Certificate for the preceding month, indicating the
total number of payments of Rents received, the number and percentage of
such payments received directly in the Lockbox Account, and the number and
percentage of such payments not received directly in the Lockbox Account.
2. a Liquid Assets Compliance Certificate for the preceding month, indicating
the total Liquid Assets held by the Company as of the the last day of the
preceding month and certifying that the Company is in compliance with the
Liquid Assets covenant described in Section 4(c)(xxii) of the Agreement.
3. a copy of the Lockbox Account bank statements and bank reconciliations for
the preceding month.
4. a Net Investment Trial Balance for the Leases, as of the last day of the
preceding month, which report shall indicate the gross balance and net
balance due under each Lease and the gross balance and net balance due
under all Leases in aggregate, as of the date of the report.
5. a Summary Past Due Report for the Leases, as of the last day of the
preceding month, which report shall indicate the amount delinquent and the
gross balance due under each and every Lease which is delinquent for more
than five days, as of the date of the report, and shall indicate totals for
the gross balances for all such delinquent Leases, sorted by the following
delinquency categories: 5-30 days delinquent; 31-60 days delinquent; 61-90
days delinquent; and over 90 days delinquent.
6. a Portfolio Activity Report setting forth the details of the occurrence
during the preceding month of any of the following activities: (A) any
amendment to a Lease or the Collateral; (B) any insurance claims made with
respect to any Collateral; (C) any insurance proceeds received with respect
to any Collateral; (D) any proceeds received from the sale of Leases and/or
the related Collateral; (E) any prepayments of a Lease by a Lessee; (F) any
voluntary prepayments made by the Company in accordance with Section 2(a)
of the Agreement; (G) any mandatory prepayments made by the Company in
accordance with Section 2(b) of the Agreement; and (H) any purchase of a
Lease by the Company.
<PAGE> 157
EXHIBIT J
---------
<PAGE> 158
CERTIFICATE
The undersigned, the Chief Financial Officer of Captec Net Lease Realty,
Inc., a Michigan corporation, ("Captec"), pursuant to Section 5(iv) of the
Credit Agreement ("Credit Agreement"), dated February 26, 1996, by and between
Captec, as borrower, and CS First Boston Mortgage Capital Corp., a Delaware
corporation, its successors and assigns, as lender, hereby certifies to Bankers
Trust Company, in its capacity as Custodian (the "Custodian") with respect to
the Lockbox Account established pursuant to a Lockbox Agreement between Captec
and the Custodian, as required under the Credit Agreement, as follows:
The Borrower hereby requests payment in the amount of $ , which
amount was deposited into the Lockbox Account and which does not constitute a
payment of rent by Lessees in respect of the Leases (each as defined in the
Credit Agreement).
The funds payable to Borrower hereunder shall be wire transferred to
Borrower in accordance with the following instructions:
Michigan National Bank
395 Briarwood Circle
Ann Arbor, Michigan 48108
ABA# 072000805
Captec Net Lease Realty, Inc.
Account# 4825-17708-4
IN WITNESS WHEREOF, the undersigned has executed this Certificate the __
day of ____________ 199__.
CAPTEC NET LEASE REALTY, INC.
By: _______________________
Name:
Title: Chief Financial Officer
<PAGE> 159
EXHIBIT K
---------
<PAGE> 160
================================================================================
CAPTEC NET LEASE REALTY, INC.
AND
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
------------------------------------------------------
ASSIGNMENT
OF LEASES AND RENTS
------------------------------------------------------
Dated:
Location:
RECORD AND RETURN TO:
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Attention: Charles J. Hamilton, Jr., Esq.
The premises described within this instrument are also known as Section
____ Block ___ and Lot ___ on the Official Tax Map of __________ County.
================================================================================
<PAGE> 161
ASSIGNMENT OF LEASES AND RENTS
------------------------------
THIS ASSIGNMENT made the ______ day of ___________________, 199___,
between CAPTEC NET LEASE REALTY, INC., a Michigan corporation, having an office
and principal place of business located at 24 Frank Lloyd Wright Drive, Lobby L,
Fourth Floor, P.O. Box 544, Ann Arbor, Michigan 48106-0544 ("Assignor") and CS
FIRST BOSTON MORTGAGE CAPITAL CORP., a Delaware corporation having an office and
principal place of business located at 55 East 52nd Street, 6th Floor, New York,
NY 10055 ("Assignee") .
Preliminary Statement
---------------------
Assignor for good and valuable consideration, the receipt and
sufficiency whereof is hereby acknowledged, hereby absolutely and
unconditionally grants, transfers and assigns to Assignee the entire landlord's
right, title and interest in and to all existing leases covering or affecting
all or any part of that certain lot or piece or parcel of land and building(s),
more particularly described in EXHIBIT A annexed hereto and made a part hereof
(the said premises, together with the buildings and improvements now or
hereafter erected thereon, being hereinafter collectively referred to as the
"Real Estate"), but not any of the obligations or liabilities of Borrower
thereunder.
TOGETHER WITH all leases, tenancies and occupancy agreements hereafter
made (including modifications, extensions and guaranties of existing leases,
tenancies and occupancy agreements) covering the Real Estate or any portion
thereof; this assignment of present and future leases, tenancies and occupancy
agreements being effective without any further or supplemental assignment of any
nature whatsoever (all present and future leases, tenancies and occupancy
agreements are hereinafter collectively referred to as the "Leases") .
TOGETHER WITH all rents, income and profits arising from the Leases and
renewals thereof and together with all rents, income and profits for the use and
occupation of the Real Estate ("Rents") .
THIS Assignment is made for the purposes of securing:
A. The payment of the principal sum, interest and other indebtedness
evidenced by a certain note dated as of February 26, 1996 and secured by a
certain mortgage encumbering the Real Estate dated as of the date hereof,
including all modifications, extensions, increases, renewals and guaranties
thereof (said mortgage and note are hereinafter collectively referred to as the
"Mortgage") .
-1-
<PAGE> 162
B. Payment of all other sums with interest thereon becoming due and
payable to Assignee under the provisions of this Assignment or of the Mortgage
or of any other instrument related thereto (All sums payable under Paragraph A
and Paragraph B, collectively, the "Indebtedness") .
C. The performance and discharge of each and every obligation, covenant
and agreement of Assignor contained herein or in the Mortgage and all documents
relating thereto.
1. ASSIGNOR'S WARRANTIES AND REPRESENTATIONS. Assignor warrants and
represents to Assignee, in order to induce Assignee to make the loan secured by
the Mortgage and to accept this Assignment and knowing that Assignee will rely
hereon, that: (a) Assignor is the sole owner of the entire landlord's interest
in the Leases, (b) the Leases are valid and enforceable and in full force and
effect and have not been altered, modified or amended in any manner whatsoever
except as herein set forth, (c) no rent reserved in the Leases has been
assigned, pledged or in any manner transferred or hypothecated, except pursuant
to this Assignment, and (d) no rent for any period more than thirty (30) days
subsequent to the date of this Assignment has been collected in advance of the
time when the same became due under the terms of the Leases.
2. ASSIGNOR'S COVENANTS. Assignor covenants with Assignee to observe and
perform all the obligations imposed upon the landlord under the Leases and not
to do or permit to be done anything to impair the security thereof; to promptly
send to Assignee copies of all notices of default which Assignor shall send or
receive under the Leases; to enforce, short of termination of the Leases, the
performance or observance of the provisions thereof by the tenants thereunder;
not to collect any of the Rents; not to subordinate the Leases to any mortgage
(other than the Mortgage) or other encumbrance or permit, consent, or agree to
such subordination without the prior written consent of Assignee; not to alter,
modify or change the material terms of the Leases nor give any consent to
exercise any option or renewal not already permitted by the Lease, nor cancel or
terminate the Leases or accept a surrender thereof, nor convey or transfer, nor
suffer or permit a conveyance or transfer of, the Real Estate, or of any
interest therein, so as to effect directly or indirectly, approximately or
remotely, a merger of the estates and rights of, or a termination or diminution
of the obligations of the tenant thereunder; not to alter, modify or change the
terms of any guaranty of the Leases nor cancel or terminate such guaranty,
without the prior written consent of Assignee; except as otherwise permitted
under the terms of the Leases, not to consent to any assignment of, or
subletting under, the Leases without the prior written consent of Assignee;
except for the existing Leases, not make, or suffer to be made, any Lease of all
or any portion of the Real Estate, nor otherwise let all or any portion of the
Real Estate, without the prior written consent of
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<PAGE> 163
Assignee; at Assignee's request, to execute any documentation confirming the
assignment and transfer to Assignee of any and all subsequent Leases upon all or
any part of the Real Estate, and to execute and deliver at the request of
Assignee all other further assurances, confirmations and assignments in the Real
Estate as Assignee shall, from time to time, reasonably require in connection
herewith.
3. PRESENT POSSESSORY INTEREST. Borrower acknowledges and confirms that
Lender has a present, possessory and "choate" interest in and to the Rents.
4. EVENTS OF DEFAULT. Upon, or at any time after, the occurrence of any
Event of Default under the Mortgage, or of any default with respect to any
obligation contained herein and/or in the Leases on the part of Assignor to be
performed or to cause to be performed beyond any applicable notice and grace
periods, Assignee, without in any way waiving such default or Event of Default
or releasing Assignor from any obligation hereunder, at its option, without
notice and without regard to the adequacy of the indebtedness secured hereby and
by the Mortgage, and irrespective of whether Assignee shall have commenced a
foreclosure of the Mortgage, may, either in person or by agent, with or without
bringing any action or proceeding, or by a receiver appointed by a court, take
possession of the Real Estate and have, hold, manage, lease and operate the same
on such terms and for such period of time as Assignee may in its sole discretion
deem proper and either with or without taking possession of the Real Estate in
its own name: (a) make any payment and/or perform any act which Assignor has
failed to make or perform, in such manner and to such extent as Assignee may
deem necessary to protect the security hereof, or otherwise, including without
limitation, the right to appear in and defend any action or proceeding
purporting to affect the security hereof, or the rights or powers of Assignee;
(b) let the Real Estate or any portion thereof in such manner and for such Rents
as Assignee shall determine in its sole and absolute discretion, exercise all
rights and remedies under the Leases and otherwise deal with tenants under the
Leases as Lender shall in its sole and absolute discretion determine; and/or (c)
demand, sue for, or otherwise collect and receive from all persons (including
Assignor, as provided in the Mortgage) all Rents, including those past due and
unpaid, with full power to make from time to time all alterations, renovations,
repairs or replacements thereto or thereof as may seem proper to Assignee and to
apply the Rents to the payment of: (i) all reasonable expenses of managing the
Real Estate, including, without limitation, the salaries, fees and wages of a
managing agent and such other employees as Assignee may deem necessary or
desirable, (ii) all taxes, charges, claims, assessments, water rents, sewer
rents, and any other liens, and premiums for all insurance which Assignee may
deem necessary or desirable, and the cost of all alterations, renovations,
repairs, or replacements, and all expenses incidental to taking and
-3-
<PAGE> 164
retaining possession of the Real Estate, and (iii) all or any portion of the
Indebtedness, together with (iv) all reasonable costs and attorneys' fees, in
such order of priority as to any of the items mentioned in this clause 4(c), as
Assignee, in its sole discretion, may determine, any statute, law, custom or use
to the contrary notwithstanding. The exercise by Assignee of any rights or
powers under this Paragraph 4 shall not be considered a waiver by Assignee of
any default by Assignor under the Mortgage or the Leases or this Assignment, any
statute, law, custom or use to the contrary notwithstanding .
5. NO LIABILITY TO ASSIGNEE. Assignee shall not be liable for any loss
sustained by Assignor resulting from Assignee's failure to let the Real Estate
after default or from any other act or omission of Assignee in managing the Real
Estate after default, unless such loss is caused by the gross negligence,
willful misconduct or bad faith of Assignee. Nor shall Assignee be obligated to
perform or discharge, nor does Assignee hereby undertake to perform or
discharge, any obligation, duty or liability under the Leases or under or by
reason of this Assignment, and Assignor shall, and does hereby agree, to
indemnify Assignee for, and to hold Assignee harmless from, any and all
liability, loss or damage which may or might be incurred under the Leases or
under or by reason of this Assignment and from any and all claims and demands
whatsoever which may be asserted against Assignee by reason of any alleged
obligations and undertakings on its part to perform or discharge any of the
terms, covenants or agreements contained in the Leases, unless resulting from
the gross negligence, willful misconduct or bad faith of Assignee. Should
Assignee incur any such liability under the Leases or under or by reason of this
Assignment or in defense of any such claims or demands, the amount thereof,
including costs, expenses and attorneys ' fees shall be secured hereby and
Assignor shall reimburse Assignee therefor immediately upon demand and, upon the
failure of Assignor so to do, Assignee may, at its option, declare all sums
secured hereby and by the Mortgage immediately due and payable. It is further
understood that this Assignment shall not operate to place responsibility for
the control, care, management or repair of the Real Estate upon Assignee, nor
for the carrying out of any of the terms and conditions of the Leases; nor shall
it operate to make Assignee responsible or liable for any waste committed on the
Real Estate by the tenants or any other parties, nor for any dangerous or
defective condition of the Real Estate, nor for any negligence in the
management, upkeep, repair or control of the Real Estate resulting in loss,
injury or death to any tenant, licensee, employee or stranger, unless resulting
from the gross negligence, willful misconduct or bad faith of Assignee. Assignee
shall assume the obligations of Assignor under a Lease to a tenant thereunder
from and after the date that Assignee succeeds to ownership of the Real Estate,
provided that such Lease remains in full force and effect and Assignee is not
otherwise entitled to terminate such Lease.
-4-
<PAGE> 165
6. TERMINATION. Upon payment in full by Assignor of the Indebtedness or
upon satisfaction of all terms and conditions of Section 2 of the Credit
Agreement in connection with the portion of the Indebtedness allocated to the
Real Estate, this Assignment shall become and be void and of no effect, but the
affidavit, certificate, letter or statement of any officer, agent or attorney of
Assignee showing any part of the Indebtedness to remain unpaid shall be and
constitute presumptive evidence of the validity, effectiveness and continuing
force of this Assignment and any person may, and is hereby authorized to, rely
thereon. Assignor hereby authorizes and directs the tenants named in the Leases
or any other tenants or future tenants or occupants of all or any portion of the
Real Estate, upon receipt from Assignee of written notice to the effect that
Assignee is then the holder of the Mortgage and that a default exists thereunder
or under this Assignment, which default remains uncured beyond any applicable
notice and grace periods, to pay over to Assignee all rents, income and profits
arising or accruing under the Leases or from the Real Estate and to continue so
to do until otherwise notified by Assignee.
7. RELEASE OF OTHER SECURITY. Assignee may take or release other
security for the payment of the Indebtedness, may release any party primarily or
secondarily liable therefor and may apply any other security held by it to the
satisfaction of the Indebtedness without prejudice to any of its rights under
this Assignment.
8. INDEMNIFICATION. Anything in this Assignment, the Mortgage or any
other Credit Facility Document (as defined in Paragraph 16 below) to the
contrary notwithstanding, Assignor shall, except to the extent such loss is
caused by the gross negligence, willful misconduct or bad faith of Assignee or
its agents or employees, indemnify and hold Assignee harmless and defend
Assignee at Assignor's sole cost and expense against any loss or liability, cost
or expense (including, without limitation, reasonable attorneys' fees and
disbursements of Assignee's counsel, whether in-house staff, retained firms or
otherwise) , and all claims, actions, procedures and suits arising out of or in
connection with (i) any ongoing matters arising out of the transaction
contemplated hereby, the Indebtedness, this Assignment, the Mortgage, any other
Credit Facility Document or the Leases, including, but not limited to, all costs
of reappraisal of the Leases, whether required by law, regulation, Assignee or
any governmental or quasi-governmental authority, (ii) any amendment to, or
restructuring of, the Indebtedness and this Assignment, the Mortgage, any other
Credit Facility Document or the Leases, and (iii) any and all lawful action that
may be taken by Assignee in connection with the enforcement of the provisions of
this Assignment, the Mortgage, any other Credit Facility Document or the Leases,
whether or not suit is filed in connection with the same, or in connection with
Assignor, any guarantor of the Indebtedness or any tenant and/or any partner,
-5-
<PAGE> 166
joint venturer or shareholder thereof becoming a party to a voluntary or
involuntary federal or state bankruptcy, insolvency or similar proceeding. All
reasonable sums expended by Assignee shall be payable on demand and, until
reimbursed by Assignor pursuant hereto, shall be deemed additional principal of
the Indebtedness and secured hereby and shall bear interest at the Default Rate
(as such term is defined in that certain Credit Agreement dated as of February
26, 1996 between Assignor and Assignee), as said term is defined in the
Mortgage. The obligations of Assignor under this paragraph shall,
notwithstanding any exculpatory or other provisions of any nature whatsoever set
forth in this Assignment, the Mortgage or any other Credit Facility Document,
constitute the personal recourse undertakings, obligations and liabilities of
Assignor.
9. NO WAIVER. Nothing herein contained, and no act done or omitted by
Assignee pursuant to the powers and rights granted to it hereunder, shall be
deemed to be a waiver by Assignee of its rights and remedies under the Mortgage,
and this Assignment is made and accepted without prejudice to any of the rights
and remedies possessed by Assignee under the terms thereof. The rights of
Assignee to collect the Indebtedness, and to enforce any other security therefor
held by it, may be exercised by Assignee either prior to, simultaneously with,
or subsequent to any action taken by it hereunder. Assignor hereby absolutely,
unconditionally and irrevocably waives any and all right to assert any setoff,
counterclaim or crossclaim of any nature whatsoever with respect to the
obligations of Assignor under this Assignment, the Mortgage, any other Credit
Facility Document or otherwise with respect to the loan secured hereby in any
action or proceeding brought by Assignee to collect same, or any portion
thereof, or to enforce, foreclose and realize upon the lien and security
interest created by this Assignment or any other Credit Facility Document
securing repayment of same, in whole or in part (provided, however, that the
foregoing shall not be deemed a waiver of Assignor's right to assert any
compulsory counterclaim maintained in a court of the United States, or of the
State of New York if such counterclaim is compelled under local law or rule of
procedure, nor shall the foregoing be deemed a waiver of Assignor's right to
assert any claim which would constitute a defense, setoff, counterclaim or
crossclaim of any nature whatsoever against Assignee in any separate action or
proceeding)
10. ASSIGNEE NOT MORTGAGEE IN POSSESSION. Nothing herein contained shall
be construed as constituting Assignee a "mortgagee in possession" in the absence
of the taking of actual possession of the Real Estate by Assignee pursuant to
the provisions herein contained. In the exercise of the powers herein granted to
Assignee, no liability shall be asserted or enforced against Assignee, all such
liability being expressly waived and released by Assignor.
-6-
<PAGE> 167
11. INCONSISTENT TERMS. In case of any inconsistency or conflict between
the terms of this Assignment and the terms of the Mortgage, the terms of this
Assignment shall in all cases govern and control.
12. FURTHER ACTS. Assignor will, at the cost of Assignor, and without
expense to Assignee, do, execute, acknowledge and deliver all and every such
further acts, conveyances, assignments, notices of assignments, transfers and
assurances as Assignee shall, from time to time, reasonably require for the
better assuring, conveying, assigning, transferring and confirming unto Assignee
the property and rights hereby assigned or intended now or hereafter so to be,
or which Assignor may be or may hereafter become bound to convey or assign to
Assignee, or for carrying out the intention or facilitating the performance of
the terms of this Assignment or for filing, registering or recording this
Assignment and, on demand, will execute and deliver and hereby authorizes
Assignee to execute in the name of Assignor to the extent Assignee may lawfully
do so, one or more financing statements, chattel mortgages or comparable
security instruments, to evidence more effectively the lien hereof upon the
Leases.
***[13. NEW YORK LAW. This Assignment is made pursuant to the provisions
of Section 291-f of the Real Property Law of the State of New York.]***
14. NOTICES. All notices given pursuant hereto shall be given (and
deemed received) in the manner set forth in the Mortgage.
15. SUCCESSORS AND ASSIGNS. This Assignment, together with the
covenants, representations and warranties herein contained, shall inure to the
benefit of Assignee and any subsequent holder of the Mortgage and shall be
binding upon Assignor, and its successors and assigns and any subsequent owner
of the Real Estate.
16. AMENDMENTS. This Assignment may only be modified, amended or changed
by an agreement in writing signed by Assignor and Assignee, and may only be
released, discharged or satisfied of record by an agreement in writing signed by
Assignee. No waiver of any term, covenant or provision of this Assignment shall
be effective unless given in writing by Assignee and if so given by Assignee
shall only be effective in the specific instance in which given. Whenever
possible, each provision of this Assignment shall be interpreted in such a
manner as to be effective and valid under applicable law, but if any provision
of this Assignment shall be unenforceable or prohibited by, or invalid under,
applicable law, such provision shall be ineffective to the extent of such
unenforceability, prohibition or invalidity, without invalidating the remaining
provisions of this Assignment. Assignor acknowledges that the Mortgage, this
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<PAGE> 168
Assignment and the other documents and instruments executed and delivered in
connection therewith or otherwise in connection with the loan secured hereby
(the "Credit Facility Documents") set forth the entire agreement and
understanding of Assignor and Assignee with respect to the loan secured hereby
and that no oral or other agreement, understanding, representation or warranty
exists with respect to the loan secured hereby other than those set forth in the
Mortgage, this Assignment and the other Credit Facility Documents.
17. WAIVER OF JURY TRIAL. ASSIGNOR HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES, AND ASSIGNEE BY ITS ACCEPTANCE OF THE MORTGAGE AND THIS
ASSIGNMENT IRREVOCABLY AND UNCONDITIONALLY WAIVES, ANY AND ALL RIGHTS TO TRIAL
BY JURY IN ANY ACTION, SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF
OR OTHERWISE RELATING TO THE MORTGAGE, THIS ASSIGNMENT AND ANY OTHER CREDIT
FACILITY DOCUMENT HERETOFORE, NOW OR HEREAFTER EXECUTED AND/OR DELIVERED IN
CONNECTION THEREWITH, THE LOAN SECURED HEREBY OR IN ANY WAY RELATED TO THIS
TRANSACTION OR OTHERWISE WITH RESPECT TO THE REAL ESTATE OR THE LEASES.
IN WITNESS WHEREOF, this Assignment has been executed by Assignor the
day and year first above written.
CAPTEC NET LEASE REALTY, INC.
By:
---------------------------------------
Name:
Title:
In the presence of:
- ----------------------------
-8-
<PAGE> 169
Corporate Acknowledgement
-------------------------
STATE OF MICHIGAN )
:ss.:
COUNTY OF WASHTENAW )
On the ______ day of [Month], 199____, before me personally came [Name],
to me known, who, being by me duly sworn, did depose and say that [HE/SHE]
resides at _________________________________________________; that [HE/SHE] is
[Title] of CAPTEC NET LEASE REALTY, INC., the corporation described in and which
executed the above instrument; and that [HE/SHE] signed [HIS/HER] name thereto
by authority of the Board of Directors of said corporation.
------------------------------
Notary Public
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<PAGE> 170
EXHIBIT A
---------
(Description of Real Estate)
The aforesaid premises being commonly known as [Address of Real Estate] ; and
being also known as Section ____, Block ____, Lot ___ on the Official Tax Map of
[County] County.
-A1-
<PAGE> 171
EXHIBIT L
---------
<PAGE> 172
================================================================================
CAPTEC NET LEASE REALTY, INC.
IN FAVOR OF
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
--------------------------------------
HAZARDOUS MATERIAL
INDEMNIFICATION AGREEMENT
--------------------------------------
Dated:
Location:
================================================================================
<PAGE> 173
HAZARDOUS MATERIAL
INDEMNIFICATION AGREEMENT
-------------------------
New York, New York
_____________________________, 199_____
Preliminary Statement
---------------------
WHEREAS, CS FIRST BOSTON MORTGAGE CAPITAL CORP., a Delaware corporation
("Lender") has agreed to make a loan to CAPTEC NET LEASE REALTY, INC., a
Michigan corporation ("Borrower") in the principal sum of up to $100,000,000
(the "Loan"), which Loan will be (a) evidenced by and payable in accordance with
the provisions of the Note, (b) secured by the Mortgage, and (c) advanced
pursuant to the provisions of the Credit Agreement, all as defined in Exhibit A;
and
WHEREAS, Lender is willing to make the Loan only if the undersigned
executes and delivers this Hazardous Material Indemnification Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and legal sufficiency of which are hereby
acknowledged, and in order to induce Lender to make the Loan, the undersigned
hereby acknowledges, agrees and confirms that all of the above recitals are
true, correct and complete and hereby covenants and agrees with Lender as
follows:
1. DEFINITIONS. For the purposes of this Hazardous Material
Indemnification Agreement the following terms shall have the following meanings:
(a) the term "Hazardous Material" shall mean any material or substance
that, whether by its nature or use, is now or hereafter defined as hazardous
waste, hazardous substance, pollutant or contaminant under any Environmental
Requirement (as hereinafter defined), or which is toxic, explosive, corrosive,
flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise
hazardous and which is now or hereafter regulated under any Environmental
Requirement, or which is or contains petroleum, gasoline, diesel fuel or another
petroleum hydrocarbon product;
<PAGE> 174
(b) the term "Environmental Requirements" shall collectively mean all
present and future laws, statutes, ordinances, rules, regulations, orders,
codes, licenses, permits, decrees, judgments, directives or the equivalent of or
by any Governmental Authority and relating to or addressing the protection of
the environment or human health;
(c) the term "Governmental Authority" shall mean the Federal government,
or any state or other political subdivision thereof, or any agency, court or
body of the Federal government, any state or other political subdivision
thereof, exercising executive, legislative, judicial, regulatory or
administrative functions;
(d) the term "Mortgaged Property" shall have the meaning given to such
term in the Credit Agreement; and
(e) the term "Indebtedness" shall have the meaning given to such term in
the Credit Agreement.
2. REPRESENTATIONS AND WARRANTIES. The undersigned hereby represents
and warrants to Lender that, except as otherwise disclosed in any environmental
site assessment obtained by Borrower with respect to any Mortgaged Property and
which environmental site assessment has been delivered to and accepted and
approved by Lender, to the best of the undersigned's knowledge after diligent
inquiry:
(a) no Hazardous Material is currently located at, on, in, under or
about the Mortgaged Property;
(c) no releasing, emitting, discharging, leaching, dumping or disposing
of any Hazardous Material from the Mortgaged Property onto or into any other
property or from any other property onto or into the Mortgaged Property has
occurred or is occurring in violation of any Environmental Requirement;
(d) no notice of violation, lien, complaint, suit, order or other notice
with respect to the Mortgaged Property is presently outstanding under any
Environmental Requirement; and
(e) the Mortgaged Property and the operation thereof are in full
compliance with all Environmental Requirements.
3. INDEMNIFICATION. The undersigned will defend, indemnify, and hold
harmless Lender, its employees, agents, officers, and directors, from and
against any and all claims, demands, penalties, causes of action, fines,
liabilities, settlements, damages, costs, or expenses of whatever kind or
nature, known or unknown, foreseen or unforeseen, contingent or otherwise
(including, without limitation, counsel and consultant fees and expenses,
investigation and laboratory fees and
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<PAGE> 175
expenses, court costs, and litigation expenses) arising out of, or in any way
related to:
(a) any breach by Borrower of any of the provisions of Section 1(p) of
the Mortgage or paragraph 4(b) (xxvi) of the Credit Agreement;
(b) the presence, disposal, spillage, discharge, emission, leakage,
release, or threatened release of any Hazardous Material which is at, in, on,
under, about, from or affecting the Mortgaged Property, including, without
limitation, any damage or injury resulting from any such Hazardous Material to
or affecting the Mortgaged Property or the soil, water, air, vegetation,
buildings, personal property, persons or animals located on the Mortgaged
Property or on any other property or otherwise;
(c) any personal injury (including wrongful death) or property damage
(real or personal) arising out of or related to any such Hazardous Material;
(d) any lawsuit brought or threatened, settlement reached, or order or
directive of or by any Governmental Authority relating to such Hazardous
Material; or
(e) any violation of any Environmental Requirement.
The indemnification provided herein shall not extend to any gross
negligence or willful misconduct on the part of Lender with respect to the
Mortgaged Property occurring after such time as Lender or its nominee owns the
Mortgaged Property or takes possession thereof directly (and not by a receiver
or other equivalent third party).
4. LEGAL EXPENSES. The undersigned hereby indemnifies and shall hold
harmless and defend Lender at the undersigned's sole cost and expense against
any loss or liability, cost or expense (including, but not limited to,
reasonable attorneys , fees and disbursements of Lender's counsel, whether
in-house staff, retained firms or otherwise), and all claims, actions,
procedures and suits arising out of or in connection with:
(a) any ongoing matters arising out of this Hazardous Material
Indemnification Agreement and any document or instrument now or hereafter
executed and/or delivered in connection herewith (the "Indemnity Documents");
(b) any amendment to, or restructuring of the obligations of the
undersigned hereunder; and
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<PAGE> 176
(c) any and all lawful action that may be taken by Lender in connection
with the enforcement of the provisions of this Hazardous Material
Indemnification Agreement or any of the other Indemnity Documents and the
obligations of the undersigned thereunder, whether or not suit is filed in
connection with the same, or in connection with Borrower, the undersigned and/or
any partner, joint venturer or shareholder thereof becoming a party to a
voluntary or involuntary federal or state bankruptcy, insolvency or similar
proceeding.
All sums expended by Lender shall be payable on demand and, until reimbursed by
the undersigned pursuant hereto, shall bear interest at the Default Rate (as
such term is defined in the Credit Agreement).
5. SURVIVAL OF OBLIGATIONS AND LIABILITIES. The obligations and
liabilities of the undersigned under this Hazardous Material Indemnification
Agreement shall survive and continue in full force and effect and shall not be
terminated, discharged or released, in whole or in part, irrespective of whether
the Indebtedness has been paid in full and irrespective of any foreclosure of
the Mortgage, sale of the Mortgaged Property pursuant to the provisions of the
Mortgage or acceptance by Lender, its nominee or wholly owned subsidiary of a
deed or assignment in lieu of foreclosure or sale and irrespective of any other
fact or circumstance of any nature whatsoever, subject only to any applicable
statute of limitations.
6. FURTHER ACTS. The undersigned hereby expressly agrees that this
Hazardous Material Indemnification Agreement is independent of, and in addition
to, all collateral granted, pledged or assigned under the Credit Facility
Documents (as such term is defined in the Credit Agreement) , and the
undersigned hereby consents that from time to time, before or after any default
by Borrower, with or without further notice to or assent from any of the
undersigned:
(a) any security at any time held by or available to Lender for any
obligation of Borrower, or any security at any time held by or available to
Lender for any obligation of any other person or party primarily, secondarily or
otherwise liable for all or any portion of the Indebtedness, the Liabilities
and/or any other obligations of Borrower or any other person or party, other
than Lender, under any of the Credit Facility Documents ("Other Obligations") ,
including any guarantor of the Indebtedness, the Liabilities and/or of any of
such Other Obligations, may be accelerated, settled, exchanged, surrendered or
released and Lender may fail to set off and may release, in whole or in part,
any balance of any deposit account or credit on its books in favor of Borrower,
or any such other person or party;
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<PAGE> 177
(b) any obligation of Borrower, or of any such other person or party,
may be changed, altered, renewed, extended, continued, accelerated, surrendered,
compromised, settled, waived or released in whole or in part, or any default
with respect thereto waived; and
(c) Lender may extend further credit in any manner whatsoever to
Borrower, and generally deal with Borrower or any of the above-mentioned
security, deposit account, credit on its books or other person or party as
Lender may see fit;
and the undersigned shall remain bound under this Hazardous Material
Indemnification Agreement, without any loss of rights by Lender and without
affecting the liability of the undersigned, notwithstanding any such exchange,
surrender, release, change, alteration, renewal, extension, continuance,
compromise, waiver, inaction, extension of further credit or other dealing. In
addition, all moneys available to Lender for application in payment or reduction
of the Indebtedness, the Liabilities and/or any Other Obligations may be applied
by Lender in such manner and in such amounts and at such time or times and in
such order, priority and proportions as Lender may see fit.
7. WAIVERS. The undersigned hereby waives:
(a) notice of acceptance of this Hazardous Material Indemnification
Agreement;
(b) protest and notice of dishonor or default to the undersigned or to
any other person or party with respect to any obligations hereby guaranteed;
(c) all other notices to which the undersigned might otherwise be
entitled; and
(d) any demand under this Hazardous Material Indemnification Agreement.
8. DEFAULTS. If any of the following events should occur:
(a) the undersigned violates any provision of this Hazardous Material
Indemnification Agreement;
(b) the undersigned commences any case, proceeding or other action under
any existing or future law of any jurisdiction, domestic or foreign, relating to
bankruptcy, insolvency, reorganization or relief of debtors, or seeks to have an
order for relief entered with respect to it, or seeks to be adjudicated a
bankrupt or insolvent, or seeks reorganization, arrangement, adjustment,
liquidation, dissolution, composition or other relief with respect to it or its
debts, or seeks the
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<PAGE> 178
appointment of a receiver, trustee, custodian or other similar official for it
or for all or any substantial part of their property;
(c) the undersigned makes a general assignment for the benefit of
creditors;
(d) there is commenced against the undersigned, any case, proceeding or
other action of a nature referred to in subparagraph (c) above or seeking the
issuance of a warrant of attachment, execution, distraint or similar process
against all or any substantial part of their property, which case, proceeding or
other action results in the entry of an order for relief or remains undismissed,
undischarged or unbonded for a period of 60 days;
(e) the undersigned takes any action indicating their consent to,
approval of, or acquiescence in, or in furtherance of, any of the acts set forth
in subparagraphs (c) and (e) above;
(f) the undersigned admits in writing its inability to pay its debts as
they mature; or
(g) the undersigned terminates or dissolves or suspends their usual
business activities or conveys, sells, leases, transfers or otherwise disposes
of all or a substantial part of their property, business or assets other than in
the ordinary course of business;
then, and in such event, Lender may declare the Liabilities to be, and the same
shall become, immediately due and payable and/or may exercise any or all of its
remedies as set forth herein or at law or in equity.
9. SUCCESSORS AND ASSIGNS. Each reference herein to Lender shall be
deemed to include its successors and assigns, in whose favor the provisions of
this Hazardous Material Indemnification Agreement shall also inure. Each
reference herein to the undersigned shall be deemed to include the heirs,
executors, administrators, legal representatives, successors and assigns of the
undersigned, all of whom shall be bound by the provisions of this Hazardous
Material Indemnification Agreement, provided, however, that the undersigned
shall in no event nor under any circumstance have the right, without obtaining
the prior written consent of Lender, to assign or transfer the undersigned's
obligations and liabilities under this Hazardous Material Indemnification
Agreement, in whole or in part, to any other person, party or entity.
10. JOINT AND SEVERAL OBLIGATIONS; SURVIVAL OF AGREEMENT. The term
"undersigned" as used herein shall, if this
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<PAGE> 179
Hazardous Material Indemnification Agreement is signed by more than one party,
unless otherwise stated herein, mean the "undersigned and each of them" and each
undertaking herein contained shall be their joint and several undertaking.
Lender may proceed against none, one or more of the undersigned at one time or
from time to time as it sees fit in its sole and absolute discretion. If any
party hereto shall be a partnership, the agreements and obligations on the part
of the undersigned herein contained shall remain in force and application
notwithstanding any changes in the individuals composing the partnership and the
term "undersigned" shall include any altered or successive partnerships but the
predecessor partnerships and their partners shall not thereby be released from
any obligations or liability hereunder. If any party hereto shall be a
corporation, the agreements and obligations on the part of the undersigned
herein contained shall remain in force and application notwithstanding the
merger, consolidation, reorganization or absorption thereof, and the term
"undersigned" shall include such new entity, but the old entity shall not
thereby be released from any obligations or liabilities hereunder. Borrower is
executing this Hazardous Material Indemnification Agreement as a further
assurance that its obligations set forth herein will remain in full force and
effect, notwithstanding the assignment or discharge of record of the Mortgage or
any other fact or circumstances whatsoever.
11. NO WAIVER BY LENDER. No delay on the part of Lender in exercising
any right or remedy under this Hazardous Material Indemnification Agreement or
failure to exercise the same shall operate as a waiver in whole or in part of
any such right or remedy. No notice to or demand on the undersigned shall be
deemed to be a waiver of the obligation of the undersigned or of the right of
Lender to take further action without notice or demand as provided in this
Hazardous Material Indemnification Agreement. No course of dealing between the
undersigned and Lender shall change, modify or discharge, in whole or in part,
this Hazardous Material Indemnification Agreement or any obligations of the
undersigned hereunder.
12. AMENDMENTS. This Hazardous Material Indemnification Agreement may
only be modified, amended, changed or terminated by an agreement in writing
signed by Lender and the undersigned. No waiver of any term, covenant or
provision of this Hazardous Material Indemnification Agreement shall be
effective unless given in writing by Lender and if so given by Lender shall only
be effective in the specific instance in which given. The execution and delivery
hereafter to Lender by the undersigned of a new instrument of guaranty or any
reaffirmation of guaranty, of whatever nature, shall not terminate, supersede or
cancel this instrument, unless expressly SQ provided therein, and all rights and
remedies of Lender hereunder or under any instrument of guaranty hereafter
executed and delivered to Lender
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<PAGE> 180
by the undersigned shall be cumulative and may be exercised singly or
concurrently.
13. ENFORCEABILITY; MERGER CLAUSE. The undersigned acknowledges that
this Hazardous Material Indemnification Agreement and the undersigned's
obligations under this Hazardous Material Indemnification Agreement are and
shall at all times continue to be absolute, irrevocable and unconditional in all
respects, and shall at all times be valid and enforceable irrespective of any
other agreements or circumstances of any nature whatsoever which might otherwise
constitute a defense to this Hazardous Material Indemnification Agreement and
the obligations of the undersigned under this Hazardous Material Indemnification
Agreement or the obligations of any other person or party (including, without
limitation, Borrower) relating to this Hazardous Material Indemnification
Agreement or the obligations of the undersigned hereunder or otherwise with
respect to the Indebtedness, including, but not limited to, a foreclosure of the
Mortgage or the realization upon any other collateral given, pledged or assigned
as security for all or any portion of the Indebtedness, or the filing of a
petition under Title 11 of the United States Code with regard to Borrower or the
undersigned, or the commencement of an action or proceeding for the benefit of
the creditors of Borrower or the undersigned, or the obtaining by Lender of
title to, respectively, the Mortgaged Property or to any collateral given,
pledged or assigned as security for the Indebtedness by reason of the
foreclosure or enforcement of the Mortgage or any other pledge or security
agreement, the acceptance of a deed or assignment in lieu of foreclosure or
sale, or otherwise. This Hazardous Material Indemnification Agreement sets forth
the entire agreement and understanding of Lender and the undersigned with
respect to the matters covered by this Hazardous Material Indemnification
Agreement, and the undersigned acknowledges that no oral or other agreements,
understandings, representations or warranties exist with respect to this
Hazardous Material Indemnification Agreement or with respect to the obligations
of the undersigned under this Hazardous Material Indemnification Agreement,
except those specifically set forth in this Hazardous Material Indemnification
Agreement.
14. DUE EXECUTION. This Hazardous Material Indemnification Agreement has
been validly authorized, executed and delivered by the undersigned. The
undersigned represents and warrants to Lender that it has the [corporate] power
to do so and to perform its obligations under this Hazardous Material
Indemnification Agreement and this Hazardous Material Indemnification Agreement
constitutes the legally binding obligation of the undersigned fully enforceable
against the undersigned in accordance with the terms hereof. The undersigned
further represents and warrants to Lender that:
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<PAGE> 181
(a) neither the execution and delivery of this Hazardous Material
Indemnification Agreement nor the consummation of the transactions contemplated
hereby nor compliance with the terms and provisions hereof will violate any
applicable provision of law or any applicable regulation or other manifestation
of governmental action; and
(b) all necessary approvals, consents, licenses, registrations and
validations of any governmental regulatory body, including, without limitation,
approvals required to permit the undersigned to execute and carry out the
provisions of this Hazardous Material Indemnification Agreement, for the
validity of the obligations of the undersigned hereunder and for the making of
any payment or remittance of any funds required to be made by the undersigned
under this Hazardous Material Indemnification Agreement, have been obtained and
are in full force and effect.
15. NOTICES. Any notice, request or demand given or made under this
Hazardous Material Indemnification Agreement shall be in writing and shall be
hand delivered or sent by Federal Express or other reputable courier service or
by postage prepaid registered or certified mail, return receipt requested, and
shall be deemed given shall be deemed delivered on receipt if delivered by hand
or wire transmission, on the next business day after mailing or deposit with the
postal service or an overnight courier service if delivered by express mail or
overnight courier, or on the third business day after mailing if mailed by
registered or certified mail, return receipt requested, as follows:
If to Lender:
CS First Boston Mortgage Capital Corp.
55 E. 52nd Street
6th Floor
New York, New York 10055
Attention: Laura Goldberg
With a copy to:
Battle Fowler LLP
75 E. 55th Street
New York, New York 10022
Attention: Charles J. Hamilton, Jr., Esq.
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<PAGE> 182
If to the undersigned:
Captec Net Lease Realty, Inc.
24 Frank Lloyd Wright Drive
Lobby L, 4th Floor
Ann Arbor, Michigan 48106
Attention: W. Ross Martin
it being understood and agreed that each party will use reasonable efforts to
send copies of any notices to the addresses marked "With a copy to" hereinabove
set forth; provided, however, that failure to deliver such copy or copies shall
have no consequence whatsoever to the effectiveness of any notice made to the
undersigned or Lender. Each party to this Hazardous Material Indemnification
Agreement may designate a change of address by notice given, as herein provided,
to the other party fifteen (15) days prior to the date such change of address is
to become effective.
16. GOVERNING LAW. This Hazardous Material Indemnification Agreement is,
and shall be deemed to be, a contract entered into under and pursuant to the
laws of the State of New York and shall be in all respects governed, construed,
applied and enforced in accordance with the laws of the State of New York
without regard to principles of conflicts of laws. The undersigned acknowledges
and agrees that this Hazardous Material Indemnification Agreement is, and is
intended to be, an instrument for the payment of money only, as such phrase is
used in section 3213 of the Civil Practice Law and Rules of the State of New
York, and the undersigned has been fully advised by its counsel of Lender's
rights and remedies pursuant to said section 3213. Nevertheless, Lender is
hereby given the right to elect, in its sole and absolute discretion, that this
Hazardous Material Indemnification Agreement be governed by the laws of the
state in which the Mortgaged Property is situate.
17. VENUE AND JURISDICTION. The undersigned agrees to submit to personal
jurisdiction in the State of New York in any action or proceeding arising out of
this Hazardous Material Indemnification Agreement. In furtherance of such
agreement, the undersigned hereby agrees and consents that without limiting
other methods of obtaining jurisdiction, personal jurisdiction over the
undersigned in any such action or proceeding may be obtained within or without
the jurisdiction of any court located in New York and that any process or notice
of motion or other application to any such court in connection with any such
action or proceeding may be served upon the undersigned by registered or
certified mail to, or by personal service at, the last known address of the
undersigned, whether such address be within or without the jurisdiction of any
such court. The undersigned hereby further agrees that the venue of any
litigation arising in
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<PAGE> 183
connection with the Indebtedness or in respect of any of the obligations of the
undersigned under this Hazardous Material Indemnification Agreement, shall, to
the extent permitted by law, be in New York County.
18. NO SETOFF OR COUNTERCLAIM. The undersigned absolutely,
unconditionally and irrevocably waives any and all right to assert or interpose
any defense, setoff, counterclaim or crossclaim of any nature whatsoever with
respect to this Hazardous Material Indemnification Agreement or the obligations
of the undersigned under this Hazardous Material Indemnification Agreement or
the obligations of any other person or party (including, without limitation,
Borrower) relating to this Hazardous Material Indemnification Agreement or the
obligations of the undersigned hereunder or otherwise with respect to the Loan
in any action or proceeding brought by Lender to collect the Indebtedness, or
any portion thereof, or to enforce the obligations of the undersigned under this
Hazardous Material Indemnification Agreement (provided, however, that the
foregoing shall not be deemed a waiver of the right of the undersigned to assert
any compulsory counterclaim maintained in a court of the United States, or of
the State of New York if such counterclaim is compelled under local law or rule
of procedure, nor shall the foregoing be deemed a waiver of the right of the
undersigned to assert any claim which would constitute a defense, setoff,
counterclaim or crossclaim of any nature whatsoever against Lender in any
separate action or proceeding).
19. NO EXCULPATION. No exculpatory provisions which may be contained in
any Credit Facility Document shall in any event or under any circumstances be
deemed or construed to modify, qualify, or affect in any manner whatsoever the
obligations and liabilities of the undersigned under this Hazardous Material
Indemnification Agreement.
20. WAIVER OF JURY TRIAL. THE UNDERSIGNED HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES, AND LENDER BY ITS ACCEPTANCE OF THIS HAZARDOUS MATERIAL
INDEMNIFICATION AGREEMENT IRREVOCABLY AND UNCONDITIONALLY WAIVES, ANY AND ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR COUNTERCLAIM ARISING IN CONNECTION
WITH, OUT OF OR OTHERWISE RELATING TO THIS HAZARDOUS MATERIAL INDEMNIFICATION
AGREEMENT.
IN WITNESS WHEREOF, the undersigned has duly executed this Hazardous
Material Indemnification Agreement the day and year first above set forth.
WITNESSES: BORROWER:
CAPTEC NET LEASE REALTY, INC.
- --------------------------
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<PAGE> 184
- --------------------------
By:
----------------------------------
Name:
Title:
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<PAGE> 185
STATE OF MICHIGAN )
: ss.:
COUNTY OF WASHTENAW )
The foregoing Hazardous Material Indemnification Agreement was
acknowledged before me the ____ day of _________________, 199_, by (NAME OF
SIGNING INDIVIDUAL), a/the [OFFICIAL TITLE OF SIGNING INDIVIDUAL] of CAPTEC NET
LEASE REALTY, INC. a Michigan corporation on such corporation's behalf.
Notary
Public
County, ---------
My
Commission Expires:
[Notary Public's Seal]
<PAGE> 186
EXHIBIT A
---------
NOTE: The term "Note" as used in this Hazardous Material Indemnification
Agreement shall mean a certain Revolving Note dated February 26, 1996, in the
principal sum of up to $100,000,000 given by Borrower to Lender.
MORTGAGE: The term "Mortgage" as used in this Hazardous Material
Indemnification Agreement shall mean a certain Mortgage, Security Agreement and
Assignment of Leases and Rents dated as of the date hereof in the principal sum
of $100,000,000 to be given by Borrower to Lender constituting a
_________________ lien on the ____________________ estate of Borrower in certain
premises located in _______________________________ County, as more particularly
described therein, and intended to be duly recorded in ________________________
County,
CREDIT AGREEMENT: The term "Credit Agreement" as used in this Hazardous
Material Indemnification Agreement shall mean a certain Credit Agreement dated
February 26, 1996, between Lender and Borrower.
-Al-
<PAGE> 187
EXHIBIT M
---------
<PAGE> 188
================================================================================
CAPTEC NET LEASE REALTY, INC.
AND
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
--------------------------------------
MORTGAGE, SECURITY AGREEMENT AND
ASSIGNMENT OF LEASES AND RENTS
--------------------------------------
Dated:
Location:
RECORD AND RETURN TO:
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Attention: Charles J. Hamilton, Jr., Esq.
The premises described within this instrument are also known as Section
____ Block ___ and Lot ___ on the Official Tax Map of _________ County.
================================================================================
<PAGE> 189
Prepared By And when Recorded
Return To:
Battle Fowler LLP
75 E. 55th Street
New York, New York 10022
Attention: Charles J. Hamilton, Jr., Esq.
Loan Number: __________
MORTGAGE, SECURITY AGREEMENT AND
--------------------------------
ASSIGNMENT OF LEASES AND RENTS
------------------------------
THIS MORTGAGE, SECURITY AGREEMENT AND ASSIGNMENT OF LEASES AND RENTS
("Mortgage") is made this [DAY] day of [MONTH], 199_, by CAPTEC NET LEASE
REALTY, INC., a Michigan corporation, whose address is 24 Frank Lloyd wright
Drive, Lobby L, 4th Floor, P.O. Box 544, Ann Arbor, Michigan 48106-0544
("Borrower"), in favor of CS FIRST BOSTON MORTGAGE CAPITAL CORP., a Delaware
corporation whose address is 55 E. 52nd Street, 6th Floor, New York, New York
10055 ("Lender").
Preliminary Statement
---------------------
Borrower is the owner of a fee estate in the premises described in
Schedule A attached hereto (the "Real Estate");
***[Borrower is the owner of a leasehold estate in the premises
described in Schedule A attached hereto (the "Real Estate") under and pursuant
to the provisions of the lease described in Schedule A-i attached hereto (the
"Ground Lease") ;]***
This Mortgage is made to secure all of the following (individually and
collectively the "Obligations"):
A. Payment in the sum of One Hundred Million and 00/100 Dollars
($100,000,000), together with interest, costs and all other sums on that amount,
to be paid according to that certain Revolving Note dated as of February 26,
1996 made by Borrower in favor of Lender ("Note") of guaranties or other
evidence(s) of indebtedness to Lender made as of the date of this Mortgage by
Borrower; and any and all extensions, renewals, modifications, substitutions or
replacements thereof. This reference to a particular dollar amount does not in
any way limit the dollar amount secured by this Mortgage.
<PAGE> 190
B. The performance of the covenants and obligations due or to become due
to Lender, including, without limit, those due under this Mortgage and all other
Credit Facility Documents, and the repayment of all sums expended by Lender in
connection with performance of those covenants and obligations.
Granting Clause
---------------
To secure the Obligations and as security for the purposes stated
elsewhere in this Mortgage, Borrower has mortgaged, given, granted, bargained,
sold, aliened, enfeoffed, conveyed, confirmed and assigned, and by these
presents does mortgage, give, grant, bargain, sell, alien, enfeoff, convey,
confirm, warrant and assign unto Lender, its successors and assigns, forever all
right, title and interest of Borrower now owned, or hereafter acquired, in and
to the following property, rights, interests and privileges (such property,
rights and interests being hereinafter collectively referred to as the
"Mortgaged Property"):
A. The Real Estate
B. All buildings, structures and improvements now located, or
subsequently constructed or placed upon the Real Estate, including, without
limit, all building materials and building equipment located on the Real Estate
(collectively, the "Improvements");
***[ C. The Ground Lease and the leasehold estate created thereunder;]
***
***[ D. All modifications, extensions and renewals of the Ground Lease
and all credits, deposits, options, purchase options, privileges and rights of
Borrower under the Ground Lease, including, but not limited to, the right, if
any, to renew or extend the Ground Lease for a succeeding term or terms or to
acquire fee title to or other interest in all or any portion of the Real Estate
or the Improvements;]***
E. All of the estate, right, title, claim or demand of any nature
whatsoever of Borrower, either in law or in equity, in possession or expectancy,
in and to the Mortgaged Property or any part thereof;
F. All easements, rights-of-way, gores of land, streets, ways, alleys,
passages, sewer rights, waters, water courses, water rights and powers, and all
estates, rights, titles, interests, privileges, liberties, tenements,
hereditaments, and appurtenances of any nature whatsoever, in any way belonging,
relating or pertaining to the Mortgaged Property (including, without limitation,
any and all development rights,
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air rights or similar or comparable rights of any nature whatsoever now or
hereafter appurtenant to the Real Estate or now or hereafter transferred to the
Real Estate) and all land lying in the bed of any street, road or avenue, opened
or proposed, in front of or adjoining the Real Estate to the center line
thereof;
G. All machinery, apparatus, equipment, goods, fittings, fixtures and
articles of personal property of every kind and nature owned by Borrower, or in
which Borrower has or shall have an interest, now or hereafter located upon the
Real Estate, or appurtenances thereto, or usable in connection with the present
or future operation and occupancy of the Mortgaged Property and all building
equipment, materials and supplies of any nature whatsoever owned by Borrower, or
in which Borrower has or shall have an interest, now or hereafter located upon
the Mortgaged Property (individually and collectively, "Equipment"), and all of
the right, title and interest of Borrower in and to any Equipment which may be
subjected to any title retention or security agreement superior in lien to the
lien of this Mortgage. It is agreed that all Equipment is part and parcel of the
Mortgaged Property and appropriated to the use of the Real Estate and, whether
affixed or not, unless Lender shall otherwise elect, be deemed to be real estate
and granted under this Mortgage;
H. All leases, tenancies and occupancy agreements hereafter made
(including modifications, extensions and guaranties of existing leases,
tenancies and occupancy agreements) ***[(other than the Ground Lease)]***
covering the Premises or any portion thereof (all present and future leases,
tenancies and occupancy agreements are hereinafter collectively referred to as
the "Leases") and the right to receive and apply the rents, income and profits
arising from the Leases and/or the Real Estate (the "Rents") to the payment of
the Obligations;
I. All rents, issues, profits, revenues, proceeds, accounts and general
intangibles arising from the Real Estate or relating to any business conducted
by Borrower on the Real Estate, under present or future leases, reservation
and/or purchase agreements, licenses or otherwise, which are specifically
assigned and transferred to Lender;
J. All right, title and interest of Borrower in and to the land lying in
the bed of any street, road, avenue, alley or walkway, opened or proposed or
vacated, adjoining the Real Estate ;
K. Any and all awards or payments, including, without limit, interest on
any awards or payments, and the right to. receive them, which may be made with
respect to the Mortgaged Property as a result of: (a) the exercise of the right
of eminent domain (including any transfer made in lieu of the exercise of said
right), (b) the alteration of the grade of any
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street, (c) any loss of or damage to any building or other improvement on the
Real Estate, (d) any other injury to or decrease in the value of the Mortgaged
Property, (e) any refund due on account of the payment of real estate taxes,
assessments or other charges levied against or imposed upon the Mortgaged
Property, or (f) any refund of utility deposits or right to any tenant deposit;
L. All proceeds of and any unearned premiums on any insurance policies
covering the Mortgaged Property, including, without limitation, the right to
receive and apply the proceeds of any insurance, judgments, or settlements made
in lieu thereof, for damage to the Mortgaged Property;
M. The right, in the name and on behalf of Borrower, to appear in and
defend any action or proceeding brought with respect to the Mortgaged Property
and to commence any action or proceeding to protect the interest of Lender in
the Mortgaged Property; and
N. All proceeds of each of the foregoing.
1. COVENANTS AND WARRANTIES. Borrower covenants, represents and warrants
to Lender as follows:
(a) AUTHORITY; NO CONFLICT. Borrower has the power and authority to
execute, deliver and perform its obligations under this Mortgage. The execution,
delivery and performance of this Mortgage by Borrower does not, and will not
violate or conflict with any provision of its organizational or charter
documents or any agreement, court order or consent decree to which Borrower is a
party or by which Borrower may be bound.
(b) WARRANTY OF TITLE. Borrower is the owner and is lawfully seized and
possessed of the Mortgaged Property. Borrower has good right, full power and
authority to mortgage the Mortgaged Property in accordance with the terms of
this Mortgage. Subject only to the Permitted Encumbrances (as such term is
defined in that certain Credit Agreement dated as of February 26, 1996 between
Borrower and Lender (the "Credit Agreement")), Borrower warrants the title to
the Real Estate, the Improvements, the Equipment ***[, the Ground Lease]*** and
the balance of the Mortgaged Property. ***[In addition, Borrower represents and
warrants that (i) the Ground Lease is in full force and effect and has not been
modified in any manner whatsoever, (ii) there are no defaults under the Ground
Lease and no event has occurred, which but for the passage of time, or notice,
or both, would constitute a default under the Ground Lease, (iii) all rents,
additional rents and other sums due and payable under the Ground Lease have been
paid in full, and (iv) no action has commenced and no notice has been given or
received for the purpose of terminating the Ground Lease.]*** Borrower also
represents and
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warrants that (i) Borrower is now, and after giving effect to this Mortgage will
be in, a solvent condition, (ii) the execution and delivery of this Mortgage by
Borrower does not constitute a "fraudulent conveyance" within the meaning of
Title 11 of the Bankruptcy Code as now constituted or under any other applicable
statute, and (iii) no bankruptcy or insolvency proceedings are pending or
contemplated by or against Borrower, (iii) .
(c) LEASES. (i) Borrower is the sole owner of the entire landlord's
interest in the Leases (as such term is defined in that certain Assignment of
Leases and Rents (the "Assignment of Leases") dated as of the date hereof made
by Borrower in favor of Lender), (ii) the Leases are valid and enforceable and
in full force and effect and have not been altered, modified or amended in any
manner whatsoever except as herein set forth, (iii) no rent reserved in the
Leases has been assigned, pledged or in any manner transferred or hypothecated,
except pursuant to this Mortgage or the Assignment of Leases, and (iv) no rent
for any period more than thirty (30) days subsequent to the date of this
Mortgage has been collected in advance of the time when the same became due
under the terms of the Leases.
(d) PAYMENT OF OBLIGATIONS. Borrower will pay and perform the
Obligations at the time and in the manner provided for its payment in the Note
and in the other Credit Facility Documents (as such term is defined in the
Credit Agreement) .
(e) MAINTENANCE OF MORTGAGED PROPERTY; WASTE. Borrower shall preserve
and maintain the Mortgaged Property in good repair, working order and condition,
excepting ordinary wear and tear, and shall not commit or permit the commission
of waste . against the Mortgaged Property. The Improvements and the Equipment
shall not be removed, demolished or materially altered (except for normal
replacement of the Equipment), without the consent of Lender. Failure, refusal
or neglect of Borrower to pay any taxes or assessment or any utility rates
levied, assessed or imposed upon the Mortgaged Property, and/or nonpayment of
any premiums for insurance, shall constitute waste, and shall entitle Lender to
exercise the remedies provided in this Mortgage, as well as those afforded by
law. Borrower will not, without obtaining the prior consent of Lender, initiate,
join in or consent to any private restrictive covenant, zoning ordinance, or
other public or private restrictions, limiting or affecting the uses which may
be made of the Mortgaged Property or any part thereof .
(f) PAYMENT OF TAXES; DISCHARGE OF LIENS.
(i) Borrower shall pay when due, and before any interest, collection
fees or penalties accrue, all taxes, assessments, encumbrances, liens,
mortgages, deeds of trust, water or sewer charges and other charges and
impositions,
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including vault charges and license fees for the use of vaults, chutes and
similar areas adjoining the Real Estate, now or hereafter levied, assessed or
existing with respect to the Mortgaged Property, or any part of it (the
"Impositions"), prior to the date upon which any fine, penalty, interest or cost
may be added thereto or imposed by law for the nonpayment thereof and Borrower
will deliver to Lender receipts showing payment of the Impositions prior to the
date upon which any fine, penalty, interest or cost may be added thereto or
imposed by law for the nonpayment thereof. If Borrower fails to pay any of the
Impositions, Lender, at its option, may pay such Impositions and the monies paid
shall be a lien upon the Mortgaged Property, added to the amount secured by this
Mortgage, and payable immediately by Borrower to Lender with interest at the
higher of (A) the interest rate, if any, charged by the particular entity
levying or assessing the Impositions, or (B) the highest rate charged by Lender
on any of the Obligations (but in either case not to exceed the maximum interest
rate permitted by law) .
(ii) Upon the occurrence of a default under this Mortgage or any other
Credit Facility Document, at the option of Lender, Borrower shall pay to Lender,
in advance on the fifteenth day of each month, a pro rata portion (as determined
by Lender) of all Impositions levied, assessed or existing on the Mortgaged
Property. In the event that sufficient funds have been deposited with Lender to
cover the amount of the Impositions when they become due and payable, Lender
shall, in its discretion, (A) return any excess to Borrower, or (B) credit such
excess against future payments to be made to such escrow fund. In the event that
sufficient funds have not been deposited to cover the amount of the Impositions
at least thirty (30) days prior to the time when they become due and payable,
Borrower shall immediately pay the amount of the deficiency to Lender. Lender
shall not be required to keep a separate account or to pay Borrower any interest
on the funds held by Lender for the payment of the Impositions pursuant to this
Section 1(f) (ii) or for the payment of insurance premiums under Section 1(h)
(v) below, or on any other funds deposited with Lender in connection with this
Mortgage. The funds on deposit with Lender are further security for the
Obligations and if an Event of Default occurs under this Mortgage, any funds
remaining on deposit with Lender may be applied against the Obligations at any
time after the Event of Default occurs, and without notice to Borrower.
(g) TRANSFER OR ENCUMBRANCE OF MORTGAGED PROPERTY. Except as set forth
in the Credit Agreement, no part of the Mortgaged Property nor any interest of
any nature whatsoever therein nor any interest of any nature whatsoever in
Borrower (whether partnership, stock, equity, beneficial, profit, loss or
otherwise) shall in any manner be further encumbered, sold, transferred,
assigned or conveyed, or permitted to be further encumbered, sold, transferred,
assigned or conveyed without the
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prior consent of Lender, which consent in any and all circumstances may be
withheld in the sole and absolute discretion of Lender. The provisions of the
foregoing sentence of this paragraph shall apply to each and every such further
encumbrance, sale, transfer, assignment or conveyance, regardless of whether or
not Lender has consented to, or waived by its action or inaction its rights
hereunder with respect to, any such previous further encumbrance, sale,
transfer, assignment or conveyance, and irrespective of whether such further
encumbrance, sale, transfer, assignment or conveyance is voluntary, by reason of
operation of law or is otherwise made. In the event ownership of the Mortgaged
Property, or any part, becomes vested in any person(s) other than Borrower,
Lender may deal with and may enter into any contract or agreement with the
successor(s) in interest with reference to this Mortgage in the same manner as
with the Borrower, without discharging or otherwise affecting the lien of this
Mortgage or Borrower's obligations under this Mortgage.
(h) INSURANCE. (i) Borrower shall keep the Improvements and Equipment
insured for the benefit of Lender against fire, standard extended coverage
perils and other hazards and risks, including, without limit, vandalism and
malicious mischief, as Lender may from time to time require and shall further
provide flood insurance (if the Mortgaged Property is situated in an area which
is considered a flood risk area by the United States Department of Housing and
Urban Development, and for which flood insurance is available under the National
Flood Insurance Act of 1968, as amended) or a certification in form satisfactory
to Lender from a licensed surveyor, appraiser or professional engineer or other
qualified person that no portion of the Real Estate is located in a federally
designated "special flood hazard area", loss of rents insurance, general
liability and product liability insurance and any other insurance as Lender may
reasonably require from time to time. All insurance shall be in amounts and in
forms and with companies as is required under the terms of the Credit Agreement.
(ii) Borrower shall deliver to Lender the policies evidencing the
required insurance with premiums fully paid for one year in advance, and with
standard mortgagee clauses (making all losses payable to Lender) . Renewals of
the required insurance (together with evidence of premium prepayment for one (1)
year in advance) shall be delivered to Lender at least thirty (30) days before
the expiration of any existing policies. All policies and renewals shall provide
that they may not be canceled or amended without giving Lender thirty (30) days
prior written notice of cancellation or amendment. Should Borrower fail to
insure or fail to pay the premiums on any required insurance or fail to deliver
the policies or renewals as provided above, Lender may have the insurance issued
or renewed (and pay the premiums on it for the account of Borrower) in amounts
and with companies and at premiums as Lender deems appropriate. If Lender
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elects to have insurance issued or renewed to insure Lender's interest, Lender
shall have no duty or obligation of any kind to also insure Borrower's interest
or to notify Borrower of Lender's actions. Any sums paid by Lender for
insurance, as provided above, shall be a lien upon the Mortgaged Property, added
to the amount secured by this Mortgage, and payable immediately by Borrower to
Lender, as the case may be, with interest on those sums at the highest rate
charged by Lender on any of the Obligations (but not to exceed the maximum
interest rate permitted by law) .
(iii) In the event of loss or damage, the proceeds of all required
insurance shall be paid to Lender. No loss or damage shall itself reduce the
Obligations. Lender or any of its employees is each irrevocably appointed
attorney-in-fact for Borrower and is authorized to adjust and compromise each
loss without the consent of Borrower, to collect, receive and receipt for the
insurance proceeds in the name of Lender and Borrower and to endorse Borrower's
name upon any check in payment of the loss. The proceeds shall be applied first
toward reimbursement of all costs and expenses of Lender in collecting the
proceeds (including, without limit, court costs and reasonable attorneys' fees),
and then toward payment of the Obligations or any portion of it, whether or not
then due or payable and in whatever order of maturity as Lender may elect, or
Lender, at its option, may apply the insurance proceeds, or any part of them, to
the repair or rebuilding of the Mortgaged Property. If Lender elects to restore
or repair the Mortgaged Property, Borrower and Lender shall enter into a written
agreement satisfactory to Lender providing for the terms under which the
insurance proceeds shall be released. Application of proceeds by Lender toward
later maturing installments of the Obligations shall not excuse Borrower from
making the regularly scheduled installment payments nor shall such application
extend or reduce the amount of any of these payments.
(iv) In the event of a foreclosure of this Mortgage, or the giving of a
deed in lieu of foreclosure, the purchaser or grantee of the Mortgaged Property
shall succeed to all of the rights of Borrower under the insurance policies
including, without limit, any right to unearned premiums and to receive the
proceeds.
(v) Upon the occurrence of a default under this Mortgage or any other
Credit Facility Document, at the option of Lender, Borrower shall pay to Lender,
in advance on the first day of each month, a pro rata portion of the annual
premiums due (as estimated by Lender) on the required insurance. In the event
that sufficient funds have been deposited with Lender to cover the amount of the
insurance premiums when the premiums become due and payable, Lender shall pay
the premiums. In the event that sufficient funds have not been deposited with
Lender to pay the
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insurance premiums at least thirty (30) days prior to the time when they become
due and payable, Borrower shall immediately pay the amount of the deficiency to
Lender.
***[(vi) The provisions of subsection 4 of Section 254 of the Real
Property Law of New York covering the insurance of buildings against loss
by fire shall not apply to this Mortgage .]***
(i) COMPLIANCE WITH LAW AND OTHER MATTERS. Borrower will comply with all
federal, state and local laws, ordinances, rules, regulations and restrictions
relating to the ownership, use, occupancy and operation of the Mortgaged
Property. Borrower shall be solely responsible to apply for and secure any
building permit or permission of any duly constituted authority for the purpose
of doing any of the things which Borrower is required or permitted to do under
the provisions of this Mortgage. Further, Borrower will comply with, perform
Borrower's obligations under, and enforce the obligation of all other parties to
all building and use restrictions, ground leases, leases, reservation and/or
purchase agreements, condominium documents and/or other instruments affecting or
relating to the use and/or occupancy of the Mortgaged Property.
(j) ALTERATION OF IMPROVEMENTS. (i) Without the prior written consent of
Lender, Borrower will not remove any building, structure or other improvement
forming part of the Mortgaged Property .
(ii) Borrower may from time to time make alterations, replacements,
additions, changes, and improvements (collectively, "Alterations") in and to the
Mortgaged Property as Borrower may find necessary or convenient for its
purposes; provided, however, that no such Alterations shall decrease the value
of the Mortgaged Property. All work with respect to any Alteration shall be done
in a good and workmanlike manner by properly qualified and licensed personnel,
and such work shall be diligently prosecuted to completion.
(iii) Borrower shall pay the costs of any Alterations done on the
Mortgaged Property, and shall keep the Mortgaged Property free and clear of
liens of any kind. Borrower shall indemnify and defend Lender from and against
any liability, loss, damage, costs, attorneys' fees, and any other expense
incurred as a result of claims of lien by any person performing work or
furnishing materials or supplies for Borrower or any person claiming under
Borrower.
(iv) No Alteration shall be undertaken until Borrower shall have
procured and paid for all required permits and authorizations of all municipal
departments and governmental subdivisions having jurisdiction. Any Alteration
involving an
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estimated cost of more than Twenty-Five Thousand and 00/100 Dollars
($25,000.00) shall be conducted under the supervision of a licensed architect
or engineer selected by Borrower and satisfactory to Lender and shall be made
in accordance with detailed plans and specifications ("Plans and
Specifications") and cost estimates prepared by such architect or engineer and
approved in writing in advance by Lender. Any Alteration shall be made
promptly and in a good workmanlike manner and in compliance with all
applicable permits and authorizations and building and zoning laws and all
laws and in accordance with the orders, rules and regulations of the Board of
Fire Insurance Underwriters and any other body hereafter exercising similar
functions having or asserting jurisdiction over the Mortgaged Property.
(v) In connection with any Alteration involving an estimated
cost in excess of Twenty-Five Thousand and 00/100 Dollars ($25,000.00), Lender
shall have the right to require Borrower to post a bond or other security
reasonably satisfactory to Lender to insure the completion of such Alteration.
(k) OBLIGATION TO REBUILD. (i) If any portion of the Mortgaged
Property is damaged or destroyed by fire or other casualty, Lender shall
forthwith give notice thereof to Lender. Borrower shall, at its sole cost and
expense, forthwith repair, restore, rebuild or replace the damaged or
destroyed improvements, fixtures or equipment, and complete the same as soon
as reasonably possible, to the condition they were in prior to such damage or
destruction, except for such changes in design or materials as may then be
required by law or are approved by Lender in Lender's reasonable discretion.
Lender, in such event, shall, to the extent the proceeds of the insurance are
made available to Lender, reimburse Borrower for the costs of making such
repairs, restoration, rebuilding and replacements on such terms as Lender may
reasonably require. To the extent, if any, that the proceeds of insurance made
available as aforesaid are insufficient to pay the entire cost of making such
repairs, restoration, rebuilding and replacements, Borrower shall pay the
amount by which such costs exceed the insurance proceeds made available as
aforesaid.
(ii) Notwithstanding the foregoing, in the event that Borrower fails
to commence the repair or restoration of the Mortgaged Property pursuant to
this Section 1(k) within sixty (60) days after the casualty, or if Borrower
abandons or fails to diligently pursue completion of such repair or
restoration (as determined in Lender's reasonable judgment), then Lender shall
be entitled to apply the insurance proceeds first towards reimbursement of all
costs and expenses of Lender in collecting the proceeds (including, without
limit, court costs and reasonable attorneys' fees), and then toward any
payment of the Obligations or any portion of it, whether or not then due or
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payable and in whatever order of maturity as Lender may elect. Application of
proceeds by Lender toward later maturing installments of the Obligations shall
not excuse Borrower from making the regularly scheduled installment payments
nor shall such application extend or reduce the amount of any of these
payments.
(1) RECORDING. Borrower will cause this Mortgage, any supplemental or
restated mortgage and any financing and continuation statements required by
the applicable Uniform Commercial Code to be recorded and filed at Borrower's
expense in such manner and in such place as may, in Lender's opinion, be
necessary or proper.
(m) ADDITIONAL ASSURANCES. Borrower will execute and deliver
additional instruments and take additional actions as Lender may reasonably
request to carry out the terms and conditions of this Mortgage.
(n) BOOKS AND RECORDS; INSPECTION RIGHTS. Borrower will at all times
maintain accurate and complete books and records and copies of all building
and use restrictions, ground leases, leases, reservation and/or purchase
agreements, condominium documents, contracts and/or other instruments with
respect to the Mortgaged Property. Lender may inspect and make copies of those
books and records and any other data relating to the Mortgaged Property.
Lender may inspect the Mortgaged Property at such reasonable times as Lender
shall determine. Borrower will promptly provide to Lender reports concerning
the income, expenses and financial and other conditions of the Mortgaged
Property as may be required from time to time by Lender.
(o) RIGHT OF ENTRY. Lender and its agents shall have the right to
enter and inspect the Mortgaged Property at all reasonable times subject to
the rights, duties and obligations under that certain lease (the "Lease")
dated as of _______________, 19 between Borrower and ___________________
("Tenant") .
(p) ENVIRONMENTAL PROVISIONS. For the purposes of this paragraph the
following terms shall have the following meanings: (i) the term "Hazardous
Material" shall mean any material or substance that, whether by its nature or
use, is subject to regulation under any Environmental Requirement, (ii) the
term "Environmental Requirements" shall collectively mean the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C.
Section 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C.
Section 1801.et seq.), the Resource Conservation and Recovery Act (42 U.S.C.
Section 6901 et seq.), the Toxic Substances Control Act (15 U.S.C. Section
2601 et seq.), the Clean Air Act (42 U.S.C. Section 7401 et seq.) and the
Federal Water
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Pollution Control Act (33 U.S.C. Section 1251 et seq.), all as presently in
effect and as the same may hereafter be amended, any regulation pursuant
thereto, or any other present or future law, ordinance, rule, regulation,
order or directive addressing environmental, health or safety issues of or by
any Governmental Authority, (iii) the term "Governmental Authority" shall mean
the Federal government, or any state or other political subdivision thereof, or
any agency, court or body of the Federal government, any state or other
political subdivision thereof, exercising executive, legislative, judicial,
regulatory or administrative functions, and (iv) the term "diligent inquiry"
shall mean a level of inquiry at least equal to any environmental site
assessment of the Mortgaged Property conducted in accordance with Lender's
environmental policies and procedures. Borrower hereby represents and warrants
to Lender that to the best of Borrower's knowledge after diligent inquiry (i)
no Hazardous Material is currently located at, on, in, under or about the
Mortgaged Property, ***[except as specifically set forth in _____________,]***
(ii) no Hazardous Material has been or is currently located at, in, on, under
or about the Mortgaged Property in a manner which violates any Environmental
Requirement, or which requires cleanup or corrective action of any kind under
any Environmental Requirement, (iii) no releasing, emitting, discharging,
leaching, dumping or disposing of any Hazardous Material from the Mortgaged
Property onto or into any other property or from any other property
onto or into the Mortgaged Property has occurred or is occurring in violation
of any Environmental Requirement, and (iv) no notice of violation, lien,
complaint, suit, order or other notice with respect to the environmental
condition of the Mortgaged Property is outstanding, nor has any such notice
been issued which has not been fully satisfied and complied with in a timely
fashion so as to bring the Mortgaged Property into full compliance with all
Environmental Requirements. Borrower shall comply, and shall cause all tenants
or other occupants of the Mortgaged Property to comply, in all respects with
all Environmental Requirements, and will not generate, store, handle, process,
dispose of or otherwise use, and will not permit any tenant or other occupant
of the Mortgaged Property to generate, store, handle, process, dispose of or
otherwise use, Hazardous Materials at, in, on, under or about the Mortgaged
Property in a manner that could lead or potentially lead to the imposition on
Borrower, Lender or the Mortgaged Property of any liability or lien of any
nature whatsoever under any Environmental Requirement. Borrower shall notify
Lender promptly in the event of any spill or other release of any Hazardous
Material at, in, on, under or about the Mortgaged Property which is required to
be reported to a Governmental Authority under any Environmental Requirement,
will promptly forward to Lender copies of any notices received by Borrower
relating to alleged violations of any Environmental Requirement and will
promptly pay when due any fine or assessment against Lender, Borrower or the
Mortgaged Property relating to
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any Environmental Requirement. If at any time it is determined that the
operation or use of the Mortgaged Property violates any applicable Environmental
Requirement or that there are Hazardous Materials located at, in, on, under or
about the Mortgaged Property which, under any Environmental Requirement, require
special handling in collection, storage, treatment or disposal, or any other
form of cleanup or corrective action, Borrower shall, within thirty (30) days
after receipt of notice thereof from any Governmental Authority or from Lender,
take, at its sole cost and expense, such actions as may be necessary to fully
comply in all respects with all Environmental Requirements, provided, however,
that if such compliance cannot reasonably be completed within such thirty (30)
day period, Borrower shall commence such necessary action within such thirty
(30) day period and shall thereafter diligently and expeditiously proceed to
fully comply in all respects and in a timely fashion with all Environmental
Requirements. If Borrower fails to timely take, or to diligently and
expeditiously proceed to complete in a timely fashion, any such action, Lender
may, in its sole and absolute discretion, make advances or payments towards the
performance or satisfaction of the same, but shall in no event be under any
obligation to do so. All sums so advanced or paid by Lender (including, without
limitation, counsel and consultant fees and expenses, investigation and
laboratory fees and expenses, and fines or other penalty payments) and all sums
advanced or paid in connection with any judicial or administrative investigation
or proceeding relating thereto, will immediately, upon demand, become due and
payable from Borrower and shall bear interest at the Default Rate (as
hereinafter defined) from the date any such sums are so advanced or paid by
Lender until the date any such sums are repaid by Borrower to Lender. Borrower
will execute and deliver, promptly upon request, such instruments as Lender may
deem useful or necessary to permit Lender to take any such action, and such
additional notes and mortgages, as Lender may require to secure all sums so
advanced or paid by Lender. If a lien is filed against the Mortgaged Property by
any Governmental Authority resulting from the need to expend or the actual
expending of monies arising from an action or omission, whether intentional or
unintentional, of Borrower or for which Borrower is responsible, resulting in
the releasing, spilling, leaking, leaching, pumping, emitting, pouring, emptying
or dumping of any Hazardous Material into the waters or onto land located within
or without the State where the Mortgaged Property is located, then Borrower
will, within thirty (30) days from the date that Borrower is first given notice
that such lien has been placed against the Mortgaged Property (or within such
shorter period of time as may be specified by Lender if such Governmental
Authority has commenced steps to cause the Mortgaged Property to be sold
pursuant to such lien) either (a) pay the claim and remove the lien, or (b)
furnish a cash deposit, bond, or such other security with respect thereto as is
satisfactory in all respects to Lender and is sufficient to effect a complete
discharge of such lien on
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the Mortgaged Property. Lender may, at its option, at intervals of not less than
one year, or more frequently if Lender reasonably believes that a Hazardous
Material or other environmental condition violates or threatens to violate any
Environmental Requirement, cause an environmental audit of the Mortgaged
Property or portions thereof to be conducted to confirm Borrower's compliance
with the provisions of this paragraph, and Borrower shall cooperate in all
reasonable ways with Lender in connection with any such audit and shall pay all
costs and expenses incurred in connection therewith. Borrower will defend,
indemnify, and hold harmless Lender, its employees, agents, officers, and
directors, from and against any and all claims, demands, penalties, causes of
action, fines, liabilities, settlements, damages, costs, or expenses of whatever
kind or nature, known or unknown, foreseen or unforeseen, contingent or
otherwise (including, without limitation, counsel and consultant fees and
expenses, investigation and laboratory fees and expenses, court costs, and
litigation expenses) arising out of, or in any way related to, (i) any breach by
Borrower of any of the provisions of this paragraph, (ii) the presence,
disposal, spillage, discharge, emission, leakage, release, or threatened release
of any Hazardous Material which is at, in, on, under, about, from or affecting
the Mortgaged Property, including, without limitation, any damage or injury
resulting from any such Hazardous Material to or affecting the Mortgaged
Property or the soil, water, air, vegetation, buildings, personal property,
persons or animals located on the Mortgaged Property or on any other property or
otherwise, (iii) any personal injury (including wrongful death) or property
damage (real or personal) arising out of or related to any such Hazardous
Material, (iv) any lawsuit brought or threatened, settlement reached, or order
or directive of or by any Governmental Authority relating to such Hazardous
Material, or (v) any violation of any Environmental Requirement or any policy or
requirement of Lender hereunder. This indemnification shall, notwithstanding any
exculpatory or other provision of any nature whatsoever to the contrary set
forth in the Note, this Mortgage or any other document or instrument now or
hereafter executed and delivered in connection with the loan evidenced by the
Note and secured by this Mortgage, constitute the personal recourse
undertakings, obligations and liabilities of Borrower. If this Mortgage is
foreclosed or Borrower tenders a deed or assignment in lieu of foreclosure,
Borrower shall deliver the Mortgaged Property to the purchaser at foreclosure or
to Lender, its nominee, or wholly owned subsidiary, as the case may be, in a
condition that complies in all respects with all Environmental Requirements. The
obligations and liabilities of Borrower under this paragraph shall survive and
continue in full force and effect and shall not be terminated, discharged or
released, in whole or in part, irrespective of whether the Obligations has been
paid in full and irrespective of any foreclosure of this Mortgage or acceptance
by Lender, its nominee or wholly owned subsidiary of a deed or assignment in
lieu of
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foreclosure and irrespective of any other fact or circumstance of any nature
whatsoever.
(q) REPORTING REQUIREMENTS. Borrower hereby covenants and agrees to
deliver financial statements in accordance with its obligations set forth in
Section 4(c) of the Credit Agreement.
(r) INDEMNIFICATION. Borrower shall appear in and defend any suit,
action or proceeding that might in any way and in the sole judgment of Lender
affect the value of the Mortgaged Property, the validity, enforceability and
priority of this Mortgage or the rights and powers of Lender. Borrower shall, at
all times, indemnify, defend, hold harmless and on demand, reimburse Lender for
any and all loss, damages, expense or cost, including cost of evidence of title
and attorneys' fees, arising out of or incurred in connection with any such
suit, action or proceeding, (but excluding any such losses, claims, damages,
liabilities, costs and expenses directly caused to be incurred by reason of the
gross negligence or willful misconduct of the person otherwise to be indemnified
and held harmless under this Section) and the sum of such expenditures shall be
secured by this Mortgage and shall bear interest at the highest rate accruing on
the Obligations, not to exceed the maximum rate permitted by law, and shall be
due and payable on demand. Borrower shall pay cost of suit, cost of evidence of
title and reasonable attorneys' fees in any proceeding or suit, including
appellate proceedings, brought by Lender to foreclose or otherwise enforce this
Mortgage.
(s) ESTOPPEL CERTIFICATES. Borrower shall, within ten (10) days after
written request therefor from Lender, and at Borrower's expense, furnish to
Lender, or such other persons or entities as Lender shall designate, a duly
acknowledged and certified written statement setting forth the amount of the
Obligations, and stating either that no setoffs or defenses exist against such
debt, or, if such setoffs or defenses are alleged to exist, the nature and
amount thereof.
(t) CHANGES IN LAWS REGARDING TAXATION. In the event of the passage
after the date of this Mortgage of any law of the state in which the Real Estate
is located deducting from the value of real property for the purpose of taxation
any lien or encumbrance thereon or changing in any way the laws for the taxation
of mortgages or debts secured by mortgages for state or local purposes or the
manner of the collection of any such taxes, and imposing a tax, either directly
or indirectly, on this Mortgage, the Note or the other Credit Facility
Documents, Borrower shall, if permitted by law, pay any tax imposed as a result
of any such law within the statutory period or within fifteen (15) days after
demand by Lender, whichever is less, provided, however, that if, in the opinion
of the attorneys for Lender, Borrower is not permitted by law to pay such taxes,
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Lender shall have the right, at its option, to declare the Obligations due and
payable on a date specified in a prior notice to Borrower of not less than
thirty (30) days.
***[ 2. THE GROUND LEASE
-------------------
(a) THE GROUND LEASE. Borrower shall (i) pay all rents, additional
rents and other sums required to be paid by Borrower as ground lessee under and
pursuant to the provisions of the Ground Lease, it being agreed and understood
that such rents, additional rents and other sums shall be paid through funds
made available to Borrower from the Lockbox Account (as such term is defined in
the Credit Agreement) as permitted pursuant to the terms and conditions of the
Lockbox Agreement (as such term is defined in the Credit Agreement) to the
extent of available funds in such Lockbox Account, (ii) diligently perform and
observe all of the terms, covenants and conditions of the Ground Lease on the
part of Borrower, as ground lessee thereunder, to be performed and observed,
unless such performance or observance shall be waived or not required in
writing by the ground lessor under the Ground Lease, to the end that all things
shall be done which are necessary to keep unimpaired the rights of Borrower, as
ground lessee, under the Ground Lease, and (iii) promptly notify Lender of the
giving of any notice by the ground lessor under the Ground Lease to Borrower of
any default by Borrower in the performance or observance of any of the terms,
covenants or conditions of the Ground Lease on the part of Borrower, as ground
lessee thereunder, to be performed or observed and deliver to Lender a true
copy of each such notice. Borrower shall not, without the prior consent of
Lender, surrender the leasehold estate created by the Ground Lease or terminate
or cancel the Ground Lease or modify, change, supplement, alter or amend the
Ground Lease, in any respect, either orally or in writing, and Borrower hereby
assigns to Lender, as further security for the payment of the Obligations and
for the performance and observance of the terms, covenants and conditions of
this Mortgage, all of the rights, privileges and prerogatives of Borrower, as
ground lessee under the Ground Lease, to surrender the leasehold estate created
by the Ground Lease or to terminate, cancel, modify, change, supplement, alter
or amend the Ground Lease, and any such surrender of the leasehold estate
created by the Ground Lease or termination, cancellation, modification, change,
supplement, alteration or amendment of the Ground Lease without the prior
consent of Lender shall be void and of no force and effect. Without limiting
the generality of the other provisions of this Mortgage, and without waiving or
releasing Borrower from any of its obligations hereunder, Lender shall have
the right, but shall be under no obligation, to pay any sums and to perform any
act or take any action as may be appropriate to cause all of the terms,
covenants and conditions of the Ground Lease on the part of Borrower, as ground
lessee thereunder, to be performed or observed to be promptly performed or
observed on behalf of Borrower, to the end
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<PAGE> 205
that the rights of Borrower in, to and under the Ground Lease shall be kept
unimpaired and free from default. If Lender shall make any payment or perform
any act or take action in accordance with the preceding sentence, Lender will
notify Borrower of the making of any such payment, the performance of any such
act, or the taking of any such action. In any such event, subject to the rights
of lessees and other occupants under the Leases, Lender and any person
designated by Lender shall have, and are hereby granted, the right to enter
upon the Mortgaged Property at any time and from time to time for the purpose
of taking any such action. If the ground lessor under the Ground Lease shall
deliver to Lender a copy of any notice of default sent by said ground lessor to
Borrower, as ground lessee under the Ground Lease, such notice shall constitute
full protection to Lender for any action taken or omitted to be taken by
Lender, in good faith, in reliance thereon. Borrower shall, from time to time,
obtain from the ground lessor under the Ground Lease such certificates of
estoppel with respect to compliance by Borrower with the terms of the Ground
Lease as may be requested by Lender. Borrower shall exercise each individual
option, if any, to extend or renew the term of the Ground Lease upon demand by
Lender made at any time within one (1) year of the last day upon which any such
option may be exercised, and Borrower hereby expressly authorizes and appoints
Lender its attorney-in-fact to exercise, either jointly or individually, any
such option in the name of and upon behalf of Borrower, which power of attorney
shall be irrevocable and shall be deemed to be coupled with an interest. ]***
***[ (b) NO MERGER OF FEE AND LEASEHOLD ESTATES. So long as any portion of
the Obligations shall remain unpaid, unless Lender shall otherwise consent,
the fee title to the Real Estate and the leasehold estate therein created
pursuant to the provisions of the Ground Lease shall not merge, but shall
always be kept separate and distinct, notwithstanding the union of such
estates in Borrower or in any other person, by purchase, operation of law or
otherwise. If Lender shall acquire the fee title to the Real Estate and the
leasehold estate therein created pursuant to the provisions of the Ground
Lease, by foreclosure of this Mortgage or otherwise, such estates shall not
merge as a result of such acquisition and shall remain separate and distinct
for all purposes after such acquisition unless and until Lender shall elect to
merge such estates.]***
***[ 3. BORROWER ACOUISITiON OF FEE ESTATE. So long as any portion of the
Obligations remains unpaid, unless Lender shall otherwise consent, if Borrower
shall acquire fee title to the Real Estate the lien of this Mortgage shall be
spread to cover the fee estate and said fee estate shall be deemed to be
included within the definition of the Mortgaged Property. Borrower shall, at
its sole cost and expense, execute such instruments as Lender deems useful or
necessary to subject the fee estate to the lien of this Mortgage.]***
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<PAGE> 206
***[ 4. LANDLORD BANKRUPTCY. Upon the filing by or against the landlord
under the Ground Lease of a petition pursuant to Title 11 of the United States
Code as now constituted or hereafter amended or under any other applicable
Federal or state bankruptcy law or other similar law (the "Bankruptcy Code"),
and the subsequent rejection of the Ground Lease by the landlord thereunder,
Borrower shall not, without the prior written consent of Landlord, (i) elect to
treat the Ground Lease as terminated pursuant to Section 365(h) (1) of the
Bankruptcy Code, or (ii) pursuant to Section 365(h) (2) of the Bankruptcy Code,
offset against the rents reserved under the Ground Lease the amount of any
damages caused by the landlord's rejection of the Ground Lease. Borrower shall
promptly, and so as to be received prior to all hearing dates, return dates or
other deadlines, send to Lender copies of all notices, summonses, pleadings,
applications and other documents received by Borrower in connection with such
petition or proceeding by the landlord under the Ground Lease .]***
5. OFFSETS, COUNTERCLAIMS AND DEFENSES. Any assignee of this Mortgage
and the Note shall take the same free and clear of all offsets, counterclaims or
defenses of any nature whatsoever which Borrower may have against any assignor
of this Mortgage and the Note, and no such offset, counterclaim or defense shall
be interposed or asserted by Borrower in any action or proceeding brought by any
such assignee upon this Mortgage or the Note and any such right to interpose or
assert any such offset, counterclaim or defense in any such action or proceeding
is hereby expressly waived by Borrower.
6. NO CREDITS ON ACCOUNT OF THE OBLIGATIONS. Borrower will not claim
or demand or be entitled to any credit or credits on account of the Obligations
for any part of the Impositions assessed against the Mortgaged Property or any
part thereof and no deduction shall otherwise be made or claimed from the
taxable value of the Mortgaged Property, or any part thereof, by reason of this
Mortgage or the Obligations.
7. OTHER SECURITY FOR THE OBLIGATIONS. Borrower shall observe and
perform all of the terms, covenants and provisions contained in the Note and in
all other mortgages and other instruments or documents evidencing, securing or
guaranteeing payment of the Obligations, in whole or in part, or otherwise
executed and delivered in connection with the Note, this Mortgage or the loan
evidenced and secured thereby.
8. DOCUMENTARY STAMPS. If at any time the United States of America,
any state thereof, or any governmental subdivision of any such state, shall
require revenue or other stamps to be affixed to the Note or this Mortgage,
Borrower will pay for the same, with interest and penalties thereon, if any.
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9. PERFORMANCE OF OTHER AGREEMENTS. Borrower shall observe and perform
each and every term to be observed or performed by Borrower pursuant to the
terms of any agreement or recorded instrument affecting or pertaining to the
Mortgaged Property.
10. APPLICATION OF CONDEMNATION AWARDS.
-----------------------------------
(a) CONDEMNATION AWARD. Notwithstanding any taking by any public or
quasi-public authority through eminent domain or otherwise, Borrower shall
continue to pay the obligations at the time and in the manner provided for its
payment in the Note and this Mortgage and the obligations shall not be reduced
until any award or payment therefor shall have been actually received and
applied by Lender to the discharge of the Obligations. Any eminent domain or
condemnation proceeds shall be paid directly to Lender and applied toward
reimbursement of all Lender's costs and expenses incurred in connection with
collecting the award (including, without limit, court costs and reasonable
attorneys' fees), and the balance applied upon the obligations whether or not
then due or payable in whatever manner Lender deems advisable.
(b) APPOINTMENT OF LENDER. Lender and each of its officers is
irrevocably appointed (which appointment is coupled with an interest)
attorney-in-fact for Borrower (with power of substitution) and is authorized to
receive, receipt for, discharge and satisfy any condemnation award or judgment,
whether joint or several, on behalf of Borrower, Borrower's legal
representatives, successors and assigns; provided, however, that Lender shall
not be liable for failure to collect any condemnation award. Although it is
hereby expressly agreed that the same shall not be necessary in any event,
Borrower shall, upon demand of Lender, make, execute and deliver any and all
assignments and other instruments sufficient for the purpose of assigning any
such award or payment to Lender, free and clear of any encumbrances of any kind
or nature whatsoever.
11. ADDITIONAL SECURITY/ASSIGNMENT OF RENTS AND LEASES.
---------------------------------------------------
(a) SECURITY INTEREST. (i) This Mortgage, as to any Equipment,
fixtures, accounts, general intangibles and order personal property included
within the definition of Mortgaged Property (collectively, "Personal Property"),
shall constitute a security agreement within the meaning of the Uniform
Commercial Code and Borrower grants to Lender a security interest in the
Equipment, fixtures, accounts, general intangibles and other personal property
of Borrower. Borrower agrees, upon request of Lender, to promptly furnish a list
of personal property owned by Borrower and subject to this Mortgage and, upon
request by Lender, to immediately execute, deliver and/or file any
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<PAGE> 208
amendments to this Mortgage, any separate security agreement and all financing
statements to evidence and perfect the security interest in such personal
property contemplated by this Section. Lender and each of its officers is
irrevocably appointed (which appointment is coupled with an interest)
attorney-in-fact for Borrower (with power of substitution) and each is
authorized to execute, deliver and/or file any of such amendments to this
Mortgage, any separate security agreement and any financing statements.
(ii) Upon the occurrence of any Event of Default under this
Mortgage, Lender, in addition to any other rights and remedies which it may
have, shall have and may exercise immediately and without demand any and all
rights and remedies of a secured party under the Uniform Commercial Code or
otherwise provided by law or by this Mortgage including, without limit, the
right to require Borrower to assemble the personal property and make it
available to Lender at a place to be designated by Lender which is reasonably
convenient to such parties, the right to collect all accounts receivable, the
right to take possession of the personal property with or without demand and
with or without process of law and the right to sell and dispose of it and
distribute the proceeds according to law. Borrower agrees that any requirement
of reasonable notice, if any, shall be met if Lender sends notice to Borrower at
least five (5) days prior to the date of sale, disposition or other event giving
rise to the required notice. Borrower agrees that the proceeds of any
disposition of the personal property may be applied by Lender first to Lender's
reasonable expenses in connection with the disposition including, without limit,
reasonable attorneys' fees and legal expenses, and then to payment of the
Obligations.
(b) LICENSES AND PERMITS. As additional security for the Obligations
and to the extent permitted by their terms, Borrower assigns to Lender all of
Borrower's rights and interest in all licenses or permits affecting the
Mortgaged Property. This assignment shall not impose upon Lender any obligations
with respect to any license or permit. Borrower shall not cancel or amend any of
the licenses or permits assigned (nor permit any of them to terminate if they
are necessary or desirable for the operation of the Mortgaged Property) without
the first obtaining the written approval of Lender.
(c) ASSIGNMENT OF RENTS AND LEASES. (i) Borrower hereby absolutely and
unconditionally assigns to Lender all of Borrower's right, title and interest in
and to all Leases (but without an assumption by Lender of liabilities of
Borrower under any of the Leases by virtue of this assignment), and Borrower
assigns to Lender the Leases, Rents, issues and profits of the Mortgaged
Property provided, however, that upon payment in full of the Indebtedness and
performance of all Obligations under the Credit Agreement, Lender shall
terminate the assignment without
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<PAGE> 209
representation (express or implied) and without any recourse whatsoever to
Lender.
(ii) At least annually, and more frequently if requested by
Lender, Borrower shall provide Lender with a certified rent roll and such other
information regarding the leases and/or occupancy agreements as Lender may
reasonably require.
(iii) Borrower acknowledges and confirms that Lender has a
present, possessory and "choate" interest in and to the Rents.
(iv) Lender shall at no time have any obligation whatever to
attempt to collect rent or other amounts from any tenant of the Mortgaged
Property. Further, Lender shall have no obligation to enforce any other
obligations owed by tenants of the Mortgaged Property. No action taken by Lender
under this Mortgage shall make Lender a "mortgagee in possession."
(v) Borrower shall not collect advance rent under any lease or
occupancy agreement pertaining to the Mortgaged Property in excess of one month
(other than as a security deposit) and Lender shall not be bound by any rent
prepayment made or received in violation of this prohibition.
(vi) At the option of Lender, this Mortgage shall become
subordinate, in whole or in part (but not with respect to priority as to
insurance proceeds or any condemnation award) to any or all leases and/or
occupancy agreements of all or part of the Mortgaged Property upon the execution
and recording by Lender of an affidavit to that effect.
***[ (vii) Lender shall have all of the rights against tenants of
the Mortgaged Property as set forth in Section 291-f of the Real Property Law of
New York.]***
(viii) In addition to the rights which Lender may have herein,
in the event of any default under this Mortgage, Lender, at its option, may
require Borrower to pay monthly in advance to Lender, or any receiver appointed
to collect the Rents, the fair and reasonable rental value for the use and
occupation of such part of the Mortgaged Property as may be in possession of
Borrower. Upon default in any such payment, Borrower will vacate and surrender
possession of the Mortgaged Property to Lender, or to such receiver and, in
default thereof, Borrower may be evicted by summary proceedings or otherwise.
(ix) Nothing contained in this Section 11(c) shall be
construed as imposing on Lender any of the obligations of the lessor under the
Leases.
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12. EVENTS OF DEFAULT AND REMEDIES.
-------------------------------
(a) EVENTS OF DEFAULT. Any one or more of the following events shall,
for purposes of this Mortgage, constitute an "Event of Default":
(i) If an Event of Default, as defined in the Credit
Agreement, shall occur.
(ii) Failure by Borrower to pay within twenty (20) days of
notice and demand by Lender, any installment of any assessment against
the Real Estate and/or Improvements for local improvements heretofore
or hereafter laid, which assessment is or may become payable in annual
or periodic installments and is or may become a lien on the Real Estate
and/or the Improvements, notwithstanding the fact that such installment
may not be due and payable at the time of such notice and demand.
(iii) The filing of any Federal tax lien against the Real
Estate and/or the Improvements and the same is not discharged of record
within thirty (30) days after the same is filed.
(iv) Any failure by Borrower (or any Guarantor) to comply with
any of the non-monetary terms, provisions, warranties or covenants of
this Mortgage, which failure continues for thirty (30) days after the
date of written notice to Borrower (or Guarantor) from Lender of such
default.
(v) Institution of foreclosure proceedings or other exercise
of rights and remedies under any mortgage, deed of trust or other lien
against the Real Estate and/or the Improvements (or any portion
thereof).
(vi) If an Event of Default shall occur under any other
mortgage or deed of trust securing the Obligations.
(vii) Any uninsured loss, theft, substantial damage or
destruction to the Real Estate and/or the Improvements in excess of
$50,000 or the issuance or filing of any attachment, levy, garnishment
or the commencement of any related proceeding or the commencement of
any other judicial process upon or in respect to the Real Estate and/or
the Improvements which is not discharged or dismissed within thirty
(30) days of the date of filing.
***[(viii) Any default by Borrower in the observance or
performance of any term, covenant or condition of the Ground Lease on
the part of Borrower, as ground lessee thereunder, to be observed or
performed, unless any such observance or
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<PAGE> 211
performance shall have been waived or not required in writing by the
ground lessor under the Ground Lease, or if any one or more of the
events referred to in the Ground Lease shall occur which would or may
cause the Ground Lease to terminate without notice or action by the
ground lessor thereunder or which would entitle the ground lessor under
the Ground Lease to terminate the Ground Lease and the term thereof by
giving notice to Borrower, as ground lessee thereunder, or if the
leasehold estate created by the Ground Lease shall be surrendered, in
whole or in part, or if the Ground Lease shall be terminated or
cancelled for any reason or under any circumstance whatsoever, or if
any of the terms, covenants or conditions of the Ground Lease shall in
any manner be modified, changed, supplemented, altered or amended
without the consent of Lender;]***
(b) REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of any Event of
Default, Lender shall have the following rights and remedies:
(i) Declare all or part of the Obligations immediately due and
payable.
(ii) Demand that Borrower immediately surrender the possession
of the Mortgaged Property to Lender, and Borrower consents to Lender
taking possession of the Mortgaged Property and the books and records
relating to the Mortgaged Property.
(iii) Lease the Mortgaged Property and collect rents for the
account of Borrower.
(iv) Foreclose the interest of Borrower in the Mortgaged
Property by action pursuant to applicable law. Commencement of such an
action shall be deemed a declaration of acceleration pursuant to clause
(i) above.
(v) Lender is authorized and empowered to sell the Mortgaged
Property and convey the same to the purchaser thereof to the extent
permitted and pursuant to the procedures provided by applicable law.
Lender may direct the sale of the Mortgaged Property to be in one or
several parcels and in any order as Lender may elect in its sole
discretion at such time and place, upon such terms and after such
notice as may be required or permitted by applicable law.
(vi) Collect and receive all rents, profits and other amounts
that are due or shall subsequently become due under the terms of any
leases, land contract, or other agreements by which Borrower is leasing
or selling the
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<PAGE> 212
Mortgaged Property or any interest in the Mortgaged Property. Lender
may also exercise any other rights or remedy of Borrower under any such
lease, land contract or other agreement. However, Lender shall have no
obligation to make any demand or inquiry as to the nature of
sufficiency of any payment received or to present or file any claim or
take any other action to collect or enforce the payment of any amounts
to which Lender may become entitled under this Mortgage. Similarly,
Lender shall not be liable for any of Borrower's obligations under any
such lease, land contract or other agreement.
(vii) Exercise all rights, remedies and privileges afforded a
"secured party" under Article 9 of the Uniform Commercial Code, with
respect to any of the Mortgaged Property which is personal property.
(viii) Enter upon the Mortgaged Property and take other
actions as Lender deems appropriate to perform Borrower's obligations
under this Mortgage to inspect, repair, protect or preserve the
Mortgaged Property, to investigate or test for the presence of any
Hazardous Materials and/or to appraise the Mortgaged Property.
(ix) Lender may, at its discretion, remedy any Event of
Default by Borrower and for such purpose shall have the right to enter
upon the Real Estate without thereby becoming liable to Borrower or any
person in possession thereof holding under Borrower. If Lender shall
remedy such a default or appear in, defend, or bring any action or
proceeding to protect its interest in the Mortgaged Property or to
foreclose this Mortgage or collect the Obligations, the costs and
expenses thereof (including reasonable attorneys' fees to the extent
permitted by law), with interest as provided in this paragraph, shall
be paid by Borrower to Lender upon demand. All such costs and expenses
incurred by Lender in remedying such default or in appearing in,
defending, or bringing any such action or proceeding shall be paid by
Borrower to Lender upon demand, with interest at the Default Rate (as
such term is defined in the Credit Agreement), provided, however, that
the Default Rate shall in no event exceed the maximum interest rate
which Borrower may by law pay, for the period after notice from Lender
that such costs or expenses were incurred to the date of payment to
Lender. To the extent any of the aforementioned costs or expenses paid
by Lender after default by Borrower shall constitute payment of (i)
taxes, charges or assessments which may be imposed by law upon the
Mortgaged Property, (ii) premiums on insurance policies covering the
Mortgaged Property, (iii) expenses incurred in upholding the lien of
this Mortgage, including, but not limited to, the costs and expenses of
any litigation to
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<PAGE> 213
collect the indebtedness secured by this Mortgage or to prosecute,
defend, protect or preserve the rights and the lien created by this
Mortgage, or (iv) any amount, cost or charge to which Lender becomes
subrogated, upon payment, whether under recognized principles of law or
equity, or under express statutory authority; then, and in each such
event, such costs, expenses and amounts, together with interest thereon
at the Default Rate, shall be added to the indebtedness secured by this
Mortgage and shall be secured by this Mortgage.
(x) Pursue any other available remedy at law or equity to
enforce the payment of the Obligations.
(c) REMEDIES GENERALLY. (i) All remedies provided for in this Mortgage
shall be available to the extent not prohibited by law, and Lender shall have
the unrestricted right to exercise any summary proceeding available at law or in
equity in connection therewith. Each remedy shall be cumulative and additional
to any other remedy of Lender at law, in equity or by statute. No delay or
omission to exercise any right or power accruing upon any default or Event of
Default shall impair any such right or power or shall be construed to be a
waiver of, or acquiescence in, any such default or Event of Default.
(ii) Lender may waive any Event of Default and may rescind any
declaration of maturity of payments on the Obligations. In case of such waiver
or recision, Borrower and Lender shall be restored to their respective former
positions and rights under this Mortgage. Any waiver by Lender of any default or
Event of Default shall be in writing and shall be limited to the particular
default waived and shall not be deemed to waive any other default. Borrower
shall not be relieved of Borrower's obligation to pay the Obligations at the
time and in the manner provided for its payment in the Note and this Mortgage by
reason of (A) failure of Lender to comply with any request of Borrower to take
any action to foreclose this Mortgage or otherwise enforce any of the provisions
hereof or of the Note or any other Credit Facility Document, (B) the release,
regardless of consideration, of the whole or any part of the Mortgaged Property
or any other security for the Obligations, or (C) any agreement or stipulation
between Lender and any subsequent owner or owners of the Mortgaged Property or
other person extending the time of payment or otherwise modifying or
supplementing the terms of the Note or any other Credit Facility Document,
without first having obtained the consent of Borrower, and in the latter event,
Borrower shall continue to be obligated to pay the Obligations at the time and
in the manner provided in the Note and this Mortgage, as so extended, modified
and supplemented, unless expressly released and discharged from such obligation
by Lender in writing. Regardless of consideration, and without the necessity for
any notice to or consent by the holder of any
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subordinate lien, encumbrance, right, title or interest in or to the Mortgaged
Property, Lender may release any person at any time liable for the payment of
the Obligations or any portion thereof or any part of the security held for the
Obligations and may extend the time of payment or otherwise modify the terms of
the Note or this Mortgage, including, without limitation, a modification of the
interest rate payable on the principal balance of the Note, without in any
manner impairing or affecting this Mortgage or the lien thereof or the priority
of this Mortgage, as so extended and modified, as security for the Obligations
over any such subordinate lien, encumbrance, right, title or interest. Lender
may resort for the payment of the Obligations to any other security held by
Lender in such order and manner as Lender, in its discretion, may elect. Lender
may take action to recover the Obligations, or any portion thereof, or to
enforce any covenant hereof without prejudice to the right of Lender thereafter
to foreclose this Mortgage. Lender shall not be limited exclusively to the
rights and remedies herein stated but shall be entitled to every additional
right and remedy now or hereafter afforded by law. The rights of Lender under
this Mortgage shall be separate, distinct and cumulative and none shall be given
effect to the exclusion of the others. No act of Lender shall be construed as an
election to proceed under any one provision herein to the exclusion of any other
provision.
(d) RECEIVERS. Upon an Event of Default and commencement of foreclosure
proceedings to enforce the rights of Lender under this Mortgage, or the
commission of waste against the Mortgaged Property, Lender shall be entitled as
a matter of right, without regard to the value of the Mortgaged Property, to the
appointment of a receiver or receivers of the Mortgaged Property and of the
Rents, issues and profits of the Mortgaged Property, pending such proceedings
and without notice to Borrower .
(e) APPLICATION OF PROCEEDS. Any proceeds received by Lender from the
exercise of remedies in accordance with the terms of this Mortgage shall be
applied as follows:
(i) First, to pay all costs and expenses incidental to the
leasing, foreclosure, sale or other disposition of the Mortgaged
Property. These costs and expenses shall include, without limit,
reasonable compensation to Lender, and its agents and attorneys and any
taxes and assessments or other liens and encumbrances prior to the lien
of this Mortgage.
(ii) Second, to all reasonable sums expended or incurred by
Lender directly or indirectly in carrying out any term, covenant or
agreement under this Mortgage or any related document, together with
interest as provided in this Mortgage.
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(iii) Third, to the payment of the Obligations. If the
proceeds are insufficient to fully pay the Obligations, then
application shall be made first to late charges and interest accrued
and unpaid, then to any applicable prepayment premiums, then to unpaid
fees and other charges and then to the outstanding principal balance.
(iv) Fourth, any surplus remaining shall be paid to Borrower
or to whomsoever may be lawfully entitled.
(f) MARSHALLING. In the event of foreclosure of this Mortgage or the
enforcement by Lender of any other rights and remedies under this Mortgage,
Borrower waives any right in respect to marshalling of assets which secure the
Obligations or to require Lender to pursue its remedies against any other assets
or any other party which may be liable for any of the Obligations.
(g) FURTHER ACTIONS. Promptly upon the request of Lender, and at
Borrower's expense, Borrower shall execute, acknowledge and deliver any and all
further conveyances, documents, mortgages, deeds of trust, security agreements,
financing statements and assurances, and do or cause to be done all further acts
as Lender may from time to time require to confirm and protect the lien of this
Mortgage or otherwise to accomplish the purposes of this Mortgage.
(h) ATTORNEYS' FEES. Any reference in this Mortgage to attorneys' fees
shall refer to fees, charges, costs and expenses of in-house and outside
attorneys and paralegals, whether or not a suit or proceeding is instituted, and
whether incurred at the trial court level, on appeal, in a bankruptcy,
administrative or probate proceeding, in consultation with counsel, or
otherwise. All costs, expenses and fees of any nature for which Borrower is
obligated to reimburse or indemnify Lender are part of the Obligations secured
by this Mortgage and are payable upon demand, unless expressly provided
otherwise, with interest until repaid at the highest rate charged on any of the
Obligations (but not to exceed the maximum rate permitted by law).
13. MISCELLANEOUS.
--------------
(a) GOVERNING LAW. This Mortgage shall be construed in accordance with
the laws of the State of [STATE WHERE PREMISES ARE LOCATED].
(b) SUCCESSORS AND ASSIGNS. This Mortgage shall be binding upon the
successors and assigns of Borrower including, without limit, any debtor in
possession or trustee in bankruptcy for Borrower, and the rights and privileges
of Lender under this Mortgage shall inure to the benefit of their respective
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successors and assigns. This shall not be deemed a consent by Lender to a
conveyance by Borrower of all or any part of the Mortgaged Property or of any
ownership interest in Borrower.
(c) NOTICES. Notice from one party to another relating to this Mortgage
shall be deemed effective if made in writing (including telecommunications) and
delivered to the recipient's address, telex number or telecopier number set
forth in this Mortgage by any of the following means: (i) hand delivery, (ii)
registered or certified mail, postage prepaid, (iii) express mail or other
overnight courier service, or (iv) telecopy, telex or other wire transmission
with request for assurance of receipt in a manner typical with respect to
communications of that type. Notice made in accordance with these provisions
shall be deemed delivered on receipt if delivered by hand or wire transmission,
on the third business day after mailing if mailed by registered or certified
mail, or on the next business day after mailing or deposit with the postal
service or an overnight courier service if delivered by express mail or
overnight courier. Borrower's telecopier number is (313) 994-1376, and Lender's
telecopier number is (212) 318-1468.
(d) ENTIRE AGREEMENT: AMENDMENTS. This Mortgage and any agreement to
which it refers state all rights and obligations of the parties and supersede
all other agreements (oral or written) with respect to the lien granted by this
Mortgage. Any amendment of this Mortgage shall be in writing and shall require
the signature of Borrower and Lender.
(e) PARTIAL INVALIDITY. The invalidity or unenforceability of any
provision of this Mortgage shall not affect the validity or enforceability of
the remaining provisions of this Mortgage.
(f) SECURITY AGREEMENT. Unless specifically provided to the contrary,
all of the terms and provisions of the Credit Agreement are hereby incorporated
and shall become a part of this Mortgage.
(g) USURY LAWS. This Mortgage and the Note are subject to the express
condition that at no time shall Borrower be obligated or required to pay
interest on the principal balance due under the Note at a rate which could
subject the holder of the Note to either civil or criminal liability as a result
of being in excess of the maximum interest rate which Borrower is permitted by
law to contract or agree to pay. If by the terms of this Mortgage or the Note
Borrower is at any time required or obligated to pay interest on the principal
balance due under the Note at a rate in excess of such maximum rate, the rate of
interest under the Note shall be deemed to be immediately reduced to such
maximum rate and the interest payable shall be computed at such maximum rate and
all prior interest payments in excess of
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such maximum rate shall be applied and shall be deemed to have been payments in
reduction of the principal balance of the Note.
(h) SOLE DISCRETION OF LENDER. Except as may otherwise be expressly
provided to the contrary, wherever pursuant to the Note, this Mortgage or any
other Credit Facility Document, Lender exercises any right given to it to
consent or not consent, or to approve or disapprove, or any arrangement or term
is to be satisfactory to Lender, the decision of Lender to consent or not
consent, or to approve or disapprove or to decide that arrangements or terms are
satisfactory or not satisfactory, shall be in the sole and absolute discretion
of Lender and shall be final and conclusive.
(i) SUPERIOR MORTGAGE. If Borrower fails to pay any installment of
principal or interest or any other sum due under any mortgage or other lien
superior in lien to the lien of this Mortgage, as the same becomes due and
payable, Lender may, at its option, pay the same, and Borrower shall upon demand
reimburse Lender for all sums so expended by Lender, with interest at a rate per
annum equal to the Default Rate. All such sums expended by Lender, with
interest, shall be secured by this Mortgage.
(j) REASONABLENESS. If at any time Borrower believes that Lender has
not acted reasonably in granting or withholding any approval or consent under
the Note, this Mortgage or any other Credit Facility Document, as to which
approval or consent either Lender has expressly agreed to act reasonably, or
absent such agreement, a court of law having jurisdiction over the subject
matter would require Lender to act reasonably, then Borrower's sole remedy shall
be to seek injunctive relief or specific performance and no action for monetary
damages or punitive damages shall in any event or under any circumstance be
maintained by Borrower against Lender.
(k) RECOVERY OF SUMS REQUIRED TO BE PAID. Lender shall have the right
from time to time to take action to recover any sum or sums which constitute a
part of the Obligations as the same become due, without regard to whether or not
the balance of the Obligations shall be due, and without prejudice to the right
of Lender thereafter to bring an action of foreclosure, or any other action, for
a default or defaults by Borrower existing at the time such earlier action was
commenced.
(1) AUTHORITY. Borrower (and the undersigned representative of
Borrower, if any) has full power, authority and legal right to execute this
Mortgage, and to mortgage, give, grant, bargain, sell, alien, enfeoff, convey,
confirm and assign the Mortgaged Property pursuant to the terms hereof and to
keep and observe all of the terms of this Mortgage on Borrower's part to be
performed.
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(m) CERTAIN DEFINITIONS. Unless the context clearly indicates a
contrary intent or unless otherwise specifically provided herein, words used in
this Mortgage shall be used interchangeably in singular or plural form and the
word "Borrower" shall mean each Borrower and any subsequent owner or owners of
the Mortgaged Property or any part thereof or interest therein; the word
"Lender" shall mean Lender or any subsequent holder of the Note; the word "Note"
shall mean the Note or any other evidence of indebtedness secured by this
Mortgage; the word "Guarantor" shall mean each person guaranteeing payment of
the obligations or any portion thereof or performance by Borrower of any of the
terms of this Mortgage and their respective heirs, executors, administrators,
legal representatives, successors and assigns; the word "person" shall include
an individual, corporation, partnership, trust, unincorporated association,
government, governmental authority, or other entity; the words "Mortgaged
Property" shall include any portion of the Mortgaged Property or interest
therein; the word "Obligations" shall mean all sums secured by this Mortgage;
and the word "default" shall mean the occurrence of any default by Borrower or
other person in the observance or performance of any of the terms, covenants or
provisions of the Note or this Mortgage on the part of Borrower or such other
person to be observed or performed without regard to whether such default
constitutes or would constitute upon notice or lapse of time, or both, an Event
of Default under this Mortgage. Whenever the context may require, any pronouns
used herein shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns and pronouns shall include the plural and vice
versa.
(n) WAIVER OF NOTICE. Borrower shall not be entitled to any notices of
any nature whatsoever from Lender except with respect to matters for which this
Mortgage and the Credit Agreement specifically and expressly provides for the
giving of notice by Lender to Borrower, and Borrower hereby expressly waives the
right to receive any notice from Lender with respect to any matter for which
this Mortgage or the Credit Agreement does not specifically and expressly
provide for the giving of notice by Lender to Borrower.
(o) ABSOLUTE AND UNCONDITIONAL OBLIGATION. Borrower acknowledges that
Borrower's obligation to pay the Obligations in accordance with the provision of
the Note and this Mortgage is and shall at all times continue to be absolute and
unconditional in all respects, and shall at all times be valid and enforceable
irrespective of any other agreements or circumstances of any nature whatsoever
which might otherwise constitute a defense to the Note or this Mortgage or the
obligation of Borrower thereunder to pay the Obligations or the obligations of
any other person relating to the Note or this Mortgage or the obligations of
Borrower under the Note or this Mortgage or otherwise with respect to the loan
secured hereby, and Borrower absolutely,
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unconditionally and irrevocably waives any and all right to assert any defense,
setoff, counterclaim or crossclaim of any nature whatsoever with respect to the
obligation of Borrower to pay the Obligations in accordance with the provisions
of the Note and this Mortgage or the obligations of any other person relating to
the Note or this Mortgage or obligations of Borrower under the Note or this
Mortgage or otherwise with respect to the loan secured hereby in any action or
proceeding brought by Borrower to collect the Obligations, or any portion
thereof, or to enforce, foreclose and realize upon the lien and security
interest created by this Mortgage or any other document or instrument securing
repayment of the Obligations, in whole or in part.
***[ (p) TRUST FUND. Pursuant to Section 13 of the Lien Law of New
York, Borrower shall receive the advances secured hereby and shall hold the
right to receive such advances as a trust fund to be applied first for the
purpose of paying the cost of any improvement and shall apply such advances
first to the payment of the cost of any such improvement on the Mortgaged
Property before using any part of the total of the same for any other
purpose***
***[ (q) NON-RESIDENTIAL PROPERTY. This Mortgage does not cover real
property principally improved by one or more structures containing in the
aggregate six (6) or less residential dwelling units having their own separate
cooking facilities***
(r) WAIVER OF STATUTORY RIGHTS. Borrower shall not and will not apply
for or avail itself of any appraisement, valuation, stay, extension or exemption
laws, or any so-called "Moratorium Laws", now existing or hereafter enacted, in
order to prevent or hinder the enforcement or foreclosure of this Mortgage, but
hereby waives the benefit of such laws to the full extent that Borrower may do
so under applicable law. Borrower for itself and all who may claim through or
under it waives any and all right to have the property and estates comprising
the Mortgaged Property marshalled upon any foreclosure of the lien of this
Mortgage and agrees that any court having jurisdiction to foreclose such lien
may order the Mortgaged Property sold as an entirety. Borrower hereby waives for
itself and all who may claim through or under it, and to the full extent
Borrower may do so under applicable law, any and all rights of redemption from
sale under any order or decree of foreclosure of this Mortgage or granted under
any statute now existing or hereafter enacted.
(s) RELATIONSHIP. The relationship of Lender to Borrower hereunder is
strictly and solely that of lender and borrower and nothing contained in the
Note, this Mortgage or any other Credit Facility Document is intended to create,
or shall in any event or under any circumstance be construed as creating, a
partnership, joint venture, tenancy-in-common, joint tenancy or
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other relationship of any nature whatsoever between Lender and Borrower other
than as lender and borrower.
(t) ACTIONS AND PROCEEDINGS. Lender shall have the right to appear in
and defend any action or proceeding brought with respect to the Mortgaged
Property and to bring any action or proceeding, in the name and on behalf of
Borrower, which Lender, in its discretion, feels should be brought to protect
its interest in the Mortgaged Property.
(u) FILING OF MORTGAGE, ETC. Borrower forthwith upon the execution and
delivery of this Mortgage and thereafter, from time to time, will cause this
Mortgage, and any security instrument creating a lien or evidencing the lien
hereof upon the Mortgaged Property and each instrument of further assurance to
be filed, registered or recorded in such manner and in such places as may be
required by any present or future law in order to publish notice of and fully to
protect, preserve and perfect the lien hereof upon, and the interest of Lender
in, the Mortgaged Property. Borrower will pay all filing, registration and
recording fees, and all expenses incident to the preparation, execution and
acknowledgment of this Mortgage, any mortgage supplemental hereto, any security
instrument with respect to the Mortgaged Property, and any instrument of further
assurance, and all Federal, state, county and municipal taxes, duties, imposts,
assessments and charges arising out of or in connection with the execution and
delivery of this Mortgage, any mortgage supplemental hereto, any security
instrument with respect to the Mortgaged Property or any instrument of further
assurance. Borrower shall hold harmless and indemnify Lender, its successors and
assigns, against any liability incurred by reason of the imposition of any tax
on the making and recording of this Mortgage.
(v) HEADINGS, ETC. The headings, titles and captions of various
paragraphs of this Mortgage are for convenience of reference only and are not to
be construed as defining or limiting, in any way, the scope or intent of the
provisions hereof.
(w) INSPECTIONS. Any inspection, audit, appraisal or examination by
Lender or Lender's agents of the Mortgaged Property or of information or
documents pertaining to the Mortgaged Property is for the sole purpose of
protecting Lender's interests under this Mortgage and is not for the benefit or
protection of Borrower or any third party.
(x) JOINT AND SEVERAL LIABILITY. In the event that more than one person
or entity executes this Mortgage, the obligations of each person or entity shall
be joint and several.
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(y) WAIVER OF JURY TRIAL. BORROWER AND LENDER ACKNOWLEDGE THAT THE RIGHT
TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY,
AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF
THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES
ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE
OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS MORTGAGE OR THE OBLIGATIONS.
(z) CONSUMER CREDIT. Notwithstanding anything in this Mortgage to the
contrary, this Mortgage shall not secure any portion of the Obligations which is
deemed to be consumer credit under the Truth in Lending Act.
(aa) RELEASE OF THIS MORTGAGE. Borrower's obligations under this
Mortgage shall terminate, and Lender shall release Borrower from its obligations
hereunder, upon payment in full of the Indebtedness (as such term is defined in
the Credit Agreement) or upon satisfaction of all terms and conditions of
Section 2 of the Credit Agreement in connection with the Revolving Loan related
to the Real Estate.
(ab) PERFORMANCE BY TENANT. Lender acknowledges that Borrower has
entered into the Lease which is subject and subordinate to this Mortgage
according to the terms and conditions of that certain Subordination,
Non-Disturbance and Attornment Agreement dated as of the date hereof among
Borrower, Lender and Tenant. Lender acknowledges that performance by Tenant
under the terms of the Lease shall constitute Borrower's performance of its
obligations under this Mortgage to the extent Tenant's performance satisfies
Borrower's obligations to Lender under this Mortgage. This provision is not
intended to be for the benefit of Tenant and Tenant is not a third party
beneficiary of such provision.
[INSERT OTHER STATE SPECIFIC PROVISIONS]
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<PAGE> 222
IN WITNESS WHEREOF, Borrower has executed this Mortgage as of the day
and year noted above.
WITNESSES: BORROWER:
CAPTEC NET LEASE REALTY, INC.
- --------------------------
- --------------------------
By:
------------------------------------
Name:
Title:
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<PAGE> 223
STATE OF MICHIGAN )
: ss.:
COUNTY OF WASHTENAW )
The foregoing Mortgage was acknowledged before me the ____ day of
________________, 199_, by [NAME OF SIGNING INDIVIDUAL], a/the [OFFICIAL TITLE
OF SIGNING INDIVIDUAL] of CAPTEC NET LEASE REALTY, INC. a Michigan corporation
on such corporation's behalf.
-----------------------------------
Notary Public
County,
----------- ----------------
My Commission Expires:
-------------
[Notary Public's Seal]
Prepared By and When Recorded
Return To:
Battle Fowler LLP
75 E. 55th Street
New York, New York 10022
Attention: Charles J. Hamilton, Jr., Esq.
<PAGE> 224
SCHEDULE A
----------
THIS SCHEDULE ATTACHED TO AND MADE A PART OF THE CERTAIN MORTGAGE, SECURITY
AGREEMENT AND ASSIGNMENT OF LEASES AND RENTS, EXECUTED BY CAPTEC NET LEASE
REALTY, INC., FOR THE BENEFIT OF CS FIRST BOSTON MORTGAGE CAPITAL CORP.
Land in the [CITY] [TOWNSHIP] [VILLAGE] of ___________, [COUNTY]
County, [STATE], described as:
<PAGE> 225
EXHIBIT N
---------
<PAGE> 226
CAPTEC FINANCIAL GROUP, INC.
OPERATIONS POLICY MANUAL
<PAGE> 227
CAPTEC FINANCIAL GROUP, INC.
OPERATIONS POLICY MANUAL
TABLE OF CONTENTS
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Page
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I. CREDIT UNDERWRITING POLICIES
----------------------------
A. Introduction 2
1. Credit Philosophy 2
2. The Credit Organization 3
3. Delivering Quality Customer Service 4
B. Summary of the Credit Underwriting Process 5
C. Credit Committee 10
1. Committee Members 10
2. Voting Requirements 10
D. Credit Decision Making Authority 11
1. Credit Committee 11
2. Vice President - Credit and Credit Manager 11
E. Franchise/Chain Concept Underwriting Process 12
1. Minimum Concept Qualifications 12
2. Review of UFOC 13
3. Credit Analysis of Franchisor Financial Statements 16
4. Analysis of Unit Closure Statistics 18
5. Review of Litigation against Franchisor 19
6. Survey of Franchisees 20
7. Minimum Credit Standards for Franchisees 21
8. Report to Credit Committee on Concept 22
F. Financing Applicant Underwriting Process 24
1. Standard Application 24
2. Review of Applicant's Financial Statements 25
3. Selection of Guarantors 27
4. Review of Principals' Personal Financial Statements 28
5. Review of Principals' Prior Operating Experience 29
6. Obtaining and Reviewing Personal Credit Reports 30
7. Obtaining and Reviewing Business Credit Reports 31
8. Reference Investigation 33
9. Site Review 34
ii
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CAPTEC FINANCIAL GROUP, INC.
OPERATIONS POLICY MANUAL
TABLE OF CONTENTS
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Page
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I. CREDIT UNDERWRITING POLICIES (CONTINUED)
----------------------------------------
F. Financing Applicant Underwriting Process (Continued)
10. Review of Franchise Agreement 35
11. Report on Financing Application 36
12. Decision to Approve or Decline 37
13. Approval and Decline Letters 38
Fl. Supplemental Underwriting Requirements for
Franchise Loans Secured by Mortgages
1. Limitation on Loan Terms & Conditions 39
2. Franchise Concept Tiering System 42
3. Concepts Approved for Secured Franchise Business Loans 46
4. Loan-To-Value Ratios 47
5. Fixed Charge Coverage Ratios 48
6. Franchisee Operator Experience Requirements 49
7. Personal Guarantee Requirements 50
8. Borrower's Use of Loan Proceeds 51
9. Portfolio Concentration Limitations 52
10. Processing of Approval Loan Applications 53
G. Definitions of Credit Analysis Terms 54
H. Credit Monitoring 58
1. Updates on Franchise Concept Underwriting Reports 58
2. Monitoring Unit Level Performance Trends within Concepts 59
3. Monitoring High Concentration Customer Accounts 60
iii
<PAGE> 229
CAPTEC FINANCIAL GROUP, INC.
OPERATIONS POLICY MANUAL
TABLE OF CONTENTS
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Page
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II. COLLECTION POLICIES
-------------------
A. Introduction 61
1. Collection Philosophy 60
2. Portfolio Management Department Organization 63
B. Account Monitoring 64
1. Standardized Payment Due Dates 64
2. System Reports 65
3. On-Line Account Monitoring 65
3. Payment Receipts 66
4 Report Monitoring Frequency 66
C. Delinquent Accounts 67
1. Equipment Financings 67
a. Identification 67
b. S - 15 Day Procedures 67
c. 15 - 30 Day Procedures 67
d. 30 -45 Day Procedures 68
e. 45 - 90 Day Procedures 68
f. Continuous Contact 69
2. Mortgage Loans 70
a. Identification 70
b. 5 - 15 Day Procedures 70
c. 15 - 30 Day Procedures 70
d. 30-45 Day Procedures 71
e. 45-90 Day Procedures 71
f. Continuous Contact 72
D. Defaulted Accounts 73
1. Equipment Financings 73
a. Replacement of Franchisee and Assumption/Transfer
of Financing Contract 73
b. Repossession and Taking Legal Action 73
c. Remarketing within Franchise System 74
d. Remarketing to Third Parties 74
e. Enforcement of Rights under Financing Contract 75
iv
<PAGE> 230
CAPTEC FINANCIAL GROUP, INC.
OPERATIONS POLICY MANUAL
TABLE OF CONTENTS
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Page
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II. COLLECTION POLICIES (CONTINUED)
-------------------------------
f. Enforcement of Franchisor Guarantees and
Remarketing Agreements 75
g. Enforcement of Guarantees from Principals and
Other Obligor-Related Parties 76
2. Mortgage Loans 77
a. Replacement of Franchisee and Assumption/Transfer
of Financing Contract 77
b. Repossession and Taking Legal Action 77
c. Remarketing within Franchise System 78
d. Remarketing to Third Parties 78
f. Enforcement of Franchisor Guarantees and
Remarketing Agreements 78
E. Problem Resolution Tools
1. Franchisor Support 79
a. Agreements with Franchisor 79
b. Coordinating with Franchisor's Interests 79
2. Regional Sub-Franchisor Support 79
3. Vendor Support 80
4. Facilitating Franchise Unit Transfer 80
F. Prepayments 81
1. Methods of Quoting Prepayments 81
2. Penalty Computation 31
3. Waiver of Prepayment Penalties 82
G. Equipment Lease Expirations 83
1. Communication to Lessee 83
2. Pricing & Negotiating with Lessee 83
3. Handling and Sale of Returned Assets 84
H. Casualty & Theft 85
1. Insurance 85
v
<PAGE> 231
CAPTEC FINANCIAL GROUP, INC.
OPERATIONS POLICY MANUAL
TABLE OF CONTENTS
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Page
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III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
----------------------------------------
A. Introduction 86
1. Documentation Department Organization 87
2. Delivering Quality Customer Service 88
B. Standardized Documentation 89
C. Documentation Checklists 90
D. Preparation of Documents 91
1. Preliminary Procedures 91
a. Documentation File 91
b. UCC and Financing Statements 91
2. Review of Documentation File 91
3. Assignment of Documentation File 91
4. Lease Document Package 92
a. Confirmation of Legal Entity 92
b. Arrangement for Direct Billing 92
c. UCC Searches 92
d. Contact Credit Department 92
5. Lease Documents 93
6. Verification of Returned Lease Documents from Lessee 94
7. Verification of Returned Lease Documents from Others 94
8. Confirmation of Delivery and Acceptance 95
9. Preparation for Funding 95
E. Legal Review of Documents 96
F. Executions of Documents 97
1. Lessee and Guarantors Signatures 97
2. Counsel Review 97
G. Funding Procedures 98
1. Master Lease Funding Disbursement Summary 98
2. Receipt of Post Closing Items 98
3. Lessee's Copy of the Lease 98
4. Final Submitting to Accounting 98
vi
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CAPTEC FINANCIAL GROUP, INC.
OPERATIONS POLICY MANUAL
TABLE OF CONTENTS
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Page
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IV. MORTGAGE LOAN DOCUMENTATION PROCEDURES
--------------------------------------
A. Introduction 100
1. Documentation Department Organization 100
2. Delivering Quality Customer Service 101
B. Standardized Documentation 102
C. Documentation Checklists 103
D. Preparation of Documents 104
1. Mortgage Documentation File 104
2. Initial Review of Documentation File 104
3. Assignment of Real Estate Documentation File 104
4. Commitment Letter 105
5. Mortgage Documentation Package 106
6. Mortgage Documents 107
a. Promissory Note 109
b. Mortgage or Deed of Trust 110
c. Estoppel Letters 111
d. Guarantee 112
e. Opinions of Counsel 113
f. Miscellaneous Closing Documents 114
g. Real Estate and Business Valuations 115
h. Environmental Site Assessments 116
i. Surveys 117
j. Certificate of Insurance 118
k. Title Commitment 119
l. Lien and Judgment Search Results 120
7. Prepayment Clauses 121
8. Verification of Returned Mortgage Documents
from Borrower 122
9. Verification of Returned Mortgage Documents
from Outside Services 122
10. Final Review of the Mortgage Document Package 122
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TABLE OF CONTENTS
--------------
Page
----
IV. MORTGAGE LOAN DOCUMENTATION PROCEDURES (CONTINUED)
--------------------------------------------------
E. Legal Review of Documents 123
F. Funding Procedures 124
G. Escrow Instructions 125
APPENDIX
- --------
Standard Credit Forms
- ---------------------
I.E.8 Report to Credit Committee on Concept (Guideline Form)
I.F.11 Report on Financing Application (Guideline Form)
I.F.12 Credit Transaction Form
I.F.13(a) Credit Approval Letter
I.F.13(b) Credit Decline Letter
Standard Collection Forms
- -------------------------
II.C.1.c Notice of Default Letter
II.C.1.d-1 Notice of Default and Acceleration of Payments Letter (Obligor)
II.C.1.d-2 Notice of Default and Demand for Payment Letter (Guarantor)
II.C.1.f Phone Log
II.G.1.a Notice of Termination ($1 purchase option)
II.G.1.b Notice of Termination (true lease)
II.G.2.a Bill of Sale
II.G.2.b Lease Renewal Agreement
Exhibits
- --------
I.F.1 Credit Application Form
II.B.2.a Delinquency Report
II.B.2.b Summary Past Due Report
III.D.5.a Equipment Lease Agreement
III.D.5.b Certificate of Delivery Acceptance
IV.C. Real Estate Document Checklist
IV.D.7.b Make-Whole Pre-Payment Clauses
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I. CREDIT UNDERWRITING POLICIES
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section A. INTRODUCTION
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1. CREDIT PHILOSOPHY - Captec's credit philosophy has been developed and
refined throughout the Company's history and is viewed by management as
dynamic. The Company's credit policies have been developed internally -
designed for Captec's specific market focus on franchise and chain
restaurant businesses and the various types of financing products provided
to its customers in those markets. This is a specialized market demanding
specialized credit policies.
Captec's credit policies are proprietary. They have certain similarities to
traditional commercial finance credit policies, but in other ways are
unique to Captec.
Captec believes that the credit decision making process is one of measuring
strengths and weaknesses to make informed credit decisions. This is a
process that includes considering the many inter-related facts of a
particular applicant in relation to the Company's market expertise, past
financing experiences, and credit underwriting policies. As such, it is not
a process which can be entirely reduced to the administration of written
policy.
Therefore, these credit policies are designed as guidelines and principles
for conducting the day-to-day business of underwriting and monitoring the
credit-worthiness of Captec's potential and existing customers. These
policies are not intended to be all-inclusive or absolute.
With respect to credit decision making, Captec believes in the value of
utilizing the "committee process" in conjunction with independent analysis
and opinion formation. The Credit Committee is made up of persons who, on a
day-to-day basis, represent a number of different functions of the Company,
most of whom have a long-term vested interest in the Company's well-being.
Credit Committee meetings are an open forum for discussion of each proposed
financing based upon the information gathered during the credit analysis
process - all Credit Committee members are encouraged to freely communicate
their opinions. The Company believes that this approach leads to balanced
credit decisions.
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2. THE CREDIT ORGANIZATION - Captec has a Credit Department made up of a group
of employees dedicated to the credit underwriting and monitoring process.
Captec also has a Credit Committee which is responsible for making credit
approval decisions. The following is the organizational chart for the
credit organization.
|
Vice CREDIT COMMITTEE
President -------------- President
Credit CFO
| Sr.VP-S&M
| Credit Mgr.
Credit
Manager
|
-----------------------|--------------------
| | |
Credit Senior Credit
Analysts Credit Clerk
Analyst
The Credit Department reports to the Company's senior management via the Chief
Financial Officer and Senior Vice President - Administration.
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3. DELIVERING QUALITY CUSTOMER SERVICE - The credit underwriting process
involves significant interaction with potential and existing customers. As
a result, personnel in the Credit Department play an important role in
delivering quality service to these customers.
The Credit Department's customer service role is also unique because it
must balance this commitment to deliver quality customer service with an
even higher commitment to making independent credit decisions, which
typically requires investigation and corroboration, rather than acceptance,
of information supplied by customers.
Among other things, quality customer service means:
- Professional communication
- Market expertise
- Timely response (see below)
- Genuine interest in the customers' needs
Timely response addresses all of the various ways in which the Credit
Department interfaces with customers. Most important of these is completing
and communicating the credit decision. To this end, the Credit Department
and Credit Committee should strive to maintain the standard of taking 5
business days subsequent to receipt of a completed application to
communicate a credit decision to all financing applicants and 10 business
days from receipt of all primary information to communicate a credit
decision on all franchise/chain concept reviews.
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The analysis and approval process of a credit application varies depending on
the nature of the credit (i.e. new program review, application under an
established program, vendor applications, etc.).
It is the responsibility of the Vice President - Credit to oversee the credit
analysis and approval process with support from the Credit Manager and Credit
Committee. The Credit Committee meets weekly at 10:00 AM on Monday and,
additionally, on an as needed basis as determined by the Vice President -
Credit. The Credit Committee reviews new franchise concepts, as well as
day-to-day transactions.
The following outlines the basic credit approval process used for the Company's
principal sources of business:
NEW FRANCHISE CONCEPT REVIEW
Captec's Sales & Marketing Department monitors many franchise concepts, ranging
from small, newly created concepts to large, mature concepts with established
track records. This monitoring effort identifies target concepts which are
selected to be considered for concept approval. At such time, the Sales &
Marketing Department submits a request to the Credit Department to conduct a
franchise concept review to determine if the concept should be approved for
Captec to provide financing to its franchisees.
A review of a new franchise concept involves analysis of the franchisor's
history and existing operations. If the program is approved, franchise lease
applications are reviewed on a deal by deal basis.
The following factors are included in reviewing a franchisor:
FRANCHISOR'S OPERATING HISTORY - A Uniform Franchise Offering Circular
(UFOC) is obtained for examination of a particular Franchisor. The
examination includes an analysis of the financial condition of the
franchisor, a study of the historical failure rates experienced by the
franchise system, a review of prior and pending litigation against the
franchisor, a review of the minimum financial requirements for new
franchisees, and consideration of the number of years in the business of
franchising.
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EVALUATION OF THE BUSINESS OPPORTUNITY - A review of the quality of the
opportunity at the individual franchisee store unit level. This includes
review of the sales to investment ratio, unit level sales and income
statistics, the concept's market penetration, and the level of direct
competition.
EVALUATION & SURVEY OF EXISTING FRANCHISEES - A telephone survey of a
random sampling of existing franchisees. The survey addresses issues such
as historical and projected sales and profitability figures, the quality of
franchisor support, and overall franchisee satisfaction with their
franchise.
The franchise concept review must also include a review of the standard store
unit equipment package, the average prices thereof and the vendors from whom
Captec would purchase such equipment. Equipment items which are new to Captec
and of a material cost amount must be researched: product brochures obtained,
fair market prices verified and vendors subjected to reference checks.
In addition, the Credit Department must, in coordination with the sales
department, work together with the franchisor to discuss various options with
respect to support to be provided by the franchisor. This support can be in the
form of guarantees, limited recourse arrangements, remarketing agreements, etc.
Franchisor support may be offered in advance by the franchisor or may be
requested by Captec as a condition to concept approval. The concept analysis
must include consideration of the need for the franchisor's support relative to
such items as the financial strength of the typical franchisee and the
historical failure rates in the system. Additionally, the ability of the
franchisor to meet any of its support obligations, particularly financial and
operating obligations must be considered.
Other general information should be gathered regarding the franchisor's future
plans for royalty revenue growth, projected new franchise unit growth, and the
annual volume of financing expected to be utilized under the proposed financing
program.
All of this information must be summarized in a written report that is presented
to the Credit Committee for consideration. The Credit Committee is charged with
considering the credit quality of the franchisor as well as the "fit" of the
proposed program with Captec's market strategy. Based upon all of this
information, the Credit Committee must decide whether or not to approve the
concept.
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FRANCHISEE APPLICATION REVIEW
A franchise concept review approval must include the establishment of standard
franchisee credit requirements and criteria. Each franchisee application must be
reviewed individually based upon these standards. Such standards typically
include minimum net worth and liquidity criteria, a range of acceptable "cost to
open" amounts and maximum debt to worth ratios.
A franchisee application review cannot be commenced by the Credit Department
until a countersigned proposal is received back from the franchisee and the
commitment fee is paid by such applicant. The commitment fee is refundable if
the application is declined, less expenses incurred by Captec, but is otherwise
non-refundable. Payment of this fee is an important indication of the
applicant's good faith in actually closing on the proposed financing. Thus, this
policy is intended to prevent the occurrence of withdrawn applications that
waste the time and efforts of the Credit Department and Credit Committee.
Additionally, the credit review process typically should not be commenced until
a complete application package is received from the applicant. Information
required for a franchisee application includes:
- Completed lease application
- Business financial statements (unless first time franchisee),
typically including 2 years of annual comparative financial
statements and, if financial statements are either prepared by
management or compiled, then 2 years of federal tax returns will
also be required
- Capitalization structure
- Bank references and verification of assets
- Demographic and site information
- Personal information on guarantors:
Personal financial statements (including personal income
statement) 2 most recent years' personal tax returns
- Monthly projections for the first 12 months of operation of the new
unit
- Summary of work experience and who will run the business
Review of a new franchisee requires an extensive investigation of the
applicant's principal officers. Information on the principals is very important
for new franchisee transactions, because they are generally the key to a
successful franchise store. In this regard, the
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analysis focuses on personal financial resources, personal credit reports and
previous operating experience. In addition, liquid assets, personal net worth,
initial cash investment, and secondary sources of household income are measured
against pre-established criteria. These criteria vary depending on the franchise
system and lease or loan requirements.
Review of multi-unit franchisees focuses on the operating history of the
existing store units and the capital resources available before and after
opening the proposed unit. Detailed analysis is conducted on the financial
results in an effort to measure financial strength and operating success. Key
ratios are measured against concept system-wide standards. Additionally,
personal financial resources and personal credit statements are analyzed.
Once the application is reviewed, a decision must be made by the Vice President
- - Credit and/or the Credit Manager as to whether the applicant is creditworthy
and is within Company guidelines (i.e., net worth, financial condition,
equipment, etc.). If the application fails to meet preliminary credit criteria,
the application is declined and the process ends. In an instance where the
credit is not strong enough to be considered as submitted, changes in the
structure may be suggested to the Captec sales representative.
If the application meets preliminary credit criteria, the process continues with
an investigation of bank and trade references. A Dun and Bradstreet report on
the company and credit bureau reports on the company's principals are obtained.
Financial statements are analyzed with a focus on net income, cash flow, net
worth, pertinent ratios, trends, and ability to service existing and additional
debt.
As a general guideline, the credit review should reveal various positive
attributes including (but not limited to) the following:
- Upward trend in sales and profits
- 3 years in business
- Positive cash flow to cover the current portion of long term debt
and lease payments
- Satisfactory bank and trade references
- Moderate leverage position
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These guidelines describe characteristics that may not all be present in each
transaction approved. Each company must be examined in light of its particular
circumstances. For example, leverage ratios often vary by concept and size of
business, or an applicant may have experienced prior operating losses but have
since successfully turned around its operations and returned to profitability.
Finally, the credit investigation and financial analysis must be summarized in
writing and the Vice President - Credit, Credit Manager or Credit Committee,
depending on the size of the transaction, must approve or reject the proposed
transaction.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: C. CREDIT COMMITTEE
- --------------------------------------------------------------------------------
1. COMMITTEE MEMBERS - Members of the Credit Committee are: the President,
Chief Financial Officer, Senior Vice President - Sales & Marketing, Vice
President - Credit and Credit Manager. Additionally, the Senior Vice
President Administration, while not a Committee member, will typically
attend all meetings of the Credit Committee to monitor the status of the
financing applications.
2. VOTING REQUIREMENTS - The Credit Committee must operate under the following
voting rules:
a) Meeting Quorum: 75% of members, but the Vice President - Credit or
Credit Manager must always be present.
b) Approval Vote: 100% of members present.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: D. CREDIT DECISION MAKING AUTHORITY
- --------------------------------------------------------------------------------
1. CREDIT COMMITTEE - The Credit Committee is the senior credit body and has
ultimate authority for making any type of credit decision. Only the Credit
Committee has the authority to approve:
a) franchise and chain concepts;
b) transaction applications that exceed $150,000 in aggregate credit
exposure to a customer (including outstanding balances on existing
financings); and
c) any and all deviations from standard credit policies.
The Vice President - Credit and Credit Manager have authority to decline
concepts, although they should submit most concept reviews to Credit
Committee, even if the probable credit decision appears to be a decline of
the concept for program financing.
2. VICE PRESIDENT - CREDIT AND CREDIT MANAGER - The Vice President - Credit
and Credit Manager have the following approval authorities:
a) Individual Authority: Transactions that do not exceed $75,000 in
aggregate credit exposure to a customer (including outstanding balances
on existing financings), assuming the customer is in an approved
concept, may be approved by the sole authority of the Vice President -
Credit or Credit Manager.
b) Joint Credit Authority: Transactions that do not exceed $150,000 in
aggregate credit exposure to a customer (including outstanding balances
on existing financings), assuming the customer is operating an approved
concept, may be approved by the Vice President - Credit or Credit
Manager and one other member of the Credit Committee.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: E. FRANCHISE/CHAIN CONCEPT UNDERWRITING PROCESS
- --------------------------------------------------------------------------------
1. MINIMUM CONCEPT QUALIFICATIONS - To be considered for the concept
underwriting process, a franchise concept should typically meet the minimum
qualifications listed below.
- Minimum of 50 units, typically 100 or more units in operation
system-wide
- Minimum of 5 years of franchising experience by the franchisor
- Minimum net worth of $5 million
- Historical net profits for the past 2 years
- Low historical rates of failure by franchisees (i.e. unit closures)
- Limited historical levels of litigation against franchisor,
particularly with regard to franchisee complaints
Concepts that fall marginally below these standards may also be considered
at the discretion of the Credit Manager.
Chain concepts (i.e. - non-franchised concepts) may become mature, proven
successful systems with a smaller number of units than a franchised
concept. Therefore, the Credit Manager may override the minimum number of
units standard for Chain concepts if the other standards are met.
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Section: I. CREDIT UNDERWRITING POLICIES
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- --------------------------------------------------------------------------------
2. REVIEW OF UFOC - The Federal Trade Commission prohibits the offer or sale
of any franchise without first providing a Uniform Franchise Offering
Circular ("UFOC") to a prospective franchisee. Thus, all franchisors
maintain a current UFOC which they provide to Captec upon request.
The UFOC is an initial and primary source of information on the franchise
concept. The FTC has established a standard format for the UFOC and
requires a variety of information disclosure. As a result, the UFOC
contains extensive information on the franchisor and the concept, and
therefore, it must be utilized extensively during the concept underwriting
process. The UFOC review must include the following:
a) FRANCHISE CONCEPT AND OPERATION - The nature of the business being
franchised and the reasons for its success must be analyzed. Unit level
sales and operating costs, unit development costs, competitive
strengths and weaknesses and geographical penetration are factors to be
considered. This analysis must result in an assessment of the quality
of the unit level business opportunity.
b) MANAGEMENT AND OPERATING HISTORY - The history of the concept must be
reviewed, including the number of years in business, the number of
years engaged in franchising, and the history of the franchisor's
business strategies. Additionally, this must include a review of the
capabilities and business experience of the key directors, officers and
employees of the franchisor. The purpose of this analysis is to gain a
historical perspective on the franchisor's business and the strengths
and weaknesses of key personnel.
c) NUMBER OF UNITS - The number of existing store units, broken down
between company (franchisor) operated and franchisee units, must be
reviewed and analyzed. The percentage mix between company and
franchisee stores must be noted, along with new unit development plans
for the next year. Franchisor involvement in unit operations affects
the franchisor's mix of revenue and income sources and is an important
consideration when measuring the franchisor's capabilities in taking
over and operating troubled franchisee units. This analysis must assess
the size of the concept, the concept-wide unit growth trends, and the
degree to which the franchisor is involved in store operations.
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2. REVIEW OF UFOC (CONTINUED)
d) FRANCHISE FEES AND EXPENSES - This is an analysis of the various
fees required to be paid by the franchisee, which typically
includes a one-time franchise fee and training fee and ongoing
royalty and advertising fees. This analysis must compare these
fees to industry standards and to assess the impact of the fee
structure on the store unit level economics.
e) FRANCHISEE'S INITIAL INVESTMENT - The UFOC includes an outline of
the low to high range of total costs to a franchisee to open a new
store unit. Generally, these costs include the franchise fee,
land, building, leasehold improvements, equipment, initial
inventory, training expenses, pre-opening expenses and working
capital reserves. This information will be used as a basis for
reviewing franchisee applications to assess whether the
franchisee's actual costs, including the cost of the asset being
financed, are reasonable. Additionally, this analysis must include
a "sales to in vestment ratio" calculation, which compares average
annual unit sales to average cost to open a unit. This ratio is an
important measure of the quality of the business opportunity from
an economic standpoint.
f) DUTIES OF THE FRANCHISOR TO THE FRANCHISEES - This is a review of
the support systems provided by the franchisor for the benefit of
the franchisee. This support review must focus on the depth of the
training program and field operations support. The purpose of this
analysis is to become familiar with the support systems available
within the system and to compare such systems to industry
standards.
g) FRANCHISOR'S LITIGATION AND CLAIMS - The UFOC lists all pending or
threatened litigation against the franchisor and/or its directors
and shareholders and provides detailed information on each case.
This analysis must include an assessment of the quality of the
franchisor's relations with its franchisees, as well as any
significant financial risks facing the franchisor as a result of
litigation.
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2. REVIEW OF UFOC (CONTINUED)
h) FRANCHISE UNIT CLOSURES - The UFOC provides a three year history
of closures of franchise units as measured by termination of
franchise agreements (there is an individual franchise agreement
for each franchisee operated store unit). This information must be
analyzed closely in order to understand the nature of any
franchisee failures and to assess the success rate of the
franchisees.
i) FINANCIAL STATEMENTS - The UFOC includes audited financial
statements on the franchisor for three fiscal years. A complete
financial analysis must be performed on these financial
statements, including inputting the statement into Captec's
spreadsheet model, conducting ratio analyses, and reviewing cash
flow coverage and line-item trends.
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3. CREDIT ANALYSIS OF FRANCHISOR FINANCIAL STATEMENTS - The Franchisor's
financial statements must be input into Captec's financial statement
spreadsheet model as a basis for the analysis.
The review of the Franchisor's financial statements must include the
three most recent fiscal year-ends. Trends must be analyzed with respect
to revenue, profit and cash flow. Trends in revenues and expenses must
be analyzed on both a nominal dollar value and percentage basis.
Revenues must be broken down in terms of store sales, franchise fees and
royalty income. The mix must be analyzed in terms of where operating
profit is derived from, as well as the stage of the Franchisor (e.g. -
early stage, high growth, mature, etc.). Generally, revenue derived from
franchise fees should decrease as a percent of total revenue as the
Franchisor matures. Results in contrast to this general trend must be
examined and discussed in detail in the written report to Credit
Committee.
Ratios must be examined and compared to industry averages. This ratio
analysis must address the following key ratios: the Debt/Worth Ratio,
the Liquidity Ratio, the Cash Flow/CPLTD Ratio and the Fixed Charge
Coverage Ratio. Trends in these ratios must also be analyzed and
assessed with respect to the long-term financial viability of the
Franchisor and the concept. If the debt/equity ratio increases every
year, a detailed analysis must be performed to ascertain the reasons for
this trend. If the Cash Flow/CPLTD Ratio is less than 1.25:1, and/or the
Fixed Charge Coverage Ratio is less than 1.25:1, a detailed analysis
must be performed to assess the degree of risk that the Franchisor would
be unable to meet its financial obligations. Such negative trends must
be discussed in detail in the written report to Credit Committee.
The company's debt must be itemized and analyzed. Long-term debt must be
reviewed in detail, examining terms, financing sources, and the
composition of the current portion of long-term debt. A cash flow
analysis must be completed to ensure that the Franchisor has an
acceptable Cash Flow/CPLTD Ratio and Fixed Charge Coverage Ratio.
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3. CREDIT ANALYSIS OF FRANCHISOR FINANCIAL STATEMENTS (CONTINUED)
A detailed financial statement analysis must be included in the Report
to Credit Committee and the results of this analysis must be summarized
in the Recommendation section of the Report to Credit Committee. The
Credit Committee must consider this information when deciding whether to
extend credit to applicants operating in the concept.
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4. ANALYSIS OF UNIT CLOSURE STATISTICS - The UFOC discloses the number of
franchise agreements terminated for any reason over the past three
years. This information is broken down further to number of units
closed, number of units transferred, and number of units taken over by
the Franchisor. The number of terminated franchises is also broken down
as a percentage of the total number of units and by geographical
location. The reasons for the closures or transfers are also discussed
in detail.
The Report to Credit Committee must contain a section outlining the unit
closure statistics and discussing the pertinent details regarding such
closures. In general, a small number and percentage of terminated
franchise agreements is acceptable. However, a large number or
percentage of terminations, or negative trends in terminations, must be
closely examined. Issues mitigating any of these negative statistics
must be discussed in depth.
Poor franchise termination history generally suggests the potential of a
major weakness in the franchise system and, therefore, must also be
summarized in the Recommendation section of the Report to Credit
Committee. The Credit Committee must consider this information when
deciding whether to extend credit to applicants operating in the
concept.
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5. REVIEW OF LITIGATION AGAINST FRANCHISOR - The UFOC discloses any
administrative, criminal or material civil action pending against the
Franchisor, any predecessor and any person identified as an officer
and/or director in the UFOC. The information contained in the UFOC on
each case must be reviewed and, if necessary, more detailed information
must be obtained, including a current status report.
Significant litigation pending between the Franchisor and its
Franchisees (significant in terms of either dollars or number of
actions) must be examined closely. This is often an indication of
weakness in the franchise system which ultimately could affect the
future earnings and financial strength of applicants.
Furthermore, if pending litigation is significant in terms of dollars,
the potential adverse affect on the company's financial condition must
be analyzed. Again, in such case further information must be obtained
on the status and range of the amount of contingent liability.
The Report to Credit Committee must contain a section outlining the
pending litigation and discussing the pertinent details regarding such
actions. Major litigation problems must also be summarized in the
Recommendation section of the Report to Credit Committee. The Credit
Committee must consider this information in deciding whether to extend
credit to applicants operating in the concept.
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6. SURVEY OF FRANCHISEES - When reviewing a Franchisor concept for
approval, a randomly selected sampling of existing Franchisees must be
surveyed. A minimum of 5% of the franchisees or 25 franchisees,
whichever is greater, must be surveyed. Franchisees must be selected
from different parts of the country. Information obtained from the
franchisees should include: 1) average sales; 2) the level of franchisee
profitability and how long it took them to become profitable; 3) whether
the franchisee is satisfied with both the pre-opening and ongoing
support from the franchisor; 4) does the franchisee believe that the
working capital requirements and other cost projections listed in the
UFOC are adequate. Each franchisee surveyed must also be asked if they
would recommend that other people become franchisees of the concept and
if they would open their store(s) again. Finally, the franchisee should
be asked if they are having any problems with their business.
The Report to Credit Committee must contain a section outlining the
results of the franchisee survey. Major franchisee concerns must also be
summarized in the Recommendation section of the Report to Credit
Committee. The Credit Committee must consider this information in
deciding whether to extend credit to applicants operating in the
concept.
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SECTION: I. CREDIT UNDERWRITING POLICIES
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7. MINIMUM CREDIT STANDARDS FOR FRANCHISEES - When reviewing a franchise
concept for approval, general credit standards must be established for
typical franchisees. Many factors must be considered when setting the
standards, including: 1) the total cost to open a typical unit; 2) first
year sales and profitability averages; 3) mature store sales and
profitability averages; and 4) standard multi-unit development
requirements. In some instances, secondary sources of personal income
for the principals must also be considered when determining liquidity
requirements.
Also, the franchisor's stated financial requirements for franchisees
must be reviewed and compared to the results of Captec's analysis.
Ideally, Captec and the Franchisor will have similar credit standards.
If Captec's credit standards significantly exceed the Franchisor's
credit standards, the approval rate of franchisee applicants may be
below acceptable levels.
All financing programs require a clean credit bureau report on the
franchisee. Generally, a standard net worth requirement and an initial
capitalization requirement should also be established. Each credit has
unique circumstances and must be reviewed on an individual basis, taking
into account the credit standards established through this analysis.
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8. REPORT TO CREDIT COMMITTEE ON CONCEPT - Utilizing all of the information
and analysis derived from the concept underwriting process, the Credit
Department must prepare a written report on each franchisor (the
"Concept Underwriting Report"). The Concept Underwriting Report must
include the following:
- One page summary of Franchisor
- One page summary of the proposed financing program
- Discussion of concept and operations
- Discussion of management and operating history
- Discussion of fees paid by franchisees
- Discussion of training and support
- Discussion of unit level economics, including average unit sales,
average return on sales, average investment required to open a
unit and standard unit capitalization requirements
- Discussion of the results of the credit analysis of the
Franchisor's financial statements
- Discussion of unit closure statistics
- Discussion of survey of franchisees
- Recommendation
See Appendix I.E.8 for the guideline format of this report.
The report must be submitted to all members of the Credit Committee for their
review in advance of the committee meeting. The Credit Committee must review and
discuss the concept, decide whether or not to approve a financing program for
the franchisees and decide what the terms and conditions of the program will be.
Either prior to or as a result of the Credit Committee s review, there may be a
negotiating process that takes place with the franchisor regarding the structure
and nature of any recourse programs, remarketing agreements, the maximum
aggregate dollar amount of program financings, the maximum dollar amount of
individual transactions, and/or the standard rate of return on such
transactions.
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8. REPORT TO CREDIT COMMITTEE ON CONCEPT (CONTINUED)
The Credit Committee may, on occasion, limit the amount of a program
to establish a relationship with a franchisor and agree, after a
predetermined period of time, to review the performance of the portfolio
and update financial and credit information on the franchisor to
determine if the program should be increased. In such instances, the
Report to Credit Committee must be revised and resubmitted to Credit
Committee for final approval.
The Report to Credit Committee must be reviewed and approved by the
Credit Committee prior to accepting franchisee financing applications.
All concepts must pass this credit underwriting process in order to
become "Approved Concepts."
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SUB-SECTION: F. FINANCING APPLICANT UNDERWRITING PROCESS
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1. STANDARD APPLICATION - A credit application must be completed, signed
and dated by a proposed applicant and made a part of every credit file.
The credit application should be used as a starting point and should
indicate the applicant's name and address, the location to be financed,
the name, address and social security number of all guarantors, the
applicant's bank and trade references, a description of the assets to be
financed, and the amount and the costs of those assets. (see Exhibit
I.F.1 for the standard application form).
A signed credit application authorizes Captec as a potential creditor to
order credit bureau reports on the guarantors and obtain credit
information from current creditors. Therefore, such credit service
reports cannot be ordered or received prior to receiving a signed
application.
The application should be submitted to Captec accompanied by a check
from the applicant for payment of the commitment fee. A copy of the
check must be attached to the application and remain in the credit file.
No application can be processed prior to receipt of the properly signed
application form and the commitment fee. Upon receipt of the signed
application and check, the transaction must be input by Credit
Department personnel into the INFO-LEASE Credit Application Module
using the information from the application. An application number and
customer credit account number is assigned at that time. If the
applicant is an existing customer or applicant, the existing customer
credit account must be used in order that all pending, approved, and/or
closed transactions may be tracked by customer, enabling the efficient
monitoring of customer borrowing concentrations.
The Credit Application Module database must be maintained for each
application throughout the application, documentation and transaction
booking process. Each application will be tracked within this system to
monitor such items as credit decision status, open approval contingency
items, documentation checklists, asset cost and description information,
and projected funding date. Each application is tracked across
departments (from credit to documentation to accounting); therefore, the
assigned credit analyst must re-assign the approved application to
Documentation Department upon completion of the credit approval process.
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2. REVIEW OF APPLICANT'S FINANCIAL STATEMENTS
a) Credit Analysis Methods - When an applicant operates one or more
existing restaurants, current financial statements on the existing
operations must be submitted with the application. This information must
be input into Captec's spreadsheet model for summarization and ratio
analysis.
The financial statements must be reviewed on both a consolidated as well
as a unit level basis. Sales of existing restaurants must be analyzed
and compared to average per unit sales for the concept. Costs and
margins must also be compared to concept-wide averages. The balance
sheet must be analyzed in terms of trends, capitalization, Debt/Worth
Ratio and other pertinent ratios. The capitalization structure should be
closely analyzed to insure that the applicant has sufficient capital to
support its existing and planned future units. If funds are put into the
business as debt from the principals (e.g. - in the form of shareholder
notes) the notes should typically be required to be subordinated to the
Captec financings.
As with any existing company, part of the financial analysis must
include analyzing pertinent ratios and studying trends. Debt/Worth Ratio
should be moderate depending on the growth stage of the company. If a
high Debt/Worth Ratio exists, there must be numerous other redeeming
features for the application to receive further consideration for
approval. A typical maximum Debt/Worth Ratio is 3:1, but ratios may vary
both upwards and downwards for different concepts and the analyst must
give consideration to these variances.
Cash flow is very important and must be positive. The existing
operations of the applicant must be generating sufficient cash flow to
service all current obligations. A typical minimum Fixed Charge Coverage
Ratio would be 1.25:1.
An existing company's profitability must also be reviewed. Depending on
the stage of the company, profitability may or may not have been
reached. On a newer unit, there may be many pre-opening costs expensed
that have limited or prevented profitability. Also, if an applicant is
in a growth phase and opening several units, numerous start-up costs,
training and overhead are often being absorbed and may also prevent
profitability. All of these factors must be taken into account by the
analyst and each application must be analyzed based upon each particular
situation.
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2. REVIEW OF APPLICANT'S FINANCIAL STATEMENTS (CONTINUED)
b) Comparison with Franchisor's Minimum Credit Requirements - Once a
Franchise concept is approved, the Franchisor file is kept in the Credit
Department and used for reference. When an application for the system
is being reviewed, various assumptions must be compared with the
franchisor information for accuracy. This Franchisor file information
and the application must be compared with respect to the following:
- the cost to open
- site and store unit size
- the net worth and liquid assets of the applicant
- unit level sales results
- unit level profits as a percent of sales
This unit level economic information must be input into and tested using
Captec's unit level economics model. Any economic stresses noted from
this analysis must be discussed in the Report on Financing Application.
This information must be compared to both: 1) continuously monitor the
accuracy of the assumptions made in the Franchisor file; and 2) to
assess the strengths and weaknesses of the applicant relative to these
standards.
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3. SELECTION OF GUARANTORS - As a policy, all principal officers owning 10%
or more of the applicant organization must individually guarantee all
financings. However, their are common occurrences of exceptions to this
policy.
The most typical examples of an exception are:
1. organizations with substantial capital paid-in directly by the
principals (i.e. - the principals have significant capital at
stake in the business)
2. organizations with substantial net worth, many years in business
and/or insignificant mass of operations (as measured by such
statistics as total revenue and number of store units)
Generally, transactions must be proposed by the Sales & Marketing
Department with a requirement for guarantees, unless the applicant
organization is an obvious exception to the policy or unless the
applicant specifically states and satisfactory explains why guarantees
are not available.
All guarantees must be joint and several for the entire amount of the
financing. Exceptions to this policy may only be allowed in unusual
circumstances.
If an application submitted for credit underwriting is submitted without
a guarantee or with a limited guarantee, the credit analysis must
address the issue of whether the applicant qualifies for an exception
from the guarantee policies. All such exceptions must be discussed in
the Report on Financing Application and can only be approved by Credit
Committee.
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4. REVIEW OF PRINCIPALS' PERSONAL FINANCIAL STATEMENTS - All personal
financial statements must be submitted directly by the principals and
must be complete, signed and dated. All personal financial statements
should be no more than 6 months old.
Each line item must be reviewed and analyzed further, if needed. Cash
must be verified through bank references and/or current bank statements.
Marketable securities must be verified through securities account
statements. The valuation of certain assets, such as business interests,
must be reviewed to assess the reasonableness of the stated value. Total
debt indicated as owing to banks and others must be reconciled with the
individuals' credit bureau report to determine the accuracy and
completeness of the liabilities section of the personal financial
statement.
The strengths and weaknesses of the personal financial condition of all
principals, particularly those who are proposed as guarantors, must be
discussed in detail in the Report on Financing Application.
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5. Review of Principals' Prior Operating Experience - A resume must be
generally obtained on the principals, and the analyst must review their
background and experience.
Positive attributes include (but are not limited to):
- previous experience operating stores within the same concept or a
concept with similar operations requirements
- previous successful business ownership
- specific occupational expertise for persons serving in various
functional areas of the applicant's organization (e.g. - a person
serving as the CFO might have a background as a CPA, a financial
officer with previous employers, etc.)
- significant business contacts and presence within the operating
territory
In most cases the principals should have direct prior operating
experience within the concept or a similar concept. Any lack of such
prior experience is a major weakness and must be highlighted in the
Report on Financing Application.
With respect to franchise loans secured by mortgages, there are certain
specific, quantitative requirements regarding the principals' prior
operating experience. See Section I.F1.5 for further details regarding
these requirements.
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6. OBTAINING AND REVIEWING PERSONAL CREDIT REPORTS - A personal credit
bureau report must be obtained directly from the reporting agency on
every potential guarantor listed on an application. The reports should
generally be obtained via the Credit Department's on-line reporting
service.
A TRW is the standard report used. This report must be used to verify
current address, social security number, year of birth, spouses name and
employment. The profile summary must be reviewed, and includes the
number of accounts, satisfactory accounts, delinquent accounts, public
records, installment balances and payments, real-estate balances and
payments, revolving balances and availability, past due amounts, and
inquiries. Each trade account is listed separately and includes the name
of the creditor, the date the account was open, balance date and last
pay date. The high credit current balance, and monthly payment are also
listed. The account status reflects the last 24 months of payment
history. Inquiries over the past two years are listed.
Each account listed on the credit report must be reviewed to establish
prompt payment history and determine that the amount of personal debt is
not excessive. Should an account show any derogatory payment history, a
detailed written explanation must be provided by the principal and the
explanation must be acceptable to Captec.
The number of inquiries must be noted and assessed as an indication of
other funding sources the individuals may be working with and the
probability of recent similar credit requests.
Any derogatory payment history noted on a personal credit report must be
disclosed in the Report on Financing Application, along with the
person's explanation and the analyst's assessment of that explanation.
Also, any discrepancies between the debt indicated on the credit report
and the debt disclosed on the personal financial statement must be
indicated in the Report on Financing Application.
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7. Obtaining and Reviewing Business Credit Reports - A Dun & Bradstreet
Business Information Report must be obtained on every company applying
for credit to Captec. The D&B report contains extensive information on
the business which must be used for both information gathering and
information verification purposes.
The D&B report contains the company's complete legal name and address,
its business activity, a rating which is generally based on the
company's net worth, the year started and number of employees. The D&B
summarizes the company's financial statements, if the company has agreed
to provide D&B with such financial statements, and the report lists any
special events. Payment histories are outlined by vendor industry,
reflecting total dollar amount, high credit and payment history. A
paydex score is assigned based on this data and the percentage of
payments within the allotted terms are disclosed. Public filings are
listed including all suits, tax liens, and UCC filings. The D&B report
lists the location of the offices of the company, ownership structure
and background information on the officers. This information is
generally used for verification purposes.
The entire D&B report must be reviewed. Any derogatory information
regarding the business rating, special events, payments histories/paydex
score and public filings (e.g. - suits and tax liens) must be fully
investigated and discussed in the Report on Financing Application.
The information in the D&B report such as the name of legal entity,
summarized financial statements, names and backgrounds of officers, and
ownership structure must be compared to such information provided
directly by the customer. Any discrepancies between these information
sources must be fully investigated, and any such discrepancies that
cannot be satisfactorily reconciled must be discussed in the Report on
Financing Application.
All lending/leasing creditors listed in the D&B report must be compared
to the bank reference and financial statement information provided
directly by the customer. Any such creditors which were not disclosed by
the customer must be contacted as a bank reference. Furthermore, if
there are any creditors who were not disclosed by the customer and who
have material outstanding balances owed to them by the customer, the
reason for such omissions must be investigated by
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7. OBTAINING AND REVIEWING BUSINESS CREDIT REPORTS (CONTINUED)
discussion with the customer. Any omissions which cannot be
satisfactorily reconciled must be discussed in the Report on Financing
Application.
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8. REFERENCE INVESTIGATION - All bank and finance company references and
all material trade references, which are either supplied with the
application or discovered during the credit investigation, must be
contacted by the Credit Analyst.
When obtaining a bank reference, the Credit Analyst must speak directly
to the account officer assigned to the applicant, to ensure that
complete information is being provided. The Credit Analyst must inquire
about the following: length of their institution's relationship with the
applicant; average deposit balances; lending/financing history; and
detailed history and status on each outstanding obligation. In addition,
the Credit Analyst should ask the account officer other questions to
probe into their overall experience and satisfaction with the customer.
This can be accomplished by asking questions regarding the applicant's
business history, growth potential and other future business plans.
References from institutions (e.g. finance companies) that have only
secured term financings (e.g. equipment and real estate leases)
outstanding with the applicant will generally provide some limited
reference information, as compared to a bank relationship. For such
references, the Credit Analyst must inquire about the history of each
financing provided, including the following: commencement date; original
balance; type of financing; collateral; term of the financing; and
payment history.
Trade references must be investigated to determine if the applicant is
paying its suppliers on a timely basis. The Credit Analyst must inquire
about the following: average and high monthly balance, payment history,
length of the vendor's relationship with the applicant; and frequency of
purchases.
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9. SITE REVIEW - A complete demographics report is included in the credit
application and generally includes the description of the site
(including diagrams), main traffic generators, competition in the area,
population, and traffic counts. The depth of site review analysis
depends upon the type of financing being considered.
EQUIPMENT financing transactions require a compilation of site
information for presentation as a section in the Report on Financing
Application. This information must be generally compared to the standard
site requirements for the concept and any major discrepancies must be
noted in the Report on Financing Application.
REAL ESTATE MORTGAGE LOAN transactions require a detailed review of the
site information. In addition to the review of the demographics report,
this review must also include a review of the Franchisor's site analysis
and pictures and site drawings for the site. Furthermore, the Senior
Vice President - Sales & Marketing must review the entire site
information package and provide summary comments to the Credit Analyst
for inclusion in the Report on Financing Application. A detailed
discussion of the site must be included in the Report on Financing
Application, and the entire site package must be made available to
Credit Committee during the committee meeting.
REAL ESTATE NET LEASE transactions require the same level of review as
described above for real estate mortgage transactions. In addition, the
President or Senior Vice President - Sales & Marketing must physically
visit the site prior to the funding of the transaction. If this site
visit occurs after a credit approval, such approval must be made
contingent upon a satisfactory site visit. A detailed discussion of the
site must be included in the Report on Financing Application, and the
entire site package must be made available to Credit Committee during
the committee meeting.
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10. REVIEW OF FRANCHISE AGREEMENT - The franchise agreement must be reviewed
during the approval process. If the application is for a new store unit,
the franchise agreement may not be available when the application is
submitted to the Credit Department because it may not yet have been
executed by the franchisee and franchisor. The franchise agreement is
typically executed 1-3 months in advance of the unit opening, depending
on the concept. Review of the franchise agreement must be listed as a
credit contingency item if the agreement is not reviewed during the
application underwriting process, and it must be submitted, reviewed and
deemed acceptable to the Credit Department prior to the funding of the
transaction.
The review of the franchise agreement must verify that:
- the term of the proposed financing does not exceed the remaining
term of the franchise agreement; and
- the franchisee, as named in the franchise agreement, is the same
entity as the lessee/borrower under the proposed financing
If the review of the franchise agreement does not verify the above
criteria, the discrepancies must be discussed with the Credit Manager to
determine whether the applicant should immediately be disqualified for
financing. If, in the opinion of the Credit Manager, the application
merits consideration for approval despite any such discrepancy, then
such discrepancy must be discussed in the Report on Financing
Application.
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11. REPORT ON FINANCING APPLICATION - Once the credit analysis is completed,
the assigned Credit Analyst or the Credit Manager must prepare a
complete written analysis on the proposed transaction and present such
report to the Credit Committee or other appropriate decision-making
authority (see Policy I.D for determination of the appropriate credit
decision-making authority).
The Report on Financing Application must include the following:
- One page Transaction Summary
- Discussion of company structure
- Discussion of background of key personnel and financial strength
of guarantors
- Discussion of operating history
- Discussion of sources and uses of capital (for applications
related to development of new units)
- Discussion of the results of the credit analysis of the
applicant's historical financial statements (if applicant has
existing store operations)
- Discussion of the results of the credit analysis of the projected
unit level economics for the unit being financed (if application
is for a new unit)
- Discussion of site information
- Recommendation
- Attach a copy of the Captec spreadsheet model (if applicant has
existing store operations)
- Attach a copy of the Captec spreadsheet for modeling the unit
level economics
See Appendix I.F.11 for the guideline format for this report.
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12. DECISION TO APPROVE OR DECLINE - The Report on Financing Application
must be submitted to all members of the Credit Committee, or other
appropriate decision-making authority (see Policy I.D for determination
of the appropriate credit decision-making authority), for their review
in advance of the committee meeting. The Credit Committee or other
appropriate decision-making authority must review and discuss the Report
and decide whether to approve or decline the proposed financing.
The Credit Committee or other appropriate decision-making authority also
has the authority to change the terms and conditions of the proposed
financing if they are not acceptable as originally proposed. Any such
changes must be communicated by the Credit Manager to the assigned
account representative in the Sales & Marketing Department, that
representative must communicate such changes to the applicant and the
applicant must accept such changes in writing in order for a transaction
to be approved.
Credit Department personnel must maintain a Credit Transaction Form
which is attached to the credit file. See Appendix I.F.12 for the format
for this report. The credit decision must be indicated on this form,
along with all contingency items. In the case of approvals, all persons
voting on the credit decision (the attending Credit Committee members or
the other appropriate decision-making members) must initial the
approval.
Credit Department personnel must also post the credit decision and any
credit contingency items into the INFO-LEASE Credit Application Module.
Such personnel must then immediately re-assign the application to the
Documentation Department and place the physical credit file in Captec's
filing cabinets.
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13. APPROVAL AND DECLINE LETTERS - Approval and decline letter must conform
to the standard form for such letters. See Appendix I.F.13(a) for
standard form approval letters and Appendix I.F.13(b) for standard form
rejection letters.
These standard form letters have been designed to legally conform to
commercial law and Federal Regulation B (Equal Credit Opportunity)
requirements. Additionally, approval letters must specify certain
documentation requirements, the standards for which are determined
outside of the Credit Department. Therefore, only Captec's General
Counsel has authority to make changes to the standard form approval or
rejection letters.
If approved, an approval letter must be signed by the Vice President -
Credit or Credit Manager and sent to the customer, outlining the terms
and conditions of the approval and the file proceeds to the
documentation department. However, with respect to franchise loans
secured by mortgages, the communication of loan application approvals
must be coordinated with the issuance of a Commitment Letter by the
Documentation Department, as more fully described in Section I.F1.9.
If the transaction is declined, a rejection letter must be signed by the
Vice President - Credit or Credit Manager and sent to the applicant.
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SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
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1. LIMITATIONS ON LOAN TERMS & CONDITIONS - Franchise loans secured by
mortgages must conform with the following terms and conditions as a
prerequisite for being considered for credit underwriting. Credit
applications with non-conforming terms and conditions must be returned
to the Sales & Marketing Department for restructuring.
a) FIXED RATE - All loans must provide for a fixed rate of interest for
the entire term of the loan. Rates may float prior to funding based
upon changes in the comparable-term U.S. Treasury Notes. The loan
interest rate will be priced based upon a spread over the Treasury
security most closely approximating the stated maturity of the loan.
b) SECURITY INTEREST - Loans must be secured by one of three types of
security interests:
FEE SIMPLE MORTGAGES provide a security interest in the Borrower's
restaurant building(s) and related land.
LEASEHOLD MORTGAGES provide a security interest in the Borrower's
ground lease. Leasehold mortgages are used in instances where the
Borrower leases the land under a ground lease from a third party
lessor.
BUSINESS ENTERPRISE LIENS provide a security interest in all of the
assets of the Borrower held at the unit that is the subject of the
financing. Business Enterprise Liens are typically used in instances
where the Borrower may have no land or building assets at the
subject unit.
At least 70% of loans made by the Company will be secured by fee simple
mortgages. No more than 30% of the loans will be secured by leasehold
mortgages and business enterprise liens. Senior management places the
limitations on the percentage of loans which can be secured by leasehold
mortgages and business enterprise liens. From time to time, such
limitations will be discussed in Credit Committee meetings and any
resulting changes to the limitations must be communicated by the Vice
President - Credit to the Sales & Marketing Department.
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SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
1. LIMITATIONS ON LOAN TERMS & CONDITIONS (CONTINUED)
Furthermore, other underwriting and documentation policies will
vary, as noted elsewhere in the Operations Manual, depending upon
whether a loan is secured by a fee simple mortgage or a leasehold
mortgage.
c) MAXIMUM LOAN MATURITY - The maturity period for any loan must be
less than or equal to 15 years.
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REVISED OCTOBER 1995
SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
1. LIMITATIONS ON LOAN TERMS & CONDITIONS (CONTINUED)
d) OTHER LOAN MATURITY RESTRICTIONS - Loan maturity periods are further
restricted as follows:
i) The loan maturity period may not be less than one half (1/2) of
the payment amortization period.
ii) The loan maturity period must be less than or equal to the
remaining term of the Borrower's franchise agreement; except
that variances from this policy are acceptable for only fully
amortizing loans that have a stated maturity that extends no
more than three (3) months beyond the franchise agreement
termination date.
e) MAXIMUM AMORTIZATION PERIOD - The loan amortization period for any
loan secured by a fee simple mortgage must be less than or equal to
20 years. The loan amortization period for any loan secured by a
leasehold mortgage or business enterprise lien must be less than or
equal to 15 years.
f) BALLOON LOANS - Loans secured by fee simple mortgages may be
structured with balloon amortizations. Balloon loans are not
permitted on loans secured by leasehold mortgages or business
enterprise liens. Furthermore, the aggregate balance of balloon
loans must not exceed 20% of the aggregate Secured Franchise
Business Loan portfolio. Senior management places limitations on the
percentage of loans which can have balloon features. From time to
time, such limitations will be discussed in Credit Committee
meetings and any resulting changes to the limitations must be
communicated by the Vice President - Credit to the Sales & Marketing
Department.
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REVISED OCTOBER 1995
SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
2. FRANCHISE CONCEPT TIERING SYSTEM - Only for purposes of underwriting
franchise loans secured by mortgages, a tiering system has been
established which categorizes franchise concepts into two tiers. These
tiers are intended to delineate the relative level of credit risk
associated with loans to franchisees within such concepts, prior to
taking into account the results of the franchisee underwriting process
(see Section I.F). The franchisee underwriting process is critical to
the overall risk analysis associated with any loan application, and
thus, the tiering system is not an exclusive or absolute measure of the
credit risk of any loan. Notwithstanding the prior sentence, tier
rankings of approved concepts have the following meaning:
Tier I - Highest Overall Quality
Tier II - Strong Overall Quality
The tier classifications are used for purposes of stratifying certain
other loan underwriting criteria, as well as for stratifying certain
concept and borrower loan portfolio concentration limits (see Section
I.F1.8 for further information regarding concentration limits).
This tiering system, and the tier ranking assigned to any concept, are
confidential and should not be communicated to loan applicants or
franchisors. The purpose of this confidentiality is to avoid offending
franchisors and applicant's with differing views on the relative
strengths and weaknesses of their concept.
The Credit Committee is responsible for assigning tier rankings to each
approved concept. The Vice President - Credit is responsible for
communicating the tier rankings, and any changes thereto, to the Sales &
Marketing Department.
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REVISED OCTOBER 1995
SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
2. FRANCHISE CONCEPT TIERING SYSTEM (CONTINUED)
The tier designation process, similar to the credit underwriting
process, involves the weighing of strengths and weaknesses and making
qualitative decisions based upon such information. The general criteria
to be used for classifying concepts by tier level are as follows:
- Size of system
- Maturity of system
- Degree of positive trademark recognition
- Degree of franchisor support
- Financial strength of franchisor
The size of the system (i.e. - number of stores under operation) is a
strong indicator of the credit risk associated with an individual
franchisee loan. It is an important measure of the scope and depth of a
concept. When accompanied by limited unit level closure statistics, the
size of the system is the best historical measure of the long-term
success of a concept at the unit level. Generally, Tier I concepts have
over 500 units (often over 1,000 units), and Tier II concepts have up to
500 units. Concepts which cross-over these general ranges are typically
tiered based upon other criteria and mitigating factors. Concepts with
over 1,000 units would, in nearly all cases, be classified as Tier I
concepts. As a general exception to the above tiering standards, casual
dining and family restaurant segment concepts will usually have lower
system unit size threshold levels due to the substantially higher unit
level revenues, capital costs and seating capacities.
The degree of maturity of a concept system is measured by such factors
as market penetration, growth rate, and number of years in operation.
Generally, Tier I concepts are more mature systems than Tier II
concepts.
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REVISED OCTOBER 1995
SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
2. FRANCHISE CONCEPT TIERING SYSTEM (CONTINUED)
Often linked with system maturity is positive trademark recognition.
Concepts with a high level of positive trademark recognition generally
have the broadest appeal in the consumer market. Tier I concepts
generally are "household names" either regionally or nationally.
Franchisor support is an important component which contributes to the
stable, consistent operation of the franchise store unit, which in turn
promotes growth in the overall size of the system. Franchisors provide
support to their franchisees in very significant ways, including site
analysis and selection, personnel training, operational support, quality
control, and the development and production of national marketing and
advertising campaigns. Generally, the level of franchisor support is
strongest for Tier I concepts.
The financial strength of the franchisor is considered and can be
important, although its is not necessarily a major factor. There is no
requirement for credit ratings of the franchisor. A financially strong
franchisor can be a benefit in terms of future system growth
opportunities and general stability. However, a franchisor with more
limited financial strength may also be able to provide all of the
necessary support for the franchisee community and, as a result, may be
just as effective as a financially stronger franchisor. For example, the
parent companies of concepts such as Arby's, Denny's and Hardees have
below investment grade corporate ratings, yet these systems have
continued high level of franchisor support of the system.
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REVISED OCTOBER 1995
SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
2. FRANCHISE CONCEPT TIERING SYSTEM (CONTINUED)
Mitigating factors which may positively affect the tier designation of a
concept include:
- Strong sales and unit growth rates
- Strong same store sales growth figures
- Superior unit level economics
- Superior management
- Beneficial Parent/Affiliate relationships
- Broad access to capital at the franchisor level
- Regional market strength
- Low unit level closure statistics
- Overall quality of the franchisees within the system
Mitigating factors which may negatively affect the tier designation of a
concept include:
- Detrimental Parent/Affiliate relationships
- High unit level closure statistics
- Poor franchisor management team
- Declining market penetration or trademark appeal
- Negative same store sales growth figures
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REVISED OCTOBER 1995
SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
3. CONCEPTS APPROVED FOR SECURED FRANCHISE BUSINESS LOANS - The following
concepts have been approved for the indicated types of security
interests (see definitions in Section I.F1.1(b)):
a) Fee Simple Mortgages
Tier I - Applebee's, Arby's, Boston Market, Burger King,
Chili's, Denny's, Hardees, Jack In The Box, KFC, Pizza
Hut, Red Robin, Taco Bell, TGI Friday's, and Wendy's.
Tier II - Carrows/Coco's, Church's/Popeye's, Eastside Mario's,
Golden Corral, Houlihan's, Kenny Rogers Roasters,
Shoney's, Sonic, and Taco Cabana.
b) Leasehold Mortgages -
Tier I - Applebee's, Arby's, Boston Market, Burger King,
Chili's, Denny's, Hardees, Jack In The Box, KFC, Pizza
Hut, Red Robin, Taco Bell, TGI Friday's, and Wendy's.
Tier II - Carrows/Coco's, Church' s/Popeye's, Eastside Mario's,
Golden Corral, Houlihan's, Kenny Rogers Roasters,
Shoney's, Sonic, and Taco Cabana.
c) Business Enterprise Liens
Tier I - Applebee's, Arby's, Burger King, KFC, Pizza Hut, Taco
Bell, and Wendy's.
Tier II - None
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REVISED OCTOBER 1995
SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
4. LOAN-TO-VALUE RATIOS - Secured Franchise Business Loans must conform to
the following loan-to-value (LTV) ratio limitations.
a) Loans secured by fee simple mortgages must be based upon an
independent valuation of the land and building assets. The LTV ratio
for each loan must not exceed the lesser of 70% of an independent
valuation of the franchise enterprise (a business valuation which
includes land and building) or 100% of the real estate appraised
value. In addition, the LTV ratio of the aggregate portfolio of fee
simple mortgage loans must not exceed the lesser of 70% of the
business valuation (including land and building) or 92.5% of the
real estate appraised value.
b) Loans secured by leasehold mortgages or business enterprise liens
must be based upon an independent valuation of the franchise
enterprise (a business valuation). The LTV ratio must be less than
or equal to 70%.
In all instances, the independent valuation must be performed by a
nationally recognized valuation firm with extensive knowledge and
experience in the area of restaurant franchise finance. Section IV.D.6
further addresses the loan documentation requirements related to real
estate and business valuations.
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REVISED OCTOBER 1995
SECTION: 1. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
5. Fixed Charge Coverage Ratios - Minimum Fixed Charge Coverage Ratios are
required as a condition of approval of any application for a Secured
Franchise Business Loan. There are two levels of minimum Fixed Charge
Coverage Ratios.
a) If the loan is secured by a fee simple mortgage, then the Borrower
Entity must have a minimum Fixed Charge Coverage Ratio of 1.10:1.
Otherwise, if the loan is secured by a leasehold mortgage or a
business enterprise lien, the Borrower entity must have a minimum
Fixed Charge Coverage Ratio of 1.20:1.
In addition, the aggregate pool of loans secured by fee simple
mortgages must have a minimum Fixed Charge Coverage Ratio of 1.15:1
for the Borrower and 1.25:1 for the individual store unit, which the
loan will be extended.
b) If the loan is secured by a fee simple mortgage, then the individual
store unit to which the loan will be extended must have a minimum
Fixed Charge Coverage Ratio of 1.20:1. Otherwise, if the loan is
secured by a leasehold mortgage or a business enterprise lien, the
individual store unit must have a minimum Fixed Charge Coverage
Ratio of 1.40:1.
In addition, the aggregate pool of loans secured by a leasehold
mortgages and business enterprise liens must have a minimum Fixed
Charge Coverage Ratio of 1.35:1 for the Borrower and 1.25:1 for the
individual store unit, which the loan will be extended.
See section I.G for the definition of Fixed Charge Coverage Ratio.
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REVISED OCTOBER 1995
SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
6. Franchisee Operator Experience Requirements - Franchisee borrowers must
meet the following operating experience requirements in order to qualify
for a loan secured by a mortgage.
a) Franchisee borrowers must currently be operating at least two (2)
franchise units of the concept to which the loan will be extended.
b) A principal member of the management team of the franchisee borrower
must have at least two (2) years of experience in the management of
restaurant operations.
c) A principal member of the management team of the franchisee borrower
must have at least one (1) year of experience in the management of
restaurant operations within the concept to which the loan will be
extended.
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REVISED OCTOBER 1995
SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
7. PERSONAL GUARANTEE REQUIREMENTS - Personal guarantee requirements differ
depending upon whether the loan is secured by a fee simple mortgage or a
leasehold mortgage or business enterprise lien (see definitions in
Section I.Fl.1(b)).
a) Loans secured by fee simple mortgages are not required to be
guaranteed by the borrower. However, when circumstances allow,
personal guarantees should be obtained. Furthermore, the omission of
personal guarantee(s) from a loan application must be highlighted on
the face of the Report on Financing Application submitted to the
Credit Committee and must be considered by the Credit Committee
relative to the credit decision for that loan application.
b) Loans secured by leasehold mortgages and business enterprise liens
MUST have personal guarantee(s), unless the Borrower is operating 25
or more restaurants in one or more concepts. Such, personal
guarantees must be offered by at least one of the principal members
of the management team of the franchisee borrower.
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REVISED OCTOBER 1995
SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
8. BORROWER'S USE OF LOAN PROCEEDS - The borrower must state the use of the
loan proceeds in the credit application. Generally, the borrower should
be using the loan proceeds to refinance existing indebtedness,
develop/acquire additional restaurant units, and/or for other purposes
relating to the operation of restaurant facilities. Any use of loan
proceeds outside of this scope must be noted in the Report on Financing
Application submitted to the Credit Committee. The Credit Committee is
responsible for determining whether the use of loan proceeds for reasons
beyond those noted herein is acceptable.
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REVISED OCTOBER 1995
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SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
9. PORTFOLIO CONCENTRATION LIMITATIONS - The Credit Committee will place
limitations on concept, borrower and geographic concentrations in the
portfolio of Secured Franchise Business Loans. Furthermore, the Chief
Financial Officer must be present at a Credit Committee meeting in which
changes to concentration limits are proposed and must vote affirmatively
for any concentration limit changes in order for such changes to become
effective.
The Vice President - Credit will maintain a written matrix which
specifies the current portfolio concept, borrower and geographic
concentration limits, and further, will be responsible for preparing and
circulating weekly reports to the Credit Committee detailing these
concentrations with respect to the outstanding loan balances and
remaining availability under the concentration limits. The Vice
President - Credit is also responsible for communicating the
limitations, and any changes thereto, to the Sales & Marketing
Department.
Such concentration limits will be stratified based upon the tier
designations assigned to each approved concept (see Section I.F1.2 and
Section I.Fl.3). Borrower concentration limits, as well as concept
concentration limits, will vary depending upon the applicable tier
ranking.
Borrower concentration limits will also vary depending upon whether a
borrower is a franchisor or a franchisee, within a given concept.
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REVISED OCTOBER 1995
SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
10. PROCESSING OF APPROVED LOAN APPLICATIONS - Credit files for approved
applications for franchise loans secured by mortgages must be forwarded
to the Manager of Contract Administration - Real Estate for preparation
of the loan and mortgage documentation.
Commitment letters for such approved loan applications must be prepared
by the Documentation Department. Loan commitment letters may NOT be
prepared or executed by Credit Department or Sales & Marketing
Department personnel.
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REVISED JULY 1995
SECTION: I. CREDIT UNDERWRITING POLICIES
SUB-SECTION: G. DEFINITIONS OF CREDIT ANALYSIS TERMS
- --------------------------------------------------------------------------------
CASH FLOW - The sum or subtraction of the following items for the applicant
business for the applicable operating period:
+ Operating Cash Flow
- Debt Service
- Operating Lease Expense
--------------------------------
= Cash Flow
CASH FLOW/CPLTD RATIO - The product of the following equation, expressed as a
ratio (e.g. 1.25:1):
+ Net Income
+ Depreciation and Amortization
-----------------------------
= Subtotal
div Current Portion of Long-Term Debt
-----------------------------------------
= Cash Flow/CPLTD Ratio -
CURRENT ASSETS - The current assets as stated on the applicant's financial
statement.
CURRENT LIABILITIES - The current liabilities as stated on the applicant's
financial statement.
CURRENT PORTION OF LONG-TERM DEBT - The current portion of long-term debt due to
mature during the next comparable operating period, as stated on the applicant's
financial statement, plus, if not already included therein, the current portion
of principal payments imputed on all capital leases. (Note: See comments under
Interest Expense definition regarding FASB financial reporting standards for
capital leases. These same comments apply to this definition for the related
principal portion of such capital leases.)
CURRENT PORTION OF OPERATING LEASES - The amount of rent due under operating
leases for the next comparable operating period.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: G. DEFINITIONS OF CREDIT ANALYSIS TERMS
- --------------------------------------------------------------------------------
DEBT SERVICE - The sum of Interest Expense, plus the amount of principal paid on
long-term debt, plus the amount of principal paid on capital leases, all for
the applicable operating period.
DEBT/WORTH RATIO - The product of the following equation, expressed as a ratio
(e.g. 2.0:1):
Total Liabilities
div Net Worth
--------------
= Debt/Worth Ratio
DEPRECIATION AND AMORTIZATION - The depreciation and amortization expense as
stated on the applicant's financial statement.
EBITDA - The sum of the following items for the applicant business for the
applicable operating period:
+ Net Income
+ Depreciation and Amortization
+ Interest Expense
+ Income Taxes
----------------
= EBITDA (earnings before interest, taxes, depreciation and
amortization)
FIXED CHARGE COVERAGE RATIO - The product of the following equation, expressed
as a ratio (e.g. 1.25:1):
Operating Cash Flow
div Fixed Charges
------------------
= Fixed Charge Coverage Ratio
FIXED CHARGES - The sum of the following items for the applicant business for
the applicable operating period:
+ Current Portion of Long-Term Debt
+ Interest Expense
+ Current Portion of Operating Leases
-------------------------------------
= Fixed Charges
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Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: G. DEFINITIONS OF CREDIT ANALYSIS TERMS
- --------------------------------------------------------------------------------
INTEREST EXPENSE - The interest expense as stated on the applicant's financial
statement, plus, if not already included therein, the interest expense imputed
on all capital leases. (Note: FASB financial reporting standards require the
interest imputed on capital leases to be recorded as interest expense and
included in the interest expense total on the financial statement. Therefore,
the interest expense as stated on the applicant's financial statement should
include the interest imputed on capital leases. If the financial statement has
been reviewed or audited, reliance may be placed on the audit firm to have
properly applied this principal. If the financial statement has not been
reviewed or audited, the analyst must determine if the imputed interest has been
properly stated, and if not, must add this interest as per the stated formula.)
LIQUIDITY RATIO - The product of the following equation, expressed as a ratio
(e.g. 1.25:1):
Current Assets
div Current Liabilities
-----------------------
= Liquidity Ratio
NET INCOME - The net income as stated on the applicant's financial statement.
NET WORTH - The net worth (e.g. - partners' capital or stockholders equity) as
stated on the applicant's financial statement. For a corporation, this will
include preferred stock, common stock, additional paid-in capital and retained
earnings, less any treasury stock or stock subscriptions receivable.
NON-RECURRING ITEMS - Items which, when computing cash flow, should be added
back to or subtracted from net income to normalize results. Examples of
Non-Recurring Items include, but are not limited to: gains on sales of assets,
expensed development costs for newly constructed store units, theft expenses,
non-recurring bank charges (e.g. - new facility fees) and discontinued
operations write-offs (on a case-by-case basis).
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: G. DEFINITIONS OF CREDIT ANALYSIS TERMS
- --------------------------------------------------------------------------------
OPERATING CASH FLOW - The sum or subtraction of the following items for the
applicant business for the applicable operating period:
+ Net Income
+ Depreciation and Amortization
+ Interest Expense
+ Operating Lease Expense
+/- Non-Recurring Items
---------------------------
= Operating Cash Flow
OPERATING LEASE EXPENSE - The amount of rental expense paid under operating
leases, as stated on the applicant's financial statements.
TOTAL LIABILITIES - The total liabilities as stated on the applicant's financial
statement, including current and long-term liabilities.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: H. CREDIT MONITORING
- --------------------------------------------------------------------------------
1. UPDATES ON FRANCHISE CONCEPT UNDERWRITING REPORTS - Once a Franchise
Concept is approved, the Franchisor file should be retained in the Credit
Department. Captec should be put on the franchisor's mailing list to
receive quarterly financial statements and any news releases on the
franchisor. All updated information must be informally reviewed by the
Credit Manager for major events or changes.
Each franchise concept must be formally reviewed on an annual basis. All
franchisors should be entered in the Credit Department's tracking system,
which provides a tickler report when the franchisor is up for an annual
review.
The annual franchise concept review should include the spreading of the
most recent audited and interim financial statements of the franchisor, a
review of the existing portfolio and a review and update of the written
Concept Underwriting Report so that it includes all current information on
the company. The Concept Underwriting Report should be submitted to Credit
Committee for renewal.
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Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: H. CREDIT MONITORING
- --------------------------------------------------------------------------------
2. MONITORING UNIT LEVEL PERFORMANCE TRENDS WITHIN CONCEPTS - As Captec
finances more franchisees in each concept and a portfolio is established,
unit level financial statements are obtained from a variety of customers.
The result is a resource of actual operating results from a cross-section
of stores within the concept.
The Vice President - Credit is responsible for overseeing the input of this
information into a database which accumulates this information and computes
average concept performance standards such as store sales, pertinent
margins, operating cost components and profits. These unit level
performance standards must be updated on an annual basis in conjunction
with the update of the Concept Underwriting Report. Any significant changes
in the standards must be noted in the updated report
Furthermore, the most current unit level performance standards must be
utilized when analyzing a new application for the concept, comparing the
applicant's projections to the standards.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: H. CREDIT MONITORING
- --------------------------------------------------------------------------------
3. MONITORING HIGH CONCENTRATION CUSTOMER ACCOUNTS - Customer accounts with
total exposure (outstanding balances) exceeding $700,000 ("high
concentration accounts") must be monitored on a continuous basis. It is the
duty of the Credit Manager to assign responsibility for monitoring each
high concentration account to a specific Credit Analyst.
Each high concentration account customer must provide Captec with quarterly
financial statements. Upon receipt, the quarterly financial information
must be input into the spreadsheet tracking system by the assigned Credit
Analyst. This system lists the customer name, details the transaction(s)
and total exposure with Captec, and lists the most recent financial
statement on file and when the next is due. A follow-up date is triggered
by this system.
The assigned Credit Analyst should perform the standard analysis on these
quarterly financial statements and report any significant changes in the
customer's financial trends and financial position to the Credit Manager.
The Credit Manager must report this information to the Credit Committee.
It is common for Captec's high concentration account customers to be in a
significant growth phase. Such growth can strain the capital resources,
management expertise and earnings trends of the customer. Therefore, when
monitoring such customers, the credit analysis should also include
comparison of projected to actual results and an on-going review of the
projected effects of growth on the financial position of the customer.
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II. COLLECTION POLICIES
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Section: II. COLLECTION POLICIES
Sub-Section: A. INTRODUCTION
- --------------------------------------------------------------------------------
1. COLLECTION PHILOSOPHY - Captec's collection philosophy has been developed
and refined throughout the Company's history and must be viewed as dynamic.
The company's collection policies have been developed internally - designed
for Captec's specific market focus on franchise and chain restaurant
businesses and the various types of financing products provided to its
customers in those markets. This is a specialized market demanding
specialized collection policies.
Captec's collection policies are proprietary. They have similarities to
other commercial finance institutions' collection policies, but in other
ways are unique to Captec
Captec's collection policies are founded upon the belief that the
collection process is both art and science. This is a process that includes
considering the many interrelated facts of a particular customer account in
relation to the Company's market expertise, past collection experiences,
and franchisor support agreements. As such, it is not a process which can
be entirely reduced to the administration of written policy.
Therefore, these policies are designed as guidelines and principals for
conducting the day-to-day business of monitoring and collecting balances
due on customer financing accounts. These policies are NOT intended to be
all-inclusive or absolute.
Captec believes in strict enforcement of the terms and conditions of its
financing contracts, and any guarantees thereon. The Portfolio Management
Department must be committed to the enforcement process and be prepared, at
all times, to use all of its resources to ensure such enforcement.
Captec's collection policies are also founded upon the belief that
enforcement of contracts within its specialized industry is often most
successful when there exists a spirit of cooperation between the various
parties having vested interests in resolving collection problems, including
on a case-by-case basis franchisors, sub-franchisors and/or franchisees.
In certain cases, this process may call for patience or limited forbearance
by Captec during the resolution negotiating process. However, ultimately
this process must be directed towards and lead to satisfactory resolution
of the customers' obligations to the Company; otherwise, the Portfolio
Management Department must pursue its collection objectives independent of
all other parties.
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Section: II. COLLECTION POLICIES
Sub-Section: A. INTRODUCTION
- --------------------------------------------------------------------------------
2. PORTFOLIO MANAGEMENT DEPARTMENT ORGANIZATION - The Portfolio Management
Department is made up of a group of employees dedicated to the collection
process. The following is an organizational chart for the Portfolio
Management Department
|
|
----------------------------
| |
Equipment Real Estate
Portfolio Portfolio
Manager Manager
(Future)
| |
----------------------------
|
|
Collectors
The Portfolio Management Department reports to the Company's Senior Management
via the Senior Vice President and General Counsel.
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Section: II. COLLECTION POLICIES
Sub-Section: B. ACCOUNT MONITORING
- --------------------------------------------------------------------------------
1. STANDARDIZED PAYMENT DUE DATES - Equipment lease payments are due on either
the 1st or 15th day of the month. Real estate leases are due on the 1st day
of the month. Real estate mortgages are due on the 1st day of the month.
2. SYSTEM REPORTS - The following reports must be generated at the stated
frequency and monitored as follows:
a) DELINQUENCY REPORT - Twice a week, after receipts have been
processed into the INFO-LEASE computer system, the Portfolio Managers
must run a Delinquency Report from the INFO-LEASE. This report lists
any amount past due for 5 days or more. Past due accounts are sorted in
the report by the number of days past due and the number of days since
the last payment, with each sort having the following categories: 5-30
days, 31-60 days, 61-90 days and over 90 days. The report must be
distributed to the Equipment Portfolio Manager, assigned Collector, and
General Counsel. These persons must review the report to remain
up-to-date regarding the status of payments and must discuss the
delinquent accounts to strategize on any necessary actions. See Exhibit
II.B.2(a) for a sample report.
b) SUMMARY PAST DUE REPORT - At the end of each month, after receipts
have been processed into the INFO-LEASE system, the Accounting
Department must run this report. This report lists any amount past due
for 5 days or more. Past due accounts aged in the report into the
following categories: 5-30 days, 31-60 days, 61-90 days and over 90
days. The report must be distributed to the Equipment Portfolio
Manager, assigned Collector, and General Counsel and Chief Financial
Officer. This report provides a month-end summary of the information in
the Delinquency Report and must be reviewed and monitored by the same
persons and in the same manner as the Delinquency Report. See Exhibit
II.B.2(b) for a sample report.
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Section: II. COLLECTION POLICIES
Sub-Section: B. ACCOUNT MONITORING
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2. System Reports (Continued)
c) SUMMARY PAST DUE BY BANK REPORT - This report is identical to the
Summary Past Due Report except that it captures information only for
contracts securing borrowings at a specific lender. The report must be
run by the Accounting Department at each month-end. The Portfolio
Manager must review the report to ensure its accuracy and, thereafter,
forward a copy of the report to the respective lender.
d) ACCOUNTS RECEIVABLE TRIAL BALANCE BY DEALER - This report must be
run on a monthly basis by the Accounting Department. It outlines the
detail of all outstanding financing balances within a franchise/chain
concept. Report detail includes customer name, contract number,
contract start date, gross remaining balance, original term and
remaining term. It also reports the date of last payment made and next
payment due date as well as the total dollar amount currently due.
Copies of this report must be distributed to the Credit Manager,
Portfolio Manager, assigned Collector, General Counsel, Chief Financial
Officer and also to the Sales & Marketing Department. The report is
primarily generated for reporting information to franchisors who have
recourse or remarketing agreements with Captec, and it is the
responsibility of the Sales & Marketing Department personnel to
distribute these reports to franchisors.
3. ON-LINE ACCOUNT MONITORING - The Portfolio Manager and assigned Collector
also must monitor pay histories of past due accounts daily by use of the
on-line information screens on the INFO-LEASE computer system.
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Section: II. COLLECTION POLICIES
Sub-Section: B. ACCOUNT MONITORING
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4. PAYMENT RECEIPTS - The majority of payments are made to lockbox accounts,
but receipts are also received in the mail direct to Captec's offices. On a
daily basis, the Accounting Department must provide to the Portfolio
Management Department a report of daily cash receipts. The cash receipts
reports will include contractual lease or loan payments, as well as other
billable items such as personal property taxes and late charges.
5. CHANGE INFORMATION - Any notification of changes received from the Lessees
are input into the INFO-LEASE database by the Equipment Portfolio Manager
and assigned Collector. Examples of change information include: change of
customer address, phone or location; change of asset location, change of
principals. Memos of changes are also routed to contract files.
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Section: II. COLLECTION POLICIES
Sub-Section: C. DELINQUENT ACCOUNTS
- --------------------------------------------------------------------------------
1. EQUIPMENT FINANCINGS
a. IDENTIFICATION - Delinquent accounts are identified by the account
monitoring procedures described in Section II.B.
b. 5 - 15 DAY PROCEDURES - All customers having amounts 5 days past due must
be immediately called by the assigned Collector, and the Collector should
attempt to arrange for the customer to make payment via overnight mail. The
Collector must advise the customer that a late charge will be assessed
shortly and that this is an opportunity for the customer to send their
payment in time to avoid the late charge. Customers who do not respond to
this call by making immediate payment must be brought by the Collector to
the Portfolio Manager's attention to discuss the customer's payment status
and to strategize on any further action required.
There is a 7 day grace period, after which late charges are assessed in an
amount equal to 10% of the past due payment. This grace period is not
stated in the contract and does not have to be granted to the customer. As
an internal policy, the grace period should typically be granted to the
customer, but the grace period generally should NOT be communicated to the
customer so as to avoid the abusive use of grace period by the customer.
c. 15 - 30 DAY PROCEDURE - If any amount due on an account (except nominal
amounts of under $100) becomes 15 days past due, a Notice Of Default with a
7 day cure period must be prepared by the assigned Collector and sent to
the customer and a copy must be sent to all guarantors (See Appendix
II.C.1.c for standard letter). During this time, the assigned Collector
must call the customer regularly to secure a "proposed" payment date and
amount. At the 15 day past due point, the Collector must advise the
Portfolio Manager of the collection history on the account and,
thereafter, the Portfolio Manager must remain involved in the collection
process and work closely with the Collector seeking to resolve the
delinquency.
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Section: II. COLLECTION POLICIES
Sub-Section: C. DELINQUENT ACCOUNTS
- --------------------------------------------------------------------------------
1. EQUIPMENT FINANCINGS (Continued)
d. 30 - 45 DAY PROCEDURES - If any amount due on an account (except nominal
amounts of under $100) becomes 30 days past due, the account must be
reassigned to the Portfolio Manager, although the previously assigned
Collector generally should remain active in supporting the on-going
collection process on the account. Immediately, a Notice Of Default and
Acceleration of Payments must be prepared by the Portfolio Manager and sent
to the customer (See Appendix II.C.1.d-1 for standard letter).
Additionally, a separate Guarantor Notice Of Default and Demand for Payment
letter must be sent to each guarantor, enclosing a copy of the letter to
the customer and outlining the guarantors' responsibilities (See Appendix
II.C.1.d-2 for standard letter). All copies of these letters must be sent
by both regular U.S. mail and by certified mail. These letters must
accelerate the contract balance and must make final demand for payment.
In addition to the above letter procedure and this time period, the
Portfolio Manager, with assistance as required from the previously assigned
Collector, must continue to speak with the customer and guarantors, their
legal counsel, and the franchisor, with the objective of resolving the
delinquency.
At the 30 day past due point, the Senior Vice President and General Counsel
must be notified of the status of the account and the actions taken on the
account to date. The Senior Vice President and General Counsel is
responsible for informing Captec's executive management of the account
status.
e. 45 - 90 DAY PROCEDURES - The Senior Vice President and General Counsel,
Portfolio Manager and Collector staff must all review possible transfer,
assumption or re-write opportunities within the chain concept system. Other
members of executive management and of the Sales & Marketing Department
should be consulted to help target potential equipment buyers and evaluate
the value of the equipment. If an asset sale is anticipated, the Portfolio
Manager must notify the customer of Captec's election to conduct a sale of
the assets. When necessary, a local collection attorney may also be
selected by the Senior Vice President and General Counsel. During this
period, a final resolution strategy must be determined and implemented.
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Section: II. COLLECTION POLICIES
Sub-Section: C. DELINQUENT ACCOUNTS
- --------------------------------------------------------------------------------
1. EQUIPMENT FINANCINGS (Continued)
f. CONTINUOUS CONTACT - Throughout the collection process, the Portfolio
Manager must oversee the activities of the entire Portfolio Management
Department with the objective of continuing dialogue with the customer to
effect payment. All verbal discussions with the customer (e.g. - telephone
calls, office visits, etc.) must be recorded in the Collectors or Portfolio
Managers phone log (see form in Appendix II.C.1.f).
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Revised July 1995
Section: II. COLLECTION POLICIES
Sub-Section: C. DELINQUENT ACCOUNTS
- --------------------------------------------------------------------------------
2. MORTGAGE LOANS
a. IDENTIFICATION - Delinquent accounts are identified by the account
monitoring procedures described in Section II.B.
b. 5 - 15 DAY PROCEDURES - All customers having amounts 5 days past due must
be immediately called by the assigned Collector, and the Collector should
attempt to arrange for the customer to make payment via overnight mail. The
Collector must advise the customer that a late charge will be assessed
shortly and that this is an opportunity for the customer to send their
payment in time to avoid the late charge. Customers who do not respond to
this call by making immediate payment must be brought by the Collector to
the Portfolio Manager's attention to discuss the customer's payment status
and to strategize on any further action required.
There is a 15 day grace period, after which late charges are assessed in an
amount equal to 5% of the past due payment. This grace period is stated in
the promissory note. The grace period generally should NOT be communicated
to the customer so as to avoid the abusive use of grace period by the
customer.
c. 15 - 30 DAY PROCEDURE - If any amount due on an account (except nominal
amounts of under $100) becomes 15 days past due, a Notice Of Default with a
5 day cure period must be prepared by the assigned Collector and sent to
the customer and a copy must be sent to all guarantors (See Appendix
II.C.1.c for standard letter). During this time, the assigned Collector
must call the customer regularly to secure a "proposed" payment date and
amount. At the 15 day past due point, the Collector must advise the
Portfolio Manager of the collection history on the account and,
thereafter, the Portfolio Manager must remain involved in the collection
process and work closely with the Collector seeking to resolve the
delinquency.
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Revised July 1995
Section: II. COLLECTION POLICIES
Sub-Section: C. DELINQUENT ACCOUNTS
- --------------------------------------------------------------------------------
2. MORTGAGE LOANS (CONTINUED)
d. 30 - 45 DAY PROCEDURES - If any amount due on an account becomes 30 days
past due, the Portfolio Manager must notify the General Counsel to the
status of the account and the actions taken on the account to date. The
General Counsel shall inform Captec's executive management of any account
that becomes 30 day past due and provide the Portfolio Manager with the
proper procedure for Default and Acceleration notice in the jurisdiction
where the mortgaged premises are located. A Notice Of Default and
Acceleration of Payments must be prepared by the Portfolio Manager in
accordance with the General Counsel direction and sent to the customer.
Additionally, a separate Guarantor Notice Of Default and Demand for Payment
letter must be sent to each guarantor, enclosing a copy of the letter to
the customer and outlining the guarantors' responsibilities. All copies of
these letters must be sent by both regular U.S. mail and by certified mail.
These letters must accelerate the contract balance and must make final
demand for payment.
In addition to the above letter procedure at this time period, the
Portfolio Manager, with assistance as required from the previously assigned
Collector, must continue to speak with the customer and guarantors, their
legal counsel, and the franchisor, with the objective of resolving the
delinquency.
e. 45 - 90 DAY PROCEDURES - The Senior Vice President and General Counsel,
Portfolio Manager and Collector staff must all review possible transfer,
assumption or re-write opportunities within the chain concept system. Other
members of executive management and of the Sales & Marketing Department
should be consulted to help target potential buyers and evaluate the value
of the real estate.
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Revised July 1995
Section: II. COLLECTION POLICIES
Sub-Section: C. DELINQUENT ACCOUNTS
- --------------------------------------------------------------------------------
2. MORTGAGE LOANS (CONTINUED)
f. CONTINUOUS CONTACT - Throughout the collection process, the Portfolio
Manager must oversee the activities of the entire Portfolio Management
Department with the objective of continuing dialogue with the customer to
effect payment. All verbal discussions with the customer (e.g. - telephone
calls, office visits, etc.) must be recorded in the Collectors or Portfolio
Managers phone log (see form in Appendix II.C.1.f).
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Revised July 1995
Section: II. COLLECTION POLICIES
Sub-Section: D. DEFAULTED ACCOUNTS
- --------------------------------------------------------------------------------
1. EQUIPMENT FINANCINGS
a. REPLACEMENT OF FRANCHISEE & ASSUMPTION/TRANSFER OF FINANCING CONTRACT -
Generally, the most effective method of recovery on defaulted accounts is
the replacement of the franchisee and, in conjunction therewith, the
assumption or transfer of the leases to the new franchisee. This process
requires cooperation from and coordination with the franchisor or
sub-franchisor, as only those parties can effect the replacement of the
franchisee. The Portfolio Manager must determine whether the franchisor is
obligated to assist Captec with this process under the terms of a
remarketing agreement. Section II.E outlines methods for managing this
process. The Equipment Portfolio Manager must be directly involved in this
process.
b. FORECLOSURE AND TAKING LEGAL ACTION - If, after all attempts, payment has
not been received, and the Equipment Portfolio Manager and General Counsel
believe that it is in Captec's best interest to repossess the equipment,
the General Counsel must contact the obligor and seek voluntarily release
of the equipment into Captec's possession. If the obligor agrees to this
request, the Equipment Portfolio Manager must arrange for immediate pick-up
of the equipment by an outside contractor. In conjunction with the
repossession, the Equipment Portfolio Manager must arrange for storage of
the equipment and gain possession.
If the obligor refuses to voluntarily release the equipment, the General
Counsel must select local counsel to represent Captec and must instruct
local counsel to immediately file the necessary proceedings to enforce
Captec's rights to repossess the equipment. Thereafter, upon approval from
the court, the Equipment Portfolio Manager must appoint a contractor as
Captec's agent, and that agent must accompany the local sheriff to remove
the equipment and gain possession.
Other legal action may be required to attempt to collect any or all amounts
due under the contract from the obligor or any guarantors. If local counsel
is obtained to gain possession of the premises, such counsel must also be
instructed by the General Counsel regarding other legal action that the
General Counsel believes should be taken against these parties. Only the
General Counsel has the authority to commence further legal action against
obligors and related guarantors.
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Revised July 1995
Section: II. COLLECTION POLICIES
Sub-Section: D. DEFAULTED ACCOUNTS
- --------------------------------------------------------------------------------
1. EQUIPMENT FINANCINGS (CONTINUED)
c. REMARKETING WITHIN FRANCHISE SYSTEM - Generally, the Equipment Portfolio
Manager should attempt to sell forclosed premises to other franchisees of
the same concept. The repossessed equipment is typically worth the most to
another franchisee. The Equipment Portfolio Manager must determine whether
the franchisor is obligated to assist Captec with this process under the
terms of a remarketing agreement. See Section II.E for further information
regarding utilizing franchisor support.
The Equipment Portfolio Manager is responsible for all sale negotiations,
although final sale amounts must be approved by the Chief Financial
Officer. The Equipment Portfolio Manager should communicate pricing
information to the Chief Financial Officer during the negotiating process
so as to avoid delays in the sale closing process.
Sales to other franchisees can be effected as cash sales or can be
structured so as to be financed by Captec via a re-write of the contract,
subject to the standard credit approval process. Structuring sales using
Captec financing will often result in the realization of a higher recovery
amount, and therefore, the Equipment Portfolio Manager should always
include this option in the sale pricing negotiations.
d. REMARKETING TO THIRD PARTIES - Captec receives frequent requests to
purchase equipment from various users and dealers. The Equipment Portfolio
Manager is responsible for maintaining information files on these inquiries
and for cultivating further remarketing sources. If equipment is
repossessed, the Equipment Portfolio Manager must review these files in an
attempt to identify potential buyers for the assets. Potential buyers must
be contacted by the Equipment Portfolio Manager when equipment is available
for sale. The original vendor of the repossessed equipment may also be of
assistance, as outlined in Section II.E.3. The Company also subscribes to
various trade publications which advertise "want to buy" prospects, and
these can be reviewed for potential buyers. Consideration must also be
given to existing customers operating other similar concepts who have
indicated a need for additional equipment.
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Section: II. COLLECTION POLICIES
Sub-Section: D. DEFAULTED ACCOUNTS
- --------------------------------------------------------------------------------
1. EQUIPMENT FINANCINGS (CONTINUED)
e. ENFORCEMENT OF RIGHTS UNDER FINANCING CONTRACT - As described in Sections
II.C.1.d and II.C.1.e, Captec must send to the obligor a notice of
default, which notice accelerates all future payment due under the
contract. This notice states that Captec will pursue all remedies provided
for in the contract. If the obligor does not respond to this notice and
make an offer to satisfy their obligation, they must be considered for
legal action. The General Counsel must review the facts of the matter and
make a recommendation to the Executive Committee of whether legal action
should be taken. The Executive Committee must consider the probabilities of
prevailing in the legal action, the projected costs of such action and the
probabilities of collecting from the obligor, and thereafter, must decide
whether to take legal action. Subject to the realities of such
considerations as legal costs and insufficient financial resources of the
obligor, Captec's policy is to take legal action to recover material
deficiencies remaining after the sale of the equipment.
f. ENFORCEMENT OF FRANCHISOR GUARANTEES AND REMARKETING AGREEMENTS - The
Equipment Portfolio Manager must provide written notice to the franchisor
according to the provisions of their Remarketing Agreement with Captec
governing default situations. A follow-up phone call must be made by the
Equipment Portfolio Manager to the franchisor to discuss the details of the
default and to coordinate plans for the actions provided for in the
Agreement. If the franchisor does not respond promptly in accordance with
the Agreement and/or hesitates to effect its responsibilities in a timely
manner, the Equipment Portfolio Manager must notify the General Counsel,
and the General Counsel must assist the Equipment Portfolio Manager in
seeking enforcement of the terms of the Agreement.
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Section: II. COLLECTION POLICIES
Sub-Section: D. DEFAULTED ACCOUNTS
- --------------------------------------------------------------------------------
1. EQUIPMENT FINANCINGS (CONTINUED)
g. ENFORCEMENT ON GUARANTEES FROM PRINCIPALS AND OTHER OBLIGOR-RELATED PARTIES
- In conjunction with Section II.D. I.e and as described in Sections II.C.
1.d and II.C.1.e, The Equipment Portfolio Manager must also send a notice
of default and acceleration to each guarantor. This notice states that
Captec will pursue all remedies provided for in the guarantee.
Captec's standard guarantee is joint and several, allowing for collection
of the entire balance due from any one or combination of guarantors. For
each specific default, the Equipment Portfolio Manager and General Counsel
must review the guarantee document to understand all of the terms of the
guarantee, most importantly noting any non-standard language in the
document. Thereafter, the Equipment Portfolio Manager must contact each
guarantor in an attempt to collect payment under the guarantee.
If the guarantors do not respond to this notice and make an offer to
satisfy their obligation, they must be considered for legal action. The
General Counsel must review the facts of the matter and make a
recommendation to the Executive Committee of whether legal action should be
taken. The Executive Committee must consider the probability of prevailing
in the legal action, the projected costs of such action and the probability
of collecting from the obligor, and thereafter, must decide whether to take
legal action. Subject to the realities of such considerations as legal
costs and insufficient financial resources of the obligor, Captec's policy
is to take legal action to recover material deficiencies remaining after
the sale of the equipment.
h. BANKRUPTCY FILINGS - All notices of bankruptcy filings must be routed to
the Equipment Portfolio Manager, and the Equipment Portfolio Manager must
send a copy to the General Counsel. The Equipment Portfolio Manager, with
the assistance of the General Counsel, must take action to promptly require
the trustee to affirm or reject the lease. If the lease is rejected, the
Equipment Portfolio Manager must promptly repossess the equipment. The
Equipment Portfolio Manager is also responsible for filing claims with the
bankruptcy court, but such claims must be received and approved by the
General Counsel prior to filing.
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Revised July 1995
Section: II. COLLECTION POLICIES
Sub-Section: D. DEFAULTED ACCOUNTS
- --------------------------------------------------------------------------------
2. MORTGAGE LOANS
a. REPLACEMENT OF FRANCHISEE & ASSUMPTION/TRANSFER OF FINANCING CONTRACT -
Generally, the most effective method of recovery on defaulted accounts is
the replacement of the franchisee and, in conjunction therewith, the
assumption or transfer of the premises to the new franchisee. This process
requires cooperation from and coordination with the franchisor or
sub-franchisor, as only those parties can effect the replacement of the
franchisee. The Portfolio Manager must determine whether the franchisor is
obligated to assist Captec with this process under the terms of a
remarketing agreement. Section II.E outlines methods for managing this
process. The Portfolio Manager must be directly involved in this process.
b. FORECLOSURE AND TAKING LEGAL ACTION - If, after all attempts, payment has
not been received, and the executive management and General Counsel believe
that it is in Captec's best interest to foreclose the mortgage, the General
Counsel shall contact the obligor and seek voluntary release of the
premises. Upon obtaining consent from the executive management, the General
Counsel will prepare the necessary documents to effect this release of
possession. If the obligor fails to respond to the request for voluntary
release of the premises, the General Counsel shall select local counsel in
the area where the mortgaged premises are located and have that counsel
institute foreclosure proceedings. Local counsel shall also be instructed
to proceed with whatever actions is necessary to collect for any deficiency
resulting from the foreclosure action. Captec's policy is to take legal
action to recover material deficiencies remaining after the sale of the
mortgaged premises.
Other legal action may be required to attempt to collect any or all amounts
due under the promissory note from the guarantors. If local counsel is
obtained to gain possession of the premises, such counsel must also be
instructed by the General Counsel regarding other legal action that the
General Counsel believes should be taken against these parties. Only the
General Counsel or associated General Counsel has the authority to commence
further legal action against obligors and related guarantors.
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Revised July 1995
Section: II. COLLECTION POLICIES
Sub-Section: D. DEFAULTED ACCOUNTS
- --------------------------------------------------------------------------------
2. MORTGAGE LOANS (CONTINUED)
c. REMARKETING WITHIN FRANCHISE SYSTEM - Generally, the Portfolio Manager
should attempt to sell the foreclosed premises to other franchisees of the
same concept. The premises is typically worth the most to another
franchisee. The Portfolio Manager must determine whether the franchisor is
obligated to assist Captec with this process under the terms of a
remarketing agreement. See Section II.E for further information regarding
utilizing franchisor support.
The Portfolio Manager is responsible for all sale negotiations, although
final sale amounts must be approved by the Chief Financial Officer. The
Portfolio Manager should communicate pricing information to the Chief
Financial Officer during the negotiating process so as to avoid delays in
the sale closing process.
Sales to other franchisees can be effected as cash sales or can be
structured so as to be financed by Captec via a re-write of the contract,
subject to the standard credit approval process. Structuring sales using
Captec financing will often result in the realization of a higher recovery
amount, and therefore, the Portfolio Manager should always include this
option in the sale pricing negotiations.
d. REMARKETING TO THIRD PARTIES - If the Portfolio Manager is unsuccessful in
Remarketing the premises to a franchisee of the same concept, franchisees
and franchisors of like concepts shall be contacted. Use of Captec's data
bank containing over 4,150 names of franchisees and 90 names of franchisors
shall be used in this effort.
e. ENFORCEMENT OF FRANCHISOR GUARANTEES AND REMARKETING AGREEMENTS - The
Portfolio Manager must provide written notice to the franchisor according
to the provisions of their Remarketing Agreement with Captec governing
default situations. A follow-up phone call must be made by the Portfolio
Manager to the franchisor to discuss the details of the default and to
coordinate plans for the actions provided for in the Agreement. If the
franchisor does not respond promptly in accordance with the Agreement
and/or hesitates to effect its responsibilities in a timely manner, the
Portfolio Manager must notify the General Counsel, and the General Counsel
must assist the Portfolio Manager in seeking enforcement of the terms of
the Agreement.
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Section: II. COLLECTION POLICIES
Sub-Section: E. PROBLEM RESOLUTION TOOLS
- --------------------------------------------------------------------------------
1. FRANCHISOR SUPPORT
a) AGREEMENTS WITH FRANCHISOR - Captec has various written agreements with
franchisors which govern delinquency/default resolution procedures. In
seeking to resolve a problem customer account, the Senior Vice
President, General Counsel, Portfolio Manager and Collector must make
themselves familiar with the terms of any such agreement, discuss
strategies in connection with the agreement and, in certain
circumstances, consult with the Senior Vice President of Sales &
Marketing and the Sales Representative regarding the planned strategy.
Thereafter, the Portfolio Manager and Collector must contact the
franchisor to discuss the problem and agree on a collection strategy.
If the agreement with the franchisor calls for financial or physical
support, the Portfolio Manager also must discuss with the franchisor
how they intend to fulfill these obligations.
b) COORDINATING WITH FRANCHISOR'S INTERESTS - Even in the event that
Captec has no written agreement with a franchisor, the Portfolio
Management Department, in seeking to resolve a problem customer
account, must strategize on how to work within the franchisor's
interest and/or how to incorporate the franchisor into the collection
process. The Portfolio Manager must contact the franchisor and discuss
the problem with them, inquire as to whether the Franchisor is having
problems with the franchisee (past due royalties, weak unit sales,
operating weaknesses, management disputes, etc.). If the franchisor is
having problems, the Portfolio Manager must inquire about what actions
the franchisor intends to take against the franchisee. This information
will be considered by Captec in forming its collection strategy for the
specific account. It also helps to corroborate information provided by
the franchisee to Captec.
2. REGIONAL SUB-FRANCHISOR SUPPORT - In some franchise systems, the franchisor
has "delegated" its franchisee support systems to some form of
sub-franchisor. In these circumstances, the franchisor support problem
resolution tools must be adjusted to fit the sub-franchisor. The Portfolio
Management Department must seek to contact and develop relationships with
these sub-franchisors for the purpose of seeking assistance with problem
resolution.
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Section: II. COLLECTION POLICIES
Sub-Section: E. PROBLEM RESOLUTION TOOLS
- --------------------------------------------------------------------------------
3. VENDOR SUPPORT - In the event of a default leading to a repossession and
remarketing of the equipment, equipment vendors may be of assistance in
contacting potential buyers of the repossessed equipment.
4. FACILITATING FRANCHISE UNIT TRANSFER - The Portfolio Manager must negotiate
the terms of transfer and supply the prospective transferee with a credit
application package. The Portfolio Manager must notify the Credit Manager
of this action. The Portfolio Manager must remain in contact with the
potential replacement franchisee to encourage the timely completion of the
application. The applicant must be instructed to return the completed
application to the attention of the Portfolio Manager. Upon receipt of the
completed application, the package must be immediately delivered to the
Credit Manager for credit underwriting. In the event that the replacement
franchisee's credit application is approved, the Portfolio Manager must
communicate to the Manager of Contract Administration the nature of the
account and any special time urgencies for the documentation of the
replacement contracts. Thereafter, the Portfolio Manager must monitor the
progress of the documentation process to ensure that the
transfer/assumption/re-write is completed in a timely fashion and any
delinquency or default is cured.
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Revised July 1995
Section: II. COLLECTION POLICIES
Sub-Section: F. PREPAYMENTS
- --------------------------------------------------------------------------------
1. METHODS OF QUOTING PREPAYMENTS - The Portfolio Manager(s) are responsible
for quoting prepayments on contracts. Generally, lease contracts do not
have prepayment clauses and are non-cancelable agreements (except in the
case of purchase option windows provided in real estate leases). Loan
contracts may have stated prepayment penalty schedules.
a) EQUIPMENT LEASES - Prepayments are allowed but not encouraged by Captec
Prepayment amounts are computed by taking into consideration book
balances, residuals, prepayment penalties, unbilled property taxes,
sales taxes and various other transaction specific items. The Chief
Financial Officer is responsible for setting the methodology for making
these calculations. The Portfolio Manager is responsible for computing
prepayment amounts. Any deviations from the standard methods of
calculation must be must be approved by the Chief Financial Officer.
b) REAL ESTATE LEASES - Prepayments are generally not allowed, except in
the case of purchase option windows provided in real estate leases. All
other prepayment requests will typically be declined, but such requests
should be directed to the Sales Account Representative for customer
relations purposes. With respect to contractual purchase options, the
Portfolio Manager is responsible for computing the purchase amount,
taxes, etc. Any non-contractual prepayment amounts must be computed by
the Chief Financial Officer. In any event, all prepayment calculations
for real estate leases must be approved by the Chief Financial Officer.
c) REAL ESTATE MORTGAGE LOANS - Prepayments are allowed to the extent
provided for in the loan documents. The Portfolio Manager is
responsible for computing the principal balance, accrued interest,
prepayment penalties, recording fees, etc, in accordance with the loan
prepayment clause(s). All prepayment calculations for real estate
mortgage loans must be approved by the Chief Financial Officer.
2. PENALTY COMPUTATION - Generally, all prepayments will be subject to a
penalty. Penalties will be calculated according to the following: first in
accordance with contractual prepayment penalty agreements; and second in
accordance with computations set from time to time by Captec's Chief
Financial Officer.
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Section: II. COLLECTION POLICIES
Sub-Section: F. PREPAYMENTS
- --------------------------------------------------------------------------------
3. WAIVER OF PREPAYMENT PENALTIES - ONLY the Chief Financial Officer has the
authority to waive prepayment penalties. Requests for such waiver should be
communicated INTERNALLY to the Chief Financial Officer.
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Section: II. COLLECTION POLICIES
Sub-Section: G. EQUIPMENT LEASE EXPIRATIONS
- --------------------------------------------------------------------------------
1. COMMUNICATION TO LESSEE - Approximately 30 days prior to the expiration of
the lease term, the Portfolio Management Department must send a letter to
advise the Lessee of their end of lease options. In addition, an invoice
for the purchase price, in an amount as determined by the Equipment
Portfolio Manager (see Section II.G.2), must accompany the letter. See
Appendix II.G.la and II.G.lb for sample termination notices.
2. PRICING & NEGOTIATING WITH LESSEE - Approximately 10 days after mailing the
termination notice, the Equipment Portfolio Manager must contact the Lessee
by phone to determine if they choose to purchase the equipment, return the
equipment or extend the lease.
The purchase amount must been established by the Equipment Portfolio
Manager at time of invoice by using current market information, i.e. trade
papers and dealer information. In the event the lease has a pre-written
purchase agreement, that amount must be billed. The Equipment Portfolio
Manager has the authority to adjust the amount due, if circumstances
dictate. The purchase amount must be clearly noted as payable on the
termination date of the lease.
Subsequent to receipt of the entire purchase price, the Equipment Portfolio
Manager must have a bill of sale prepared, must execute the bill of sale
and send it to the lessee. See Appendix II.G.2a for standard form of bill
of sale. Any modifications to the standard form of bill of sale must be
approved by the General Counsel. A copy of the bill of sale must be filed
in the lease file.
The Equipment Portfolio Manager may negotiate terms for an extended payment
plan if necessary and is mutually agreed. In such event, the Equipment
Portfolio Manager must negotiate the terms of the extension or renewal and
produce appropriate documentation for execution. See Appendix II.G.2b for
the standard form of Lease Extension Agreement. The terms of extension
vary, dependent upon the needs of the Lessee as well as the willingness of
Captec.
If the Lessee does not respond in a timely manner to the termination letter
or does not pay the purchase price in a timely manner, the Lease Agreement
provides Captec with the right to collect month to month extension rentals
from the termination date through payment of the purchase price. Such
extension rentals
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Section: II. COLLECTION POLICIES
Sub-Section: G. EQUIPMENT LEASE EXPIRATIONS
- --------------------------------------------------------------------------------
2. PRICING & NEGOTIATING WITH LESSEE (CONTINUED)
are equal to the monthly rent required during the base term of the lease.
The Equipment Portfolio Manager has authority to use their own discretion
in choosing whether to enforce this provision of the lease. If such
extension rentals are to be enforced, the Equipment Portfolio Manager must
notify the Accounting Department to prepare an invoice for such amounts
due.
3. HANDLING AND SALE OF RETURNED ASSETS - The Lessee is required to provide
written notice of intent to return all, but not less than all, of the
leased equipment. The Equipment Portfolio Manager must instruct the Lessee
on where to ship the equipment, and should select a location that will lead
to the most efficient disposal of the equipment. The Lessee is responsible
for packaging, de-installation, insurance and freight charges to a site as
designated by Lessor.
If possible, the Equipment Portfolio Manager should attempt to negotiate a
sale of the equipment to a third party prior to shipment and, in such case,
must instruct the Lessee to ship from their site directly to the buyer.
Buyers must be solicited from various sources. They can be existing
Lessees, franchisees, franchisors, vendors or perhaps unrelated third party
buyers. The Equipment Portfolio Manager must negotiate the terms of the
equipment sale and facilitate invoices, purchase orders and any other
required documents. Captec has storage facilities available locally. If the
equipment is to be stored elsewhere, the Equipment Portfolio Manager must
arrange for the off-site storage.
The Equipment Portfolio Manager must arrange for any necessary inspections
as well as de-installation, if needed, at Lessee's expense. After
completion of rental payments, the Equipment Portfolio Manager must obtain
original documents, including UCC reassignments, from any assignee, in
order to be able to provide buyers with evidence of clear title. The
Equipment Portfolio Manager must forward original UCC's (keeping a copy in
the lease file) to the Documentation Department for processing the
termination of the UCC.
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Section: II. COLLECTION POLICIES
Sub-Section: H. CASUALTY & THEFT
- --------------------------------------------------------------------------------
1. INSURANCE REQUIREMENTS - Lessees are required to assume all risk of loss or
damage to the leased equipment. If there is a loss during the term of the
lease, the Lessee is required to report such to the Equipment Portfolio
Manager. In addition, Captec requires insurance from the Lessee naming
Captec as loss payee and additional insured. Therefore, in the event of a
loss, the insurance company will also notify Captec of the loss event.
The Equipment Portfolio Manager must work with Lessee and insurance company
to compensate Captec for the loss by replacement of the equipment or
payment of balance due under the lease. In some cases, a stipulated loss
value schedule may be part of the lease agreement and must be used to
determine the value of the loss.
Compensation may also be sought from the insurance companies for any
equipment which might be missing at time of repossession or termination.
In the event of a Notice of Insurance Cancellation during the lease term,
the Equipment Portfolio Manager must notify the Lessee that cancellation is
a condition of a default and must advise the Lessee of the requirement of
reinstatement of coverage. The Equipment Portfolio Manager must monitor
such accounts to verify that the insurance is actually reinstated.
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III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
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Section: III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
Sub-Section: A. INTRODUCTION
- --------------------------------------------------------------------------------
1. DOCUMENTATION DEPARTMENT ORGANIZATION - Captec has a Documentation
Department made up of a group of employees dedicated to production and
processing of all equipment lease documentation. The following is the
organizational chart for the documentation department organization.
|
|
-------------------
| Manager of |
| Contract |
| Administration |
| Equipment |
-------------------
|
|
-------------------
| Contract |
| Administrators |
-------------------
|
|
-------------------
| Contract |
| Clerk |
-------------------
The Documentation Department reports to the Company's senior management via
the Senior Vice President and General Counsel.
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Section: III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
Sub-Section: A. INTRODUCTION
- --------------------------------------------------------------------------------
2. DELIVERING QUALITY CUSTOMER SERVICE - The equipment lease documentation
process involves considerable interaction with Captec's lessees,
franchisors and equipment vendors. As a result, personnel in the
Documentation Department play an important role in delivering quality
service to these customers and suppliers.
The Documentation Department's customer service role is also unique since
it must balance this commitment to deliver quality customer service with
the requirement to produce documentation that protects Captec's interest in
the leased property and that complies with all laws, including those in the
lessee's place of business.
Among other things, quality customer service means:
- Professional communication
- Market expertise
- Timely response (see below)
- Genuine interest in the customers' needs
Timely response addresses all of the various ways in which the
Documentation Department interfaces with customers. This includes timely
preparation of documents, timely resolution of documentation issues,
facilitating timely execution of documents and timely completion of the
lease funding.
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Section: III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
Sub-Section: B. STANDARDIZED DOCUMENTATION
- --------------------------------------------------------------------------------
All equipment lease documentation must be prepared using Captec's standardized
documents. See Section III.D.5 for a list of the standard documentation. Any
changes to such standard documentation or any additional non-standard
documentation required for a specific lease must be pre-approved by the Senior
Vice President and General Counsel.
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Section: III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
Sub-Section: C. DOCUMENTATION CHECKLISTS
- --------------------------------------------------------------------------------
Each document required for a lease transaction must be input into the
Documentation Checklist included in the application file of the INFO-LEASE
Credit Application Module. There are pre-programmed standardized checklist
available for selection and modification. The Documentation Checklist must be
maintained at all times by the assigned Contract Administrator such that each
document required for a specific lease can be monitored as to its status.
The Manager of Contract Administration - Equipment is responsible for monitoring
the INFO-LEASE checklist reports to ensure that transactions are being processed
on a timely basis.
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Section: III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
Sub-Section: D. PREPARATION OF DOCUMENTS
- --------------------------------------------------------------------------------
1. PRELIMINARY PROCEDURES - Upon approval of a Credit application and receipt
of the Credit File, the following preliminary procedures occur:
a) DOCUMENTATION FILE - A Documentation File must be created by the
Credit Department from the Credit File and forwarded to the
Documentation Manager. The following documents must be copied from the
Credit File and placed into the Documentation File:
- Credit Approval Letter
- Report on Financing Application
- Lease Proposal
- Check evidencing payment of Commitment Fee
- Any other information necessary to prepare the Lease documents
b) UCC and Financing Statements - The Documentation Clerk must prepare
the following documents and send them to the Lessee:
- UCC financing statements
- Credit Approval Letter
- Insurance Request Letter
- Landlord's Waiver
- Letter to Lessee outlining the Closing Process
- Invoice and Payment Information for Equipment Vendors
2. REVIEW OF DOCUMENTATION FILE - Once the Documentation File has been
created, the Documentation Manager is required to review the file and
determine a projected funding date and identify any additional information
or clarification that is needed from the Credit Department regarding the
terms of the commitment.
3. ASSIGNMENT OF DOCUMENTATION FILE - After review, the Documentation Manager
must assign the file to a Contract Administrator, who has had previous
experience, if possible, with the concept account. The Documentation
Manager must update INFOLEASE to show the projected funding date and the
Contract Administrator worklist ID.
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Section: III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
Sub-Section: D. PREPARATION OF DOCUMENTS
- --------------------------------------------------------------------------------
4. LEASE DOCUMENT PACKAGE - The Contract Administrator must review the file to
determine what, if any, additional documents or information must be
obtained in order to prepare the Lease. Accordingly, the Contract
Administrator must prepare a Lease Documentation Package based on the
Lessee's business organization, the type of equipment being leased, the
equipment location and the terms of the lease commitment. In addition, the
following procedures must be completed by the Contractor Administrator:
a) CONFIRMATION OF LEGAL ENTITY - The Contract Administrator must
confirm the legal entity or the Lessee and order certified copies of
organizational documents and Certificates of Good Standing from the
state of organization and the state where the equipment is located.
b) ARRANGEMENT FOR DIRECT BILLING - The Contract Administrator must
contact the lessee to determine the name, address and phone number of
the vendor who will be supplying the leased equipment and arrange for
direct billing to Captec. At such time, the Contract Administrator must
also give the Documentation Clerk invoices to prepare an Equipment
Schedule for the Lease and any purchase orders required by equipment
vendors.
c) UCC SEARCHES - If the transaction is a sale/leaseback or if the
equipment has been delivered prior to Captec's UCC filings, the
Contract Administrator must order UCC searches.
d) CONTACT CREDIT DEPARTMENT - The Contract Administrator must contact
the Credit Department for approval of any increase in the amount of
funding requested by the Lessee or changes in the structure of the
commitment.
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Section: III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
Sub-Section: D. PREPARATION OF DOCUMENTS
- --------------------------------------------------------------------------------
5. LEASE DOCUMENTS - The Contract Administrator must prepare the following
documents that complete the Document Package and send them to the Lessee
via overnight courier:
- Equipment Lease Agreement
- Purchase Option Addendum
- Franchisee Addendum
- Certificate of Delivery Acceptance
- Certificate of Authority
- UCC-l with Equipment List (or UCC-3 if applicable)
- Bill of Sale (for salelease back)
- Personal/Corporate Guaranty
- Subordination Agreement
- Pay Proceeds Letter
- Cover Letter enclosing outlines of any additional documents or
information still needed from Lessee. Additional requirements
include:
- Fully-Executed Copy of Franchise Agreement
- Fully-Executed Copy of Landlord Lease (If premises are rented)
- Copy of Deed (If premises are owned)
- Legal Description of Premises (for Fixture Filings)
- Lessee's Federal ID Number
- Cover Letter also outlining any outstanding credit contingencies
such as:
- Verification of Liquid Assets
- Copies of Tax Returns
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Section: III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
Sub-Section: D. PREPARATION OF DOCUMENTS
- --------------------------------------------------------------------------------
6. VERIFICATION OF RETURNED LEASE DOCUMENTS FROM LESSEE - The Contract
Administrator must follow up with the Lessee for timely return of properly
executed lease documents. Upon receipt of the returned documentation
package, the Contract Administrator is required to review the lease
documents signed by the Lessee. Specifically, the Contract Administrator
must verify the following:
- The signatures on the documents are authorized by the Lessee
- No changes have been made to the documents
- The documents contain original signatures
- All signatures on Personal and Corporate Guaranties are notarized
- The documents are properly dated
7. VERIFICATION OF RETURNED LEASE DOCUMENTS FROM OTHERS - The Contract
Administrator must review documents that are received separately from the
Lessee to verify the accuracy of the documents. These documents will
include:
- Original Invoices required from the equipment vendor that must
include a detailed description of the equipment, the location where
the equipment is to be delivered and show the purchaser as "Captec."
(unless it is a sale/leaseback)
- A Certificate of Insurance showing Captec as Additional Insured and
Loss Payee for liability and property damage coverage at equipment
location in amounts that are satisfactory to Captec.
- A Landlord's Waiver stating that the equipment is Captec's personal
property, that Captec may remove it at any time and that Captec will
be given notice if Lessee defaults under the landlord lease.
Mortgagee must also sign, if applicable.
- UCC searches to confirm that no prior liens exist. If the searches
do not show the Captec lease filing, the Contract Administrator must
complete a follow-up search.
- Copies of Organizational Documents and Good Standing Certificates to
confirm valid corporate status and authority.
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Section: III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
Sub-Section: D. PREPARATION OF DOCUMENTS
- --------------------------------------------------------------------------------
8. CONFIRMATION OF DELIVERY AND ACCEPTANCE - The Contract Administrator must
make a due diligence telephone call to the Lessee confirming the delivery
and acceptance of all equipment.
9. PREPARATION FOR FUNDING - After the equipment has been delivered and
installed and Captec has received a complete lease document package,
including original vendor invoices, the Documentation Department must
prepare the transaction for funding.
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Section: III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
Sub-Section: E. LEGAL REVIEW OF DOCUMENTS
- --------------------------------------------------------------------------------
If the Lessee has requested changes to the standard lease documents, the
Documentation Department must seek approval by Captec's General Counsel. The
Documentation Manager may assist the Contract Administrator in negotiating the
lease documents and landlord waivers, with final approval of Captec's General
Counsel.
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Section: III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
Sub-Section: F. EXECUTION OF DOCUMENTS
- --------------------------------------------------------------------------------
1. LESSEE AND GUARANTORS SIGNATURES - The documents must be sent by the
Documentation Department to the Lessee unsigned. The lessee and guarantors
are required to sign the documents and return them to the Contract
Administrator. Furthermore, the signatures of the guarantors must be
notarized.
2. COUNSEL REVIEW - The signed lease documents must be presented by the
Contract Administrator to Captec's General Counsel for execution. (If
Captec's General Counsel is not available, the file must be presented to
the Chief Financial Officer.) Captec's General Counsel is required to
review the entire documentation file with the Commitment Letter to insure
that all terms and contingencies of Captec's approval are met prior to
executing the documents.
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Section: III. EQUIPMENT LEASE DOCUMENTATION PROCEDURES
Sub-Section: G. FUNDING PROCEDURES
- --------------------------------------------------------------------------------
1. MASTER LEASE FUNDING DISBURSEMENT SUMMARY - The transaction will fund
after the documents have been executed by Captec. At that time, the Master
Lease Funding Disbursement Summary, outlining the vendors and the amounts
to be paid, must be approved and issued to the Accounting Department. The
Accounting Department will prepare payments to vendors as outlined in the
disbursement summary.
2. RECEIPT OF POST CLOSING ITEMS - Any items approved by Captec's General
Counsel for receipt on a post closing basis must be obtained by the
Contract Administrator within 30 days of funding.
3. LESSEE'S COPY OF THE LEASE - A fully-executed copy of the Lease (with all
attachments and addendums), the Certification of Delivery Acceptance and
any Guaranties must be returned to the Lessee by the Documentation
Department.
4. FINAL SUBMITTING TO ACCOUNTING - The Contract Administrator or the
Documentation Clerk must place the documents in order in the lease file,
complete any final data entries and submit the file to the Accounting
Department for booking and billing.
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IV. MORTGAGE LOAN DOCUMENTATION PROCEDURES
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Revised July 1995
Section: IV. MORTGAGE LOAN DOCUMENTATION PROCEDURES
Sub-Section: A. INTRODUCTION
- --------------------------------------------------------------------------------
1. DOCUMENTATION DEPARTMENT ORGANIZATION - Captec has a Real Estate
Documentation Department made up of a group of employees dedicated to
production and processing of all mortgage documentation. The following is
the organizational chart for the Real Estate Documentation Department.
|
|
----------------
| Manager of |
| Contract |
|Administration |
| Real Estate |
----------------
|
|
----------------
| Contract |
|Administrators |
| (Future) |
----------------
|
|
----------------
| Contract |
| Clerk |
| (Future) |
----------------
The Real Estate Documentation Department reports to the Company's senior
management via the Senior Vice President - Administration.
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Revised July 1995
Section: IV. MORTGAGE LOAN DOCUMENTATION PROCEDURES
Sub-Section: A. INTRODUCTION
- --------------------------------------------------------------------------------
2. DELIVERING QUALITY CUSTOMER SERVICE - The mortgage documentation process
involves considerable interaction with Captec's borrowers and franchisors.
As a result, personnel in the Real Estate Documentation Department play an
important role in delivering quality service to these customers and
sellers.
The Real Estate Documentation Department's customer service role is also
unique since it must balance this commitment to deliver quality customer
service with the requirement to produce documentation that protects
Captec's interest in the mortgaged property and that complies with all
laws, including those in the borrower's place of business and the location
of the real estate.
Among other things, quality customer service means:
- Professional communication
- Market expertise
- Timely response (see below)
- Genuine interest in the customers' needs
Timely response addresses all of the various ways in which the Real Estate
Documentation Department interfaces with customers. This includes timely
preparation of documents, timely resolution of documentation issues,
facilitating timely execution of documents and timely completion of the
mortgage funding.
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Revised July 1995
Section: IV. MORTGAGE LOAN DOCUMENTATION PROCEDURES
Sub-Section: B. STANDARDIZED DOCUMENTATION
- --------------------------------------------------------------------------------
All mortgage documentation must be prepared using Captec's standardized
documents, as modified to conform with local requirements. See Section IV.D.6
for a list of the standard documentation. Any changes to such standard
documentation or any additional non-standard documentation required for a
specific mortgage must be pre-approved by the Senior Vice President -
Administration.
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Revised July 1995
Section: IV. MORTGAGE LOAN DOCUMENTATION PROCEDURES
Sub-Section: C. DOCUMENTATION CHECKLISTS
- --------------------------------------------------------------------------------
Each document required for a mortgage transaction must be inputted into the Real
Estate Document Checklist. There are pre-established standardized checklists
available for selection and modification. The Real Estate Document Checklist
must be maintained at all times by the assigned Contract Administrator such that
each document required for a specific mortgage can be monitored as to its
status. See Exhibit IV.C for a sample Real Estate Documentation Checklist.
The Manager of Contract Administration - Real Estate is responsible for
monitoring the Real Estate Document Checklist reports to ensure that
transactions are being processed on a timely basis.
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Revised July 1995
Section: IV. MORTGAGE LOAN DOCUMENTATION PROCEDURES
Sub-Section: D. PREPARATION OF DOCUMENTS
- --------------------------------------------------------------------------------
1. MORTGAGE DOCUMENTATION FILE - Upon approval of a mortgage loan application,
the Mortgage Documentation File must be created by the Credit Department
from the Credit File and forwarded to the Manager of Contract
Administration - Real Estate. The following documents must be copied from
the Credit File and placed into the Mortgage Documentation File:
- Credit Approval Letter
- Transaction Summary
- Mortgage Loan Proposal Letter
- Check evidencing payment of Commitment Fee
- Any other information necessary to prepare the mortgage documents
2. INITIAL REVIEW OF DOCUMENTATION FILE - Once the Mortgage Documentation File
has been created, the Manager of Contract Administration - Real Estate is
required to review the file and identify any additional information or
clarification that is needed from the Credit Department regarding the terms
of the commitment.
3. ASSIGNMENT OF REAL ESTATE DOCUMENTATION FILE - After review, the Manager of
Contract Administration - Real Estate must assign the file to a Contract
Administrator. The Manager of Contract Administration - Real Estate must
update the Real Estate Document Checklist to show the projected funding
date.
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Revised July 1995
Section: IV. MORTGAGE LOAN DOCUMENTATION PROCEDURES
Sub-Section: D. PREPARATION OF DOCUMENTS
- --------------------------------------------------------------------------------
4. COMMITMENT LETTER - The Manager of Contract Administration - Real Estate
must prepare the Commitment Letter in accordance with the terms of the
Mortgage Loan Proposal Letter but incorporate any modifications or
additions called for in the Credit Approval Letter. Upon completion, the
Manager of Contract Administration - Real Estate must have the Commitment
Letter reviewed by the Senior Vice President - Administration and the Sales
Representative. After the review process of the Commitment Letter has been
completed, the Manager of Contract Administration - Real Estate is required
to incorporate all necessary changes to the Commitment Letter.
The Commitment Letter must be signed by the Senior Vice President -
Administration or in his absence, the Chief Financial Officer or the
President. The signed Commitment Letter must be sent by the Manager of
Contract Administration - Real Estate to the Borrower via overnight
courier.
If the Borrower requests material changes to the Commitment Letter, the
Manager of Contract Administration - Real Estate must have the changes
reviewed by the Senior Vice President - Administration or Vice President -
Credit, who determines if the Commitment Letter needs to be resubmitted to
the Credit Committee. If these changes are determined to require additional
approval from the Credit Committee, the revised Commitment Letter must also
be resubmitted to the Senior Vice President - Administration or an
authorized officer of Captec. Once completed, the Manager of Contract
Administration - Real Estate sends the Commitment Letter to the Borrower
via overnight courier.
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Revised July 1995
Section: IV. MORTGAGE LOAN DOCUMENTATION PROCEDURES
Sub-Section: D. PREPARATION OF DOCUMENTS
- --------------------------------------------------------------------------------
5. MORTGAGE DOCUMENT PACKAGE - Upon receipt of the Commitment Letter, signed by
the Borrower, and the remainder of the Commitment Fee, the Contract
Administrator must prepare and send the Real Estate Document Checklist to
the Borrower via facsimile. In addition, the Contract Administrator must
contact the Borrower to determine what, if any, additional documents or
information must be obtained in order to prepare the Mortgage Document
Package and coordinate the ordering of outside services. Accordingly, the
Contract Administrator must prepare a Mortgage Document Package based on the
Borrower's business organization, the property location and the terms of the
Commitment Letter. Specifically, the following procedures must be completed
by the Contractor Administrator:
a) CONFIRMATION OF LEGAL ENTITY - The Contract Administrator must
confirm the legal entity of the Borrower and order certified copies of
organizational documents and certificates of good standing/authority
from the state of organization and, if different, the state where the
property is located.
b) ORDER OF OUTSIDE SERVICES - The Contract Administrator must contact
the Borrower to coordinate the ordering of outside services. These
services include Real Estate and Business Valuation, Environmental Site
Assessment, Survey, Title Insurance, and Lien and Judgment searches.
See Section IV.D.6.
c) CONTACT CREDIT DEPARTMENT - The Contract Administrator must contact
the Credit Department for approval of any increase in the amount of
funding requested by the Borrower, clearing of any credit contingency
requirements and/or changes in the structure of the Commitment Letter.
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- --------------------------------------------------------------------------------
6. MORTGAGE DOCUMENTS - The Contract Administrator must prepare, or request
the preparation by third parties of, the following documents that complete
the Mortgage Document Package. Upon completion, the Contract Administrator
must promptly send the Mortgage Document Package to the Borrower via
overnight courier:
- Promissory Note
- Mortgage or Deed of Trust
- Estoppel Letters
- Guarantee
- Forms of Opinions of Counsel
- Miscellaneous Closing Documents
- Cover Letter outlining any additional documents or information still
needed from the Borrower. Additional requirements include:
- Fully-Executed Copy of Franchise Agreement
- Lessee's Federal ID Number
- Cover Letter also outlining any outstanding credit contingencies
such as:
- Verification of Liquid Assets
- Copies of Tax Returns
- Studies on Demographics and/or Competition
In addition, the Contract Administrator must obtain the following outside
services with the Borrower:
- Real Estate and Business Valuation
- Environmental Site Assessment
- Survey
- Certificate of Insurance
- Title Commitment
- Lien and Judgment Search Results
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- --------------------------------------------------------------------------------
6. MORTGAGE DOCUMENTS (CONTINUED)
a) PROMISSORY NOTE - The purpose of the Promissory Note is to evidence the
Borrower's obligation to repay the mortgage loan to Captec and to
identify key agreements and terms of repayment between the Borrower and
Captec. The Contract Administrator is required to review and confirm
that the following information found in the Promissory Note is
accurate:
- Name of the Borrower;
- Amount of the mortgage loan;
- Interest payable on the outstanding balance of the mortgage loan;
- Monthly payments;
- Term of the mortgage loan;
- Amortization period of the mortgage loan.
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- --------------------------------------------------------------------------------
6. MORTGAGE DOCUMENTS (CONTINUED)
b) MORTGAGE OR DEED OF TRUST - In general, the Mortgage or Deed of Trust
provides Captec with a lien on and a security interest in the real
estate and/or improvements. The Real Estate Documentation Department is
responsible for determining if a Mortgage or Deed of Trust is required
in the State in which the property is located. In those States where a
Deed of Trust is employed, the trustee must be approved by the Contract
Administrator.
The Contract Administrator must prepare the Mortgage or Deed of Trust
on Captec's standard forms, modified to conform with state law
requirements. These forms will include, among others, the following
provisions:
- LIENS - The Borrower must keep the property free from all liens
and/or encumbrances (other than those acceptable to Captec)
throughout the term of the loan.
- COMPLIANCE WITH LAW - The Borrower must comply with all laws,
ordinances, orders, rules and regulations of any governmental
authority having jurisdiction over the property.
- UTILITIES - The Borrower must pay all utility charges related to the
property.
- TAXES - The Borrower must pay all real estate taxes, assessments, ad
valorem taxes or gross receipt taxes imposed by any authority having
the power to tax the property. The Borrower must further agree to
pay all personal property taxes related to the property.
- MAINTENANCE AND REPAIRS - The Borrower must maintain the property in
good repair, order and condition.
- INSURANCE - The Borrower must maintain policies of insurance, in
amounts and with insurance companies as are satisfactory to Captec.
- ALTERATIONS - The Borrower must not make material alterations to the
property unless prior written approval is obtained from Captec. The
cost of all alterations will be paid for by the Borrower.
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b) MORTGAGE OR DEED OF TRUST (CONTINUED)
- ASSIGNMENT AND SUBLETTING - The Borrower will not be permitted
to transfer or assign the property without prior written
approval from Captec.
- HAZARDOUS MATERIALS - The Borrower must make certain
representations and warranties for the benefit of Captec
regarding hazardous materials and relevant environmental laws,
and must further agree to indemnify and hold harmless Captec
from any loss, liability, damage or expense that Captec may
incur as a result thereof.
- LEGAL DESCRIPTION - The legal description of the property on
the Mortgage or Deed of Trust must conform to the legal
description found on the Title Commitment.
- LEASE AND/OR LICENSING AGREEMENTS - If the Borrower has a lease
and/or licensing agreement with an operating entity who has the
right to conduct franchise operations on the property, an
assignment (on Captec's standard form) of the Borrower's rights
and interest in that lease and/or licensing agreement must be
given to Captec.
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- --------------------------------------------------------------------------------
6. MORTGAGE DOCUMENTS (CONTINUED)
c) ESTOPPEL LETTERS -
FRANCHISOR ESTOPPEL LETTER - The Franchisor must provide to Captec an
Estoppel Letter, stating that the Borrower has entered into a franchise
agreement with the Franchisor and that the franchise agreement is in
full force and effect. The Franchisor must also state that the Borrower
is not in default under the franchise agreement as of the closing date.
In addition, the Contract Administrator must review and confirm that
the Borrower has a valid franchise agreement in place for the property
and that the franchise agreement has a term that is equal to or greater
than the term of the mortgage loan (except as outlined in Section
I.F1.1).
GROUND LEASE LANDLORD ESTOPPEL LETTER - The Ground Lease Landland must
provide to Captec an Estoppel Letter, stating that the Borrower has
entered into a ground lease with the Landlord and that the ground lease
is in full force and effect. The Landlord must also state that the
Borrower is not in default under the ground lease as of the closing
date. In addition, the Contract Administrator must review and confirm
that the Borrower has a valid ground lease in place for the property
and that the ground lease has a term that is equal to or greater than
the term of the mortgage loan.
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- --------------------------------------------------------------------------------
6. MORTGAGE DOCUMENTS (CONTINUED)
d) GUARANTEE - The Contract Administrator is responsible for obtaining
Guarantees from those principals of the borrowing entity as are
indicated in the Credit Approval Letter. In general, the Guarantees are
full and unconditional and will guarantee the full performance and
payment of all obligations of the Borrower under the Promissory Note,
the Mortgage or Deed of Trust, and all other documents evidencing or
securing the mortgage loan.
The Contract Administrator must use Captec's standard form and confirm
that the correct Guarantor(s)' names, Borrower's name and loan amount
appear on all Guarantees. In addition, the Contract Administrator must
verify that all Guarantees are properly executed and notarized.
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- --------------------------------------------------------------------------------
6. MORTGAGE DOCUMENTS (CONTINUED)
e) OPINIONS OF COUNSEL - The Contract Administrator must confirm that all
of the legal opinions are issued in the name of Captec. The following
legal opinions are required and must be reviewed by the Contract
Administrator and obtained as of the closing:
- BUSINESS ENTITY - A legal opinion must verify that the Borrower
is a duly formed and valid existing entity and qualified to do
business in the jurisdiction where the property is located;
- OBTAINED APPROVALS - A legal opinion confirming all approvals
necessary as a condition of the Borrower entering into,
executing, and delivering the mortgage loan documents has been
obtained;
- VALID AND BINDING AGREEMENT - A legal opinion stating that the
Promissory Note, the Mortgage or Deed of Trust, and all other
documents executed by the Borrower and delivered to Captec in
connection with the transaction are valid and binding
obligations of the Borrower and enforceable in accordance with
their terms.
In addition, the Contract Administrator is to obtain a legal opinion
that confirms that the Guarantees from the individuals are valid and
binding obligations of the Guarantors.
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- --------------------------------------------------------------------------------
6. MORTGAGE DOCUMENTS (CONTINUED)
f) MISCELLANEOUS CLOSING DOCUMENTS - The Contract Administrator must
review and confirm that the following Miscellaneous Closings Documents
are accurate:
- CERTIFICATE OF BORROWER - The Certificate of Borrower provides
additional representation and warranties supplemental to those
set forth in the Promissory Note and Mortgage or Deed of Trust.
- CERTIFICATE OF GUARANTOR - The Certificate of Guarantor
provides additional representation and warranties supplemental
to those set forth in the Guarantees.
- CERTIFICATE OF OCCUPANCY - If the mortgage interest includes a
newly constructed building, the Contract Administrator must
obtain from the Borrower a copy of a valid Certificate of
Occupancy issued for the property.
- CLOSING STATEMENT - The Closing Statement provides loan
disbursement instructions.
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6. MORTGAGE DOCUMENTS (CONTINUED)
g) REAL ESTATE AND BUSINESS VALUATIONS - All valuations must be prepared
by Deloitte & Touche's Valuation and Realty Consulting Group.
Valuations for loans secured by a Mortgage or Deed of Trust on a fee
interest in the property will be based upon the real estate value,
prepared by Deloitte & Touche. The maximum loan-to-value (LTV) ratios
for such loans will be as follows:
Tier LTV
---- ---
I 90%
II 85%
III 80%
Valuations for loans secured by a Mortgage or Deed of Trust on a
leasehold interest in the property must be based upon the business
enterprise value, as calculated by Deloitte & Touche. The maximum
loan-to-value (LTV) for such loans will be 70%.
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6. MORTGAGE DOCUMENTS (CONTINUED)
h) ENVIRONMENTAL SITE ASSESSMENTS - The Borrower is required to obtain a
Phase I Environmental Site Assessment, prepared by a certified
Environment Engineer or an engineer who is licensed and authorized to
conduct business in the state where the property is located.
The Environmental Site Assessment must be addressed to Captec, and the
Contract Administrator must review and confirm that the Environmental
Engineer has not discovered any conditions that will lead to the
evidence of an environmental hazard or condition with respect to the
site. If environmental conditions do exist, Captec will reject the site
or require the Borrower to engage in a Phase II Environmental Site
Assessment to develop and implement further studies and a remediation
program.
An Environmental Site Assessment provided by the Borrower may be used
if the assessment was completed less than one year from the expected
closing date and accompanied by a reliance letter, addressed to Captec
and signed by the engineer.
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6. MORTGAGE DOCUMENTS (CONTINUED)
i) SURVEYS - Mortgage loans require a survey to conform to the ALTA-ACSM
survey standards. The survey must be certified to the Borrower, Captec,
and the Title Company and contain sufficient information and analysis
to satisfy Captec.
Once the survey is completed, the Contract Administrator must review
and confirm the following information:
- The legal description of the property found on the survey must
conform to the legal description found on the Title Commitment;
- All easements and all other matters affecting the title as
noted in the Title Commitment are to be shown on the survey;
- The building and all other major improvements are to be shown
on the survey and located within the applicable building set
back lines;
- There are no encroachments from adjoining properties onto the
property and no encroachments from the property onto adjoining
properties.
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6. MORTGAGE DOCUMENTS (CONTINUED)
j) CERTIFICATE OF INSURANCE - The Contract Administrator must review and
confirm that a Certificate of Insurance is issued by a company that is
acceptable to Captec and includes the following types and amounts of
insurance coverage, with loss payable clauses in favor of Captec:
- Comprehensive general liability and property damage insurance
with initial limits of at least $2,000,000/$2,000,000 for
bodily injury and/or death and $1,000,000 for property damage;
- Fire and extended coverage insurance on a replacement form with
inflation-guard, vandalism and malicious mischief endorsements;
- Flood insurance, in amounts acceptable to Captec, unless
evidence is provided that the property is not located in a
federally designated flood plain area;
- Rent loss or business interruption insurance covering a period
of not less than three (3) months;
Furthermore, the Contract Administrator must confirm that the Borrower has
delivered evidence to Captec, on the closing date, that all policies of
insurance are paid in full and are in full force and effect for not less than
one (1) year from the closing date and contain the following items:
- Captec is named as an additional insured;
- Each policy cannot be modified, amended or canceled without
thirty (30) days' prior written notice to Captec;
- Appropriate clauses pursuant to which the insurance carriers
waive all rights of subrogation against the insured party and
all additional insured parties with respect to all losses
payable under such policies;
- Appropriate clauses that any loss otherwise payable under such
policies will be payable notwithstanding any act or negligence
of Captec or the Borrower.
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6. MORTGAGE DOCUMENTS (CONTINUED)
k) TITLE COMMITMENT - The Contract Administrator must review and confirm
that the Title Commitment:
- appears in the most recent ALTA form without standard
exceptions;
- names Captec as insured;
- has the correct amount of the mortgage loan as the insured
amount;
- is issued by a title company that is acceptable to Captec;
- includes title endorsements deemed necessary by Captec's
counsel;
- must be subject to no exceptions, unless approved by Captec
prior to the closing date;
- includes an itemization of all outstanding and pending special
assessments or states that there are none;
- includes an itemization of all taxes affecting the property and
states whether the taxes are current;
- has attached copies of all instruments creating exceptions to
the title of the property;
- has the closing date as its effective date.
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6. MORTGAGE DOCUMENTS (CONTINUED)
l) LIEN AND JUDGMENT SEARCH RESULTS - The Contract Administrator must
order all UCC and other Lien Searches, such as tax liens and judgment
liens. The lien searches are required to be completed in the State and
County in which the Borrower's chief executive office is located, and
in the State and County where the property to be financed is located.
In addition to the Borrower, Lien Searches may be required on
individual Guarantors, and in the case of a Borrower that is a limited
partnership, lien searches must be completed on the general partners.
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- --------------------------------------------------------------------------------
7. PREPAYMENT CLAUSES - The Contract Administrator is responsible for
reviewing and confirming that the correct Prepayment Clause is found in the
Promissory Note. Captec has two variations of a Prepayment Clause, as
described below.
a) MAKE-WHOLE PRE-PAYMENT CLAUSE - Under the make-whole provision, the
Borrower is not allowed to prepay the loan during its first or second
year. But commencing in the third year, the Borrower may elect to
prepay the entire outstanding balance. In addition to the outstanding
loan balance, the Borrower agrees to pay a premium, if applicable,
based on a predetermined formula that guarantees Captec an agreed upon
yield. (See Exhibit IV.D.7(b)) This clauses is the prefered prepayment
provision.
b) PREPAYMENT PREMIUM SCHEDULE - If the Borrower elects to prepay all or a
portion of the outstanding balance on the loan, the following schedule
of premiums must be collected:
Year(s) Premium
------- -------
1 5%
2 4%
3 3%
4 2%
5-10 1%
c) ONE-TIME PREMIUM-FREE PRE-PAYMENT CLAUSE - Supplemental to the
Pre-Payment Clauses above, certain mortgage loans may include an
additional option allowing the Borrower to prepay the loan, without a
premium, during a pre-determined, single thirty (30) day period,
occurring during the seventh to tenth year of the loan.
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- --------------------------------------------------------------------------------
8. VERIFICATION OF RETURNED MORTGAGE DOCUMENTS FROM BORROWER - The Contract
Administrator must follow up with the Borrower for timely return of the
properly executed Mortgage Document Package. Upon receipt of the Mortgage
Document Package, the Contract Administrator is required to verify the
following:
- The signatures on the documents are authorized by the Borrower;
- No changes have been made to the documents;
- The documents contain original signatures;
- All signatures on personal and corporate Guarantees are notarized;
- The documents are properly dated, witnessed, and notarized.
9. VERIFICATION OF RETURNED MORTGAGE DOCUMENTS FROM OUTSIDE SERVICES - The
Contract Administrator must review documents that are received separately
from the Borrower to verify the accuracy of the documents.
10. FINAL REVIEW OF THE MORTGAGE DOCUMENT PACKAGE - The Mortgage Document
Package must be presented by the Contract Administrator to the Manager of
Contract Administration - Real Estate for final review. The Manager of
Contract Administration - Real Estate is required to review the entire
Documentation File with the Commitment Letter to insure that all terms and
contingencies of Captec's approval are met.
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Sub-Section: E. LEGAL REVIEW OF DOCUMENTS
- --------------------------------------------------------------------------------
If the Borrower has requested changes to the standard Mortgage Documents, the
Real Estate Documentation Department must seek approval by the Senior Vice
President - Administration. The Manager of Contract Administration - Real Estate
may assist the Contract Administrator in negotiating the Mortgage Documents and
with the final approval from the Senior Vice President - Administration.
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Section: IV. MORTGAGE LOAN DOCUMENTATION PROCEDURES
Sub-Section: F. FUNDING PROCEDURES
- --------------------------------------------------------------------------------
1. MORTGAGE FUNDING DISBURSEMENT SUMMARY - The transaction will be in a
position to fund after all documents, listed in the Mortgage Document
Checklist, have been received by the Real Estate Documentation Department
and the executed Mortgage or Deed of Trust has been delivered to the Title
Company. At that time, the Mortgage Funding Disbursement Summary, outlining
the amounts to be disbursed to the Title Company, must be issued to the
Accounting Department.
2. RECEIPT OF POST CLOSING ITEMS - Any items approved by the Senior Vice
President - Administration for receipt on a post closing basis must be
obtained by the Contract Administrator within 30 days of funding.
3. BORROWER'S COPY OF THE MORTGAGE - A copy of the fully-executed Promissory
Note and Mortgage or Deed of Trust (with all attachments and addendums),
and any Guaranties must be delivered to the Borrower by the Real Estate
Documentation Department promptly after funding.
4. FINAL SUBMITTING TO ACCOUNTING - The Contract Administrator or the
Documentation Clerk must place the documents in order in the Mortgage
Documentation File, complete any final data entries and submit the file to
the Accounting Department for final booking and billing.
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Sub-Section: G. ESCROW INSTRUCTIONS
- --------------------------------------------------------------------------------
The Real Estate Documentation Department must send to the Title Company the
executed Mortgage or Deed of Trust, the fluids to be disbursed, and written
escrow instructions. These escrow instructions must authorize the Title Company
to record the Mortgage or Deed of Trust, disburse the funds in accordance with
Captec's Closing Statement and issue its Title Commitment. Once the Contract
Administrator has confirmed that the Title Company is prepared to issue its
Title Commitment, the Mortgage or Deed of Trust will be released and recorded.
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APPENDIX
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Section: APPENDIX
Sub-Section: I.E.8 - Report to Credit Committee on Concept (Guideline Form)
- --------------------------------------------------------------------------------
FORMAT & OUTLINE
CONCEPT UNDERWRITING REPORT
-------------------------------------------------------
FRANCHISOR/CHAIN SUMMARY
Franchisor: Name & Address]
Number of Units: Franchised - ____
Company owned - ____
Projected Units: ____ new units over the next year
Franchisee Fee: $______
Investment per Unit: $_______ - $_______
Asset Cost:
Land $_______ - $_______
Building $_______ - $_______
Equipment $_______ - $_______
Franchisor Sales: $___ Million(FYE___)
Business Nature: ______________________
Ownership: ________________
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Sub-Section: I.E.8 - Report to Credit Committee on Concept (Guideline Form)
(CONTINUED)
- --------------------------------------------------------------------------------
PROPOSED FINANCING PROGRAM
Program Description: A $_________ financing facility for the financing of
[real estate/equipment] for [Concept] [franchisees].
Type of Financing:
Real Estate [Net Lease or Mortgage]
Equipment [Lease or Loan]
Asset Financing Amount:
Real Estate Up to $_________ per location (__% of cost)
Equipment Up to $_________ per location (__% of cost)
Term:
Real Estate ___Years
Equipment ___ Months
Amortization Periods:
Real Estate [fully amortizing or balloon]
Equipment [fully amortizing or balloon]
Yields Anticipated: Describe nature of anticipated yields and status of
rate negotiations.
Equipment Package: List major equipment items.
Franchisor Support: Describe the general aspects of any contractual support
from the Franchisor, including the details of any
remarketing and recourse agreements.
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Sub-Section: I.E.8 - Report to Credit Committee on Concept (Guideline Form)
(CONTINUED)
- --------------------------------------------------------------------------------
CONCEPT UNDERWRITING FINDINGS
Concept and Operation
- ---------------------
Typically should include discussion of:
- franchisor's headquarters location
- method of franchising/licensing
- concept features (including description of products sold and target
- market)
- typical building features (for restaurants)
- typical site features
- list of direct competition
- discussion of competitive advantages
Management and Operating History
- --------------------------------
Typically should include discussion of:
- history of concept and major events during its history
- ownership structure
- number of units in operation and growth trends
- number of outstanding development agreements
- projected new unit openings during next year
- summary background information on principal officers and directors
Fees Paid by the Franchisee
- ---------------------------
Franchise Fee: indicate fee for first franchise unit and the fee schedule
for multiple units
Royalty Fee: ___% of net sales, payable _________
Also, describe any unique features to the royalty
arrangements
Joint Marketing Fee: ___% of net sales, payable _________
Also, describe any unique features to the royalty
arrangements
Franchisee Ad
Requirements: Indicate any requirements imposed on the franchisee for
spending advertising dollars in the local market.
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Sub-Section: I.E.8 - Report to Credit Committee on Concept (Guideline Form)
(CONTINUED)
- --------------------------------------------------------------------------------
Investment Requirements
- -----------------------
The following is a summary of the estimated costs, exclusive of land and
building investments, that the franchisee may be required to incur:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ITEM HIGH LOW
- --------------------------------------------------------------------------------
<S> <C> <C>
Franchise Fee $0 $0
- --------------------------------------------------------------------------------
Architect/Engineering 0 0
- --------------------------------------------------------------------------------
Equipment- 0 0
Kitchen, Furniture, POS
- --------------------------------------------------------------------------------
Signage 0 0
- --------------------------------------------------------------------------------
Working Capital I 0 0
Pre-Opening
- --------------------------------------------------------------------------------
Leasehold Improvements 0 0
- --------------------------------------------------------------------------------
TOTAL $0 $0
- --------------------------------------------------------------------------------
</TABLE>
The above costs are exclusive of land and building investments the franchisee
may be required to incur. These costs vary widely due to geographic areas, code
requirements, condition of the structure, building design and size of building.
However, the typical range of land and building costs are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ITEM HIGH LOW
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $0 $0
- --------------------------------------------------------------------------------
Improvements on Land 0 0
- --------------------------------------------------------------------------------
Building 0 0
- --------------------------------------------------------------------------------
TOTAL $0 $0
- --------------------------------------------------------------------------------
</TABLE>
Training and Support
- --------------------
Typically should include discussion of:
- description of standard pre-opening training program, noting who
receives training, location of training, length of training period and
nature of training process
- description of other support features such as: site selection, design
and construction assistance, promotional and advertising programs,
grand opening assistance, and on-going operations monitoring
Financial Requirements and Average Sales
- ----------------------------------------
Describe the minimum franchisee financial requirements (including net worth and
liquidity thresholds) and comment on the sufficiency of these requirements.
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Sub-Section: I.E.8 - Report to Credit Committee on Concept (Guideline Form)
(CONTINUED)
- --------------------------------------------------------------------------------
Discuss the average sales per store unit broken down as follows:
- for franchised units
- for company operated units
- system-wide
Discuss other unit level economic measures such as various expense components
expressed as a percent of sales, average cash flow as a percent of sales, and
average net income as a percent of sales.
Financial Condition
- -------------------
Discuss the findings of the analysis of the franchisor's financial statements.
Attach to the report the detailed financial statement spreadsheets which were
prepared by the Credit Department. Highlight all pertinent trends, ratios and
balances. Discuss all significant strengths and weaknesses.
Closures
- --------
For the past five years the following number of franchised units closed for any
reason:
Fiscal year Ending
19 19 19 19 19
-- -- -- -- --
Discuss the reasons behind all closures.
Franchisee Survey
- -----------------
Indicate how many franchisees were surveyed (indicate number and % of franchise
units represented by respondents) and their mix between single-unit versus
multi-unit operators. Indicate the trends noted from the responses, including
satisfaction ratings for both their own stores, the concept in general and the
franchisor's support efforts. Indicate the range of average store unit sales
represented by the respondents. Indicate any unusual comments or concerns noted
by the respondents. Summarize the Credit Department's overall impressions from
the survey responses.
Recommendation
- --------------
Summarize all strengths and weaknesses identified during the underwriting
process, generally devoting a single sentence to each. Highlight any information
which is incomplete. Make a recommendation for approval or decline based upon
these issues.
6
<PAGE> 365
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: I.F.11 - Report on Financing Application (Guideline Form)
- --------------------------------------------------------------------------------
TRANSACTION SUMMARY
LESSEE:
-----------------
GUARANTORS:
-----------------
CONCEPT:
-----------------
TRANSACTION
TYPE:
-----------------
LOCATION:
-----------------
PROJECTED
OPENING:
-----------------
PURCHASE PRICE: $
-----------------
TERM:
------
RATE:
------
PURCHASE OPTION: %
---
CLOSING FEE: %
---
IRR: %
---
IRR w/ RESIDUAL: %
---
TOTAL IRR: %
---
TRANSACTION:
Summarize the nature of the proposed transaction. Enumerate the total
outstanding credit exposure to the customer, both before and after the proposed
transaction.
7
<PAGE> 366
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: I.F.11 - Report on Financing Application (Guideline Form)
(CONTINUED)
- --------------------------------------------------------------------------------
ORGANIZATION BACKGROUND:
Provide a summarization of the applicant's business structure, operating history
and current operations.
KEY PERSONNEL:
Summarize the findings of the review of principals' prior operating experience
(see Policy I.F.5)
GUARANTORS:
Provide a detailed discussion of the findings from the review of principals'
personal financial statements (see Policy I.F.4) and the review of personal
credit reports (see Policy I.F.6).
FINANCIAL ANALYSIS:
Discuss in detail all of the findings from the review of the applicant's
financial statements (see Policy I.F.2).
Note what references were contacted, any derogatory comments received from such
references and the analysts findings with respect to such comments (see Policy
I.F.8).
For all applications related to a newly opened store unit, discuss in detail
(and attach as an exhibit) the results of the credit analysis of the unit level
economics for the new unit.
SOURCES AND USES:
For all applications related to a newly opened store unit, provide a chart
indicating the sources and uses of capital and discuss whether these amounts
reconcile with the expected sources and uses of capital as outlined in the
Report to Credit Committee on Concept (see Policy I.E.7).
SITE ANALYSIS:
Discuss in detail all of the findings from site review (see Policy I.F.9).
8
<PAGE> 367
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: I.F.11 - Report on Financing Application (Guideline Form)
(CONTINUED)
- --------------------------------------------------------------------------------
OTHER:
Discuss any other unusual positive or negative findings of the underwriting
process which the analyst believes to be material to the credit decision.
RECOMMENDATION:
The analyst must state a recommendation to approve or decline, and note any
contingencies for approvals. The primary strengths and weaknesses of the
application must be highlighted, along with the principle reasons supporting the
recommendation
9
<PAGE> 368
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: I.F.12 - Credit Transaction Form
- --------------------------------------------------------------------------------
APPROVAL SHEET
- -------------------------------------------------- -----------------------------
LESSOR: APPLICATION #
- -------------------------------------------------- -----------------------------
LESSEE: CCA NO.:
- -------------------------------------------------- -----------------------------
AMOUNT: APPROVAL NO.:
- -------------------------------------------------- -----------------------------
FRANCHISE: LOGGED IN:
- -------------------------------------------------- -----------------------------
APPROVED AT: SALESMAN:
- -------------------------------------------------- -----------------------------
BY: RECOURSE:
- -------------------------------------------------- -----------------------------
AMOUNT: TERM
- -------------------------------------------------- -----------------------------
DATE: RATE: DISCOUNT:
- -------------------------------------------------- -----------------------------
EXPIRATION RATE: APPROVAL: PURCHASE OPTION:
- -------------------------------------------------- -----------------------------
RATE FACTOR: CLOSING FEE:
- -------------------------------------------------- -----------------------------
TRANSACTION TYPE: REAL ESTATE: EQUIPMENT:
- -------------------------------------------------- -----------------------------
CAPTEC APPROVAL
BY: DATE:
-------------------------------- -------------------------
COMMENTS:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
- --------------------------------------- -------------------- -------------------
APPROVAL REQUIREMENTS DATE REQUESTED DATE RECEIVED
- --------------------------------------- -------------------- -------------------
- --------------------------------------- -------------------- -------------------
- --------------------------------------- -------------------- -------------------
- --------------------------------------- -------------------- -------------------
- --------------------------------------- -------------------- -------------------
- --------------------------------------- -------------------- -------------------
- --------------------------------------- -------------------- -------------------
- --------------------------------------- -------------------- -------------------
- --------------------------------------- -------------------- -------------------
- --------------------------------------- -------------------- -------------------
- --------------------------------------- -------------------- -------------------
- --------------------------------------- -------------------- -------------------
REJECTED AT: BY: DATE: REASON:
--------------------- -------- ------ -----------------
WITHDRAWN BY: DATE: REASON:
------------------------------ ------- ---------------
- ----------------------- -------------------- -----------------------------------
DATE STATUS OTHER COMMENTS
- ----------------------- -------------------- -----------------------------------
- ----------------------- -------------------- -----------------------------------
- ----------------------- -------------------- -----------------------------------
- ----------------------- -------------------- -----------------------------------
10
<PAGE> 369
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: I.F.13.a - Credit Approval Letter
- --------------------------------------------------------------------------------
[Date]
[Address]
Dear [Mr/Ms. Lessee],
We are pleased to inform you that the lease application of [Applicant Name] has
been approved. This lease approval is subject to the following terms and
conditions:
LESSEE:
LOCATION:
LESSOR: Captec Financial Group, Inc. or its assignee
COST: $
EQUIPMENT: Restaurant Equipment
BASE TERM
COMMENCEMENT: [First or Fifteenth] of the month following equipment
acceptance.
BASE LEASE TERM: [#] Months
INTERIM RENT: Pro rata daily rate for the period between equipment
acceptance date and commencement of base term.
MONTHLY
PAYMENT FACTOR: [ ]
Payments are subject to change to reflect changes in money
market rates that may occur prior to Base Lease Term
Commencement date.
PAYMENT FREQUENCY: First and last month's rent is due upon closing. All
remaining payments are due monthly in advance.
PURCHASE OPTION: At the end of the Base Term or any renewal term, the Lessee
may purchase the equipment for [__% of the original
equipment cost] [the fair market value] [$1.00].
11
<PAGE> 370
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: I.F.13.a - Credit Approval Letter (CONTINUED)
- --------------------------------------------------------------------------------
NET LEASE: This shall he a net lease. The Lessee will be
unconditionally obligated to pay rent during the base term.
All taxes (except income taxes of the Lessor), maintenance,
insurance, risk of loss, and risk of obsolescence during the
term will he at the sole risk and expense of the Lessee.
CONDITIONS: This approval is subject to the following conditions:
- Documentation acceptable to all parties to the Lease.
- Lessee agrees that approval of documents will not be
unreasonably withheld.
- No material adverse change in the financial condition of
the Lessee or any Guarantor prior to the closing.
- Complete legal description of all properties (see
enclosed forms).
- Lessee shall reimburse Lessor for all Uniform Commercial
Code filing and search costs incurred by Lessor as well
as any other fees or charges incurred in relation to
filing or recording any documents in connection with
this lease agreement or any supplemental documents.
- See enclosed list for further documentation
requirements.
- Personal Guarantees of [ ].
The rate expires 30 days from the approval date. This approval is good for 90
days from the approval date of [- -95]. In order for the approval to hold, the
lease must be funded by [- -95]. If the transaction has not been closed on or
before this date, the application must be re-approved and updated financial
information may be required. An additional processing fee of $150.00 is charged
if an application requires re-approval. This approval is also contingent upon
acceptable documentation and insurance coverage.
Please acknowledge your acceptance and understanding of these terms and
conditions by signing below and returning the original signed copy to Captec
Financial Group, Inc. The commitment fee previously submitted is a cost of
business and does not apply toward the lease payments. In the event Lessee fails
to enter into the Lease, the commitment fee will he forfeited to Lessor as
liquidated damages.
12
<PAGE> 371
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: I.F.13.a - Credit Approval Letter (CONTINUED)
- --------------------------------------------------------------------------------
If you have any questions or concerns, please contact at (313)994-5505.
Sincerely,
- ------------------------
Credit Manager
Accepted and understood by:
- -----------------------------------------------------------
Date
13
<PAGE> 372
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: I.F.13.b - Credit Decline Letter
- --------------------------------------------------------------------------------
[Date]
(Address]
Dear [Mr/Ms. Lessee],
Thank you for applying to Captec for credit. We have given your request careful
consideration and regret that we are unable to extend credit to you at this
time.
Captec is required by Federal Reserve Board regulations to provide you, upon
timely request, specific reason(s) for the denial of business credit. [Reasons
for denial include: No P.G. of spouse who is operator, derogatory personal
credit.]
If you wish further information please contact:
Captec Financial Group, Inc.
24 Frank Lloyd Wright Drive
Lobby L, 4th Floor
Ann Arbor, MI 48106
Attention: Credit Department
Phone: (313)994-5505
In contacting the Credit Department, please specifically identify that your
request is made pursuant to Regulation B, and provide an address and all the
information specified. We will contact you with the reason(s) for denial within
thirty (30) days of receiving your written request
The Federal Equal Credit Opportunity Act prohibits creditors from discriminating
against credit applicants on the basis of race, color, religion, national
origin, sex, marital status, age (provided the applicant has the capacity to
enter into a binding contract); because all or part of the applicant's income
derives from any public assistance program; or because the applicant has in good
faith exercised any right under the Consumer Credit Protection Act. The federal
agency that administers compliance with this law concerning this creditor is the
Federal Trade Commission, Equal Credit Opportunity, Washington, DC 20580.
Sincerely,
- ----------------------
Credit Manager
14
<PAGE> 373
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: ll.C.1.c - Notice of Default Letter
- --------------------------------------------------------------------------------
Date
Name
Company
Address
City, State Zip
RE: LEASE#
Dear ____________:
YOU ARE HEREBY NOTIFIED that pursuant to section 15(i) of your lease with CAPTEC
FINANCIAL GROUP, INC. (Lessor) dated the _____ day of_______, 199_, you are in
default for non payment of rent for the Month(s) of________________ in the total
sum of $_______________.
You are hereby granted 7 days from date hereof to cure said default or Lessor
shall declare the remaining __ payments totaling $________ due and payable
forthwith as well as requiring the return of the equipment described in Exhibit
A of said Lease, pursuant to Section 15(b) of said Lease, and to exercise any
and all other remedies provided for default in Section 15(b) as well as any
other rights provided by law.
All questions should be directed to the under signed by mail directed to the
Lessor at 24 Frank Lloyd Wright Drive, Lobby L, 4th Floor, Ann Arbor, MI 48106
or by telephone at (3l3)-994-5505.
Sincerely,
CAPTEC FINANCIAL GROUP, INC.
BY:
----------------------
ITS
-----------------------
15
<PAGE> 374
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: ll.C.1.d-1 - Notice of Default & Acceleration of Payments
Letter (Obligor)
- --------------------------------------------------------------------------------
DATE
NAME
COMPANY NAME
ADDRESS
RE: LEASE#
Dear
On [DATE] a Notice of Default was sent to you, certified mall, providing you
with an opportunity to cure your lease default within seven days from that date.
Since we have not received that payment, your account remains in default and
that option to cure that default is hereby withdrawn.
YOU ARE HEREBY NOTIFIED THAT CAPTEC FINANCIAL GROUP, INC. HEREBY ELECTS,
ACCORDING TO THE TERMS OF YOUR LEASE AGREEMENT, TO ACCELERATE YOUR REMAINING
PAYMENTS AT THIS TIME.
DEMAND IS HEREBY MADE FOR PAYMENT IN FULL FOR THE REMAINING RENTALS AND ACCRUED
FEES ON YOUR ACCOUNT IN THE AMOUNT OF _________________ WITHIN TEN (10) DAYS
FROM DATE OF THIS NOTICE AND THE IMMEDIATE RETURN OF EQUIPMENT AS PROVIDED IN
YOUR LEASE.
If these funds are not in our possession by that date, we will have our
attorneys commence action under the Lease and pursue our remedies provided in
your Lease Agreement as well as any other rights provided by law.
You may contact the undersigned at (313) 994-5505 with any questions you might
have concerning your account balance.
Sincerely,
CAPTEC FINANCIAL GROUP, INC.
By:
---------------------------
Patricia A. Devine
Its: Equipment Portfolio Manager
---------------------------
Via Certified Mail
16
<PAGE> 375
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: ll.C.1.d-2 - Notice of Default and Demand for Payment
Letter (Guarantor)
- --------------------------------------------------------------------------------
DATE
NAME
COMPANY
ADDRESS
CITY, STATE ZIP
RE: LEASE #
DEAR (GUARANTOR)
The subject Lease is in Default as evidenced by a copy of the enclosed Notice to
the Lessee. Accordingly, Captec Financial Group, Inc. has elected, pursuant to
the terms of said Lease to accelerate the remaining payments so that there is
presently due and payable the sum of $____________.
As a Guarantor under said Lease dated the ___ day of__________ 199__ you agreed
"to pay on demand all sums due and to become due, to you (Captec) from the
Obligor...." In addition, if this matter is referred to an attorney you are
obligated to pay attorney fees and costs.
DEMAND IS HEREBY MADE FOR PAYMENT IMMEDIATELY OF THE ENTIRE BALANCE SET FORTH
ABOVE. IF CERTIFIED FUNDS ARE NOT RECEIVED BY US WITHIN TEN (10) DAYS FROM DATE
OF THIS NOTICE WE WILL REFER THIS MATTER TO OUR ATTORNEYS FOR IMMEDIATE ACTION.
If you have any questions concerning this balance please contact the undersigned
at (313) 994-5505.
Sincerely,
CAPTEC FINANCIAL GROUP, INC.
By:
-----------------
Its:
----------------
Via Certified Mail
17
<PAGE> 376
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: II.C.1.f- Phone Log
- --------------------------------------------------------------------------------
PHONE LOG
COMPANY NAME:___________________________________________
PHONE NO:_______________________________________________
FAX NO:_________________________________________________
LEASE NO:_______________________________________________
CONTACT:________________________________________________
- ---------- -------------- -------------- --------------------- -----------------
INVOICE DUE DATE AMOUNT LATE CHG. TOTAL
- ---------- -------------- -------------- --------------------- -----------------
- -------- -----------------------------------------------------------------------
DATE NOTES
- -------- -----------------------------------------------------------------------
- -------- -----------------------------------------------------------------------
- -------- -----------------------------------------------------------------------
- -------- -----------------------------------------------------------------------
- -------- -----------------------------------------------------------------------
- -------- -----------------------------------------------------------------------
- -------- -----------------------------------------------------------------------
- -------- -----------------------------------------------------------------------
18
<PAGE> 377
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: II.G.1.a - Notice of Termination ($1 purchase option)
- --------------------------------------------------------------------------------
DATE
NAME
COMPANY
ADDRESS
CITY, STATE ZIP
Re: Lease No.
Dear__________:
Our records indicate that the term of your lease with Captec Leasing Company
will expire on _____________,l99__.
Your lease was structured so that you would have ownership of the equipment at
the term of the lease. After receipt of your final rental payment, a Bill of
Sale will be sent to you.
We have enjoyed out business relationship and would be please to offer our
leasing services to you in the future. If you have any questions regarding the
above, please call me at 3l3/994-55O5.
Yours very truly,
CAPTEC FINANCIAL GROUP, INC.
By:___________________
Its:___________________
19
<PAGE> 378
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: II.G.1.b - Notice of Termination (true lease)
- --------------------------------------------------------------------------------
DATE
NAME
COMPANY
ADDRESS
CITY, STATE ZIP
RE: LEASE NO.
Dear
Our records indicate that the term of your lease with Captec Leasing Company
will expire on _________ __, 199__.
After receipt of your final rental payment, you will have two options. First you
may purchase the equipment for the sum of ________________ (see our invoice
enclosed). This sum must be received in our office no later than _____________
__, 199__.
Secondly, if you do not wish to purchase the equipment you must return it to a
designated location as directed in writing at your expense, on or before
_____________ __, 199__. Please note that your are liable for the same monthly
payment provided for in your lease until the equipment is received at the site
as instructed.
We have enjoyed our business relationship and would be pleased to offer out
leasing services to you in the future. If you have any questions regarding the
above, please call me at 313/994-5505.
Yours very truly,
CAPTEC FINANCIAL GROUP, INC.
By:_________________
Its:________________
20
<PAGE> 379
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: II.G.2.a - Bill of Sale
- --------------------------------------------------------------------------------
BILL OF SALE
In consideration of the sum of __________________________________________and
/100 ($________) Dollars, receipt of which is hereby acknowledged, CAPTEC
FINANCIAL GROUP, INC. ("Seller") does hereby sell and transfer to___________.
("Buyer") the following described personal property:
SEE SCHEDULE A ATTACHED HERETO
The above described personal property is in a used condition, having been leased
by the Buyer in the exercise of its rights under a lease. The Seller in neither
a manufacturer nor distributor of, nor dealer or merchant in, said personal
property.
THE SELLER MAKES NO WARRANTY OF TITLE OR THAT SAID PROPERTY IS FREE OF LIENS OR
CLAIMS IN FAVOR OF OTHERS, AND MAKES NO WARRANTY OF MERCHANTABILITY IN RESPECT
TO SAID PERSONAL PROPERTY, WHICH PROPERLY IS SOLD IN AN "AS IS, WHERE IS"
CONDITION, WITH ALL FAULTS. BY ACCEPTANCE OF DELIVERY OF SAID PROPERTY, THE
BUYER AFFIRMS THAT IT HAS NOT RELIED ON THE SELLER'S SKILL OR JUDGMENT TO SELECT
OR FURNISH SAID PROPERTY FOR ANY PARTICULAR PURPOSE, AND THAT THE SELLER MAKES
NO WARRANTY THAT SAID PROPERTY IS FIT FOR ANY PARTICULAR PURPOSE AND THAT THERE
ARE NO REPRESENTATIONS OR WARRANTIES, EXPRESSED, IMPLIED OR STATUTORY, THAT
EXTEND BEYOND THE DESCRIPTION OF SAID PROPERTY ABOVE SET FORTH.
This is a final and exclusive expression of the agreement of the Seller and the
Buyer and no course of dealing or usage of trade or course of performance shall
be relevant to explain or supplement any term expressed in this agreement.
By acceptance of delivery of said property, the Buyer acknowledges that the
Buyer has either examined said property as fully as desired, or has been given
the opportunity for such examination and has been given the opportunity for such
examination and has refused to make such examination.
IN WITNESS WHEREOF, Seller has executed this instrument this day of____________.
CAPTEC FINANCIAL GROUP, INC.
24 Frank Lloyd Wright Drive
P.O. Box 544
Ann Arbor, Michigan 48106-0544
By: _____________________
Its: _____________________
21
<PAGE> 380
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: APPENDIX
Sub-Section: II.G.2.b - Lease Renewal Agreement
- --------------------------------------------------------------------------------
LEASE RENEWAL AGREEMENT
-----------------------
This agreement is executed pursuant to Lease Agreement No. ________ dated ____,
199_ (the "Lease Agreement"). Lessor and Lessee hereby agree that, for the
purposes of extending the Basic Term of the Lease Agreement, the terms of the
Lease Agreement shall be amended as follows:
5. BASIC TERM: _______ (_) months commencing on________________ and ending on
_________.
7. BASIC RENT: ________________ (_) payments of$_________ (plus applicable
sales/use tax) payable monthly on the ____________________ (_) day of each
successive month commencing ________________________. Followed by __________ (_)
payments of $_________ (plus applicable sales/use tax) payable monthly on the
____________________ (_ ) day of each successive month commencing______________.
In all other respects, the terms and conditions of the Lease Agreement and the
Equipment Schedule shall remain the same and continue to be in effect.
LESSEE HEREBY ACKNOWLEDGES RECEIPT OF A TRUE COPY OF THIS AGREEMENT.
LESSOR: LESSEE:
CAPTEC FINANCIAL GROUP
------------------------------
By: By:
------------------------- ---------------------------
(Signature) (Signature)
Name: Name:
----------------------- --------------------------
(Print Name & Title)
Date: Date:
------------------------ -------------------------
22
<PAGE> 381
EXHIBITS
1
<PAGE> 382
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: EXHIBITS
Sub-Section: I.F.1 - Credit Application Form
- --------------------------------------------------------------------------------
2
<PAGE> 383
24 Frank Lloyd Wright Drive 800-522-7832
Lobby L. 4th Floor [CAPTEC FINANCIAL GROUP LOGO] 313-994-5505
P.O. Box 544
Ann Arbor, MI 48106-0544
SALESPERSON ___________ LEASE APPLICATION DATE _______________
COMPANY NAME ___________________________________________________________________
ADDRESS ________________________________________________________________________
City County State Zip
PHONE _____________________ CONTACT ___________________________________________
ADDRESS OF INSTALLATION: SAME ____ OTHER ______________________________________
TIME IN BUSINESS ______ TYPE OF BUSINESS _______________________________________
CIRCLE ONE: Corporation Partnership Proprietorship
================================================================================
GUARANTOR
- ------------------- ----------------------- -------------------------
NAME NAME NAME
- ------------------- ----------------------- -------------------------
TITLE TITLE TITLE
- ------------------- ----------------------- -------------------------
HOME ADDRESS HOME ADDRESS HOME ADDRESS
- ------------------- ----------------------- -------------------------
- ------------------- ----------------------- -------------------------
- ------------------- ----------------------- -------------------------
S.S# S.S# S.S#
- ------------------- ----------------------- -------------------------
PHONE PHONE PHONE
** IF LESS THAN ONE YEAR AT THIS ADDRESS, PLEASE ALSO INCLUDE PREVIOUS ADDRESS.
================================================================================
BANK REFERENCES
BANK BRANCH/LOCATION PHONE ACCOUNT# OFFICERS CH SV LN
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
TRADE REFERENCES
FIRM CONTACT CITY/STATE PHONE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
EQUIPMENT
VENDORS______________________ PHONE_________________ SALESPERSON________________
ADDRESS ________________________________________________________________________
EQUIPMENT DESCRIPTION (INCLUDE MODEL AND SERIAL NUMBERS WHEN AVAILABLE):
____________________________________ COST ___________ TAX _______________
____________________________________ TOTAL ___________ CUST. DWNPMT ______
____________________________________ TERM ____________ RATE ______________
____________________________________ # ADVANCE PMTS ______________________
<PAGE> 384
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: EXHIBITS
Sub-Section: II.B.2.a - Delinquency Report
- --------------------------------------------------------------------------------
3
<PAGE> 385
Collection Reports - 25
- --------------------------------------------------------------------------------
Collection Report Menu
- --------------------------------------------------------------------------------
DELINQUENCY REPORT
PURPOSE
This report lists past-due contracts, sorting them by delinquency status
(number of days past due) and by number of days since a payment has been
made.
Characteristics
Frequency Upon request.
Generation This report is selected from the Collection
Report Menu.
Format The contracts are listed in numerical order.
Examples of headings printed on the report
are as follows:
"PAST DUE OVER 90 DAYS
LAST PAYMENT OVER 90 DAYS AGO"
"PAST DUE OVER 90 DAYS
LAST PAYMENT 61-90 DAYS AGO"
"PAST DUE 61-90 DAYS
LAST PAYMENT OVER 90 DAYS AGO"
Fields
CONTRACT NUMBER The contract number within the lessor.
CUSTOMER NAME The customer's name.
PAST DUE The total amount past due.
- --------------------------------------------------------------------------------
Info-Lease(R) Report Guide Rev VIII
Decision Systems, Inc. 04/1989
<PAGE> 386
26 - Collection Reports
- --------------------------------------------------------------------------------
COLLECTION REPORT MENU
- --------------------------------------------------------------------------------
Delinquency Report cont....
RENTAL PAYMENT The scheduled payment amount.
LAST PAYMENT DATE The date of the last payment. This could be
either a default or manually entered date.
NEXT DUE DATE The due date of the next payment.
BOOK EXPOSURE The book exposure is calculated as follows:
Net Investment
+ Unearned ITC
-----------------
= Book Exposure
See Appendix 2 - 1 for net investment
calculation.
Note: The Book Exposure is printed if the
contract is over 60 days past due and
the last payment was over 60 days ago
(Delinquency Report only).
BALANCE REMAINING The contract balance remaining.
This is printed if the contract is past-due
less than or equal to 60 days, or the last
payment was less than or equal to 60 days
ago.
TOTALS Totals are printed for PAST DUE and BALANCE
REMAINING if the contract is past-due less
than or equal to 60 days, or the last payment
was less than or equal to 60 days ago. They
are also printed for RENTAL PAYMENT.
Totals are printed for PAST DUE and BOOK
EXPOSURE if the contract is over 60 days
past-due and the last payment was over 60
days ago. They are also printed for RENTAL
PAYMENT.
NUMBER OF CONTRACTS The total contracts within their past-due and
last payment date categories.
- --------------------------------------------------------------------------------
Info-Lease(R) Report Guide Rev VIII
Decision Systems, Inc. 04/1989
<PAGE> 387
Collection Reports - 27
DELINQUENCY.RPT INFO-LEASE TEST SYSTEM PAGE 5
03/10/1989 DELINQUENCY REPORT
AS OF MARCH 10, 1989
PAST DUE 3-30 DAYS
LAST PAYMENT 1-30 DAYS AGO
<TABLE>
<CAPTION>
RENTAL LAST NEXT BALANCE
CONTRACT NUMBER CUSTOMER NAME PAST DUE PAYMENT PAYMENT DATE DUE DATE REMAINING
- --------------- ------------- -------- ------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
001-0000009-000 SUMMIT DESIGN COMPANY 21,323.70 21,323.70 02/27/1989 03/01/1989 725,005.80
001-0000009-001 SUMMIT DESIGN COMPANY 5,786.46 5,786.46 02/27/1989 03/01/1989 219,885.48
001-0000009-002 SUMMIT DESIGN COMPANY 6,817.73 6,817.73 02/27/1989 03/01/1989 299,980.12
001-0000009-003 SUMMIT DESIGN COMPANY 5,141.76 5,141.76 02/27/1989 03/01/1989 241,662.72
001-0000009-004 SUMMIT DESIGN COMPANY 4,595.84 4,595.84 02/27/1989 03/01/1989 229,792.00
001-0000009-005 SUMMIT DESIGN COMPANY 6,596.87 6,596.87 02/27/1989 03/01/1989 349,634.11
001-0000009-006 SUMMIT DESIGN COMPANY 8,417.20 8,417.20 02/27/1989 03/01/1989 454,528.80
001-0000030-000 COLLINS BUILDING & DEVELOPMENT 1,248.27 1,248.27 02/22/1989 03/01/1989 21,220.59
001-0000030-001 COLLINS BUILDING & DEVELOPMENT 506.12 506.12 02/22/1989 03/01/1989 8,604.04
001-0000088-016 SETHE COMPANY 4,293.30 4,293.30 02/06/1989 03/01/1989 90,159.30
001-0000098-000 MILTON INC. 6,357.95 6,357.95 02/03/1989 03/01/1989 95,369.25
001-0000098-001 MILTON INC. 430.32 430.32 02/03/1989 03/01/1989 6,454.80
001-0000098-002 MILTON INC. 539.15 539.15 02/03/1989 03/01/1989 10,243.85
001-0000098-003 MILTON INC. 132.73 132.73 02/03/1989 03/01/1989 2,787.33
001-0000151-000 SOUTH ORTHOPEDIC SURGERY 859.56 859.56 02/21/1989 03/01/1989 29,225.04
001-0000192-000 TATES, D HERMAN 1,104.31 1,104.31 02/23/1989 03/01/1989 8,834.48
001-0000204-000 CLARK COMPANY 1,126.84 1,126.84 02/06/1989 03/01/1989 28,171.00
001-0000277-000 ROUNDLAKE LUMBER & MOLDING CO 3,923.37 3,923.37 02/23/1989 03/01/1989 176,551.65
001-0000277-001 ROUNDLAKE LUMBER & MOLDING CO 340.23 340.23 02/23/1989 03/01/1989 17,011.50
001-0000277-002 ROUNDLAKE LUMBER & MOLDING CO 827.27 827.27 02/23/1989 03/01/1989 47,154.39
001-0000311-002 A-PLUS CHEMICAL CO., INC. 625.82 625.82 02/06/1989 03/01/1989 36,297.56
001-0000398-000 CELLWAY MEDICAL CLINIC, LTD. 9,136.88 9,136.88 02/02/1989 03/01/1989 529,939.04
001-0000034-000 H & L FAST PRINT 641.66 641.66 03/01/1989 03/01/1989 19,249.80
001-0000034-001 H & L FAST PRINT 395.33 395.33 03/01/1989 03/01/1989 13,045.89
001-0000051-001 DEHLER ASSOCIATES INC 1,156.38 1,156.38 03/03/1989 03/01/1989 21,971.22
001-0000051-002 DEHLER ASSOCIATES INC 79.27 79.27 03/03/1989 03/01/1989 1,823.21
001-0000051-004 DEHLER ASSOCIATES INC 578.78 578.78 03/03/1989 03/01/1989 10,418.04
001-0000094-000 QUINN INDUSTRIES 1,508.65 1,508.65 03/22/1989 03/01/1989 3,017.33
001-0000094-001 QUINN INDUSTRIES 388.97 388.99 03/22/1989 03/01/1989 4,667.86
001-0000094-002 QUINN INDUSTRIES 53.97 53.97 03/22/1989 03/01/1989 701.61
001-0000094-003 QUINN INDUSTRIES 296.21 296.21 03/22/1989 03/01/1989 4,739.36
001-0000094-004 QUINN INDUSTRIES 114.35 114.35 03/22/1989 03/01/1989 2,401.35
001-0000094-005 QUINN INDUSTRIES 284.70 284.70 03/22/1989 03/01/1989 6,832.80
001-0000094-006 QUINN INDUSTRIES 989.78 989.79 03/22/1989 03/01/1989 7,918.31
001-0000129-000 BLOCKE BUILDING CORPORATION 304.88 304.88 03/10/1989 03/01/1989 8,536.64
001-0000370-001 SET MANUFACTURING CORPORATION 1,726.41 1,734.59 03/20/1989 03/01/1989 102,332.63
001-0000379-001 BILL D. TULL, M.D., P.C. 189.42 473.54 03/01/1989 03/01/1989 18,657.48
001-0000398-003 CELLWAY MEDICAL CLINIC, LTD. 112.77 393.68 03/01/1989 03/01/1989 22,552.53
001-0000398-004 CELLWAY MEDICAL CLINIC, LTD. 488.45 749.05 03/01/1989 03/01/1989 44,682.40
001-0000449-000 TYSON INDUSTRIES 449.20 23,100.55 03/01/1989 03/01/1989 69,750.85
---------- ---------- ----------
TOTALS: 99,890.86 123,376.08 3,991,812.16
NUBER OF CONTRACTS: 40
</TABLE>
<PAGE> 388
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
Section: EXHIBITS
Sub-Section: II.B.2.b - Summary Past Due Report
- --------------------------------------------------------------------------------
4
<PAGE> 389
Collection Reports - 13
- --------------------------------------------------------------------------------
COLLECTION REPORT MENU
- --------------------------------------------------------------------------------
SUMMARY PAST DUE REPORT
PURPOSE
The Summary Past Due Report lists past-due contracts by aging category,
including ones with only miscellaneous amounts past due. This report also
provides a summmary by aging category of the receivable balances for contracts.
CHARACTERISTICS
Frequency This is considered a period-end report, but may be
requested at any time.
Generation This report is selected from the Collection Report
Menu.
In addition to the standard sort options, you are
given the option to have the residual added to
the CBR on the report.
Format The left side of the report displays the past-
due payment aging fields, and the right side lists
the contract balance remaining and any receivable
writedown that may have been entered. Grand totals
of all fields are printed at the end of the
report. The contract information is listed in
numerical order. Following each primary page
break, a Portfolio Percent Report will be printed
that summarizes the past-due contracts as a
percentage of the entire portfolio. A summary page
follows the report, which shows general ledger
totals.
- --------------------------------------------------------------------------------
Info-Lease(R) Report Guide Rev VIII
Decision Systems, Inc. 04/1989
<PAGE> 390
14 - Collection Reports
- --------------------------------------------------------------------------------
COLLECTION REPORT MENU
- --------------------------------------------------------------------------------
SUMMARY PAST DUE REPORT CONT....
FIELDS
CONTRACT NUMBER The contract number within the lessor.
CUSTOMER NAME The customer's name.
PAYMENTS PAST DUE BY The list of past-due amounts in their respective
AGING CATEGORIES aging categories.
LATE CHRGS The total late charges past due.
INTEREST The total interest past due.
MISC The total miscellaneous charges past due.
TAXES The total taxes past due.
TOT PAST DUE The total contract amount past due.
CONTRACT BALANCE The receivable balance appears in the aging
REMAINING/WRITEDOWN category corresponding to the oldest payment.
Ex: A contract has three payments past due as
follows:
01-30 $775.00
31-60 $775.00
61-90 $775.00
The contract balance remaining is $15,500, and
will be printed in the 61-90 aging
classification.
- --------------------------------------------------------------------------------
Info-Lease(R) Report Guide Rev VIII
Decision Systems, Inc. 04/1989
<PAGE> 391
Collection Reports - 15
- --------------------------------------------------------------------------------
COLLECTION REPORT MENU
- --------------------------------------------------------------------------------
SUMMARY PAST DUE REPORT CONT....
CONTRACT BALANCE If there has been a writedown to the receivable,
REMAINING/WRITEDOWN the writedown amount is printed as a negative
CONT.... amount below the receivable balance.
Note: The Renewal CBR or "OPEN RNWL" will be
printed if the original CBR goes to zero
and the contract has been renewed (Renewal
Module only).
SUMMARY PAGES
Following each primary page break, a Portfolio Percent Report will be
printed that summarizes the past-due contracts as a percentage of the
entire portfolio.
The last page of the report prints a miscellaneous general ledger
summary. The payments to each individual account are reported along with
the identifying general ledger account number and description.
- --------------------------------------------------------------------------------
Info-Lease(R) Report Guide Rev VIII
Decision Systems, Inc. 04/1989
<PAGE> 392
Collection Reports - 17
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SUMMARY.PASTDUE.RPT INFO-LEASE TEST SYSTEM PAGE 8
03/10/1989 SUMMARY PAST DUE REPORT FOR MARCH 10, 1989
PAYMENTS PAST DUE BY AGING CATEGORY CBR + RESIDUAL/WRITEDOWN
CONTRACT NUMBER 3-30 31-60 61-90 91-OVER LATE CHRGS GROUPED ACCORDING TO AGING CATEGORY
CUSTOMER NAME INTEREST MISC TAXES TOT PAST DUE 3-30 31-60 61-90 91-OVER
- --------------- -------- -------- ----- ------- ------------- ---- ----- ----- -------
001-0000222-006
FILING FEES 5.00 0.00
001-0000239-000 0.00 0.00 0.00 0.00 0.00
WILLIAMS TRACTOR CO 0.00 86.54
JANUARY LATE CHARGE 86.54 0.00
001-0000241-000 0.00 0.00 0.00 0.00 0.00
WILKINSONS DEVELOP & CONSTRC 0.00 123.45
JANUARY LATE CHARGE 123.45 0.00
001-0000247-000 6,007.21 6,007.21 6,007.21 24,028.84 0.00 258,310.03
HUELDON ASSOCIATES 0.00 0.00 42,050.47
001-0000247-001 523.33 523.33 523.33 2,093.32 0.00 25,119.84
HUELDON ASSOCIATES 0.00 0.00 3,663.31
001-0000254-000 0.00 0.00 0.00 0.00 0.00
WILSON TRANSPORTATION 0.00 2,388.06
LEASE PAYMENT FROM
12-1 THRU 1-1 745.76 50.26
LEASE PAYMENT FROM
1-1 THRU 2-1 745.76 50.26
LEASE PAYMENT FROM
2-1 THRU 3-1 745.76 50.26
001-0000277-000 3,923.37 0.00 0.00 0.00 0.00 186,153.65
ROUNDLAKE LUMBER A MOLDING CO 0.00 0.00 3,923.37
001-0000277-001 340.23 0.00 0.00 0.00 0.00 17,011.50
ROUNDLAKE LUMBER & HOLDING CO 0.00 0.00 340.23
001-0000277-002 827.27 0.00 0.00 0.00 0.00 47,154.39
ROUNDLAKE LUMBER S HOLDING CO 0.00 830.27
FILING FEES 3.00 0.00
001-0000303-000 1,761.09 1,761.09 0.00 0.00 0.00 88,054.50
SMITH MOTOR CAR COMPANY, LTD 0.00 3,747.59
DECEMBER LATE CHARGE 111.82 0.00
JANUARY LATE CHARGE 113.59 0.00
001-0000311-002 625.82 0.00 0.00 0.00 0.00 36,297.56
A-PLUS CHEMICAL CO., INC. 0.00 41.93 667.75
001-0000336-005 912.99 30.43 0.00 0.00 0.00 53,896.84
REST LINE REFRIGERATION CO INC 0.00 0.00 943.42
001-0000370-001 1,726.41 0.00 0.00 0.00 0.00 106,413.63
LOW MANUFACTURING, INC. 0.00 0.00 1,726.41
001-0000379-001 189.42 0.00 0.00 0.00 0.00 18,658.48
BILL A. TULM, M.D., P.C. 0.00 0.00 189.42
</TABLE>
<PAGE> 393
Collection Reports - 18
<TABLE>
<CAPTION>
SUMMARY.PASTDUE.RPT INFO-LEASE TEST SYSTEM PAGE 13
03/10/1989 SUMMARY PAST DUE REPORT FOR MARCH 10, 1989
PORTFOLIO PERCENT
CBR
WITH
PAST DUE DAYS % PORTFOLIO RESIDUAL NO. OF CONTRACTS
- ------------- ----------- ----------- ----------------
<S> <C> <C> <C>
30 TO 30 9,580.60 1
31 TO 60 20.68 44,589,332.07 27
61 TO 90 9.28 20,009,695.06 24
OVER 90 69.23 149,260,696.01 42
===== ============== ====
TOTAL 99.20 213,869,303.74 94
TOTAL CBR BALANCE WITH RESIDUAL 215,590,990.52
TOTAL NO. OF CONTRACTS............ 135
</TABLE>
<PAGE> 394
Collection Reports - 19
<TABLE>
<CAPTION>
SUMMARY.PASTDUE.RPT INFO-LEASE TEST SYSTEM PAGE 12
03/10/1989 SUMMARY PAST DUE REPORT FOR MARCH 10, 1989
MISCELLANEOUS PASTDUE SUMMARY
CL ACCOUNT NUMBER DESCRIPTION AMOUNT
- ----------------- ----------- ------
<S> <C> <C>
LLL.3501.BBB.RR.00 Other Insurance Fees 400.00
LLL.3501.BBB.RR.00 Setup Charges 15.50
LLL.2095.BBB.RR.00 Property Tax 333.33
LLL.3501.BBB.RR.00 Insurance Fees 46.50
UNKNOWN 15.50
0022 UNKNOWN 138.29
LLL.3502.BBB.RR.00 Service Fees 200.00
</TABLE>
TOTAL MISCELLANEOUS PAST DUE 1,149.12
<PAGE> 395
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: EXHIBITS
Sub-Section: III.D.5(a) - Equipment Lease Agreement
- --------------------------------------------------------------------------------
5
<PAGE> 396
24 Frank Lloyd Wright Drive
Captec Lobby L, 4th Floor LEASE AGREEMENT
P.O. Box 544
Ann Arbor, Michigan 48106-0544
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
QTY. DESCRIPTION OF LEASED EQUIPMENT MODEL NO. SERIAL NO.
- ----------------------------------------------------------------------------------------------------------------
NEITHER VENDOR
NOR ANY SALESMAN
IS AN AGENT OF
LESSOR NOR ARE
THEY AUTHORIZED TO
WAIVE OR ALTER THE
TERMS OF THIS
LEASE. THEIR
REPRESENTATIONS
SHALL IN NO WAY
AFFECT LESSEE OR
LESSOR'S RIGHTS OR
OBLIGATIONS AS
HEREIN SET FORTH.
- ----------------------------------------------------------------------------------------------------------------
EQUIPMENT LOCATION: (If other than Billing Address of Lessee)
Street Address City County State Zip
- ----------------------------------------------------------------------------------------------------------------
- -------------------------------------------------- ----------------------------------------------------------
RENTAL PAYMENT SCHEDULE ADVANCE PAYMENT
Check for this amount must accompany Lease Application
BASE LEASE TERM ----------------------------------------------------------
RENTAL Commencement Date________________________
TERM
________ Payments of $_____per [ ] month [ ] 1st and last ____________
[ ] quarter $__________________________ [ ] Other____________________
Followed By _______________
______ ________ Payments of $_____per [ ] month Inclusive of applicable tax
[ ] quarter
[ ] Months Inclusive/Exclusive of applicable tax
[ ] Quarters
- -------------------------------------------------- ----------------------------------------------------------
================================================================================================================
1. PURCHASE AND ACCEPTANCE: Lessee requests Lessor to purchase the Equipment from a supplier (the "Supplier")
and arrange for delivery to Lessee, which shall be deemed complete upon the Commencement Date. Lessor shall have
no responsibility for delay or failure of Supplier to fill the order for the Equipment.
- ----------------------------------------------------------------------------------------------------------------
2. DISCLAIMER OF WARRANTIES AND CLAIMS; LIMITATION OF REMEDIES. THERE ARE NO WARRANTIES BY OR ON
BEHALF OF LESSOR. Lessee acknowledges and agrees by his signature below as follows:
(a) LESSOR MAKES NO WARRANTIES EITHER EXPRESS OR IMPLIED AS TO THE CONDITION OF THE EQUIPMENT. ITS
MERCHANTABILITY, ITS FITNESS OR SUITABILITY FOR ANY PARTICULAR PURPOSE, ITS DESIGN, ITS CAPACITY, ITS
QUALITY, OR WITH RESPECT TO ANY CHARACTERISTICS OF THE EQUIPMENT;
(b) Lessee has fully inspected the Equipment which it has requested Lessor to acquire from Lessee's
selected Supplier and Lease to Lessee and the Equipment is in good condition and to Lessee's complete
satisfaction and Lessee hereby approves the contract by which Lessor has acquired the Equipment;
(c) Lessee leases the Equipment "as is" and with all faults;
(d) Lessee specifically acknowledges that the Equipment is leased to Lessee solely for commercial or
business purposes and not for personal, family, household, or agricultural purposes;
(e) if the Equipment is not property installed, does not operate as represented or warranted by the
Supplier or manufacturer, or is unsatisfactory for any reason, regardless of cause or consequence.
Lessee's only remedy, if any, shall be against the Supplier or manufacturer of the Equipment and not
against Lessor;
(f) Provided Lessee is not in default under this Lease, Lessor assigns to Lessee any warranties made
by the Supplier or the manufacturer of the Equipment; and
(g) LESSEE SHALL HAVE NO REMEDY FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES AGAINST LESSOR: and
(h) NO DEFECT, DAMAGE, OR UNFITNESS OF THE EQUIPMENT FOR ANY PURPOSE SHALL RELIEVE LESSEE OF THE
OBLIGATION TO PAY RENT OR RELIEVE LESSEE OF ANY OTHER OBLIGATION UNDER THIS LEASE.
-------------------
The parties have specifically negotiated and agreed to the foregoing paragraph. INITIALS
- ----------------------------------------------------------------------------------------------------------------
3. STATUTORY FINANCE LEASE. Lessee agrees and acknowledges that it is the intent of both parties to this Lease
that it qualify as a statutory finance lease under Article 2A of the Uniform Commercial Code. Lessee
acknowledges and agrees that Lessee has selected both: (1) the Equipment: and (2) the Supplier from whom Lessor
is to purchase the Equipment. Lessee acknowledges that Lessor has not participated in any way in Lessee's
selection of the Equipment or of the Supplier, and Lessor has not selected, manufactured, or supplied the
Equipment. LESSEE IS ADVISED THAT IT MAY HAVE RIGHTS UNDER THE CONTRACT EVIDENCING THE LESSOR'S PURCHASE OF THE
EQUIPMENT FROM THE SUPPLIER CHOSEN BY LESSEE AND THAT LESSEE SHOULD CONTACT THE SUPPLIER OF THE EQUIPMENT FOR A
DESCRIPTION OF ANY SUCH RIGHTS.
THE ADDITIONAL PROVISIONS ON THE REVERSE SIDE HEREOF ARE INCLUDED IN, AND MADE A
PART OF, THIS LEASE. THIS IS A NON-CANCELABLE LEASE FOR THE TERM INDICATED ABOVE.
LESSOR LESSEE
- ------------------------------------------------------------ ------------------------------------------------
ACCEPTED:
--------------------------------------------------------- --------------------------------------------
LESSOR LESSEE (COMPLETE LEGAL NAME)
DATE: ___________________________________________________ ADDRESS ____________________________________
CITY ___________COUNTY ______ST ___ZIP______
BY:______________________________________________________
AUTHORIZED SIGNATURE PHONE (___)_____________ DATE_______________
BY: X_______________________________________
LEASE NO:________________________________________________ AUTHORIZED SIGNATURE
- ------------------------------------------------------------ ------------------------------------------------
</TABLE>
<PAGE> 397
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: EXHIBITS
Sub-Section: III.D.5(b) - Certificate of Delivery Acceptance
- --------------------------------------------------------------------------------
6
<PAGE> 398
24 Frank Lloyd Wright Drive
Captec Lobby L, 4th Floor LEASE AGREEMENT
P.O. Box 544
Ann Arbor, Michigan 48106-0544
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
QTY. DESCRIPTION OF LEASED EQUIPMENT MODEL NO. SERIAL NO.
- ----------------------------------------------------------------------------------------------------------------
NEITHER VENDOR
NOR ANY SALESMAN
IS AN AGENT OF
LESSOR NOR ARE
THEY AUTHORIZED TO
WAIVE OR ALTER THE
TERMS OF THIS
LEASE. THEIR
REPRESENTATIONS
SHALL IN NO WAY
AFFECT LESSEE OR
LESSOR'S RIGHTS OR
OBLIGATIONS AS
HEREIN SET FORTH.
- ----------------------------------------------------------------------------------------------------------------
EQUIPMENT LOCATION: (If other than Billing Address of Lessee)
Street Address City County State Zip
- ----------------------------------------------------------------------------------------------------------------
- -------------------------------------------------- ----------------------------------------------------------
RENTAL PAYMENT SCHEDULE ADVANCE PAYMENT
Check for this amount must accompany Lease Application
BASE LEASE ----------------------------------------------------------
RENTAL Commencement Date________________________
TERM
________ Payments of $_____per [ ] month [ ] 1st and last ____________
[ ] quarter $__________________________ [ ] Other____________________
Followed By _______________
______ ________ Payments of $_____per [ ] month Inclusive of applicable tax
[ ] quarter
[ ] Months (Includes Advance Rentals)
[ ] Quarters
- -------------------------------------------------- ----------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
LESSEE'S CERTIFICATE OF DELIVERY ACCEPTANCE
We are pleased to confirm to you as follows:
1. All of the equipment described in the attached Lease has been delivered to and received by the
undersigned Lessee; that all installation of other work necessary prior to the use thereof has been
completed; that said equipment has been examined and/or tested and is in good operating order and
condition and is in all respects satisfactory to the undersigned and as represented, and that said
equipment has been accepted by the undersigned and complies with all terms of the attached Lease.
Consequently, Lessor is hereby authorized to pay for the leased equipment and commence said lease.
2. In the future, in the event that said equipment fails to perform as expected or represented Lessee
will continue to honor the attached Lease by continuing to make monthly payments in the normal course
of business and will look solely to the seller or manufacturer for the performance of all covenants
and warranties. In addition, Lessee will indemnify Lessor and hold them harmless from any
nonperformance of the aforementioned equipment, hereinafter referred to as "Accepted Items".
RENT PAYMENT DATE: _______ DAY OF EACH MONTH.
(If the Acceptance Date is not a rent payment date, interim rent will be added to the first rent
payment as provided in Section 4 of the Lease.)
3. LESSEE'S ASSURANCES. Lessee represents, warrants and agrees as follows:
(a) The representations and warranties of Lessee in Section 13 of the Agreement are true and correct
on and as of the below Acceptance Date as though made as of that date. The representations and
warranties of any guarantor of Lessee's obligations under the Lease contained in the related guaranty
are similarly true and correct.
(b) Lessee has received, inspected and approved the Accepted Items. They are in good working order and
conform to the Lease and all applicable specifications. Lessee will not terminate, repudiate or modify
the Lease as to the Accepted Items or reject or revoke its acceptance of the Accepted Items for any
reason whatsoever. The above information concerning the Accepted Items is true, correct and complete.
The Accepted Items are being placed in service on the Acceptance Date, which, unless Lessor has
consented otherwise, is the date on which Lessee is signing this Certificate of Acceptance.
(c) No Event of Default under the Lease has occurred. There has been no adverse change in the business
or financial condition of Lessee or any such guarantor since the date of the most recent financial
statements submitted to Lessor before Lessor signed the Lease.
4. WARRANTY AND RELATED MATTERS. Lessor has not selected, manufactured or supplied the Accepted Items.
Lessor is acquiring the Accepted Items in connection with the Lease. Lessee has received a copy of and
has approved the purchase order(s) or contracts(s) for the Accepted Items. Lessee acknowledges that it
has selected the supplier(s) of the Accepted Items. Lessor hereby informs Lessee that Lessee may have
rights under the purchase order(s) or contract(s) for the Accepted Items and advises Lessee to contact
such supplier(s) for a description of any such rights.
This certificate shall not be considered to alter, construe. or amend the terms of the aforesaid
Agreement(s).
- ----------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------ ------------------------------------------------
--------------------------------------------------------- --------------------------------------------
LESSEE (COMPLETE LEGAL NAME) SUPPLIER
BILLING ADDRESS _________________________________________ ADDRESS ____________________________________
CITY ___________COUNTY ______ST ___ZIP___________________ CITY ___________COUNTY ______ST ___ZIP______
PHONE (___)_____________ ACCEPTANCE DATE_________________ PHONE (___)_____________ DATE_______________
BY: X____________________________________________________ CONTACT_____________________________________
AUTHORIZED SIGNATURE
LEASE NO:________________________________________________
- ------------------------------------------------------------ ------------------------------------------------
</TABLE>
<PAGE> 399
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: EXHIBITS
Sub-Section: IV.C - Real Estate Document Checklist
- --------------------------------------------------------------------------------
7
<PAGE> 400
MORTGAGE CHECKLIST
Lender: _______________________________________________________
Borrower: _______________________________________________________
Restaurant: _______________________________________________________
Property Location: _______________________________________________________
Closing Date: _______________________________________________________
Funding Account: _______________________________________________________
DOCUMENTATION REQUIREMENTS
Real Estate Document Requirements
<TABLE>
<CAPTION>
Doc's Date Received Person
PRELIMINARY INFORMATION Sent Due Date Responsible Comments
Checklist Created 7/5/95
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------
1 Proposal Letter/Commitment Fee SalesRep
-------------------------------------------------------------------------------------------
2 Commitment Letter/2nd Commit. Fee LPerkins
-------------------------------------------------------------------------------------------
PRELIMINARY SITE INFORMATION
-------------------------------------------------------------------------------------------
3 Site Inspection SalesRep MAXIMUM OF ACTUAL COSTS: $1,000/SITE
-------------------------------------------------------------------------------------------
4 Site Plan Customer
-------------------------------------------------------------------------------------------
5 City Map Customer
-------------------------------------------------------------------------------------------
6 Aerial Photographs Customer
------------------------------------------------------------------------------------------
7 Site Photographs Customer
------------------------------------------------------------------------------------------
8 Demographic Study Customer
------------------------------------------------------------------------------------------
9 Competition Study Customer
------------------------------------------------------------------------------------------
BORROWER OPERATIONS INFORMATION
------------------------------------------------------------------------------------------
10 Franchise Agreement Customer
-----------------------------------------------------------------------------------------
11 Area Development Agreement Customer
-----------------------------------------------------------------------------------------
12 Franchise Site Approval Customer
-----------------------------------------------------------------------------------------
BORROWER ORGANIZATIONAL INFORMATION
-----------------------------------------------------------------------------------------
13 Articles of Incorporation LPerkins
-----------------------------------------------------------------------------------------
14 Bylaws (Certified) Customer
-----------------------------------------------------------------------------------------
15 Good Standing Certificate LPerkins
-----------------------------------------------------------------------------------------
16 Qualification as Foreign Corporation LPerkins
-----------------------------------------------------------------------------------------
17 Incumbency Certificate Customer
-----------------------------------------------------------------------------------------
18 Resolutions Customer
-----------------------------------------------------------------------------------------
GUARANTOR(S) ORGANIZATION INFORMATION
-----------------------------------------------------------------------------------------
19 Articles of Incorporation LPerkins
-----------------------------------------------------------------------------------------
20 Bylaws (Certified) Customer
-----------------------------------------------------------------------------------------
21 Good Standing Certificate LPerkins
-----------------------------------------------------------------------------------------
22 Qualification as Foreign Corporation LPerkins
-----------------------------------------------------------------------------------------
TITLE INFORMATIOM
-----------------------------------------------------------------------------------------
23 Title Commitment LPerkins $2,000/$1000,000 OF VALUE, AN
ADDITIONAL $1.00/$1,000 UP TO
$10,000,000
-----------------------------------------------------------------------------------------
24 Documents Noted as Exemptions LPerkins
-----------------------------------------------------------------------------------------
25 Survey LPerkins "AS BUILT" $2,500 TO $4,500 CAN
BE SELECTED BY CUST.SATIS. TO CFG
-----------------------------------------------------------------------------------------
26 Real Property Tax Bills Customer
-----------------------------------------------------------------------------------------
27 UCC Search Results LPerkins COMBINED WITH ITEM #29 COSTS WILL
BE APPROX. $200/$300
-----------------------------------------------------------------------------------------
28 Tax Lien Search Results LPerkins SEE ITEM #28
-----------------------------------------------------------------------------------------
29 Documents Required to Clear Title LPerkins
-----------------------------------------------------------------------------------------
SITE INFORMATION
30 Business Valuation Customer $1,300.00/site
-----------------------------------------------------------------------------------------
31 Environmental Report(s) Customer $2,700 TO $2,900 SELECTED BY CUST.
SATIS. TO CFG
-----------------------------------------------------------------------------------------
32 Zoning/Building Letter(s) Customer
-----------------------------------------------------------------------------------------
33 Certificate of Occupancy Customer
-----------------------------------------------------------------------------------------
34 Health Permits Customer
-----------------------------------------------------------------------------------------
35 Other Licenses Customer RETAIL
-----------------------------------------------------------------------------------------
INSURANCE INFORMATION
-----------------------------------------------------------------------------------------
36 Insurance Certificate Customer
-----------------------------------------------------------------------------------------
CLOSING INFORMATION
37 Mortgage MCPS
-----------------------------------------------------------------------------------------
38 Promissory Note MCPS
-----------------------------------------------------------------------------------------
39 Subordination Agreement MCPS
-----------------------------------------------------------------------------------------
40 Guaranty MCPS
-----------------------------------------------------------------------------------------
41 Certificate of Borrower MCPS
-----------------------------------------------------------------------------------------
42 Certificate of Guarantor MCPS
-----------------------------------------------------------------------------------------
43 Electronic Funds Transfer Auth. MCPS
-----------------------------------------------------------------------------------------
44 Franchisor Estoppel Letter MCPS
-----------------------------------------------------------------------------------------
45 UCC Financing Statement MCPS
-----------------------------------------------------------------------------------------
46 Title Policy LPerkins
-----------------------------------------------------------------------------------------
47 Title Affidavit (by Borrower) LPerkins
-----------------------------------------------------------------------------------------
48 Wiring Instructions Customer
-----------------------------------------------------------------------------------------
49 Closing Statement LPerkins
-----------------------------------------------------------------------------------------
50 Opinion of Counsel MCPS INCLUDED IN LEGAL BILL OF CFG
-----------------------------------------------------------------------------------------
51 Escrow Closing Letter MCPS
-----------------------------------------------------------------------------------------
52 UCC Financing Statement Customer
-----------------------------------------------------------------------------------------
53 Consent & Waiver (if Ground Lease) MCPS
</TABLE>
<PAGE> 401
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: EXHIBITS
Sub-Section: IV.D.7(b) - Make-Whole Pre-Payment Clause
- --------------------------------------------------------------------------------
8
<PAGE> 402
MAKE-WHOLE PRE-PAYMENT CLAUSE
Except as provided herein, Borrower may not prepay this Note during the
first and second Loan Years. Commencing with the third Loan Year and if no Event
of Default exists, Borrower may voluntarily prepay the entire unpaid Principal
Sum on any date on which a Monthly Installment is payable. Borrower must give
Lender at least thirty (30) days prior written notice of Borrower's intention to
prepay. Once given, such notice may not be withdrawn, and failure to prepay in
accordance with the notice shall be an Event of Default. The prepayment of the
Principal Sum shall be accompanied by a payment of all accrued and unpaid
interest and a premium for prepayment.
Borrower acknowledges that (i) Lender is entitled to receive an agreed
yield on the Loan and (ii) Lender may not realize such yield if the Principal
Sum is repaid prior to the Maturity Date. Accordingly, Lender shall not be
required to accept any tender of prepayment of the Principal Sum at any time
when the Reinvestment Rate is lower than the Stated Rate unless such tender also
includes a sum of money (the "Additional Sum") equal to the present value
computed at the Reinvestment Rate of the difference between a stream of monthly
payments necessary to amortize the Principal Balance of the Stated Rate and a
stream of monthly payments necessary to amortize the Principal Balance at the
Reinvestment Rate (the "Differential"). In the event the Differential is less
than zero no Additional Sum will be required.
For purposes hereof (a) the Stated Rate is ___________________________
(___%) percent, and (b) the Reinvestment Rate is the Yield on a United States
Treasury Note of a constant maturity rate maturing closest in time but prior to
the Maturity Date, as reported in THE WALL STREET JOURNAL on the fifth (5th)
business day preceding the prepayment date.
In addition to the Additional Sum, if any, every tender of prepayment of
the Principal Sum shall be accompanied by a payment equal to (x) all accrued but
unpaid interest and other charges to the date of prepayment and (y) an
administrative fee equal to one half of one percent (.05%) of the Principal Sum
being prepaid but not less than $1,000 (collectively "Other Charges").
If, by reason of an Event of Default, the unpaid balance of the
Principal Sum is accelerated, such acceleration shall be deemed to be a
prepayment and Borrower shall pay to Lender, in addition to all other sums due
as a result of the acceleration, any Additional Sum and Other Charges. In the
event of an acceleration in the first or second Loan Year, Borrower shall be
required to pay a prepayment premium equal to five (5%) percent of the unpaid
Principal Sum together with any Additional Sums and Other Charges.
If a partial prepayment of the Principal Sum occurs as a result of the
application by Lender of Taking Proceeds or Insurance Proceeds, as provided in
the Indenture no Additional Sum or Other Charges shall be payable and each
Monthly Installment thereafter shall be reduced to an amount which will amortize
the then unpaid Principal Sum at the Interest Rate over the then remaining
Number of Monthly Installments.
<PAGE> 403
EXHIBIT O
---------
<PAGE> 404
EXHIBIT P
---------
<PAGE> 405
================================================================================
CAPTEC NET LEASE REALTY, INC.,
[TENANT)
AND
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
----------------------------------------------------------------
SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
----------------------------------------------------------------
Dated:
Location:
RECORD AND RETURN TO:
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Attention: Charles J. Hamilton, Jr., Esq.
The premises described within this instrument are also known as Section
___, Block ___ and Lot ___ on the Official Tax Map of __________ County.
================================================================================
<PAGE> 406
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
-------------------------------------------------------
[Note: Change Lender to Prime Landlord form for
Sublease Transactions]
THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (this
"Agreement") is made and entered into as of the ____ day of ____________, 19__,
by and among (i) [TENANT], [ENTITY] ("Tenant"); (ii) CAPTEC NET LEASE REALTY,
INC., a Michigan Corporation ("Landlord"); and (iii) CS FIRST BOSTON MORTGAGE
CAPITAL CORP., a Delaware corporation ("Lender").
WITNESSETH:
-----------
WHEREAS, Lender is the holder of that certain mortgage/deed of trust,
dated _______________, 199 ("Mortgage/Deed of trust") encumbering that certain
parcel of real property and the improvements thereon, commonly known as the
_____________ located at____________________________ in Schedule 1 attached
hereto and incorporated herein by this reference (the "Property");
WHEREAS, Lender and Landlord are parties to the Mortgage/Deed of
Trust, pursuant to which Landlord financed the Property from Lender; and
WHEREAS, Landlord and Tenant are parties to that certain Lease, dated
______________, 199 (the "Lease"), pursuant to which Tenant leased the Property
from Landlord.
NOW, THEREFORE, in consideration for the mutual covenants and
agreements contained herein, the sufficiency of which is hereby acknowledged,
the parties hereto hereby agree as follows:
1. SUBORDINATION. The Lease and all of the terms, covenants and
provisions thereof and all rights, remedies and options of Tenant thereunder are
hereby made, and shall at all times continue to be, subject, junior and
subordinate in all respects to the Mortgage/Deed of Trust and to the lien
thereof and to all increases, renewals, modifications, spreaders,
consolidations, replacements and extensions thereof and to the rights of Lender
thereunder and to any and all sums secured thereby, with the same force and
effect as if the Mortgage/Deed of Trust and all other such instruments had been
executed, delivered and recorded prior to the execution of the Lease.
2. NON-DISTURBANCE. So long as (i) the term of the Lease shall have
commenced pursuant to the provisions thereof, (ii) Tenant shall be in possession
of the Property, (iii) the Lease shall be in full force and effect and (iv)
Tenant is not in
1
<PAGE> 407
default in the payment of rent or any other sums payable under the Lease or any
of the other terms, covenants or conditions of the Lease on Tenant's part to be
performed beyond any applicable grace or cure period provided in the Lease,
then: (a) Tenant's possession of the Property shall not be diminished or
interfered with by Lender or any third party purchaser; (b) the Lease shall not
be terminated or affected by the foreclosure of the Mortgage/Deed of Trust or
the Lender's exercise of any remedy provided for in the Mortgage/Deed of Trust;
and (c) in the event that Lender forecloses upon the Property, Lender shall
elect to preserve the Lease as a lease between Lender and Tenant in accordance
with the terms of this Agreement.
3. ATTORNMENT. In the event that Lender or any successors in interest
to Lender shall become the owner of the Property by reason of the foreclosure of
the Mortgage/Deed of Trust or the acceptance of a deed or assignment in lieu of
foreclosure or otherwise, then:
(a) Tenant shall be bound to Lender, and Lender shall be bound to
Tenant, under all of the terms, covenants and conditions of the Lease for the
balance of the term thereof remaining, and any extensions or renewals thereof
which may be effected in accordance with any option therefor contained in the
Lease, with the same force and effect as if Lender were the original landlord
under the Lease, except that Paragraph 3(b) below and the other provisions of
this Agreement shall modify the Lease, and Tenant does hereby attorn to Lender
as its landlord, said attornment to be effective and self-operative without the
execution of any further instruments; provided, however, that within ten (10)
days after receipt of written request therefor from Lender, Tenant will execute
and deliver to Lender any instrument or other documents reasonably requested by
Lender to confirm Tenant's attornment to Lender.
(b) Notwithstanding the foregoing, however, it is agreed that in no
event shall Lender:
(1) be liable for any act or omission of any prior landlord
(including Landlord);
(2) be obligated to cure any defaults of any prior landlord
(including Landlord) which occurred prior to the date that
Lender succeeded to the interest of such prior landlord
under the Lease; provided that from and after the date
Lender becomes owner of the Property, Lender shall be
obligated to cure any continuing non-monetary default of the
landlord under the Lease to the extent such default is
capable of being cured by Lender;
2
<PAGE> 408
(3) be subject to any offsets or defenses which Tenant may be
entitled to assert against any prior landlord (including
Landlord) with respect to events occurring prior to the date
Lender succeeded to Landlord's interest;
(4) be bound by any rent or other amounts paid by Tenant to any
prior landlord (including Landlord) more than one (1) month in
advance of the date that Lender succeeded to the interest of
such prior landlord under the Lease; or
(5) be bound by any amendment or modification of the Lease or any
supplemental agreement made without the written consent of
Lender.
(c) The terms of the Lease shall be further amended by (i)
substituting the provisions of the Mortgage/Deed of Trust with respect to the
disposition of any casualty insurance proceeds or condemnation awards, (ii)
removing any indemnity provision of whatever nature contained in the Lease
running from Landlord to Tenant, (iii) removing any offsets, claims or
counterclaims which shall have accrued to Tenant against Landlord prior to the
date on which Lender or its successor in interest shall have become the owner
of the Property and (iv) providing that Lender shall not be liable for any
security deposit or other monies not actually received by Lender.
4. AMENDMENTS. Tenant shall not, without the prior written consent of
Lender (a) enter into any agreement amending, modifying or terminating the
Lease, (b) prepay any of the rents, additional rents or other sums due under the
Lease for more than one (1) month in advance of the due date thereof, (c)
voluntarily surrender the Property or terminate the Lease without cause or
shorten the term thereof, or (d) assign the Lease or sublet the Property or any
part thereof; and any such amendment, modification, termination, prepayment,
voluntary surrender, assignment or subletting, without the prior written consent
of Lender shall not be binding on Lender.
5. TENANT'S REPRESENTATIONS AND WARRANTIES. Tenant hereby represents and
warrants to Lender that as of the date hereof (a) Tenant is the owner and holder
of the tenant's interest under the Lease, (b) a true and complete copy of the
Lease is annexed hereto and made a part hereof as Schedule 2 and the Lease has
not been modified or amended, (c) the Lease is in full force and effect and the
term thereof commenced on ________________, pursuant to the provisions thereof,
(d) the Property has been completed and Tenant has taken possession of the same
on a rent paying basis, (e) neither Tenant nor the
3
<PAGE> 409
Landlord is in default under any of the terms, covenants or provisions of the
Lease and Tenant to the best of its knowledge knows of no event which but for
the passage of time or the giving of notice or both would constitute an event of
default by Tenant or the Landlord under the Lease, (f) neither Tenant nor the
Landlord has commenced any action or given or received any notice for the
purpose of terminating the Lease, (g) all rents, additional rents and other sums
due and payable under the Lease have been paid in full and no rents, additional
rents or other sums payable under the Lease have been paid for more than one (1)
month in advance of the due dates thereof, and (h) there are no offsets or
defenses to the payment of the rents, additional rents, or other sums payable
under the Lease.
6. PAYMENT OF RENT TO LENDER. Tenant agrees to pay the rent and any
other payments due under the Lease to Lender upon receipt of written notice from
Lender that it has succeeded to the interest of Landlord under the Lease, and
Landlord agrees that Tenant is entitled to rely conclusively upon such notice
without any duty of inquiry.
7. LIMITATION ON LIABILITY OF LENDER. There shall be no personal
liability on the part of Lender or any officer, director, employee, shareholder
or partner of Lender for the performance of the Lease or any covenant or
agreement contained therein or in this Agreement. Tenant shall look solely to
Lender's estate and interest in the Property, if any, for the satisfaction of
every remedy of Tenant for any breach by Lender under the Lease or this
Agreement or otherwise arising out of or in connection with the Lease, and
Lender is hereby released or relieved of any other liability hereunder and under
the Lease. Tenant agrees that with respect to any money judgment which may be
obtained or secured by Tenant against Lender, Tenant shall look solely to the
estate or interest owned by Lender in the Property and Tenant will not collect
or attempt to collect any such claim out of any other assets of Lender.
8. PERFORMANCE BY LENDER: CONFLICT. Nothing in this Agreement shall be
or be deemed to be an agreement by Lender to perform any obligation of Landlord
under the Lease unless and until the Lender acquires the Property, and then only
if required to do so by the terms of the Lease, as modified and limited by this
Agreement. In the event of any conflict between the terms of this Agreement and
the terms of the Lease, the terms of this Agreement shall control.
9. NOTICES. Any notice required or permitted to be given hereunder
shall be in writing and may be given by personal delivery, certified mail,
return receipt requested or by nationally recognized overnight courier service
and if given personally or by mail or by courier service, shall be deemed
sufficiently given if addressed to the parties at the addresses
4
<PAGE> 410
set forth below. Any party may by notice specify a different address for notice
purposes.
Addresses for Notices:
To Lender: CS First Boston Mortgage
Capital Corp.
55 E. 52nd Street
New York, New York 10055
Attention: Laura Goldberg
To Landlord: Captec Net Lease Realty, Inc.
24 Frank Lloyd Wright Drive
Lobby L, 4th Floor
P.O. Box 544
Ann Arbor, Michigan 48106-0544
To Tenant: [TENANT]
--------------------------------------------
--------------------------------------------
--------------------------------------------
10. SUCCESSORS AND ASSIGNS. This Agreement and each and every covenant
and provision contained herein shall be binding upon and shall inure to the
benefit of the parties hereto and their respective representatives, successors
and assigns.
11. GOVERNING LAW; JURISDICTION. This Agreement shall be governed by
and construed in accordance with the laws of the jurisdiction in which the
Property is located.
12. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY KNOWINGLY,
INTENTIONALLY AND FREELY WAIVES TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM BROUGHT BY ANY OTHER PARTY HERETO IN RESPECT OF ANY MATTER ARISING
OUT OF OR IN CONNECTION WITH THIS AGREEMENT.
[SIGNATURE PAGE FOLLOWS]
5
<PAGE> 411
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered as of the date herein above first written.
WITNESSES: TENANT:
-------
[TENANT]
_________________________________ By___________________________
_________________________________ Its____________________________
LANDLORD:
---------
CAPTEC NET LEASE REALTY, INC.
_________________________________ By___________________________
_________________________________ Its_____________________________
WITNESSES: LENDER:
-------
CS FIRST BOSTON MORTGAGE
CAPITAL CORP.
_________________________________ By___________________________
_________________________________ Its_____________________________
6
<PAGE> 412
STATE OF _____________ )
: ss.
COUNTY OF ____________ )
The foregoing instrument was acknowledged before me this ___ day of
________, 199_, by __________________, as ___________ of [TENANT], (TENANT
ENTITY] on behalf of the [ENTITY].
--------------------------------------
Notary Public
_________ County, ____________________
My commission Expires: _______________
[Notary Public's Seal]
STATE OF MICHIGAN )
: ss.
COUNTY OF WASHTENAW)
The foregoing instrument was acknowledged before me this ___ day of
________, 199_, by __________________, as _________ of CAPTEC NET LEASE REALTY,
INC., a Michigan corporation, on behalf of the corporation.
--------------------------------------
Notary Public
Washtenaw County, Michigan
My commission Expires: _______________
[Notary Public's Seal]
STATE OF NEW YORK)
: ss.
COUNTY OF NEW YORK)
The foregoing instrument was acknowledged before me this ___ day of
________, 199_, by __________________, as _________ of CS FIRST BOSTON MORTGAGE
CAPITAL CORP., a Delaware corporation, on behalf of the corporation.
--------------------------------------
Notary Public
_________ County, ____________________
My commission Expires: _______________
[Notary Public's Seal]
Drafted By and When Recorded
Return to:
- ---------------------------
- ---------------------------
- ---------------------------
- ---------------------------
7
<PAGE> 413
SCHEDULE 1 to
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
-------------------------------------------------------
Land situated in the _______________ of ___________, County of
_____________, State of _________________ , and more particularly described as
follows:
8
<PAGE> 414
SCHEDULE 2 to
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
-------------------------------------------------------
[Copy of the Lease]
9
<PAGE> 415
EXHIBIT Q
---------
<PAGE> 416
I. CREDIT UNDERWRITING POLICIES
1
<PAGE> 417
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section A. INTRODUCTION
- --------------------------------------------------------------------------------
1. CREDIT PHILOSOPHY - Captec's credit philosophy has been developed and
refined throughout the Company's history and is viewed by management as
dynamic. The Company's credit policies have been developed internally-
designed for Captec's specific market focus on franchise and chain
restaurant businesses and the various types of financing products
provided to its customers in those markets. This is a specialized market
demanding specialized credit policies.
Captec's credit policies are proprietary. They have certain similarities
to traditional commercial finance credit policies, but in other ways are
unique to Captec
Captec believes that the credit decision making process is one of
measuring strengths and weaknesses to make informed credit decisions.
This is a process that includes considering the many inter-related facts
of a particular applicant in relation to the Company's market expertise,
past financing experiences, and credit underwriting policies. As such,
it is not a process which can be entirely reduced to the administration
of written policy.
Therefore, these credit policies are designed as guidelines and
principles for conducting the day-to-day business of underwriting and
monitoring the credit-worthiness of Captec's potential and existing
customers. These policies are NOT intended to be all-inclusive or
absolute.
With respect to credit decision making, Captec believes in the value of
utilizing the "committee process" in conjunction with independent
analysis and opinion formation. The Credit Committee is made up of
persons who, on a day-to-day basis, represent a number of different
functions of the Company, most of whom have a long-term vested interest
in the Company's well-being. Credit Committee meetings are an open
forum for discussion of each proposed financing based upon the
information gathered during the credit analysis process - all Credit
Committee members are encouraged to freely communicate their opinions.
The Company believes that this approach leads to balanced credit
decisions.
2
<PAGE> 418
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section A. INTRODUCTION
- --------------------------------------------------------------------------------
2. THE CREDIT ORGANIZATION - Captec has a Credit Department made up of a
group of employees dedicated to the credit underwriting and monitoring
process. Captec also has a Credit Committee which is responsible for
making credit approval decisions. The following is the organizational
chart for the credit organization.
------------ ------------------
Vice Credit Committee
President - ----------------
Credit ------ President
------------ CFO
Sr. VP-S&M
------------ Credit Mgr.
Credit
Manager ------------------
------------
--------------------------------------------
------------ ------------ ------------
Credit Senior Credit
Analysts Credit Clerk
Analyst
------------ ------------ ------------
The Credit Department reports to the Company's senior management via the Chief
Financial Officer and Senior Vice President - Administration.
3
<PAGE> 419
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section A. INTRODUCTION
- --------------------------------------------------------------------------------
3. DELIVERING QUALITY CUSTOMER SERVICE - The credit underwriting process
involves significant interaction with potential and existing customers.
As a result, personnel in the Credit Department play an important role
in delivering quality service to these customers.
The Credit Department's customer service role is also unique because it
must balance this commitment to deliver quality customer service with
an even higher commitment to making independent credit decisions, which
typically requires investigation and corroboration, rather than
acceptance, of information supplied by customers.
Among other things, quality customer service means:
- Professional communication
- Market expertise
- Timely response (see below)
- Genuine interest in the customers' needs
Timely response addresses all of the various ways in which the Credit
Department interfaces with customers. Most important of these is
completing and communicating the credit decision. To this end, the
Credit Department and Credit Committee should strive to maintain the
standard of taking 5 business days subsequent to receipt of a completed
application to communicate a credit decision to all financing applicants
and 10 business days from receipt of all primary information to
communicate a credit decision on all franchise/chain concept reviews.
4
<PAGE> 420
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: B. SUMMARY OF THE CREDIT UNDERWRITING PROCESS
- --------------------------------------------------------------------------------
The analysis and approval process of a credit application varies depending on
the nature of the credit (i.e. new program review, application under an
established program, vendor applications, etc.).
It is the responsibility of the Vice President - Credit to oversee the credit
analysis and approval process with support from the Credit Manager and Credit
Committee. The Credit Committee meets weekly at 10:00 AM on Monday and,
additionally, on an as needed basis as determined by the Vice President -
Credit. The Credit Committee reviews new franchise concepts, as well as
day-to-day transactions.
The following outlines the basic credit approval process used for the Company's
principal sources of business:
NEW FRANCHISE CONCEPT REVIEW
Captec's Sales & Marketing Department monitors many franchise concepts, ranging
from small, newly created concepts to large, mature concepts with established
track records. This monitoring effort identifies target concepts which are
selected to be considered for concept approval. At such time, the Sales &
Marketing Department submits a request to the Credit Department to conduct a
franchise concept review to determine if the concept should be approved for
Captec to provide financing to its franchisees.
A review of a new franchise concept involves analysis of the franchisor's
history and existing operations. If the program is approved, franchise lease
applications are reviewed on a deal by deal basis.
The following factors are included in reviewing a franchisor:
FRANCHISOR'S OPERATING HISTORY - A Uniform Franchise Offering Circular
(UFOC) is obtained for examination of a particular Franchisor. The
examination includes an analysis of the financial condition of the
franchisor, a study of the historical failure rates experienced by the
franchise system, a review of prior and pending litigation against the
franchisor, a review of the minimum financial requirements for new
franchisees, and consideration of the number of years in the business of
franchising.
5
<PAGE> 421
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: B. SUMMARY OF THE CREDIT UNDERWRITING PROCESS (CONT.)
- --------------------------------------------------------------------------------
EVALUATION OF THE BUSINESS OPPORTUNITY - A review of the quality of the
opportunity at the individual franchisee store unit level. This includes
review of the sales to investment ratio, unit level sales and income
statistics, the concept's market penetration, and the level of direct
competition.
EVALUATION & SURVEVY OF EXISTING FRANCHISEES - A telephone survey of a
random sampling of existing franchisees. The survey addresses issues
such as historical and projected sales and profitability figures, the
quality of franchisor support, and overall franchisee satisfaction with
their franchise.
The franchise concept review must also include a review of the standard store
unit equipment package, the average prices thereof and the vendors from whom
Captec would purchase such equipment. Equipment items which are new to Captec
and of a material cost amount must be researched: product brochures obtained,
fair market prices verified and vendors subjected to reference checks.
ln addition, the Credit Department must, in coordination with the sales
department, work together with the franchisor to discuss various options with
respect to support to be provided by the franchisor. This support can be in the
form of guarantees, limited recourse arrangements, remarketing agreements, etc.
Franchisor support may be offered in advance by the franchisor or may be
requested by Captec as a condition to concept approval. The concept analysis
must include consideration of the need for the franchisor's support relative to
such items as the financial strength of the typical franchisee and the
historical failure rates in the system. Additionally, the ability of the
franchisor to meet any of its support obligations, particularly financial and
operating obligations must be considered.
Other general information should be gathered regarding the franchisor's future
plans for royalty revenue growth, projected new franchise unit growth, and the
annual volume of financing expected to be utilized under the proposed financing
program.
All of this information must be summarized in a written report that is presented
to the Credit Committee for consideration. The Credit Committee is charged with
considering the credit quality of the franchisor as well as the "fit" of the
proposed program with Captec's market strategy. Based upon all of this
information, the Credit Committee must decide whether or not to approve the
concept.
6
<PAGE> 422
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: B. SUMMARY OF THE CREDIT UNDERWRITING PROCESS (CONT.)
- --------------------------------------------------------------------------------
FRANCHISEE APPLICATION REVIEW
A franchise concept review approval must include the establishment of standard
franchisee credit requirements and criteria. Each franchisee application must be
reviewed individually based upon these standards. Such standards typically
include minimum net worth and liquidity criteria, a range of acceptable "cost to
open" amounts and maximum debt to worth ratios.
A franchisee application review cannot be commenced by the Credit Department
until a countersigned proposal is received back from the franchisee and the
commitment fee is paid by such applicant. The commitment fee is refundable if
the application is declined, less expenses incurred by Captec, but is otherwise
non-refundable. Payment of this fee is an important indication of the
applicant's good faith in actually closing on the proposed financing. Thus, this
policy is intended to prevent the occurrence of withdrawn applications that
waste the time and efforts of the Credit Department and Credit Committee.
Additionally, the credit review process typically should not be commenced until
a complete application package is received from the applicant. Information
required for a franchisee application includes:
- Completed lease application
- Business financial statements (unless first time franchisee),
typically including 2 years of annual comparative financial
statements and, if financial statements are either prepared by
management or compiled, then 2 years of federal tax returns will
also be required
- Capitalization structure
- Bank references and verification of assets
- Demographic and site information
- Personal information on guarantors:
Personal financial statements (including personal income statement)
2 most recent years' personal tax returns
- Monthly projections for the first 12 months of operation of the new
unit
- Summary of work experience and who will run the business
Review of a new franchisee requires an extensive investigation of the
applicant's principal officers. Information on the principals is very important
for new franchisee transactions, because they are generally the key to a
successful franchise store. In this regard, the
7
<PAGE> 423
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: B. SUMMARY OF THE CREDIT UNDERWRITING PROCESS (CONT.)
- --------------------------------------------------------------------------------
analysis focuses on personal financial resources, personal credit reports and
previous operating experience. In addition, liquid assets, personal net worth,
initial cash investment, and secondary sources of household income are measured
against pre-established criteria. These criteria vary depending on the franchise
system and lease or loan requirements.
Review of multi-unit franchisees focuses on the operating history of the
existing store units and the capital resources available before and alter
opening the proposed unit. Detailed analysis is conducted on the financial
results in an effort to measure financial strength and operating success. Key
ratios are measured against concept system-wide standards. Additionally,
personal financial resources and personal credit statements are analyzed.
Once the application is reviewed, a decision must be made by the Vice President
- - Credit and/or the Credit Manager as to whether the applicant is creditworthy
and is within Company guidelines (i.e., net worth, financial condition,
equipment, etc.). If the application fails to meet preliminary credit criteria,
the application is declined and the process ends. In an instance where the
credit is not strong enough to be considered as submitted, changes in the
structure may be suggested to the Captec sales representative.
If the application meets preliminary credit criteria, the process continues with
an investigation of bank and trade references. A Dun and Bradstreet report on
the company and credit bureau reports on the company's principals are obtained.
Financial statements are analyzed with a focus on net income, cash flow, net
worth, pertinent ratios, trends, and ability to service existing and additional
debt.
As a general guideline, the credit review should reveal various positive
attributes including (but not limited to) the following:
- Upward trend in sales and profits
- 3 years in business
- Positive cash flow to cover the current portion of long term debt
and lease payments
- Satisfactory bank and trade references
- Moderate leverage position
8
<PAGE> 424
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: B. SUMMARY OF THE CREDIT UNDERWRITING PROCESS (CONT.)
- --------------------------------------------------------------------------------
This guidelines describe characteristics that may not all be present in each
transaction approved. Each company must be examined in light of its particular
circumstances. For example, leverage ratios often vary by concept and size of
business, or an applicant may have experienced prior operating losses but have
since successfully turned around its operations and returned to profitability.
Finally, the credit investigation and financial analysis must be summarized in
writing and the Vice President - Credit, Credit Manager or Credit Committee,
depending on the size of the transaction, must approve or reject the proposed
transaction.
9
<PAGE> 425
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: C. CREDIT COMMITTEE
- --------------------------------------------------------------------------------
1. COMMITTEE MEMBERS - Members of the Credit Committee are: the President,
Chief Financial Officer, Senior Vice President - Sales & Marketing, Vice
President - Credit and Credit Manager. Additionally, the Senior Vice
President Administration, while not a Committee member, will typically
attend all meetings of the Credit Committee to monitor the status of the
financing applications.
2. VOTING REQUIREMENTS - The Credit Committee must operate under the
following voting rules:
a) Meeting Quorum: 75% of members, but the Vice President - Credit or
Credit Manager must always be present.
b) Approval Vote: 100% of members present.
10
<PAGE> 426
CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: D. CREDIT DECISION MAKING AUTHORITY
- --------------------------------------------------------------------------------
1. CREDIT COMMITTEE - The Credit Committee is the senior credit body and
has ultimate authority for making any type of credit decision. Only the
Credit Committee has the authority to approve:
a) franchise and chain concepts;
b) transaction applications that exceed $150,000 in aggregate credit
exposure to a customer (including outstanding balances on existing
financings); and
c) any and all deviations from standard credit policies.
The Vice President - Credit and Credit Manager have authority to decline
concepts, although they should submit most concept reviews to Credit
Committee, even if the probable credit decision appears to be a decline
of the concept for program financing.
2. VICE PRESIDENT - CREDIT AND CREDIT MANAGER - The Vice President - Credit
and Credit Manager have the following approval authorities:
a) Individual Authority: Transactions that do not exceed $75,000 in
aggregate credit exposure to a customer (including outstanding
balances on existing financings), assuming the customer is in an
approved concept, may be approved by the sole authority of the Vice
President - Credit or Credit Manager.
b) Joint Credit Authority: Transactions that do not exceed $150,000 in
aggregate credit exposure to a customer (including outstanding
balances on existing financings), assuming the customer is operating
an approved concept, may be approved by the Vice President - Credit
or Credit Manager and one other member of the Credit Committee.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: E. FRANCHISE/CHAIN CONCEPT UNDERWRITING PROCESS
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1. MINIMUM CONCEPT QUALIFICATIONS - To be considered for the concept
underwriting process, a franchise concept should typically meet the
minimum qualifications listed below.
- Minimum of 50 units, typically 100 or more units in operation
system-wide
- Minimum of 5 years of franchising experience by the franchisor
- Minimum net worth of $5 million
- Historical net profits for the past 2 years
- Low historical rates of failure by franchisees (i.e. unit closures)
- Limited historical levels of litigation against franchisor,
particularly with regard to franchisee complaints
Concepts that fall marginally below these standards may also be
considered at the discretion of the Credit Manager.
Chain concepts (i.e. - non-franchised concepts) may become mature,
proven successful systems with a smaller number of units than a
franchised concept. Therefore, the Credit Manager may override the
minimum number of units standard for Chain concepts if the other
standards are met.
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Section: I. CREDIT UNDERWRITING POLICIES
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2. REVIEW OF UFOC - The Federal Trade Commission prohibits the offer or
sale of any franchise without first providing a Uniform Franchise
Offering Circular ("UFOC") to a prospective franchisee. Thus, all
franchisors maintain a current UFOC which they provide to Captec upon
request.
The UFOC is an initial and primary source of information on the
franchise concept. The FTC has established a standard format for the
UFOC and requires a variety of information disclosure. As a result, the
UFOC contains extensive information on the franchisor and the concept,
and therefore, it must be utilized extensively during the concept
underwriting process. The UFOC review must include the following:
a) FRANCHISE CONCEPT AND OPERATION - The nature of the business being
franchised and the reasons for its success must be analyzed. Unit
level sales and operating costs, unit development costs, competitive
strengths and weaknesses and geographical penetration are factors to
be considered. This analysis must result in an assessment of the
quality of the unit level business opportunity.
b) MANAGEMENT AND OPERATING HISTORY - The history of the concept must
be reviewed, including the number of years in business, the number
of years engaged in franchising, and the history of the franchisor's
business strategies. Additionally, this must include a review of the
capabilities and business experience of the key directors, officers
and employees of the franchisor. The purpose of this analysis is to
gain a historical perspective on the franchisor's business and the
strengths and weaknesses of key personnel.
c) NUMBER OF UNITS - The number of existing store units, broken down
between company (franchisor) operated and franchisee units, must be
reviewed and analyzed. The percentage mix between company and
franchisee stores must be noted, along with new unit development
plans for the next year. Franchisor involvement in unit operations
affects the franchisor' mix of revenue and income sources and is
an important consideration when measuring the franchisor's
capabilities in taking over and operating troubled franchisee units.
This analysis must assess the size of the concept, the concept-wide
unit growth trends, and the degree to which the franchisor is
involved in store operations.
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2. REVIEW OF UFOC (CONTINUED)
d) FRANCHISE FEES AND EXPENSES - This is an analysis of the various fees
required to be paid by the franchisee, which typically includes a
one-time franchise fee and training fee and ongoing royalty and
advertising fees. This analysis must compare these fees to industry
standards and to assess the impact of the fee structure on the store
unit level economics.
e) FRANCHISEE'S INITIAL INVESTMENT - The UFOC includes an outline of the
low to high range of total costs to a franchisee to open a new store
unit. Generally, these costs include the franchise fee, land, building,
leasehold improvements, equipment, initial inventory, training expenses,
pre-opening expenses and working capital reserves. This information will
be used as a basis for reviewing franchisee applications to assess
whether the franchisee's actual costs, including the cost of the asset
being financed, are reasonable. Additionally, this analysis must include
a "sales to investment ratio" calculation, which compares average annual
unit sales to average cost to open a unit. This ratio is an important
measure of the quality of the business opportunity from an economic
standpoint.
f) DUTIES OF THE FRANCHISOR TO THE FRANCHISEES - This is a review of the
support systems provided by the franchisor for the benefit of the
franchisee. This support review must focus on the depth of the training
program and field operations support. The purpose of this analysis is to
become familiar with the support systems available within the system and
to compare such systems to industry standards.
g) FRANCHISOR'S LITIGATION AND CLAIMS - The UFOC lists all pending or
threatened litigation against the franchisor and/or its directors and
shareholders and provides detailed information on each case. This
analysis must include an assessment of the quality of the franchisor's
relations with its franchisees, as well as any significant financial
risks facing the franchisor as a result of litigation.
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2. REVIEW OF UFOC (CONTINUED)
h) FRANCHISE UNIT CLOSURES - The UFOC provides a three year history of
closures of franchise units as measured by termination of franchise
agreements (there is an individual franchise agreement for each
franchisee operated store unit). This information must be analyzed
closely in order to understand the nature of any franchisee failures
and to assess the success rate of the franchisees.
i) FINANCIAL STATEMENTS - The UFOC includes audited financial
statements on the franchisor for three fiscal years. A complete
financial analysis must be performed on these financial statements,
including inputting the statement into Captec's spreadsheet model,
conducting ratio analyses, and reviewing cash flow coverage and
line-item trends.
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3. CREDIT ANALYSIS OF FRANCHISOR FINANCIAL STATEMENTS - The Franchisor's
financial statements must be input into Captec's financial statement
spreadsheet model as a basis for the analysis.
The review of the Franchisor's financial statements must include the
three most recent fiscal year-ends. Trends must be analyzed with respect
to revenue, profit and cash flow. Trends in revenues and expenses must
be analyzed on both a nominal dollar value and percentage basis.
Revenues must be broken down in terms of store sales, franchise fees and
royalty income. The mix must be analyzed in terms of where operating
profit is derived from, as well as the stage of the Franchisor (e.g. -
early stage, high growth, mature, etc.). Generally, revenue derived from
franchise fees should decrease as a percent of total revenue as the
Franchisor matures. Results in contrast to this general trend must be
examined and discussed in detail in the written report to Credit
Committee.
Ratios must be examined and compared to industry averages. This ratio
analysis must address the following key ratios: the Debt/Worth Ratio,
the Liquidity Ratio, the Cash Flow/CPLTD Ratio and the Fixed Charge
Coverage Ratio. Trends in these ratios must also be analyzed and
assessed with respect to the long-term financial viability of the
Franchisor and the concept. If the debt/equity ratio increases every
year, a detailed analysis must be performed to ascertain the reasons for
this trend. If the Cash Flow/CPLTD Ratio is less than 1.25:1, and/or the
Fixed Charge Coverage Ratio is less than 1.25:1, a detailed analysis
must be performed to assess the degree of risk that the Franchisor would
be unable to meet its financial obligations. Such negative trends must
be discussed in detail in the written report to Credit Committee.
The company's debt must be itemized and analyzed. Long-term debt must be
reviewed in detail, examining terms, financing sources, and the
composition of the current portion of long-term debt. A cash flow
analysis must be completed to ensure that the Franchisor has an
acceptable Cash Flow/CPLTD Ratio and Fixed Charge Coverage Ratio.
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Section: I. CREDIT UNDERWRITING POLICIES
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3. CREDIT ANALYSIS OF FRANCHISOR FINANCIAL STATEMENTS (CONTINUED)
A detailed financial statement analysis must be included in the Report
to Credit Committee and the results of this analysis must be
summarized in the Recommendation section of the Report to Credit
Committee. The Credit Committee must consider this information when
deciding whether to extend credit to applicants operating in the
concept.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: E. FRANCHISE/CHAIN CONCEPT UNDERWRITING PROCESS
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4. ANALYSIS OF UNIT CLOSURE STATISTICS - The UFOC discloses the number of
franchise agreements terminated for any reason over the past three
years. This information is broken down further to number of units
closed, number of units transferred, and number of units taken over by
the Franchisor. The number of terminated franchises is also broken down
as a percentage of the total number of units and by geographical
location. The reasons for the closures or transfers are also discussed
in detail.
The Report to Credit Committee must contain a section outlining the unit
closure statistics and discussing the pertinent details regarding such
closures. In general, a small number and percentage of terminated
franchise agreements is acceptable. However, a large number or
percentage of terminations, or negative trends in terminations, must be
closely examined. Issues mitigating any of these negative statistics
must be discussed in depth.
Poor franchise termination history generally suggests the potential of a
major weakness in the franchise system and, therefore, must also be
summarized in the Recommendation section of the Report to Credit
Committee. The Credit Committee must consider this information when
deciding whether to extend credit to applicants operating in the
concept.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: E. FRANCHISE/CHAIN CONCEPT UNDERWRITING PROCESS
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5. REVIEW OF LITIGATION AGAINST FRANCHISOR - The UFOC discloses any
administrative, criminal or material civil action pending against the
Franchisor, any predecessor and any person identified as an officer
and/or director in the UFOC. The information contained in the UFOC on
each case must be reviewed and, if necessary, more detailed information
must be obtained, including a current status report.
Significant litigation pending between the Franchisor and its
Franchisees (significant in terms of either dollars or number of
actions) must be examined closely. This is often an indication of
weakness in the franchise system which ultimately could affect the
future earnings and financial strength of applicants.
Furthermore, if pending litigation is significant in terms of dollars,
the potential adverse affect on the company's financial condition must
be analyzed. Again, in such case further information must be obtained on
the status and range of the amount of contingent liability.
The Report to Credit Committee must contain a section outlining the
pending litigation and discussing the pertinent details regarding such
actions. Major litigation problems must also be summarized in the
Recommendation section of the Report to Credit Committee. The Credit
Committee must consider this information in deciding whether to extend
credit to applicants operating in the concept.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: E. FRANCHISE/CHAIN CONCEPT UNDERWRITING PROCESS
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6. SURVEY OF FRANCHISEES - When reviewing a Franchisor concept for
approval, a randomly selected sampling of existing Franchisees must be
surveyed. A minimum of 5% of the franchisees or 25 franchisees,
whichever is greater, must be surveyed. Franchisees must be selected
from different parts of the country. Information obtained from the
franchisees should include: 1) average sales; 2) the level of franchisee
profitability and how long it took them to become profitable; 3) whether
the franchisee is satisfied with both the pre-opening and ongoing
support from the franchisor; 4) does the franchisee believe that the
working capital requirements and other cost projections listed in the
UFOC are adequate. Each franchisee surveyed must also be asked if they
would recommend that other people become franchisees of the concept and
if they would open their store(s) again. Finally, the franchisee should
be asked if they are having any problems with their business.
The Report to Credit Committee must contain a section outlining the
results of the franchisee survey. Major franchisee concerns must also be
summarized in the Recommendation section of the Report to Credit
Committee. The Credit Committee must consider this information in
deciding whether to extend credit to applicants operating in the
concept.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: E. FRANCHISE/CHAIN CONCEPT UNDERWRITING PROCESS
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7. MINIMUM CREDIT STANDARDS FOR FRANCHISEES - When reviewing a franchise
concept for approval, general credit standards must be established for
typical franchisees. Many factors must be considered when setting the
standards, including: 1) the total cost to open a typical unit; 2) first
year sales and profitability averages; 3) mature store sales and
profitability averages; and 4) standard multi-unit development
requirements. In some instances, secondary sources of personal income
for the principals must also be considered when determining liquidity
requirements.
Also, the franchisor's stated financial requirements for franchisees
must be reviewed and compared to the results of Captec's analysis.
Ideally, Captec and the Franchisor will have similar credit standards.
If Captec's credit standards significantly exceed the Franchisor's
credit standards, the approval rate of franchisee applicants may be
below acceptable levels.
All financing programs require a clean credit bureau report on the
franchisee. Generally, a standard net worth requirement and an initial
capitalization requirement should also be established. Each credit has
unique circumstances and must be reviewed on an individual basis, taking
into account the credit standards established through this analysis.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: E. FRANCHISE/CHAIN CONCEPT UNDERWRITING PROCESS
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8. REPORT TO CREDIT COMMITTEE ON CONCEPT - Utilizing all of the information
and analysis derived from the concept underwriting process, the Credit
Department must prepare a written report on each franchisor (the
"Concept Underwriting Report"). The Concept Underwriting Report must
include the following:
- One page summary of Franchisor
- One page summary of the proposed financing program
- Discussion of concept and operations
- Discussion of management and operating history
- Discussion of fees paid by franchisees
- Discussion of training and support
- Discussion of unit level economics, including average unit sales,
average return on sales, average investment required to open a
unit and standard unit capitalization requirements
- Discussion of the results of the credit analysis of the
Franchisor's financial statements
- Discussion of unit closure statistics
- Discussion of survey of franchisees
- Recommendation
See Appendix I.E.8 for the guideline format of this report.
The report must be submitted to all members of the Credit Committee for
their review in advance of the committee meeting. The Credit Committee
must review and discuss the concept, decide whether or not to approve a
financing program for the franchisees and decide what the terms and
conditions of the program will be.
Either prior to or as a result of the Credit Committee's review, there
may be a negotiating process that takes place with the franchisor
regarding the structure and nature of any recourse programs, remarketing
agreements, the maximum aggregate dollar amount of program financings,
the maximum dollar amount of individual transactions, and/or the
standard rate of return on such transactions.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: E. FRANCHISE/CHAIN CONCEPT UNDERWRITING PROCESS
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8. REPORT TO CREDIT COMMITTEE ON CONCEPT (CONTINUED)
The Credit Committee may, on occasion, limit the amount of a program to
establish a relationship with a franchisor and agree, after a
predetermined period of time, to review the performance of the portfolio
and update financial and credit information on the franchisor to
determine if the program should be increased. In such instances, the
Report to Credit Committee must be revised and resubmitted to Credit
Committee for final approval.
The Report to Credit Committee must be reviewed and approved by the
Credit Committee prior to accepting franchisee financing applications.
All concepts must pass this credit underwriting process in order to
become "Approved Concepts."
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: F. FINANCING APPLICANT UNDERWRITING PROCESS
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1. STANDARD APPLICATION - A credit application must be completed, signed
and dated by a proposed applicant and made a part of every credit file.
The credit application should be used as a starting point and should
indicate the applicant's name and address, the location to be financed,
the name, address and social security number of all guarantors, the
applicant's bank and trade references, a description of the assets to be
financed, and the amount and the costs of those assets. (see Exhibit
I.F.1 for the standard application form).
A signed credit application authorizes Captec as a potential creditor to
order credit bureau reports on the guarantors and obtain credit
information from current creditors. Therefore, such credit service
reports cannot be ordered or received prior to receiving a signed
application.
The application should be submitted to Captec accompanied by a check
from the applicant for payment of the commitment fee. A copy of the
check must be attached to the application and remain in the credit file.
No application can be processed prior to receipt of the properly signed
application form and the commitment fee. Upon receipt of the signed
application and check, the transaction must be input by Credit
Department personnel into the INFO-LEASE Credit Application Module
using the information from the application. An application number and
customer credit account number is assigned at that time. If the
applicant is an existing customer or applicant, the existing customer
credit account must be used in order that all pending, approved, and/or
closed transactions may be tracked by customer, enabling the efficient
monitoring of customer borrowing concentrations.
The Credit Application Module database must be maintained for each
application throughout the application, documentation and transaction
booking process. Each application will be tracked within this system to
monitor such items as credit decision status, open approval contingency
items, documentation checklists, asset cost and description information,
and projected funding date. Each application is tracked across
departments (from credit to documentation to accounting); therefore, the
assigned credit analyst must re-assign the approved application to
Documentation Department upon completion of the credit approval process.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: F. FINANCING APPLICANT UNDERWRITING PROCESS
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2. REVIEW OF APPLICANT'S FINANCIAL STATEMENTS
a) CREDIT ANALYSIS METHODS - When an applicant operates one or more
existing restaurants, current financial statements on the existing
operations must be submitted with the application. This information must
be input into Captec's spreadsheet model for summarization and ratio
analysis.
The financial statements must be reviewed on both a consolidated as well
as a unit level basis. Sales of existing restaurants must be analyzed
and compared to average per unit sales for the concept. Costs and
margins must also be compared to concept-wide averages. The balance
sheet must be analyzed in terms of trends, capitalization, Debt/Worth
Ratio and other pertinent ratios. The capitalization structure should be
closely analyzed to insure that the applicant has sufficient capital to
support its existing and planned future units. If funds are put into the
business as debt from the principals (e.g. - in the form of shareholder
notes) the notes should typically be required to be subordinated to the
Captec financings.
As with any existing company, part of the financial analysis must
include analyzing pertinent ratios and studying trends. Debt/Worth Ratio
should be moderate depending on the growth stage of the company. If a
high Debt/Worth Ratio exists, there must be numerous other redeeming
features for the application to receive further consideration for
approval. A typical maximum Debt/Worth Ratio is 3:1, but ratios may vary
both upwards and downwards for different concepts and the analyst must
give consideration to these variances.
Cash flow is very important and must be positive. The existing
operations of the applicant must be generating sufficient cash flow to
service all current obligations. A typical minimum Fixed Charge Coverage
Ratio would be 1.25:1.
An existing company's profitability must also be reviewed. Depending on
the stage of the company, profitability may or may not have been
reached. On a newer unit, there may be many pre-opening costs expensed
that have limited or prevented profitability. Also, if an applicant is
in a growth phase and opening several units, numerous start-up costs,
training and overhead are often being absorbed and may also prevent
profitability. All of these factors must be taken into account by the
analyst and each application must be analyzed based upon each particular
situation.
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2. REVIEW OF APPLICANT'S FINANCIAL STATEMENTS (CONTINUED)
b) COMPARISON WITH FRANCHISOR'S MINIMUM CREDIT REQUIREMENTS - Once a
Franchise concept is approved, the Franchisor file is kept in the Credit
Department and used for reference. When an application for the system is
being reviewed, various assumptions must be compared with the franchisor
information for accuracy. This Franchisor file information and the
application must be compared with respect to the following:
- the cost to open
- site and store unit size
- the net worth and liquid assets of the applicant
- unit level sales results
- unit level profits as a percent of sales
This unit level economic information must be input into and tested using
Captec's unit level economics model. Any economic stresses noted from
this analysis must be discussed in the Report on Financing Application.
This information must be compared to both: 1) continuously monitor the
accuracy of the assumptions made in the Franchisor file; and 2) to
assess the strengths and weaknesses of the applicant relative to these
standards.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: F. FINANCING APPLICANT UNDERWRITING PROCESS
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3. SELECTION OF GUARANTORS - As a policy, all principal officers owning 10%
or more of the applicant organization must individually guarantee all
financings. However, their are common occurrences of exceptions to this
policy.
The most typical examples of an exception are:
1. organizations with substantial capital paid-in directly by
the principals (i.e. - the principals have significant
capital at stake in the business)
2. organizations with substantial net worth, many years in
business and/or insignificant mass of operations (as measured
by such statistics as total revenue and number of store
units)
Generally, transactions must be proposed by the Sales & Marketing
Department with a requirement for guarantees, unless the applicant
organization is an obvious exception to the policy or unless the
applicant specifically states and satisfactory explains why guarantees
are not available.
All guarantees must be joint and several for the entire amount of the
financing. Exceptions to this policy may only be allowed in unusual
circumstances.
If an application submitted for credit underwriting is submitted without
a guarantee or with a limited guarantee, the credit analysis must
address the issue of whether the applicant qualifies for an exception
from the guarantee policies. All such exceptions must be discussed in
the Report on Financing Application and can only be approved by Credit
Committee.
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Section: I. CREDIT UNDERWRITING POLICIES
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4. REVIEW OF PRINCIPALS' PERSONAL FINANCIAL STATEMENTS - All personal
financial statements must be submitted directly by the principals and
must be complete, signed and dated. All personal financial statements
should be no more than 6 months old.
Each line item must be reviewed and analyzed further, if needed. Cash
must be verified through bank references and/or current bank statements.
Marketable securities must be verified through securities account
statements. The valuation of certain assets, such as business interests,
must be reviewed to assess the reasonableness of the stated value. Total
debt indicated as owing to banks and others must be reconciled with the
individuals' credit bureau report to determine the accuracy and
completeness of the liabilities section of the personal financial
statement.
The strengths and weaknesses of the personal financial condition of all
principals, particularly those who are proposed as guarantors, must be
discussed in detail in the Report on Financing Application.
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Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: F. FINANCING APPLICANT UNDERWRITING PROCESS
- --------------------------------------------------------------------------------
5. REVIEW OF PRINCIPALS' PRIOR OPERATING EXPERIENCE - A resume must be
generally obtained on the principals, and the analyst must review their
background and experience.
- Positive attributes include (but are not limited to):
- previous experience operating stores within the same concept or a
concept with similar operations requirements
- previous successful business ownership
- specific occupational expertise for persons serving in various
functional areas of the applicant's organization (e.g. - a person
serving as the CFO might have a background as a CPA, a financial
officer with previous employers, etc.)
- significant business contacts and presence within the operating
territory
In most cases the principals should have direct prior operating
experience within the concept or a similar concept. Any lack of such
prior experience is a major weakness and must be highlighted in the
Report on Financing Application.
With respect to franchise loans secured by mortgages, there are certain
specific, quantitative requirements regarding the principals' prior
operating experience. See Section I.Fl.5 for further details regarding
these requirements.
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Section: I. CREDIT UNDERWRITING POLICIES
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6. OBTAINING AND REVIEWING PERSONAL CREDIT REPORTS - A personal credit
bureau report must be obtained directly from the reporting agency on
every potential guarantor listed on an application. The reports should
generally be obtained via the Credit Department's on-line reporting
service.
A TRW is the standard report used. This report must be used to verify
current address, social security number, year of birth, spouses name and
employment. The profile summary must be reviewed, and includes the
number of accounts, satisfactory accounts, delinquent accounts, public
records, installment balances and payments, real-estate balances and
payments, revolving balances and availability, past due amounts, and
inquiries. Each trade account is listed separately and includes the name
of the creditor, the date the account was open, balance date and last
pay date. The high credit, current balance, and monthly payment are also
listed. The account status reflects the last 24 months of payment
history. Inquiries over the past two years are listed.
Each account listed on the credit report must be reviewed to establish
prompt payment history and determine that the amount of personal debt is
not excessive. Should an account show any derogatory payment history, a
detailed written explanation must be provided by the principal and the
explanation must be acceptable to Captec.
The number of inquiries must be noted and assessed as an indication of
other funding sources the individuals may be working with and the
probability of recent similar credit requests.
Any derogatory payment history noted on a personal credit report must be
disclosed in the Report on Financing Application, along with the
person's explanation and the analyst's assessment of that explanation.
Also, any discrepancies between the debt indicated on the credit report
and the debt disclosed on the personal financial statement must be
indicated in the Report on Financing Application.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: F. FINANCING APPLICANT UNDERWRITING PROCESS
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7. OBTAINING AND REVIEWING BUSINESS CREDIT REPORTS - A Dun & Bradstreet
Business Information Report must be obtained on every company applying
for credit to Captec The D&B report contains extensive information on
the business which must be used for both information gathering and
information verification purposes.
The D&B report contains the company's complete legal name and address,
its business activity, a rating which is generally based on the
company's net worth, the year started and number of employees. The D&B
summarizes the company's financial statements, if the company has agreed
to provide D&B with such financial statements, and the report lists any
special events. Payment histories are outlined by vendor industry,
reflecting total dollar amount, high credit and payment history. A
paydex score is assigned based on this data and the percentage of
payments within the allotted terms are disclosed. Public filings are
listed including all suits, tax liens, and UCC filings. The D&B report
lists the location of the offices of the company, ownership structure
and background information on the officers. This information is
generally used for verification purposes.
The entire D&B report must be reviewed. Any derogatory information
regarding the business rating, special events, payments histories/paydex
score and public filings (e.g. - suits and tax liens) must be fully
investigated and discussed in the Report on Financing Application.
The information in the D&B report such as the name of legal entity,
summarized financial statements, names and backgrounds of officers, and
ownership structure must be compared to such information provided
directly by the customer. Any discrepancies between these information
sources must be fully investigated, and any such discrepancies that
cannot be satisfactorily reconciled must be discussed in the Report on
Financing Application.
All lending/leasing creditors listed in the D&B report must be compared
to the bank reference and financial statement information provided
directly by the customer. Any such creditors which were not disclosed by
the customer must be contacted as a bank reference. Furthermore, if
there are any creditors who were not disclosed by the customer and who
have material outstanding balances owed to them by the customer, the
reason for such omissions must be investigated by
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: F. FINANCING APPLICANT UNDERWRITING PROCESS
- --------------------------------------------------------------------------------
7. OBTAINING AND REVIEWING BUSINESS CREDIT REPORTS (CONTINUED)
discussion with the customer. Any omissions which cannot be
satisfactorily reconciled must be discussed in the Report on Financing
Application.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: F. FINANCING APPLICANT UNDERWRITING PROCESS
- --------------------------------------------------------------------------------
8. REFERENCE INVESTIGATION - All bank and finance company references and
all material trade references, which are either supplied with the
application or discovered during the credit investigation, must be
contacted by the Credit Analyst.
When obtaining a bank reference, the Credit Analyst must speak directly
to the account officer assigned to the applicant, to ensure that
complete information is being provided. The Credit Analyst must inquire
about the following: length of their institution's relationship with the
applicant; average deposit balances; lending/financing history; and
detailed history and status on each outstanding obligation. In addition,
the Credit Analyst should ask the account officer other questions to
probe into their overall experience and satisfaction with the customer.
This can be accomplished by asking questions regarding the applicant's
business history, growth potential and other future business plans.
References from institutions (e.g. finance companies) that have only
secured term financings (e.g. equipment and real estate leases)
outstanding with the applicant will generally provide some limited
reference information, as compared to a bank relationship. For such
references, the Credit Analyst must inquire about the history of each
financing provided, including the following: commencement date; original
balance; type of financing; collateral; term of the financing; and
payment history.
Trade references must be investigated to determine if the applicant is
paying its suppliers on a timely basis. The Credit Analyst must inquire
about the following: average and high monthly balance, payment history,
length of the vendor's relationship with the applicant; and frequency of
purchases.
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Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: F. FINANCING APPLICANT UNDERWRITING PROCESS
- --------------------------------------------------------------------------------
9. SITE REVIEW - A complete demographics report is included in the credit
application and generally includes the description of the site
(including diagrams), main traffic generators, competition in the area,
population, and traffic counts. The depth of site review analysis
depends upon the type of financing being considered.
EQUIPMENT financing transactions require a compilation of site
information for presentation as a section in the Report on Financing
Application. This information must be generally compared to the standard
site requirements for the concept and any major discrepancies must be
noted in the Report on Financing Application.
REAL ESTATE MORTGAGE LOAN transactions require a detailed review of the
site information. In addition to the review of the demographics report,
this review must also include a review of the Franchisor's site analysis
and pictures and site drawings for the site. Furthermore, the Senior
Vice President - Sales & Marketing must review the entire site
information package and provide summary comments to the Credit Analyst
for inclusion in the Report on Financing Application. A detailed
discussion of the site must be included in the Report on Financing
Application, and the entire site package must be made available to
Credit Committee during the committee meeting.
REAL ESTATE NET LEASE transactions require the same level of review as
described above for real estate mortgage transactions. In addition, the
President or Senior Vice President - Sales & Marketing must physically
visit the site prior to the funding of the transaction. If this site
visit occurs after a credit approval, such approval must be made
contingent upon a satisfactory site visit. A detailed discussion of the
site must be included in the Report on Financing Application, and the
entire site package must be made available to Credit Committee during
the committee meeting.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: F. FINANCING APPLICANT UNDERWRITING PROCESS
- --------------------------------------------------------------------------------
10. REVIEW OF FRANCHISE AGREEMENT - The franchise agreement must be reviewed
during the approval process. If the application is for a new store unit,
the franchise agreement may not be available when the application is
submitted to the Credit Department because it may not yet have been
executed by the franchisee and franchisor. The franchise agreement is
typically executed 1-3 months in advance of the unit opening, depending
on the concept. Review of the franchise agreement must be listed as a
credit contingency item if the agreement is not reviewed during the
application underwriting process, and it must be submitted, reviewed and
deemed acceptable to the Credit Department prior to the funding of the
transaction.
The review of the franchise agreement must verity that:
- the term of the proposed financing does not exceed the remaining
term of the franchise agreement; and
- the franchisee, as named in the franchise agreement, is the same
entity as the lessee/borrower under the proposed financing
If the review of the franchise agreement does not verity the above
criteria, the discrepancies must be discussed with the Credit Manager to
determine whether the applicant should immediately be disqualified for
financing. If, in the opinion of the Credit Manager, the application
merits consideration for approval despite any such discrepancy, then
such discrepancy must be discussed in the Report on Financing
Application.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: F. FINANCING APPLICANT UNDERWRITING PROCESS
- --------------------------------------------------------------------------------
11. REPORT ON FINANCING APPLICATION - Once the credit analysis is completed,
the assigned Credit Analyst or the Credit Manager must prepare a
complete written analysis on the proposed transaction and present such
report to the Credit Committee or other appropriate decision-making
authority (see Policy I.D for determination of the appropriate credit
decision-making authority).
The Report on Financing Application must include the following:
- One page Transaction Summary
- Discussion of company structure
- Discussion of background of key personnel and financial strength
of guarantors
- Discussion of operating history
- Discussion of sources and uses of capital (for applications
related to development of new units)
- Discussion of the results of the credit analysis of the
applicant's historical financial statements (if applicant has
existing store operations)
- Discussion of the results of the credit analysis of the projected
unit level economics for the unit being financed (if application
is for a new unit)
- Discussion of site information
- Recommendation
- Attach a copy of the Captec spreadsheet model (if applicant has
existing store operations)
- Attach a copy of the Captec spreadsheet for modeling the unit
level economics
See Appendix I.F.11 for the guideline format for this report.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: F. FINANCING APPLICANT UNDERWRITING PROCESS
- --------------------------------------------------------------------------------
12. DECISION TO APPROVE OR DECLINE - The Report on Financing Application
must be submitted to all members of the Credit Committee, or other
appropriate decision-making authority (see Policy I.D for determination
of the appropriate credit decision-making authority), for their review
in advance of the committee meeting. The Credit Committee or other
appropriate decision-making authority must review and discuss the Report
and decide whether to approve or decline the proposed financing.
The Credit Committee or other appropriate decision-making authority also
has the authority to change the terms and conditions of the proposed
financing if they are not acceptable as originally proposed. Any such
changes must be communicated by the Credit Manager to the assigned
account representative in the Sales & Marketing Department, that
representative must communicate such changes to the applicant and the
applicant must accept such changes in writing in order for a transaction
to be approved.
Credit Department personnel must maintain a Credit Transaction Form
which is attached to the credit file. See Appendix I.F.12 for the
format for this report. The credit decision must be indicated on this
form, along with all contingency items. In the case of approvals, all
persons voting on the credit decision (the attending Credit Committee
members or the other appropriate decision-making members) must
initial the approval.
Credit Department personnel must also post the credit decision and any
credit contingency items into the INFO-LEASE Credit Application Module.
Such personnel must then immediately re-assign the application to the
Documentation Department and place the physical credit file in Captec's
filing cabinets.
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Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: F. FINANCING APPLICANT UNDERWRITING PROCESS
- --------------------------------------------------------------------------------
13. APPROVAL AND DECLINE LETTERS - Approval and decline letter must conform
to the standard form for such letters. See Appendix I.F.13(a) for
standard form approval letters and Appendix I.F.13(b) for standard form
rejection letters.
These standard form letters have been designed to legally conform to
commercial law and Federal Regulation B (Equal Credit Opportunity)
requirements. Additionally, approval letters must specify certain
documentation requirements, the standards for which are determined
outside of the Credit Department. Therefore, only Captec's General
Counsel has authority to make changes to the standard form approval or
rejection letters.
If approved, an approval letter must be signed by the Vice President -
Credit or Credit Manager and sent to the customer, outlining the terms
and conditions of the approval and the file proceeds to the
documentation department. However, with respect to franchise loans
secured by mortgages, the communication of loan application approvals
must be coordinated with the issuance of a Commitment Letter by the
Documentation Department, as more fully described in Section I.F1.9.
If the transaction is declined, a rejection letter must be signed by the
Vice President - Credit or Credit Manager and sent to the applicant.
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Revised October 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: F1. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
1. LIMITATIONS ON LOAN TERMS & CONDITIONS - Franchise loans secured by
mortgages must conform with the following terms and conditions as a
prerequisite for being considered for credit underwriting. Credit
applications with non-conforming terms and conditions must be returned
to the Sales & Marketing Department for restructuring.
a) FIXED RATE - All loans must provide for a fixed rate of interest for
the entire term of the loan. Rates may float prior to funding based upon
changes in the comparable-term U.S. Treasury Notes. The loan interest
rate will be priced based upon a spread over the Treasury security most
closely approximating the stated maturity of the loan.
b) SECURITY INTEREST - Loans must be secured by one of three types of
security interests:
FEE SIMPLE MORTGAGES provide a security interest in the Borrower's
restaurant building(s) and related land.
LEASEHOLD MORTGAGES provide a security interest in the Borrower's
ground lease. Leasehold mortgages are used in instances where the
Borrower leases the land under a ground lease from a third party
lessor.
BUSINESS ENTERPRISE LIENS provide a security interest in all of the
assets of the Borrower held at the unit that is the subject of the
financing. Business Enterprise Liens are typically used in instances
where the Borrower may have no land or building assets at the
subject unit.
At least 70% of loans made by the Company will be secured by fee
simple mortgages. No more than 30% of the loans will be secured by
leasehold mortgages and business enterprise liens. Senior management
places the limitations on the percentage of loans which can be
secured by leasehold mortgages and business enterprise liens. From
time to time, such limitations will be discussed in Credit Committee
meetings and any resulting changes to the limitations must be
communicated by the Vice President - Credit to the Sales & Marketing
Department.
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Revised October 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: Fl. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
1. LIMITATIONS ON LOAN TERMS & CONDITIONS (CONTINUED)
Furthermore, other underwriting and documentation policies will vary, as
noted elsewhere in the Operations Manual, depending upon whether a loan
is secured by a fee simple mortgage or a leasehold mortgage.
c) MAXIMUM LOAN MATURITY - The maturity period for any loan must be less
than or equal to 15 years.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: Fl. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
1. LIMITATIONS ON LOAN TERMS & CONDITIONS (CONTINUED)
d) OTHER LOAN MATURITY RESTRICTIONS - Loan maturity periods are further
restricted as follows:
i) The loan maturity period may not be less than one half (1/2) of
the payment amortization period.
ii) The loan maturity period must be less than or equal to the
remaining term of the Borrower's franchise agreement; except
that variances from this policy are acceptable for only fully
amortizing loans that have a stated maturity that extends no
more than three (3) months beyond the franchise agreement
termination date.
e) MAXIMUM AMORTIZATION PERIOD - The loan amortization period for any
loan secured by a fee simple mortgage must be less than or equal to 20
years. The loan amortization period for any loan secured by a leasehold
mortgage or business enterprise lien must be less than or equal to 15
years.
f) BALLOON LOANS - Loans secured by fee simple mortgages may be
structured with balloon amortizations. Balloon loans are not permitted
on loans secured by leasehold mortgages or business enterprise liens.
Furthermore, the aggregate balance of balloon loans must not exceed 20%
of the aggregate Secured Franchise Business Loan portfolio. Senior
management places limitations on the percentage of loans which can have
balloon features. From time to time, such limitations will be discussed
in Credit Committee meetings and any resulting changes to the
limitations must be communicated by the Vice President - Credit to the
Sales & Marketing Department.
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Revised October 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: Fl. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
2. FRANCHISE CONCEPT TIERING SYSTEM - Only for purposes of underwriting
franchise loans secured by mortgages, a tiering system has been
established which categorizes franchise concepts into two tiers. These
tiers are intended to delineate the relative level of credit risk
associated with loans to franchisees within such concepts, prior to
taking into account the results of the franchisee underwriting process
(see Section I.F). The franchisee underwriting process is critical to
the overall risk analysis associated with any loan application, and
thus, the tiering system is not an exclusive or absolute measure of the
credit risk of any loan. Notwithstanding the prior sentence, tier
rankings of approved concepts have the following meaning:
Tier I - Highest Overall Quality
Tier II - Strong Overall Quality
The tier classifications are used for purposes of stratifying certain
other loan underwriting criteria, as well as for stratifying certain
concept and borrower loan portfolio concentration limits (see Section
I.F1.8 for further information regarding concentration limits).
This tiering system, and the tier ranking assigned to any concept, are
confidential and should not be communicated to loan applicants or
franchisors. The purpose of this confidentiality is to avoid offending
franchisors and applicant's with differing views on the relative
strengths and weaknesses of their concept.
The Credit Committee is responsible for assigning tier rankings to each
approved concept. The Vice President - Credit is responsible for
communicating the tier rankings, and any changes thereto, to the Sales &
Marketing Department.
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Revised October 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: Fl. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
2. FRANCHISE CONCEPT TIERING SYSTEM (CONTINUED)
The tier designation process, similar to the credit underwriting
process, involves the weighing of strengths and weaknesses and making
qualitative decisions based upon such information. The general criteria
to be used for classifying concepts by tier level are as follows:
- Size of system
- Maturity of system
- Degree of positive trademark recognition
- Degree of franchisor support
- Financial strength of franchisor
The size of the system (i.e. - number of stores under operation) is a
strong indicator of the credit risk associated with an individual
franchisee loan. It is an important measure of the scope and depth of a
concept. When accompanied by limited unit level closure statistics, the
size of the system is the best historical measure of the long-term
success of a concept at the unit level. Generally, Tier I concepts have
over 500 units (often over 1,000 units), and Tier II concepts have up to
500 units. Concepts which cross-over these general ranges are typically
tiered based upon other criteria and mitigating factors. Concepts with
over 1,000 units would, in nearly all cases, be classified as Tier I
concepts. As a general exception to the above tiering standards, casual
dining and family restaurant segment concepts will usually have lower
system unit size threshold levels due to the substantially higher unit
level revenues, capital costs and seating capacities.
The degree of maturity of a concept system is measured by such factors
as market penetration, growth rate, and number of years in operation.
Generally, Tier I concepts are more mature systems than Tier II
concepts.
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Revised October 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: Fl. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
2. FRANCHISE CONCEPT TIERING SYSTEM (CONTINUED)
Often linked with system maturity is positive trademark recognition.
Concepts with a high level of positive trademark recognition generally
have the broadest appeal in the consumer market. Tier I concepts
generally are "household names" either regionally or nationally.
Franchisor support is an important component which contributes to the
stable, consistent operation of the franchise store unit, which in turn
promotes growth in the overall size of the system. Franchisors provide
support to their franchisees in very significant ways, including site
analysis and selection, personnel training, operational support, quality
control, and the development and production of national marketing and
advertising campaigns. Generally, the level of franchisor support is
strongest for Tier I concepts.
The financial strength of the franchisor is considered and can be
important, although its is not necessarily a major factor. There is no
requirement for credit ratings of the franchisor. A financially strong
franchisor can be a benefit in terms of future system growth
opportunities and general stability. However, a franchisor with more
limited financial strength may also be able to provide all of the
necessary support for the franchisee community and, as a result, may be
just as effective as a financially stronger franchisor. For example, the
parent companies of concepts such as Arby's, Denny's and Hardees have
below investment grade corporate ratings, yet these systems have
continued high level of franchisor support of the system.
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Revised October 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: Fl. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
2. FRANCHISE CONCEPT TIERING SYSTEM (CONTINUED)
Mitigating factors which may positively affect the tier designation of a
concept include:
- Strong sales and unit growth rates
- Strong same store sales growth figures
- Superior unit level economics
- Superior management
- Beneficial Parent/Affiliate relationships
- Broad access to capital at the franchisor level
- Regional market strength
- Low unit level closure statistics
- Overall quality of the franchisees within the system
Mitigating factors which may negatively affect the tier designation of a
concept include:
- Detrimental Parent/Affiliate relationships
- High unit level closure statistics
- Poor franchisor management team
- Declining market penetration or trademark appeal
- Negative same store sales growth figures
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Revised October 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: Fl. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
3. CONCEPTS APPROVED FOR SECURED FRANCHISE BUSINESS LOANS - The following
concepts have been approved for the indicated types of security
interests (see definitions in Section I.F1.1(b)):
a) Fee Simple Mortgages
Tier I - Applebee's, Arby's, Boston Market, Burger King,
Chili's, Denny's, Hardees, Jack In The Box, KFC, Pizza
Hut, Red Robin, Taco Bell, TGI Friday's, and Wendy's.
Tier II - Carrows/Coco's, Church's/Popeye's, Eastside Mario's,
Golden Corral, Houlihan's, Kenny Rogers Roasters,
Shoney's, Sonic, and Taco Cabana.
b) Leasehold Mortgages
Tier I - Applebee's, Arby's, Boston Market, Burger King,
Chili's, Denny's, Hardees, Jack In The Box, KFC, Pizza
Hut, Red Robin, Taco Bell, TGI Friday's, and Wendy's.
Tier II - Carrows/Coco's, Church's/Popeye's, Eastside Mario's,
Golden Corral, Houlihan's, Kenny Rogers Roasters,
Shoney's, Sonic, and Taco Cabana.
c) Business Enterprise Liens
Tier I - Applebee's, Arby's, Burger King, KFC, Pizza Hut, Taco
Bell, and Wendy's.
Tier II - None
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: Fl. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
4. LOAN-TO-VALUE RATIOS - Secured Franchise Business Loans must conform to the
following loan-to-value (LTV) ratio limitations.
a) Loans secured by fee simple mortgages must be based upon an
independent valuation of the land and building assets. The LTV ratio
for each loan must not exceed the lesser of 70% of an independent
valuation of the franchise enterprise (a business valuation which
includes land and building) or 100% of the real estate appraised
value. In addition, the LTV ratio of the aggregate portfolio of fee
simple mortgage loans must not exceed the lesser of 70% of the
business valuation (including land and building) or 92.5% of the real
estate appraised value.
b) Loans secured by leasehold mortgages or business enterprise liens must
be based upon an independent valuation of the franchise enterprise (a
business valuation). The LTV ratio must be less than or equal to 70%.
In all instances, the independent valuation must be performed by a nationally
recognized valuation firm with extensive knowledge and experience in the area of
restaurant franchise finance. Section IV.D.6 further addresses the loan
documentation requirements related to real estate and business valuations.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: Fl. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
5. FIXED CHARGE COVERAGE RATIOS - Minimum Fixed Charge Coverage Ratios are
required as a condition of approval of any application for a Secured
Franchise Business Loan. There are two levels of minimum Fixed Charge
Coverage Ratios.
a) If the loan is secured by a fee simple mortgage, then the Borrower
Entity must have a minimum Fixed Charge Coverage Ratio of 1.10:1.
Otherwise, if the loan is secured by a leasehold mortgage or a
business enterprise lien, the Borrower entity must have a minimum
Fixed Charge Coverage Ratio of 1.20:1.
In addition, the aggregate pool of loans secured by fee simple
mortgages must have a minimum Fixed Charge Coverage Ratio of 1.15:1
for the Borrower and 1.25:1 for the individual store unit, which the
loan will be extended.
b) If the loan is secured by a fee simple mortgage, then the individual
store unit to which the loan will be extended must have a minimum
Fixed Charge Coverage Ratio of 1.20:1. Otherwise, if the loan is
secured by a leasehold mortgage or a business enterprise lien, the
individual store unit must have a minimum Fixed Charge Coverage Ratio
of 1.40:1.
In addition, the aggregate pool of loans secured by a leasehold
mortgages and business enterprise liens must have a minimum Fixed
Charge Coverage Ratio of 1.35:1 for the Borrower and 1.25:1 for the
individual store unit, which the loan will be extended.
See section I.G for the definition of Fixed Charge Coverage Ratio.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: Fl. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
6. FRANCHISEE OPERATOR EXPERIENCE REQUIREMENTS - Franchisee borrowers must
meet the following operating experience requirements in order to qualify
for a loan secured by a mortgage.
a) Franchisee borrowers must currently be operating at least two (2)
franchise units of the concept to which the loan will be extended.
b) A principal member of the management team of the franchisee borrower
must have at least two (2) years of experience in the management of
restaurant operations.
c) A principal member of the management team of the franchisee borrower
must have at least one (1) year of experience in the management of
restaurant operations within the concept to which the loan will be
extended.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: Fl. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
7. PERSONAL GUARANTEE REQUIREMENTS - Personal guarantee requirements differ
depending upon whether the loan is secured by a fee simple mortgage or a
leasehold mortgage or business enterprise lien (see definitions in Section
I.F1.1(b)).
a) Loans secured by fee simple mortgages are not required to be
guaranteed by the borrower. However, when circumstances allow,
personal guarantees should be obtained. Furthermore, the omission of
personal guarantee(s) from a loan application must be highlighted on
the face of the Report on Financing Application submitted to the
Credit Committee and must be considered by the Credit Committee
relative to the credit decision for that loan application.
b) Loans secured by leasehold mortgages and business enterprise liens
must have personal guarantee(s), unless the Borrower is operating 25
or more restaurants in one or more concepts. Such, personal guarantees
must be offered by at least one of the principal members of the
management team of the franchisee borrower.
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Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: Fl. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
8. BORROWER'S USE OF LOAN PROCEEDS - The borrower must state the use of
the loan proceeds in the credit application. Generally, the borrower
should be using the loan proceeds to refinance existing indebtedness,
develop/acquire additional restaurant units, and/or for other purposes
relating to the operation of restaurant facilities. Any use of loan
proceeds outside of this scope must be noted in the Report on
Financing Application submitted to the Credit Committee. The Credit
Committee is responsible for determining whether the use of loan
proceeds for reasons beyond those noted herein is acceptable.
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Section: I. CREDIT UNDERWRITING POLICIES
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SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
9. PORTFOLIO CONCENTRATION LIMITATIONS - The Credit Committee will place
limitations on concept, borrower and geographic concentrations in the
portfolio of Secured Franchise Business Loans. Furthermore, the Chief
Financial Officer must be present at a Credit Committee meeting in which
changes to concentration limits are proposed and must vote affirmatively
for any concentration limit changes in order for such changes to become
effective.
The Vice President - Credit will maintain a written matrix which specifies
the current portfolio concept, borrower and geographic concentration
limits, and further, will be responsible for preparing and circulating
weekly reports to the Credit Committee detailing these concentrations with
respect to the outstanding loan balances and remaining availability under
the concentration limits. The Vice President - Credit is also responsible
for communicating the limitations, and any changes thereto, to the Sales &
Marketing Department.
Such concentration limits will be stratified based upon the tier
designations assigned to each approved concept (see Section I.Fl.2 and
Section I.F1.3). Borrower concentration limits, as well as concept
concentration limits, will vary depending upon the applicable tier ranking.
Borrower concentration limits will also vary depending upon whether a
borrower is a franchisor or a franchisee, within a given concept.
52
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CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Revised October 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: Fl. SUPPLEMENTAL UNDERWRITING REQUIREMENTS FOR
SECURED FRANCHISE BUSINESS LOANS
- --------------------------------------------------------------------------------
10. PROCESSING OF APPROVED LOAN APPLICATIONS - Credit files for approved
applications for franchise loans secured by mortgages must be forwarded to
the Manager of Contract Administration - Real Estate for preparation of the
loan and mortgage documentation.
Commitment letters for such approved loan applications must be prepared by
the Documentation Department. Loan commitment letters may not be prepared
or executed by Credit Department or Sales & Marketing Department personnel.
53
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CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: G. DEFINITIONS OF CREDIT ANALYSIS TERMS
- --------------------------------------------------------------------------------
CASH FLOW - The sum or subtraction of the following items for the applicant
business for the applicable operating period:
+ Operating Cash Flow
+ Debt Service
- Operating Lease Expense
-------------------------------
= Cash Flow
CASH FLOW/CPLTD RATIO - The product of the following equation, expressed as a
ratio (e.g. 1.25:1):
+ Net Income
+ Depreciation and Amortization
-----------------------------
= Subtotal
div Current Portion of Long-Term Debt
-------------------------------------------------
= Cash Flow/CPLTD Ratio
CURRENT ASSETS - The current assets as stated on the applicant's financial
statement.
CURRENT LIABILITIES - The current liabilities as stated on the applicant's
financial statement.
CURRENT PORTION OF LONG-TERM DEBT - The current portion of long-term debt due to
mature during the next comparable operating period, as stated on the applicant's
financial statement, plus, if not already included therein, the current portion
of principal payments imputed on all capital leases. (Note: See comments under
Interest Expense definition regarding FASB financial reporting standards for
capital leases. These same comments apply to this definition for the related
principal portion of such capital leases.)
CURRENT PORTION OF OPERATING LEASES - The amount of rent due under operating
leases for the next comparable operating period.
54
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CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: G. DEFINITIONS OF CREDIT ANALYSIS TERMS
- --------------------------------------------------------------------------------
DEBT SERVICE - The sum of Interest Expense, plus the amount of principal paid on
long-term debt, plus the amount of principal paid on capital leases, all for
the applicable operating period.
DEBT/WORTH RATIO - The product of the following equation, expressed as a ratio
(e.g. 2.0:1):
Total Liabilities
div Net Worth
----------------
= Debt/Worth Ratio
DEPRECIATION AND AMORTIZATION - The depreciation and amortization expense as
stated on the applicant's financial statement.
EBITDA - The sum of the following items for the applicant business for the
applicable operating period:
+ Net Income
+ Depreciation and Amortization
+ Interest Expense
+ Income Taxes
--------------------
= EBITDA (earnings before interest, taxes, depreciation and
amortization)
FIXED CHARGE COVERAGE RATIO - The product of the following equation, expressed
as a ratio (e.g. 1.25:1):
Operating Cash Flow
div Fixed Charges
----------------------
= Fixed Charge Coverage Ratio
FIXED CHARGES - The sum of the following items for the applicant business for
the applicable operating period:
+ Current Portion of Long-Term Debt
+ Interest Expense
+ Current Portion of Operating Leases
-------------------------------------------
= Fixed Charges
55
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CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: G. DEFINITIONS OF CREDIT ANALYSIS TERMS
- --------------------------------------------------------------------------------
INTEREST EXPENSE - The interest expense as stated on the applicant's financial
statement, plus, if not already included therein, the interest expense imputed
on all capital leases. (Note: FASB financial reporting standards require the
interest imputed on capital leases to be recorded as interest expense and
included in the interest expense total on the financial statement. Therefore,
the interest expense as stated on the applicant's financial statement should
include the interest imputed on capital leases. If the financial statement has
been reviewed or audited, reliance may be placed on the audit firm to have
properly applied this principal. If the financial statement has not been
reviewed or audited, the analyst must determine if the imputed interest has been
properly stated, and if not, must add this interest as per the stated formula.)
LIQUIDITY RATIO - The product of the following equation, expressed as a ratio
(e.g. 1.25:1):
Current Assets
div Current Liabilities
---------------------------
= Liquidity Ratio
NET INCOME - The net income as stated on the applicant's financial statement.
NET WORTH - The net worth (e.g. - partners' capital or stockholders equity) as
stated on the applicant's financial statement. For a corporation, this will
include preferred stock, common stock, additional paid-in capital and retained
earnings, less any treasury stock or stock subscriptions receivable.
NON-RECURRING ITEMS - Items which, when computing cash flow, should be added
back to or subtracted from net income to normalize results. Examples of
Non-Recurring Items include, but are not limited to: gains on sales of assets,
expensed development costs for newly constructed store units, theft expenses,
non-recurring bank charges (e.g. - new facility fees) and discontinued
operations write-offs (on a case-by-case basis).
56
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CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: G. DEFINITIONS OF CREDIT ANALYSIS TERMS
- --------------------------------------------------------------------------------
OPERATING CASH FLOW - The sum or subtraction of the following items for the
applicant business for the applicable operating period:
+ Net Income
+ Depreciation and Amortization
+ Interest Expense
+ Operating Lease Expense
+/- Non-Recurring Items
---------------------------
= Operating Cash Flow
OPERATING LEASE EXPENSE - The amount of rental expense paid under operating
leases, as stated on the applicant's financial statements.
TOTAL LIABILITIES - The total liabilities as stated on the applicant's financial
statement, including current and long-term liabilities.
57
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CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: H. CREDIT MONITORING
- --------------------------------------------------------------------------------
1. UPDATES ON FRANCHISE CONCEPT UNDERWRITING REPORTS - Once a Franchise
Concept is approved, the Franchisor file should be retained in the Credit
Department. Captec should be put on the franchisor's mailing list to
receive quarterly financial statements and any news releases on the
franchisor. All updated information must be informally reviewed by the
Credit Manager for major events or changes.
Each franchise concept must be formally reviewed on an annual basis. All
franchisors should be entered in the Credit Department's tracking system,
which provides a tickler report when the franchisor is up for an annual
review.
The annual franchise concept review should include the spreading of the
most recent audited and interim financial statements of the franchisor, a
review of the existing portfolio and a review and update of the written
Concept Underwriting Report so that it includes all current information on
the company. The Concept Underwriting Report should be submitted to Credit
Committee for renewal.
58
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CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Revised July 1995
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: H. CREDIT MONITORING
- --------------------------------------------------------------------------------
2. MONITORING UNIT LEVEL PERFORMANCE TRENDS WITHIN CONCEPTS - As Captec
finances more franchisees in each concept and a portfolio is established,
unit level financial statements are obtained from a variety of customers.
The result is a resource of actual operating results from a cross-section
of stores within the concept.
The Vice President - Credit is responsible for overseeing the input of this
information into a database which accumulates this information and computes
average concept performance standards such as store sales, pertinent
margins, operating cost components and profits. These unit level
performance standards must be updated on an annual basis in conjunction
with the update of the Concept Underwriting Report. Any significant changes
in the standards must be noted in the updated report.
Furthermore, the most current unit level performance standards must be
utilized when analyzing a new application for the concept, comparing the
applicant's projections to the standards.
59
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CAPTEC FINANCIAL GROUP, INC. OPERATIONS POLICY MANUAL
- --------------------------------------------------------------------------------
Section: I. CREDIT UNDERWRITING POLICIES
Sub-Section: H. CREDIT MONITORING
- --------------------------------------------------------------------------------
3. MONITORING HIGH CONCENTRATION CUSTOMER ACCOUNTS - Customer accounts with
total exposure (outstanding balances) exceeding $700,000 ("high
concentration accounts") must be monitored on a continuous basis. It is the
duty of the Credit Manager to assign responsibility for monitoring each
high concentration account to a specific Credit Analyst.
Each high concentration account customer must provide Captec with quarterly
financial statements. Upon receipt, the quarterly financial information
must be input into the spreadsheet tracking system by the assigned Credit
Analyst. This system lists the customer name, details the transaction(s)
and total exposure with Captec, and lists the most recent financial
statement on file and when the next is due. A follow-up date is triggered
by this system.
The assigned Credit Analyst should perform the standard analysis on these
quarterly financial statements and report any significant changes in the
customer's financial trends and financial position to the Credit Manager.
The Credit Manager must report this information to the Credit Committee.
It is common for Captec's high concentration account customers to be in a
significant growth phase. Such growth can strain the capital resources,
management expertise and earnings trends of the customer. Therefore, when
monitoring such customers, the credit analysis should also include
comparison of projected to actual results and an on-going review of the
projected effects of growth on the financial position of the customer.
60
<PAGE> 476
AMENDMENT NO.1
TO CREDIT AGREEMENT BETWEEN
CAPTEC FINANCIAL GROUP FUNDING CORPORATION, BORROWER,
AND
CS FIRST BOSTON MORTGAGE CAPITAL CORP., LENDER
Section 4(c)(iv)(C) of the above named Credit Agreement dated February 26, 1996
(the "Agreement") is hereby amended and restated, so as to be and read in its
entirety as follows:
(C) Subordinated Debt payable to the Parent in an aggregate
principal amount not to exceed at any time the sum of 10% of the then aggregate
principal amount outstanding of the Revolving Loans plus $500,000; provided,
however, that the Borrower may incur Subordinated Debt in an aggregate principal
amount in excess of the sum of 10% of the then aggregate principal amount
outstanding of the Revolving Loans plus $500,000 provided (i) the proceeds of
such excess Subordinated Debt is used by Borrower to fund the origination of
Loans and (ii) any such excess Subordinated Debt is prepaid in full on the date
of the next succeeding Credit Event.
IN WITNESS WHEREOF, Lender and Borrower have caused this amendment to be duly
executed so as to be effective as of March 31, 1996.
LENDER BORROWER
- ------ --------
CS FIRST BOSTON MORTGAGE CAPTEC FINANCIAL GROUP
CAPITAL CORP. FUNDING CORPORATION
By: /s/ Emily Youssouf By: /s/ W. Ross Martin
------------------------------ -----------------------------
Name: Emily Youssouf Name: W. Ross Martin
Title: Director Title: Vice President
Address: Chief Executive Office:
- -------- -----------------------
55 East 52nd Street 24 Frank Lloyd Wright Drive
New York, New York 10055 Lobby L, 4th Floor
Ann Arbor, Michigan 48106-0544
<PAGE> 1
Exhibit 10.2
EMPLOYMENT AGREEMENT
BETWEEN
CAPTEC NET LEASE REALTY, INC.
AND
PATRICK L. BEACH
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the _____ day of
___________, 1997, between Captec Net Lease Realty, Inc., a Delaware corporation
(the "Company"), and Patrick L. Beach (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive, and the Executive
desires to be employed by the Company, on the terms and subject to the
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties agree as follows:
1. Employment.
(a) The Company hereby employs the Executive as its President
and Chief Executive Officer and the Executive hereby accepts such employment, on
the terms and subject to the conditions hereinafter set forth.
(b) During the term of this Employment Agreement and any
renewal hereof (all references herein to the term of this Employment Agreement
shall include references to the period of renewal hereof, if any), the Executive
shall be and shall have the titles of President and Chief Executive Officer and
shall devote such business time and efforts to his employment as the Executive
deems appropriate and perform diligently such duties as are customarily
performed by Chief Executive Officers and Presidents of publicly-held real
estate investment trusts, together with such other duties as may be reasonably
requested from time to time by the Board of Directors of the Company (the
"Board"), which duties shall be consistent with his positions as set forth
above and as provided in Paragraph 2.
<PAGE> 3
2. Term and Positions.
(a) Subject to the provisions for the termination of this
Agreement as provided for herein, the term of this Employment Agreement shall
commence on the date hereof and shall continue through December 31, 2000 (the
"Base Term") and shall automatically be extended for an additional one year
(each a "Renewal Year") at the end of each full calendar year for which this
Employment Agreement remains in effect unless on or before November 30 of each
calendar year, either party gives to the other party written notice of
termination of this Employment Agreement, in which case this Employment
Agreement shall terminate upon the completion of the then applicable employment
period including any previous Renewal Years.
(b) The Executive shall be entitled to serve as the President
and Chief Executive Officer of the Company. Without limiting the general scope
of the Executive's position: (i) the Executive shall not be required to report
to any single individual and the Board of Directors, (ii) no other individual
shall be elected or appointed as Chief Executive Officer of the Company, (iii)
the highest other executive officers of the Company shall report to no
individual other than the Executive, and (iv) no individual or group of
individuals (including a committee established or other designee appointed by
the Board) shall have any authority over or equal to the authority of the
Executive in his role as Chief Executive Officer, and neither the Company, the
Board, nor any member of the Board shall take any action which will or could
have the effect of, or appear to have the effect of, giving such authority to
any such individual or group. The Executive shall be entitled to the full
protection of applicable indemnification provisions of the certificate of
incorporation and bylaws of the Company, as the same may be amended from time to
time, for his service as a director, officer and employee of the Company.
(c) If:
(i) the Company materially changes the Executive's
duties and responsibilities as set forth in Paragraph 1(b) or 2(b)
without his consent (including, without limitation, by violating any of
the provisions of clause (i), (ii), (iii) or (iv) of Paragraph 2 (b));
(ii) the Executive's place of employment or the
principal executive offices of the Company are moved to a location more
than fifty (50) miles from the geographical center of Ann Arbor,
Michigan;
(iii) there occurs a material breach by the Company
of any of its obligations under this Employment Agreement (other than
those specified in this Section 2(c)) that has not
-2-
<PAGE> 4
been cured in all material respects within ten (10) days after
the Executive gives notice thereof to the Company;
(iv) there occurs a "change in control" (as
hereinafter defined) of the Company; or
(v) the Board or any nominating committee thereof or
committee performing a Board nomination function fails to nominate the
Executive for election to the Board in connection with any
shareholders' meeting to be held or action to be taken for the election
of directors;
then the Executive shall have the right to terminate his employment with the
Company, but such termination shall not be considered a voluntary resignation or
termination of such employment or of this Employment Agreement by the Executive
but rather a discharge of the Executive by the Company without "cause" (as
defined in Paragraph 5(a)(ii)).
(d) The Executive shall be considered not to have consented to
any written proposal calling for a material change in his duties and
responsibilities unless he shall give written notice of his consent thereto to
the Board within fifteen (15) days after receipt of such written proposal. If
the Executive shall not have given such consent, the Company shall have the
opportunity to withdraw such proposed material change by written notice to the
Executive given within ten (10) days after the end of said fifteen (15) day
period.
(e) The term "change in control" means the first to occur
of the following events:
(i) any person or group of commonly controlled
persons owns or controls, directly or indirectly, fifteen percent (15%)
or more of the voting control or value of the equity interests in the
Company following consummation of the initial public offering of the
Company's Common Shares, without par value (the "IPO");
(ii) any person or group of commonly controlled
persons who own less than five percent (5%) of the voting control or
value of the equity interests in the Company during the first 30 days
following the consummation of the IPO acquire ownership or control,
directly or indirectly, of more than twenty percent (20%) of the voting
control or value of the equity interests in the Company;
(iii) the shareholders of the Company approve an
agreement to merge or consolidate with another corporation or other
entity resulting (whether separately or in connection with a series of
transactions) in a change in ownership of twenty percent (20%) or more
of the voting control or value of the equity interests in the Company,
or an agreement to sell
-3-
<PAGE> 5
or otherwise dispose of all or substantially all of the Company's
assets (including, without limitation, a plan of liquidation or
dissolution), or otherwise approve of a fundamental alteration in the
nature of the Company's business.
3. Compensation.
During the term of this Employment Agreement the Company shall pay or
provide, as the case may be, to the Executive the compensation and other
benefits and rights set forth in this Paragraph 3.
(a) The Company shall pay to the Executive a base salary payable in
accordance with the Company's usual pay practices (and in any event no less
frequently than monthly) at the rate of One Hundred Fifty Thousand Dollars
($150,000) per annum, to be increased (but not decreased) from time to time
(based upon the performance of the Company and the Executive) in a manner
consistent with the compensation of Chief Executive Officers of publicly-held
real estate investment trusts.
(b) The Company shall pay to the Executive bonus compensation for each
calendar year of the Company, not later than sixty (60) days following the end
of each year or the termination of his employment, as the case may be, prorated
on a per diem basis for partial calendar years, and determined and calculated in
a manner set forth on Exhibit A attached hereto.
(c) The Company shall grant to the Executive, pursuant to the
Company's Long-Term Incentive Plan, options to acquire 400,000 shares of the
Company's $.01 par value common stock (the "Common Stock") for a period of ten
years from the date of the initial public offering of the Common Stock at a
price equal to the initial public offering price of the Common Stock. The
options shall vest (at which time they shall become exerciseable) prorata on
each of the first three anniversaries of the execution of the Employment
Agreement.
(d) The Company shall provide to the Executive and his family all the
medical, dental, and all other group insurance benefits which the Company
provides generally to employees of the Company during active employment. In the
event of disability or death of the Executive, these benefits shall be continued
by the Company for life for the Executive and his spouse.
(e) The Executive shall participate in all retirement and other benefit
plans of the Company generally available from time to time to employees of the
Company and for which the Executive qualifies under their terms (and nothing in
this Employment Agreement shall or shall be considered to in any way affect the
Executive's rights and benefits thereunder except as expressly provided herein).
(f) The Executive shall be entitled to such periods of vacation and
sick leave allowance each year as are determined by the Executive in his
reasonable and good faith discretion, which in any event shall be not less than
as provided generally under the Company's vacation and sick leave policy for
executive officers.
(g) The Executive shall be entitled to participate in any option or
other employee benefit compensation plan that is generally available to senior
executive officers, as distinguished
-4-
<PAGE> 6
from general management, of the Company. The Executive's participation in and
benefits under any such plan shall be on the terms and subject to the conditions
specified in the governing document of that plan.
(h) Beginning on the day after the cessation of the Executive's
employment with the Company, except in the case of termination of the
Executive's employment for cause under Paragraph 5, and continuing until the
Executive's death or the date, if ever, on which the Executive begins full-time
employment with another employer, the Company shall provide to the Executive, at
no cost to the Executive, office space at a location (other than the executive
offices of the Company) suitable to the Executive's status as the former Chief
Executive Officer of the Company, a full-time secretary and other customary
office support functions.
(i) The Company shall reimburse the Executive or provide him with an
expense allowance during the term of this Employment Agreement for travel,
entertainment and other expenses reasonably and necessarily incurred by the
Executive in connection with the Company's business. The Executive shall furnish
such documentation with respect to reimbursements to be made hereunder as the
Company shall reasonably request.
4. Payment in the Event of Death or Permanent Disability.
(a) The Company shall arrange for certain life insurance benefits to be
available to the Executive and his family as provided in this paragraph pursuant
to a Split-Dollar Agreement between the Company and the Executive (or his
assigns), in substantially the form of EXHIBIT B attached hereto and
incorporated herein by this reference. The life insurance benefit to be provided
by the Company to the Executive and his family under the Split-Dollar Agreement
shall be provided under two policies. One policy shall be a joint and survivor
policy in the amount of One Million Dollars ($1,000,000) insuring the life of
the Executive and his spouse. The other policy shall insure the Executive's life
and shall be in an amount equal to the greater of (i) One Million Dollars
($1,000,000) or (ii) five (5) times the Executive's annual cash compensation
paid or payable by the Company (including the base salary provided under
Paragraph 3(a) of this Agreement and the bonus provided under Paragraph 3(b) of
this Agreement). Each year, the amount of the life insurance benefit shall be
reviewed and revised in accordance with the prior years' cash compensation paid
and accrued for the benefit of the Executive, as soon as the amount of the prior
year's earned cash compensation, including all cash bonuses, can be calculated.
(b) In the event of the Executive's "permanent disability" (as
hereinafter defined) during the term of this Employment Agreement, for a period
of fifteen (15) years the Company shall pay to the Executive an annual amount
equal to .80 times the Executive's then effective per annum rate of salary, as
determined under Paragraph
-5-
<PAGE> 7
3(a), plus a pro rata portion of the bonus applicable to the fiscal year in
which such permanent disability occurs, as such bonus is determined under
Paragraph 3(b). After such fifteen (15) year period and for each year thereafter
until the Executive attains age sixty-five (65), the Company shall pay to the
Executive a disability benefit in an amount equal to the greater of (i)
sixty-five percent (65%) of the Executive's base compensation during the year in
which the disability occurred, or (ii) fifty percent (50%) of the Executive's
average annual total cash compensation for the three (3) years immediately
before the year in which the disability occurred. The Company, to the extent
possible, shall insure such disability benefits through an insurance company.
Such coverage shall contain a benefit for total, as well as partial and
residual, disabilities. The Company shall review and revise the amount of
coverage not less than annually in accordance with the prior year's total cash
compensation as soon as the amount of cash compensation, including all cash
bonuses, can be calculated. In the event of, and upon the Executive's permanent
disability, all unvested options shall vest immediately and become fully
exerciseable.
(c) Except as otherwise provided in Paragraphs 3(e), 3(h) (in the event
of permanent disability only), 4(a), and 4(b), in the event of the Executive's
death or permanent disability, the Executive's employment hereunder shall
terminate and the Executive shall be entitled to no further compensation or
other benefits under this Employment Agreement, except as to that portion of any
unpaid salary and other benefits accrued and earned by him hereunder, up to and
including the date of such death or permanent disability, as the case may be.
(d) For purposes of this Employment Agreement, the Executive's
"permanent disability" shall be deemed to have occurred after one hundred twenty
(120) days in the aggregate during any consecutive twelve (12) month period, or
after ninety (90) consecutive days, during which one hundred twenty (120) or
ninety (90) days, as the case may be, the Executive, by reason of his physical
or mental disability or illness, shall have been unable to discharge his duties
under this Employment Agreement. The date of permanent disability shall be such
one hundred twentieth (120th) or ninetieth (90th) day, as the case may be. In
the event either the Company or the Executive, after receipt of notice of the
Executive's permanent disability from the other, dispute that the Executive's
permanent disability shall have occurred, the Executive shall promptly submit to
a physical examination by the chief of medicine of any major accredited hospital
in the Ann Arbor, Michigan, area and, unless such physician shall issue his
written statement to the effect that in his opinion, based on his diagnosis, the
Executive is capable of resuming his employment and devoting his full time and
energy to discharging his duties within thirty (30) days after the date of such
statement, such permanent disability shall be deemed to have occurred.
5. Termination.
(a) The employment of the Executive under this Employment
-6-
<PAGE> 8
Agreement, and the terms hereof, may be terminated by the Company:
(i) on the death or permanent disability (as defined in
Section 4(d)) of the Executive,
(ii) for cause at any time by action of the Board. For
purposes hereof, the term "cause" shall mean:
(A) The Executive's fraud, commission of a felony or
of an act or series of acts which result in material injury to
the business reputation of the Company, commission of an act
or series of repeated acts of dishonesty which are materially
inimical to the best interests of the Company, or the
Executive's willful and repeated failure to perform his lawful
duties under this Employment Agreement, which failure has not
been cured within fifteen (15) days after the Company gives
notice thereof to the Executive; or
(B) The Executive's material breach of any material
provision of this Employment Agreement, which breach has not
been cured in all substantial respects within ten (10) days
after the Company gives notice thereof to the Executive; or
(iii) other than for cause at any time by action of the Board,
subject to the operation of Paragraph 5(c).
The exercise by the Company of its rights of termination under this
Paragraph 5 shall be the Company's sole remedy in the event of the
occurrence of an event as a result of which such right to terminate
arises. Upon any termination of this Employment Agreement, the
Executive shall be deemed to have resigned from all offices held by the
Executive in the Company.
(b) In the event of a termination claimed by the Company to be for
"cause" pursuant to Paragraph 5(a)(ii), the Executive shall have the right to
have the justification for said termination determined by arbitration in
Detroit, Michigan. In order to exercise such right, the Executive shall serve on
the Company within thirty (30) days after termination a written request for
arbitration. The Company immediately shall request the appointment of an
arbitrator by the American Arbitration Association and thereafter the question
of "cause" shall be determined under the rules of the American Arbitration
Association, and the decision of the arbitrator shall be final and binding on
both parties. The parties shall use all reasonable efforts to facilitate and
expedite the arbitration and shall act to cause the arbitration to be completed
as promptly as possible. During the pendency of the arbitration, the Executive
shall continue to receive all compensation and benefits to which he is entitled
hereunder, and if at any time during the pendency of such arbitration the
Company
-7-
<PAGE> 9
fails to pay and provide all compensation and benefits to the Executive in a
timely manner, the Company shall be deemed to have automatically waived whatever
rights it then may have had to terminate the Executive's employment for cause.
If the arbitrator determines that the Executive's termination was effected for
"cause," the Executive shall reimburse the Company for all compensation and
benefits received by him during the pendency of the arbitration to which he is
not entitled in accordance with the first sentence of Paragraph 5(c). Expenses
of the arbitration shall be borne equally by the parties.
(c) In the event of termination for any of the reasons set forth in
subparagraph (a)(i) or (a)(ii) of this Paragraph 5, except as otherwise provided
in Paragraphs 3(e), 3(i) (in the case of permanent disability only), 4(a), and
4(b), the Executive shall be entitled to no further compensation or other
benefits under this Employment Agreement, except as to that portion of any
unpaid salary and other benefits accrued and earned by him hereunder up to and
including the effective date of such termination and all unvested options shall
be forfeited. If the Company terminates the Executive's employment other than
pursuant to subparagraph 5(a)(i) or 5(a)(ii) or the Executive terminates his
employment pursuant to subparagraph 2(c), all of the compensation and benefits
payable to the Executive pursuant to this Employment Agreement shall be paid to
the Executive for the remainder of the term of this Employment Agreement (as
that term is defined in subparagraph 2(a)), and all option granted to the
Executive shall vest immediately and become fully exerciseable.
6. Tax Adjustment Payments. If all or any portion of the amounts
payable to the Executive under this Employment Agreement (together with all
other payments of cash or property, whether pursuant to this Employment
Agreement or otherwise, including, without limitation, the issuance of common
stock of the Company, or the granting, exercise or termination of options
therefor) constitutes "excess parachute payments" within the meaning of Section
280G of the Code that are subject to the excise tax imposed by Section 4999 of
the Code (or any similar tax or assessment), the amounts payable hereunder shall
be increased to the extent necessary to place the Executive in the same
after-tax position as he would have been in had no such tax assessment been
imposed on any such payment paid or payable to the Executive under this
Employment Agreement or any other payment that the Executive may receive in
connection therewith. The determination of the amount of any such tax or
assessment and the incremental payment required hereby in connection therewith
shall be made by the accounting firm employed by the Executive within thirty
(30) calendar days after such payment and said incremental payment shall be made
within five (5) calendar days after determination has been made. If, after the
date upon which the payment required by this Paragraph 6 has been made, it is
determined (pursuant to final regulations or published rulings of the Internal
Revenue Service, final judgment of a court of competent jurisdiction, Internal
Revenue Service audit assessment, or otherwise) that the amount of excise or
other similar taxes or assessments payable by the Executive is greater
-8-
<PAGE> 10
than the amount initially so determined, then the Company shall pay the
Executive an amount equal to the sum of: (i) such additional excise or other
taxes, PLUS (ii) any interest, fines and penalties resulting from such
underpayment, PLUS (iii) an amount necessary to reimburse the Executive for any
income, excise or other tax assessment payable by the Executive with respect to
the amounts specified in (i) and (ii) above, and the reimbursement provided by
this clause (iii), in the manner described above in this Paragraph 6. Payment
thereof shall be made within five (5) calendar days after the date upon which
such subsequent determination is made.
7. Representations and Warranties of the Company.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, and has all requisite
corporate power and authority to enter into, execute and deliver this Employment
Agreement, fulfill its obligations hereunder and consummate the transactions
contemplated hereby.
(b) The execution and delivery of, performance of obligations under,
and consummation of the transactions contemplated by, this Employment Agreement
have been duly authorized and approved by all requisite corporate action by or
in respect of the Company, and this Employment Agreement constitutes the legally
valid and binding obligation of the Company, enforceable by the Executive in
accordance with its terms.
(c) No provision of the Company's governing documents or any agreement
to which it is a party or by which it is bound or of any material law or
regulation of the kind usually applicable and binding upon the Company prohibits
or limits its ability to enter into, execute and deliver this Employment
Agreement, fulfill its respective obligations hereunder and consummate the
transactions contemplated hereby.
8. Miscellaneous.
(a) The Executive represents and warrants that he is not a party to any
agreement, contract or understanding, whether employment or otherwise, which
would restrict or prohibit him from undertaking or performing employment in
accordance with the terms and conditions of this Employment Agreement.
(b) The provisions of this Employment Agreement are severable and if
any one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions and any partially
unenforceable provision, to the extent enforceable in any jurisdiction,
nevertheless shall be binding and enforceable.
(c) The rights and obligations of the Company under this Employment
Agreement shall inure to the benefit of, and shall be
-9-
<PAGE> 11
binding on, the Company and its successors and assigns, and the rights and
obligations (other than obligations to perform services) of the Executive under
this Employment Agreement shall inure to the benefit of, and shall be binding
upon, the Executive and his heirs, personal representatives and assigns.
(d) Any controversy or claim arising out of or relating to this
Employment Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association then
pertaining in Detroit, Michigan, and judgment upon the award rendered by the
arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. The arbitrator or arbitrators shall be deemed to possess the powers to
issue mandatory orders and restraining orders in connection with such
arbitration.
(e) Any notice to be given under this Employment Agreement shall be
personally delivered in writing or shall have been deemed duly given when
received after it is posted in the United States mail, postage prepaid,
registered or certified, return receipt requested, and if mailed to the
Company, shall be addressed to its principal place of business, and if mailed
to the Executive, shall be addressed to him at his home address last known on
the records of the Company, or at such other address or addresses as either the
Company or the Executive may hereafter designate in writing to the other.
(f) The failure of either party to enforce any provision or provisions
of this Employment Agreement shall not in any way be construed as a waiver of
any such provision or provisions as to any future violations thereof, or prevent
that party thereafter from enforcing each and every other provision of this
Employment Agreement. The rights granted the parties herein are cumulative and
the waiver of any single remedy shall not constitute a waiver of such party's
right to assert all other legal remedies available to it under the
circumstances.
(g) This Employment Agreement supersedes all prior agreements and
understandings between the parties and may not be modified or terminated orally.
No modification, termination or attempted waiver shall be valid unless in
writing and signed by the party against whom the same is sought to be enforced.
(h) This Employment Agreement shall be governed by and construed
according to the laws of the State of Delaware.
-10-
<PAGE> 12
(i) Where necessary or appropriate to the meaning hereof, the singular
and plural shall be deemed to include each other, and the masculine, feminine
and neuter shall be deemed to include each other.
CAPTEC NET LEASE REALTY, INC.
By:
--------------------------
Title: -----------------------
-----------------------------
PATRICK L. BEACH
-11-
<PAGE> 13
EXHIBIT A
BONUS CALCULATION
The amount of the bonus to be paid by the Company to the Executive
under Paragraph 3(b) of the Employment Agreement shall be based on the increase
in the "funds from operations per share" of the Company from year to year. The
bonus for calendar 1996 under this Agreement shall be based on the increase from
the Company's pro forma 1995 "funds from operations per share" to the Company's
1996 "funds from operations per share." Each year thereafter, the "funds from
operations per share" for the current year shall be compared to the "funds from
operations per share" for the immediately preceding year. The amount of the
"funds from operations per share" shall be appropriately adjusted in connection
with share dividends, share splits and other changes in the Company's
capitalization and shall be determined each year by the Company's Compensation
Committee in conjunction with such accountants or other experts as may be
appropriate. The amount of the bonus each year shall be calculated as follows:
<TABLE>
<CAPTION>
GROWTH FROM PRIOR YEAR'S AMOUNT OF BONUS AS
"FUNDS FROM OPERATIONS PER SHARE" PERCENTAGE OF BASE SALARY Sa
<S> <C>
Zero to less than 5% 10%
5% to less than 10% 25%
10% to less than 15% 50%
15% to less than 20% 75%
20% or higher 100%
</TABLE>
<PAGE> 14
EXHIBIT B
[SPLIT-DOLLAR AGREEMENT]
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NEW YORK 10010
LIFE INSURANCE SALES ILLUSTRATION
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
For Client:
Client:
Proposed Policy: Survivorship Whole Life (Form # 2J-90(96))
Base Policy provides Guaranteed Level Death Benefit payable only at second
death.
Base Policy provides Guaranteed Level Premiums payable for 55 years.
1st Insured's Risk Classification: MALE PREFERRED NONSMOKER age 47
2nd Insured's Risk Classification: FEMALE PREFERRED NONSMOKER age 45
For issue in the state of OH.
Divided Option: Dividends buy Paid-Up Additional Insurance.
<TABLE>
<CAPTION>
INITIAL CONTRACT PREMIUMS
BENEFITS INCLUDED ANNUAL SEMI-ANNUAL CHECK-O-MATIC YEARS TO PAY
- ----------------- ------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
2,500 Base Policy (Guaranteed) $ 28,475.00 $ 15,341.25 $ 2,557.50 55
----------- ----------- ----------
Total Initial Contract Premium $ 28,475.00 $ 15,341.25 $ 2,557.50
</TABLE>
This policy insures two individuals with the death benefit payable only at the
second death, except for any First- to-Die Rider. The primary purpose of this
policy is to provide for estate liquidity.
If you apply for this life insurance policy, MetLife will determine your
eligibility for coverage and premiums based on your actual risk classifications
and issue ages. You should compare the specifications shown above to those on
page 3 of any policy you may receive. If different, your MetLife representative
will explain any differences and provide you with a revised illustration.
WHAT IS GUARANTEED
The Contract Premium (Base Policy premium and all riders, except First-to-Die
Rider if any) shown in the illustration is guaranteed and can not be increased
by MetLife. MetLife also guarantees that the Death Benefit and the Cash Value
will never be less than the amount shown under the "Guaranteed" column headings
as long as the policyowner pays the required Contract Premiums, when due, and
does not borrow or surrender any Guaranteed Cash Value. THE GUARANTEED CASH
VALUE AND THE GUARANTEED DEATH BENEFIT DO NOT REFLECT REDUCTIONS THAT WOULD
RESULT FROM ANY POLICY LOANS FROM ANY POLICY LOANS OR SURRENDERS.
<PAGE> 15
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NEW YORK 10010
LIFE INSURANCE SALES ILLUSTRATION
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
WHAT IS NON-GUARANTEED
Amounts shown under the "Non-Guaranteed" columns reflect dividends. Dividends --
WHICH CAN NOT BE GUARANTEED, PREDICTED, OR EVEN ESTIMATED -- may be used to
increase your Death Benefit and/or Cash Value, used to reduce your Premium
Outlay, taken in cash, or applied under certain combinations of these uses. This
illustration is based on the 1996 dividend scale.
Since dividends will vary as changes occur MetLife's investment earnings
(interest), claims experience, and expenses, your actual Non-Guaranteed Cash
Value, Death Benefit, and Premium Outlay may differ (more or less) from what is
shown in the illustration.
In addition, the actual dividend option you choose and the extent to which you
borrow or surrender your policy's cash value will also cause your Non-Guaranteed
Cash Value and Death Benefit, as well as your Premium Outlay to be more or less
than what is shown in the illustration.
The purpose in showing the "Non-Guaranteed" columns is to assist you in
understanding how the policy works, NOT how it will perform.
ACCELERATED PAYMENT ARRANGEMENT -- Dividends can also be used to reduce the
number of years premium payments must be made in cash as shown in the Premium
Outlay column.
Additions Rider Cash Value if any.
Since dividends are NON-GUARANTEED, the actual number of years you will have to
pay the Contract Premium which continues to be required for 55 years, in cash,
may differ from what is shown in this illustration. If dividends are reduced,
some additional out-of-pocket cash outlays may be required by you even after
cash outlays have been discontinued under the Accelerated Payment Arrangement.
<PAGE> 16
The following table demonstrated how dividends may affect policy values.
<TABLE>
<CAPTION>
NON-GUARANTEED
NON-GUARANTEED CURRENT DIV. SCALE (LESS 1% OF
GUARANTEED CURRENT DIV. SCALE THE INTEREST COMPONENT)
POLICY CONTRACT DEATH CASH PREMIUM DEATH CASH PREMIUM DEATH CASH
YEAR PREMIUM BENEFIT VALUE OUTLAY BENEFIT VALUE OUTLAY BENEFIT VALUE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5 28475 25000000 8000 28475 2653674 108340 28475 2630333 104036
10 28475 25000000 247500 28475 2931903 351579 28475 2848424 331463
20 28475 25000000 707500 0 2631836 759613 8851 2553315 728574
age 65 28475 25000000 602500 0 2644931 654683 11500 2550686 620750
age 65 28475 25000000 707500 0 2631836 759613 8851 2553315 728574
</TABLE>
For the table above as well as the Standard Ledger section shown on the
following pages, Contract Premiums and Premium Outlay are assumed to be paid on
the first day of each policy year, and Cash Values and Death Benefits are shown,
do not show the impact of any loans or cash surrenders. The Non-Guaranteed Death
Benefit and Cash Value columns, which are based on the Premium Outlay shown,
reflect any illustrated loans or cash surrenders. Other Non-Guaranteed columns
shown in this illustration that reflect dividend balances only show the impact
of any illustrated cash surrenders.
<PAGE> 17
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NEW YORK 10010
LIFE INSURANCE SALES ILLUSTRATION
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
Proposed Insureds: and
Acknowledges
This illustration provides a summary of certain guaranteed and
non-guaranteed values and certain other provisions relating to the policy
described in this illustration. The policy must be read carefully to see exactly
what benefits are provided and what conditions apply. All rights and obligations
will be governed by the terms and conditions set forth in the policy itself if
and when issued. You have the absolute right to return the policy for any reason
to MetLife or to the sales representative from whom you purchased this policy
within 10 days after you receive it (or a longer period if stated in your
policy) and receive a refund of any premiums paid.
We have received all 14 pages of the illustration and understand that
if any of the pages are missing this illustration is not valid. We understand
that any non-guaranteed elements illustrated are subject to change. This means
that the Premium Outlay, non-guaranteed cash values, and non-guaranteed death
benefits may be more or less than those shown in the illustration. No
representations have been made to us to the contrary. We also understand that
under no circumstances (except for policy loans or surrenders) will the values
and benefits ever be less than those shown as guaranteed for as long as the
required contract premiums are paid.
Date:
Signature of Applicant (policyowner)
Date:
Signature of Applicant (policyowner)
Date:
Signature of 1st Insured (if other than policyowner)
Date:
Signature of 2nd Insured (if other than policyowner)
I certify that this illustration has been presented to the applicants in its
entirety and that I have explained that any non-guaranteed elements illustrated
are subject to change. I have made no representations that are inconsistent with
the illustration.
Date:
Signature of Representative
<PAGE> 18
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
STANDARD LEDGER
PREPARED FOR: AND
PRESENTED BY: Agent
MALE PREFERRED NONSMOKER 47
FEMALE PREFERRED NONSMOKER 45
ISSUE STATE: OH
FACE AMOUNT OF INSURANCE - 'GUARANTEED DEATH BENEFIT': $2,500,000.00
TARGET AMOUNT OF INSURANCE: $2,500,000.00
TARGET AMOUNT OF INSURANCE: $ 28,475.00
DIVIDENDS BUY PAID-UP ADDITIONAL INSURANCE 1996 DIVIDEND SCALE, 1996
PORTFOLIO
<TABLE>
<CAPTION>
NON GUARANTEED
GUARANTEED CASH
VALUE OF
POL CONTRACT CASH DEATH PREMIUM AMOUNT ANNUAL LOAN ANNUAL ADDITIONAL CASH ADDITIONAL DEATH
YEAR PREMIUM VALUE BENEFIT OUTLAY SURR. LOAN INTEREST DIVIDEND INSURANCE VALUE INSURANCE BENEFIT
B-O-Y E-O-Y B-O-Y B-O-Y B-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 28475 0 2500000 28475 0 0 0 0 0 0 0 25000000
2 28475 2500 2500000 28475 0 0 0 5000 4999 7499 31973 2531903
3 28475 25000 2500000 28475 0 0 0 5850 11248 36248 68061 2568061
4 28475 52500 2500000 28475 0 0 0 6775 18917 71417 108339 2608339
5 28475 8000 2500000 28475 0 0 0 7925 28340 108340 153674 2653674
6 28475 112500 2500000 28475 0 0 0 9250 39827 152327 204546 2704508
7 28475 142500 2500000 28475 0 0 0 9975 52936 195436 257584 2757584
8 28475 177500 2500000 28475 0 0 0 10800 67886 245386 313115 2813115
9 28475 212500 2500000 28475 0 0 0 11675 84858 297358 371162 2871162
10 28475 247500 2500000 28475 0 0 0 12625 104079 351579 431903 2931903
</TABLE>
The Contract Premium is required in each policy year. Any Premium
Outlay shown to be less than the Contract Premium relies on dividends and/or
certain other policy values to make up the difference. Dividends which are based
on the 1996 dividend scale cannot be guaranteed and are likely to be changed by
MetLife over time. As a result, your policy's Premium Outlay, non-guaranteed
values and benefits are likely to be more or less favorable than those
illustrated. But your Premium Outlay will not exceed the required Contract
Premium (unless you increase the SIB premium or repay any loan) and your values
and benefits will not be less than the amounts shown under the columns
designated as guaranteed (except for any surrenders and loans). This
illustration is not valid unless accompanied by the Supplemental Footnotes
beginning on page 10.
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIO-LD
<PAGE> 19
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
STANDARD LEDGER
PREPARED FOR: AND
PRESENTED BY: Agent
MALE PREFERRED NONSMOKER 47
FEMALE PREFERRED NONSMOKER 45
ISSUE STATE: OH
FACE AMOUNT OF INSURANCE - 'GUARANTEED DEATH BENEFIT':
$ 2,500,000.00
TARGET AMOUNT OF INSURANCE $ 2,500,000.00
INITIAL ANNUAL CONTRACT
PREMIUM (see Page 1) $28,475.00
DIVIDENDS BUY PAID-UP ADDITIONAL INSURANCE 1996 DIVIDEND SCALE, 1996
PORTFOLIO
<TABLE>
<CAPTION>
NON GUARANTEED
GUARANTEED CASH
ANNUAL VALUE OF
POL CONTRACT CASH DEATH PREMIUM AMOUNT ANNUAL LOAN ANNUAL ADDITIONAL CASH ADDITIONAL DEATH
YEAR PREMIUM VALUE BENEFIT OUTLAY SURR. LOAN INTEREST DIVIDEND INSURANCE VALUE INSURANCE BENEFIT
B-O-Y E-O-Y B-O-Y B-O-Y B-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
# 11 28475 287500 2500000 0 28475 0 0 13675 95143 382643 374757 2874757
# 12 28475 327500 2500000 0 28475 0 0 14800 86614 414114 324000 2824000
# 13 28475 367500 2500000 0 28475 0 0 15950 78564 446064 279242 2779242
# 14 28475 412500 2500000 0 28475 0 0 17325 71250 483750 240760 2740750
# 15 28475 457500 2500000 0 28475 0 0 18700 64744 522244 208101 2708101
# 16 28475 112500 2500000 0 28475 0 0 20200 59228 561728 181194 2681194
# 17 28475 142500 2500000 0 28475 0 0 21900 54983 607483 160208 2660208
# 18 28475 177500 2500000 0 28475 0 0 13675 52183 654683 144931 2644131
# 19 28475 212500 2500000 0 28475 0 0 25650 51141 703641 135497 2635497
# 20 28475 247500 2500000 0 28475 0 0 27750 52113 759613 131836 2631136
</TABLE>
The Contract Premium is required in each policy year. Any Premium
Outlay shown to be less than the Contract Premium relies on dividends and/or
certain other policy values to make up the difference. Dividends which are based
on the 1996 dividend scale cannot be guaranteed and are likely to be changed by
MetLife over time. As a result, your policy's Premium Outlay, non-guaranteed
values and benefits are likely to be more or less favorable than those
illustrated. But your Premium Outlay will not exceed the required Contract
Premium (unless you increase the SIB premium or repay any Loan) and your values
and benefits will not be less than the amounts shown under the columns
designated as guaranteed (except for any surrenders and loans). This
illustration is not valid unless accompanied by the Supplemental Footnotes
beginning on page 10. # The Premium Outlay for these years illustrates the use
of dividends which are not guaranteed an/or other policy values. As dividends
vary, the Premium Outlay may be more or less than the amount shown. Please refer
to page 13 for an explanation of the Accelerated Payment Arrangement
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 20
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
STANDARD LEDGER
PREPARED FOR: AND
PRESENTED BY: Agent
MALE PREFERRED NONSMOKER 47
FEMALE PREFERRED NONSMOKER 45
ISSUE STATE: OH
FACE AMOUNT OF INSURANCE - 'GUARANTEED DEATH BENEFIT':
$ 2,500,000.00
TARGET AMOUNT OF INSURANCE $ 2,500,000.00
INITIAL ANNUAL CONTRACT
PREMIUM (see Page 1)
$28,475.00
DIVIDENDS BUY PAID-UP ADDITIONAL INSURANCE
1996 DIVIDEND SCALE, 1996 PORTFOLIO
<TABLE>
<CAPTION>
NON GUARANTEED
GUARANTEED CASH
ANNUAL VALUE OF
POL CONTRACT CASH DEATH PREMIUM AMOUNT ANNUAL LOAN ANNUAL ADDITIONAL CASH ADDITIONAL DEATH
YEAR PREMIUM VALUE BENEFIT OUTLAY SURR. LOAN INTEREST DIVIDEND INSURANCE VALUE INSURANCE BENEFIT
B-O-Y E-O-Y B-O-Y B-O-Y B-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
# 21 28475 760000 2500000 0 28475 0 0 30025 55426 815426 134009 2634009
# 22 28475 817500 2500000 0 28475 0 0 32675 61629 879129 142541 2642541
# 23 28475 872500 2500000 0 28475 0 0 35475 71084 943584 157423 2657483
# 24 28475 932500 2500000 0 28475 0 0 38350 84105 1016605 178515 2678505
# 25 28475 990000 2500000 -282063 28475 282062 22565 41400 101127 786499 205917 2401289
# 26 28475 1050000 2500000 0 28475 0 24370 44675 122660 843662 239872 2410814
# 27 28475 1112500 2500000 0 28475 0 26320 48225 149310 906492 280764 2425446
# 28 28475 1172500 2500000 0 28475 0 28425 52050 181696 970453 328982 2445289
# 29 28475 1232500 2500000 0 28475 0 30699 56075 220436 1038494 384873 2470431
# 30 28475 1292500 2500000 0 28475 0 33155 60300 266156 1111059 448801 2501204
</TABLE>
The Contract Premium is required in each policy year. Any Premium
Outlay shown to be less than the Contract Premium relies on dividends and/or
certain other policy values to make up the difference. Dividends which are based
on the 1996 dividend scale cannot be guaranteed and are likely to be changed by
MetLife over time. As a result, your policy's Premium Outlay, non-guaranteed
values and benefits are likely to be more or less favorable than those
illustrated. But your Premium Outlay will not exceed the required Contract
Premium (unless you increase the SIB premium or repay any Loan) and your values
and benefits will not be less than the amounts shown under the columns
designated as guaranteed (except for any surrenders and loans). This
illustration is not valid unless accompanied by the Supplemental Footnotes
beginning on page 10. # The Premium Outlay for these years illustrates the use
of dividends which are not guaranteed an/or other policy values. As dividends
vary, the Premium Outlay may be more or less than the amount shown. Please refer
to page 13 for an explanation of the Accelerated Payment Arrangement
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 21
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
STANDARD LEDGER
PREPARED FOR: AND
PRESENTED BY: Agent
MALE PREFERRED NONSMOKER 47
FEMALE PREFERRED NONSMOKER 45
ISSUE STATE: OH
FACE AMOUNT OF INSURANCE - 'GUARANTEED DEATH BENEFIT':
$ 2,500,000.00
TARGET AMOUNT OF INSURANCE $ 2,500,000.00
INITIAL ANNUAL CONTRACT
PREMIUM (see Page 1) $28,475.00
DIVIDENDS BUY PAID-UP ADDITIONAL INSURANCE
1996 DIVIDEND SCALE, 1996 PORTFOLIO
<TABLE>
<CAPTION>
NON GUARANTEED
GUARANTEED CASH
ANNUAL VALUE OF
POL CONTRACT CASH DEATH PREMIUM AMOUNT ANNUAL LOAN ANNUAL ADDITIONAL CASH ADDITIONAL DEATH
YEAR PREMIUM VALUE BENEFIT OUTLAY SURR. LOAN INTEREST DIVIDEND INSURANCE VALUE INSURANCE BENEFIT
B-O-Y E-O-Y B-O-Y B-O-Y B-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
# 31 28475 1352500 2500000 0 28475 0 35808 64450 319267 1188362 520735 1537360
# 32 28475 1412500 2500000 0 28475 0 38672 68600 380280 1270703 600844 2578767
# 33 28475 1470000 2500000 0 28475 0 41766 72525 449499 1355656 688972 2625129
# 34 28475 1527500 2500000 0 28475 0 45107 76300 527297 1445847 785136 2676186
# 35 28475 1582500 2500000 0 28475 0 48716 80050 614152 1538986 889586 2731920
# 36 28475 1637500 2500000 0 28475 0 52613 83700 710565 1637786 1002674 2792395
# 37 28475 1690000 2500000 0 28475 0 56822 87350 817017 1739916 1124811 2857110
# 38 28475 1740000 2500000 0 28475 0 61368 91050 934064 1845595 1256629 2928160
# 39 28475 1787500 2500000 0 28475 0 66278 94625 1062095 1954848 1398469 3003722
# 40 28475 1832500 2500000 0 28475 0 71580 97900 1201354 2067527 1550475 3084143
</TABLE>
The Contract Premium is required in each policy year. Any Premium Outlay shown
to be less than the Contract Premium relies on dividends and/or certain other
policy values to make up the difference. Dividends which are based on the 1996
dividend scale cannot be guaranteed and are likely to be changed by MetLife over
time. As a result, your policy's Premium Outlay, non-guaranteed values and
benefits are likely to be more or less favorable than those illustrated. But
your Premium Outlay will not exceed the required Contract Premium (unless you
increase the SIB premium or repay any Loan) and your values and benefits will
not be less than the amounts shown under the columns designated as guaranteed
(except for any surrenders and loans). This illustration is not valid unless
accompanied by the Supplemental Footnotes beginning on page 10. # The Premium
Outlay for these years illustrates the use of dividends which are not guaranteed
an/or other policy values. As dividends vary, the Premium Outlay may be more or
less than the amount shown. Please refer to page 13 for an explanation of the
Accelerated Payment Arrangement
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 22
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
STANDARD LEDGER
PREPARED FOR: AND
PRESENTED BY: Agent
MALE PREFERRED NONSMOKER 47
FEMALE PREFERRED NONSMOKER 45
ISSUE STATE: OH
FACE AMOUNT OF INSURANCE - 'GUARANTEED DEATH BENEFIT':
$ 2,500,000.00
TARGET AMOUNT OF INSURANCE $ 2,500,000.00
INITIAL ANNUAL CONTRACT
PREMIUM (see Page 1) $28,475.00
DIVIDENDS BUY PAID-UP ADDITIONAL INSURANCE
1996 DIVIDEND SCALE, 1996 PORTFOLIO
<TABLE>
<CAPTION>
NON GUARANTEED
GUARANTEED CASH
ANNUAL VALUE OF
POL CONTRACT CASH DEATH PREMIUM AMOUNT ANNUAL LOAN ANNUAL ADDITIONAL CASH ADDITIONAL DEATH
YEAR PREMIUM VALUE BENEFIT OUTLAY SURR. LOAN INTEREST DIVIDEND INSURANCE VALUE INSURANCE BENEFIT
B-O-Y E-O-Y B-O-Y B-O-Y B-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
# 41 28475 1877500 2500000 0 28475 0 77306 100825 1351969 2185836 1712589 3168955
# 42 28475 1917500 2500000 0 28475 0 83491 103375 1514046 2304422 1884666 3257542
# 43 28475 1957500 2500000 0 28475 0 90170 105500 1687705 2427911 2066418 3349124
# 44 28475 1995000 2500000 0 28475 0 97384 106850 1872537 2552859 2256830 3442152
# 45 28475 2035000 2500000 0 28475 0 105174 107875 2068978 2681426 2455673 3535821
# 46 28475 2072500 2500000 0 28475 0 113588 108875 2278072 2817132 2663229 3629789
# 47 28475 2110000 2500000 0 28475 0 122675 109350 2499974 2953859 2878397 3722268
# 48 28475 2152500 2500000 0 28475 0 132489 111650 2740186 3104082 3105907 3817503
# 49 28475 2195000 2500000 0 28475 0 143088 113375 2999167 3262475 3344253 3912831
# 50 28475 2240000 2500000 0 28475 0 154535 115100 3278076 3431849 3594343 4008115
</TABLE>
The Contract Premium is required in each policy year. Any Premium Outlay shown
to be less than the Contract Premium relies on dividends and/or certain other
policy values to make up the difference. Dividends which are based on the 1996
dividend scale cannot be guaranteed and are likely to be changed by MetLife over
time. As a result, your policy's Premium Outlay, non-guaranteed values and
benefits are likely to be more or less favorable than those illustrated. But
your Premium Outlay will not exceed the required Contract Premium (unless you
increase the SIB premium or repay any Loan) and your values and benefits will
not be less than the amounts shown under the columns designated as guaranteed
(except for any surrenders and loans). This illustration is not valid unless
accompanied by the Supplemental Footnotes beginning on page 10. # The Premium
Outlay for these years illustrates the use of dividends which are not guaranteed
an/or other policy values. As dividends vary, the Premium Outlay may be more or
less than the amount shown. Please refer to page 13 for an explanation of the
Accelerated Payment Arrangement
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE,
NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 23
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
STANDARD LEDGER
PREPARED FOR: AND
PRESENTED BY: Agent
MALE PREFERRED NONSMOKER 47
FEMALE PREFERRED NONSMOKER 45
ISSUE STATE: OH
FACE AMOUNT OF INSURANCE - 'GUARANTEED DEATH BENEFIT':
$2,500,000.00
TARGET AMOUNT OF INSURANCE $2,500.000.00
INITIAL ANNUAL CONTRACT PREMIUM (see Page 1):
$28,475.00
DIVIDENDS BUY PAID-UP ADDITIONAL INSURANCE 1996 DIVIDEND SCALE, 1996
PORTFOLIO
<TABLE>
<CAPTION>
NON GUARANTEED
GUARANTEED CASH
ANNUAL VALUE OF
POL CONTRACT CASH DEATH PREMIUM AMOUNT ANNUAL LOAN ANNUAL ADDITIONAL CASH ADDITIONAL DEATH
YEAR PREMIUM VALUE BENEFIT OUTLAY SURR. LOAN INTEREST DIVIDEND INSURANCE VALUE INSURANCE BENEFIT
B-O-Y E-O-Y B-O-Y B-O-Y B-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
#51 28475 2287500 2500000 0 28475 0 166898 118300 3579203 3613578 3858106 4104910
#52 28475 2332500 2500000 0 28475 0 180250 118750 3901122 3800247 4135086 420170
#53 28475 2380000 2500000 0 28475 0 194760 119275 4248592 4000547 4430001 4301966
#54 28475 2420000 2500000 0 28475 0 210244 119700 4613789 4195500 4744744 4406455
#55 28475 2500000 2500000 0 28475 0 227063 120150 4936993 4371641 4936993 4371641
</TABLE>
The Contract Premium is required in each policy year. Any Premium
Outlay shown to be Less than the Contract Premium relies on dividends and/or
certain other policy values to make up the difference. Dividends which are based
on the 1996 dividend scale cannot be guaranteed and are likely to be changed by
MetLife over time. As a result, your policy's Premium Outlay, non-guaranteed
values and benefits are likely to be more or less favorable than those
illustrated. But your Premium Outlay will not exceed the required Contract
Premium (unless you increase the SIE premium or repay any loan) and your values
and benefits will not be less than the amounts shown under the columns
designated as guaranteed (except for any surrenders and loans). This
illustration is not valid unless accompanied by the Supplemental Footnotes
beginning on page 10.
# The Premium Outlay for three years illustrates the use of dividends
which are not guaranteed and/or other policy values. As dividends vary, the
Premium Outlay may be more or less than the amount shown. Please refer to page
13 for an explanation of the Accelerated Payment Arrangement.
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NY 10010-3690
95121H1 (EXP 1296) MLIC-LD
<PAGE> 24
THE EXPLANATORY NOTES
STANDARD LEDGER
Premium Outlay -- Shows the results if the January 1996 dividend scale continues
without change. Dividends are not guaranteed and may increase or decrease in the
future. If the future dividends decrease, it is possible that dividends and any
Paid-Up Additions Rider Cash Value will not be sufficient in some future years
to fund the full Contract Premium, and some additional out-of-pocket cash outlay
will be required. The amount of any additional cash outlay will depend on the
level of coverage to remain in force. This column also reflects any cash
surrenders and/or loans.
Guaranteed Cash Value - The total as of the end of the policy year of the
Guaranteed Cash Value of the base policy, plus the Guaranteed Cash Value of the
Supplemental Insurance Benefit, if any (calculated using guaranteed maximum term
rates and no dividends), plus the Paid-Up Additions Rider Guaranteed Cash Value,
if any. All value assume no dividends are paid, no loans or cash surrenders are
made, and all Contract Premiums have been paid, when due, through that year.
Guaranteed Death Benefit - The total of the Face Amount of insurance under the
base policy, any guaranteed coverage under Supplemental Insurance Benefit
coverage (calculated using guaranteed maximum term rates and no dividends), any
Four Year Term Insurance Rider coverage, and any Guaranteed Paid-Up Additions
Rider Death Benefit. It does not include the Death Benefit of any First-to-Die
Rider.
Non-Guaranteed Cash Value- The total as of the end of the year of the Guaranteed
Cash Value of the base policy, plus the Non-Guaranteed Paid-Up Additions Rider
Cash Value, if any, plus the Cash Value of Paid- Up Insurance purchased by
dividends and under the Supplemental Insurance Benefit, if any, plus accumulated
dividends, if any, plus the end of year dividend, if any, minus any outstanding
loans and loan interest due. This column reflects any cash surrenders shown.
Non-Guaranteed Additional Insurance - Includes the Death Benefit of Paid-Up
Additional Insurance purchase by dividends and under the Supplemental Insurance
Benefit, if any. It does not include any values under the Paid-Up Additions
Rider.
Non-Guaranteed Death Benefit - Includes the Face Amount of insurance under the
base policy, the Death Benefit of Paid-Up Additional Insurance purchased by
dividends, if any, plus the accumulated dividends, if any, the Death Benefit of
the Paid-Up Additions Rider, if any, the Death Benefit of the Supplemental
Insurance Benefit, if any, the Death Benefit of the Four Year Term Rider
Insurance, if any, minus any outstanding loan and loan interest due. It does not
include the Death Benefit of the First-to-Die Rider, if any. This column
reflects any cash surrenders shown.
Amount Surrendered - Includes any amounts surrendered from any dividend balances
and/or Paid-Up Rider values.
Dividend Information - Dividends, which are based on the January 1996 scale,
cannot be guaranteed, and are likely to be changed by MetLife over time. As a
result, your policy's Premium Outlay and non- guaranteed values and benefits are
likely to be more or less favorable than those illustrated. However, your
Premium Outlay will not exceed the required Contract Premium (unless you
increase the SIB premium or repay any loan), and your values and benefits will
not be less than the amounts shown in the guaranteed values columns (except for
any surrenders and loans).
Tax Note - The inclusion of the Paid-UP Additions Rider, the Four Year Term
Rider, or the First-to-Die Rider may cause this policy to be considered a
modified endowment contract (MEC) for federal income tax purposes. If so,
<PAGE> 25
amounts you receive, including loans proceeds, will be subject to federal income
tax to the extent of any gain in your policy. Taxable amounts are also generally
subject to a 10 percent additional tax unless you are at least age 59 1/2 when
such amounts are received. Please consult your tax or legal advisor for possible
tax implications.
Issue of Insurance - Any application for insurance will be subject to MetLife's
underwriting rules.
Loan Interest- This illustration is based on an adjustable loan interest rate of
8.00%. Actual rates may differ and are subject to change on each policy
anniversary.
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE,
NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIO-LD
<PAGE> 26
Interest Adjusted Indexes - These indexes provide a means for evaluating the
comparative cost of the policy under stated assumptions. They can be useful in
comparing similar plans of insurance, a lower index being better than a higher
one. These indexes reflect the time value of money.
Indexes are approximate because they involve assumptions, including the rate of
interest used, the dividends being paid in cash and the continuation of current
dividend scales. Indexes apply to the basic policy only. They exclude the
Supplemental Insurance Benefit, if any, as well as any optional riders such as
disability waiver.
Interest adjusted indexes based on a 5.00% interest rate for the basic policy:
<TABLE>
<CAPTION>
END OF END OF
10 YRS 20 YRS
<S> <C> <C>
LIFE INSURANCE NET PAYMENT COST INDEX 8.53 6.82
LIFE INSURANCE SURRENDER COST INDEX 1.03 1.34
EQUIVALENT LEVEL ANNUAL DIVIDEND 286 4.57
</TABLE>
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE,
NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 27
After premiums for your policy have been paid for a number of years, the
Accelerated Payment arrangement allows you to choose to pay future premiums, as
they fall due, through the use of accumulated dividends, and Paid-Up Additions
Rider cash value, if any. When you wish to start this procedure, ask your
Metropolitan Life Sales Representative to confirm that the dividends credited to
your policy and the Paid-Up Additions Rider cash value, if any, together with
future dividends based on the scale then in effect, are sufficient to accomplish
this objective. If values are sufficient, the procedure will make future premium
payments annually (no out-of-pocket cash outlay from you). Your Sales
Representative will assist you in making this change, if necessary, and in
putting this procedure in effect.
The number of years illustrated that out-of-pocket premium payments are required
under the Accelerated Payment arrangement is based upon the dividend scale in
effect at the time the policy is issued. Dividends, however, are not guaranteed.
Changes in dividend scales may increase or decrease the number of years for
which out-of-pocket premiums need to be paid. Also, if future dividend scales
decrease after this Accelerate Payment procedure is started, it is possible that
values may not be sufficient in some future years to pay the then full current
premium, again requiring out-of-pocket payment of the insufficient amount.
The Accelerated Payment arrangement increases your flexibility. When dividends
are sufficient, you may stop your out-of-pocket outlay or continue to pay your
premiums as you normally do. Even if you have chosen to pay premiums by the
Accelerated Payment arrangement, you may return to paying your premiums directly
at any time.
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE,
NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 28
BENEFITS THAT MAY BE AVAILABLE
The following are descriptions of benefits provided under the contract or by
riders that may be included with your policy, only at issue. These benefits, are
subject to certain limitations and exclusions which are not described below,
and, may not be available with all policies and in all states. For full details,
ask to see a specimen contract and/or rider.
DISABILITY WAIVER OF PREMIUMS BENEFIT
This benefit will be available, at the policyowner's option, an either or both
of the insureds. Provides that, if a covered insured becomes totally disabled,
as described in the rider, before age 60 and such disability lasts for at least
six months, the full premium for the base policy and the Four Year Term
Insurance Rider and the First-to- Die Rider will be waived while total
disability continues. Premiums for any Paid-Up Additions Rider benefit or for
the Supplemental Insurance Benefit will not be paid by this benefit. If the
totally disabled insured dies, the premium payments will resume. There is also a
limited waiver benefit for total disability occurring between ages 60 and 65.
PAID-UP ADDITIONAL INSURANCE BENEFIT
Provides for the purchase of additional paid-up insurance payable at the death
of the second insured to die and which generates additional cash values. This
rider also provides the potential for greater premium flexibility and for
advancing the year when cash premium payments are no longer required under the
Accelerated Payment arrangement.
FOUR YEAR TERM RIDER (ESTATE PROTECTION RIDER)
Application where the policy is to be transferred to a trust, or other third
party owner, shortly after issue. This rider is intended to offset the
possibility that the proceeds of the policy could be includible in the taxable
estate of the second insured to die if such a transfer were to occur within
years of death.
FIRST-TO-DIE RIDER
This rider provides level tern insurance on both insured lives with the death
benefit payable at the death of the first insured to die. The term of the
coverage can be either 10, 15, or 20 years, subject to issue age limitations.
SUPPLEMENTAL INSURANCE BENEFIT (SIB)
This benefit allows the policyholder to buy a combination of term insurance and
paid-up additional insurance to supplement the fact amount of insurance. If this
benefit is to be used, it must be elected at the time of issue.
POLICY SPLIT OPTION
This option allows the policyholder to convert the Survivorship Whole Life base
policy and any Supplemental Insurance Benefit, any Paid-Up Additions Rider, and
any accumulated dividends into two separate single life policies, one on the
life of each of the insureds. This option is only available when the two
insureds are married to each other at the time the policy was issued and may
only be exercised in certain situations and is not available in all states.
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 29
POLICY FACT SHEET
<TABLE>
<CAPTION>
INSURED #1 INSURED #2
<S> <C> <C>
NAME
SEX MALE FEMALE
AGE LAST BIRTHDAY 47
RATING CLASS PREFERRED (47) PREFERRED (45)
SMOKING STATUS NONSMOKER NONSMOKER
SPECIAL RATING CLASS NONE (0) NONE (0)
NONE (0) NONE (0)
ISSUE STATE OH
COVERAGES:
GUARANTEED BASIC FACT AMOUNT $2,500,000
NON GUARANTEED SUPPLEMENTAL INSURANCE BENEFIT $ 0
FOUR YEAR TERM RIDER $ 0
FIRST-TO-DIE RIDER $ 0
DISABILITY WAIVER INSURED 1 NO
DISABILITY WAIVER INSURED 2 NO
NON GUARANTEED PAID-UP ADDITIONS RIDER NO
INITIAL PREMIUMS:
BASIC POLICY PREMIUM $ 28,475.00 15,341.25 2,557.50
DISABILITY WAIVER INSURED 1 $ 0.00 0.00 0.00
DISABILITY WAIVER INSURED 2 $ 0.00 0.00 0.00
NON GUARANTEED SUPPL INS BEN (0) $ 0.00 0.00 0.00
ADDITIONAL DUMP-IN (SIB) $ 0.00
PLANNED SIB BILLABLE PREMIUM $ 0.00 0.00 0.00
FOUR YEAR TERM RIDER $ 0.00 0.00 0.00
FIRST-TO-DIE RIDER $ 0.00 0.00 0.00
NON GUARANTEED PAID-UP RIDER $ 0.00
ADDITIONAL DUMP-IN (PUAR) $ 0.00
7 PAY GUIDELINE PREMIUM $ 58,750.00
UNDERWRITING AMOUNT FOR PUAR $ 0.00
PRF NSM PREMIUM FOR PUAR $ 28,400.00
NON GUARANTEED INITIAL PUAR DEATH BENEFIT $ 0.00
NON GUARANTEED DEATH BENEFIT $2,500,000.00
INITIAL AMOUNT OF SIB PAID-UP ADDITIONS $ 0
INITIAL AMOUNT OF SIB ONE-YEAR TERM INS $ 0
</TABLE>
ACCOUNT REPRESENTATIVE:
THIS FORM MUST BE ATTACHED TO APPLICATION
<PAGE> 1
Exhibit 10.3
EMPLOYMENT AGREEMENT
BETWEEN
CAPTEC NET LEASE REALTY, INC.
AND
W. ROSS MARTIN
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the _____ day of
___________, 1997, between Captec Net Lease Realty, Inc., a Delaware corporation
(the "Company"), and W. Ross Martin (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive, and the Executive
desires to be employed by the Company, on the terms and subject to the
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties agree as follows:
1. Employment.
(a) The Company hereby employs the Executive as its Executive
Vice President and Chief Financial Officer and the Executive hereby accepts such
employment, on the terms and subject to the conditions hereinafter set forth.
(b) During the term of this Employment Agreement and any
renewal hereof (all references herein to the term of this Employment Agreement
shall include references to the period of renewal hereof, if any), the
Executive shall be and shall have the titles of Executive Vice President and
Chief Financial Officer and shall devote such business time and efforts to his
employment as the Executive deems appropriate and perform diligently such
duties as are customarily performed by Executive Vice Presidents and/or Chief
Financial Officers of publicly-held real estate investment trusts, together
with such other duties as may be reasonably requested from time to time by the
Chief Executive Officer and/or Board of Directors of the Company (the "Board"),
which duties shall be consistent with his positions as set forth above and as
provided in Paragraph 2.
<PAGE> 3
2. Term and Positions.
(a) Subject to the provisions for the termination of this
Agreement as provided for herein, the term of this Employment Agreement shall
commence on the date hereof and shall continue through December 31, 2000 (the
"Base Term") and shall automatically be extended for an additional one year
(each a "Renewal Year") at the end of each full calendar year for which this
Employment Agreement remains in effect unless on or before November 30 of each
calendar year, either party gives to the other party written notice of
termination of this Employment Agreement, in which case this Employment
Agreement shall terminate upon the completion of the then applicable employment
period including any previous Renewal Years.
(b) The Executive shall be entitled to serve as the
Executive Vice President and the Chief Financial Officer of the Company.
Without limiting the general scope of the Executive's position: (i) the
Executive shall not be required to report to any single individual other than
the Chief Executive Officer and the Board of Directors, (ii) no other
individual shall be elected or appointed as Executive Vice President or Chief
Financial Officer of the Company, (iii) with the exception of the Chief
Executive Officer, no other executive officer of the Company shall report to
any individual other than the Executive or the Chief Executive Officer, and
(iv) with the exception of the Chief Executive Officer, no individual or group
of individuals (including a committee established or other designee appointed
by the Board) shall have any authority over or equal to the authority of the
Executive in his role as Executive Vice President or Chief Financial Officer,
and neither the Company, the Board, nor any member of the Board shall take any
action which will or could have the effect of, or appear to have the effect of,
giving such authority to any such individual or group. The Executive shall be
entitled to the full protection of applicable indemnification provisions of the
certificate of incorporation and bylaws of the Company, as the same may be
amended from time to time, for his service as a director, officer and employee
of the Company.
(c) If:
(i) the Company materially changes the Executive's
duties and responsibilities as set forth in Paragraph 1(b) or 2(b)
without his consent (including, without limitation, by violating any of
the provisions of clause (i), (ii), (iii) or (iv) of Paragraph 2 (b));
(ii) the Executive's place of employment or the
principal executive offices of the Company are moved to a location more
than fifty (50) miles from the geographical center of Ann Arbor,
Michigan;
(iii) there occurs a material breach by the Company
of any of its obligations under this Employment Agreement
-2-
<PAGE> 4
(other than those specified in this Section 2(c)) that has not been
cured in all material respects within ten (10) days after the Executive
gives notice thereof to the Company;
(iv) there occurs a "change in control" (as
hereinafter defined) of the Company; or
(v) the Board or any nominating committee thereof or
committee performing a Board nomination function fails to nominate the
Executive for election to the Board in connection with any
shareholders' meeting to be held or action to be taken for the election
of directors;
then the Executive shall have the right to terminate his employment with the
Company, but such termination shall not be considered a voluntary resignation or
termination of such employment or of this Employment Agreement by the Executive
but rather a discharge of the Executive by the Company without "cause" (as
defined in Paragraph 5(a)(ii)).
(d) The Executive shall be considered not to have consented to
any written proposal calling for a material change in his duties and
responsibilities unless he shall give written notice of his consent thereto to
the Board within fifteen (15) days after receipt of such written proposal. If
the Executive shall not have given such consent, the Company shall have the
opportunity to withdraw such proposed material change by written notice to the
Executive given within ten (10) days after the end of said fifteen (15) day
period.
(e) The term "change in control" means the first to occur
of the following events:
(i) any person or group of commonly controlled
persons owns or controls, directly or indirectly,fifteen percent (15%)
or more of the voting control or value of the equity interests in the
Company following consummation of the initial public offering of the
Company's Common Shares, without par value (the "IPO");
(ii) any person or group of commonly controlled
persons who own less than five percent (5%) of the voting control or
value of the equity interests in the Company during the first 30 days
following the consummation of the IPO acquire ownership or control,
directly or indirectly, of more than twenty percent (20%) of the voting
control or value of the equity interests in the Company;
(iii) the shareholders of the Company approve an
agreement to merge or consolidate with another corporation or other
entity resulting (whether separately or in connection with a series of
transactions) in a change in ownership of twenty percent (20%) or more
of the voting control or value of
-3-
<PAGE> 5
the equity interests in the Company, or an agreement to sell or
otherwise dispose of all or substantially all of the Company's assets
(including, without limitation, a plan of liquidation or dissolution),
or otherwise approve of a fundamental alteration in the nature of the
Company's business.
3. Compensation.
During the term of this Employment Agreement the Company shall pay or
provide, as the case may be, to the Executive the compensation and other
benefits and rights set forth in this Paragraph 3.
(a) The Company shall pay to the Executive a base salary payable in
accordance with the Company's usual pay practices (and in any event no less
frequently than monthly) at the rate of One Hundred Thousand Dollars ($100,000)
per annum, to be increased (but not decreased) from time to time (based upon the
performance of the Company and the Executive) in a manner consistent with the
compensation of Chief Financial Officers of publicly-held real estate investment
trusts.
(b) The Company shall pay to the Executive bonus compensation for each
calendar year of the Company, not later than sixty (60) days following the end
of each year or the termination of his employment, as the case may be, prorated
on a per diem basis for partial calendar years, and determined and calculated in
a manner set forth on EXHIBIT A attached hereto.
(c) The Company shall grant to the Executive, pursuant to the
Company's Long-Term Incentive Plan, options to acquire 200,000 shares of the
Company's $.01 par value common stock (the "Common Stock") for a period of ten
years from the date of the initial public offering of the Common Stock at a
price equal to the initial public offering price of the Common Stock. The
options shall vest (at which time they shall become exerciseable) prorata on
each of the first three anniversaries of the execution.
(d) The Company shall provide to the Executive and his family all the
medical, dental, and all other group insurance benefits which the Company
provides generally to employees of the Company during active employment. In the
event of disability or death of the Executive, these benefits shall be continued
by the Company for life for the Executive and his spouse.
(e) The Executive shall participate in all retirement and other benefit
plans of the Company generally available from time to time to employees of the
Company and for which the Executive qualifies under their terms (and nothing in
this Agreement shall or shall be considered to in any way affect the Executive's
rights and benefits thereunder except as expressly provided herein).
(f) The Executive shall be entitled to such periods of vacation and
sick leave allowance each year as are determined by the Executive in his
reasonable and good faith discretion, which in any event shall be not less than
as provided generally under the Company's vacation and sick leave policy for
executive officers.
(g) The Executive shall be entitled to participate in any option or
other employee benefit compensation plan that is generally available to senior
executive officers, as distinguished
-4-
<PAGE> 6
from general management, of the Company. The Executive's participation in and
benefits under any such plan shall be on the terms and subject to the conditions
specified in the governing document of that plan.
(h) Beginning on the day after the cessation of the Executive's
employment with the Company, except in the case of termination of the
Executive's employment for cause under Paragraph 5, and continuing until the
Executive's death or the date, if ever, on which the Executive begins full-time
employment with another employer, the Company shall provide to the Executive, at
no cost to the Executive, office space at a location (other than the executive
offices of the Company) suitable to the Executive's status as the former Chief
Financial Officer of the Company, a full-time secretary and other customary
office support functions.
(i) The Company shall reimburse the Executive or provide him with an
expense allowance during the term of this Employment Agreement for travel,
entertainment and other expenses reasonably and necessarily incurred by the
Executive in connection with the Company's business. The Executive shall furnish
such documentation with respect to reimbursements to be made hereunder as the
Company shall reasonably request.
4. Payment in the Event of Death or Permanent Disability.
(a) The Company shall arrange for certain life insurance benefits to be
available to the Executive and his family as provided in this paragraph pursuant
to a Split-Dollar Agreement between the Company and the Executive (or his
assigns), in substantially the form of EXHIBIT B attached hereto and
incorporated herein by this reference. The life insurance benefit to be provided
by the Company to the Executive and his family under the Split-Dollar Agreement
shall be provided under two policies. One policy shall be a joint and survivor
policy in the amount of One Million Dollars ($1,000,000) insuring the life of
the Executive and his spouse. The other policy shall insure the Executive's life
and shall be in an amount equal to the greater of (i) One Million Dollars
($1,000,000) or (ii) five (5) times the Executive's annual cash compensation
paid or payable by the Company (including the base salary provided under
Paragraph 3(a) of this Agreement and the bonus provided under Paragraph 3(b) of
this Agreement). Each year, the amount of the life insurance benefit shall be
reviewed and revised in accordance with the prior years' cash compensation paid
and accrued for the benefit of the Executive, as soon as the amount of the prior
year's earned cash compensation, including all cash bonuses, can be calculated.
(b) In the event of the Executive's "permanent disability" (as
hereinafter defined) during the term of this Employment Agreement, for a period
of fifteen (15) years the Company shall pay to the Executive an annual amount
equal to .80 times the Executive's then effective per annum rate of salary, as
determined under Paragraph
-5-
<PAGE> 7
3(a), plus a pro rata portion of the bonus applicable to the fiscal year in
which such permanent disability occurs, as such bonus is determined under
Paragraph 3(b). After such fifteen (15) year period and for each year thereafter
until the Executive attains age sixty-five (65), the Company shall pay to the
Executive a disability benefit in an amount equal to the greater of (i)
sixty-five percent (65%) of the Executive's base compensation during the year in
which the disability occurred, or (ii) fifty percent (50%) of the Executive's
average annual total cash compensation for the three (3) years immediately
before the year in which the disability occurred. The Company, to the extent
possible, shall insure such disability benefits through an insurance company.
Such coverage shall contain a benefit for total, as well as partial and
residual, disabilities. The Company shall review and revise the amount of
coverage not less than annually in accordance with the prior year's total cash
compensation as soon as the amount of cash compensation, including all cash
bonuses, can be calculated. In the event of, and upon, Executive's permanent
disability, all unvested options shall vest immediately and become fully
exerciseable.
(c) Except as otherwise provided in Paragraphs 3(e), 3(h) (in
the event of permanent disability only), 4(a), and
4(b), in the event of the Executive's death or permanent disability,
the Executive's employment hereunder shall terminate and the Executive shall be
entitled to no further compensation or other benefits under this Employment
Agreement, except as to that portion of any unpaid salary and other benefits
accrued and earned by him hereunder up to and including the date of such death
or permanent disability, as the case may be.
(d) For purposes of this Employment Agreement, the Executive's
"permanent disability" shall be deemed to have occurred after one hundred twenty
(120) days in the aggregate during any consecutive twelve (12) month period, or
after ninety (90) consecutive days, during which one hundred twenty (120) or
ninety (90) days, as the case may be, the Executive, by reason of his physical
or mental disability or illness, shall have been unable to discharge his duties
under this Employment Agreement. The date of permanent disability shall be such
one hundred twentieth (120th) or ninetieth (90th) day, as the case may be. In
the event either the Company or the Executive, after receipt of notice of the
Executive's permanent disability from the other, dispute that the Executive's
permanent disability shall have occurred, the Executive shall promptly submit to
a physical examination by the chief of medicine of any major accredited hospital
in the Ann Arbor, Michigan, area and, unless such physician shall issue his
written statement to the effect that in his opinion, based on his diagnosis, the
Executive is capable of resuming his employment and devoting his full time and
energy to discharging his duties within thirty (30) days after the date of such
statement, such permanent disability shall be deemed to have occurred.
5. Termination.
-6-
<PAGE> 8
(a) The employment of the Executive under this Employment Agreement,
and the terms hereof, may be terminated by the Company:
(i) on the death or permanent disability (as defined in
Section 4(d)) of the Executive,
(ii) for cause at any time by action of the Board. For
purposes hereof, the term "cause" shall mean:
(A) The Executive's fraud, commission of a felony or
of an act or series of acts which result in material injury to
the business reputation of the Company, commission of an act
or series of repeated acts of dishonesty which are materially
inimical to the best interests of the Company, or the
Executive's willful and repeated failure to perform his lawful
duties under this Employment Agreement, which failure has not
been cured within fifteen (15) days after the Company gives
notice thereof to the Executive; or
(B) The Executive's material breach of any material
provision of this Employment Agreement, which breach has not
been cured in all substantial respects within ten (10) days
after the Company gives notice thereof to the Executive; or
(iii) other than for cause at any time by action of the Board,
subject to the operation of Paragraph 5(c).
The exercise by the Company of its rights of termination under this
Paragraph 5 shall be the Company's sole remedy in the event of the
occurrence of an event as a result of which such right to terminate
arises. Upon any termination of this Employment Agreement, the
Executive shall be deemed to have resigned from all offices held by the
Executive in the Company.
(b) In the event of a termination claimed by the Company to be for
"cause" pursuant to Paragraph 5(a)(ii), the Executive shall have the right to
have the justification for said termination determined by arbitration in
Detroit, Michigan. In order to exercise such right, the Executive shall serve on
the Company within thirty (30) days after termination a written request for
arbitration. The Company immediately shall request the appointment of an
arbitrator by the American Arbitration Association and thereafter the question
of "cause" shall be determined under the rules of the American Arbitration
Association, and the decision of the arbitrator shall be final and binding on
both parties. The parties shall use all reasonable efforts to facilitate and
expedite the arbitration and shall act to cause the arbitration to be completed
as promptly as possible. During the pendency of the arbitration, the Executive
shall continue to receive all compensation and benefits to which he is entitled
hereunder, and if
-7-
<PAGE> 9
at any time during the pendency of such arbitration the Company fails to pay and
provide all compensation and benefits to the Executive in a timely manner, the
Company shall be deemed to have automatically waived whatever rights it then may
have had to terminate the Executive's employment for cause. If the arbitrator
determines that the Executive's termination was effected for "cause," the
Executive shall reimburse the Company for all compensation and benefits received
by him during the pendency of the arbitration to which he is not entitled in
accordance with the first sentence of Paragraph 5(c). Expenses of the
arbitration shall be borne equally by the parties.
(c) In the event of termination for any of the reasons set forth in
subparagraph (a)(i) or (a)(ii) of this Paragraph 5, except as otherwise
provided in Paragraphs 3(e), 3(i) (in the case of permanent disability only),
4(a), and 4(b), the Executive shall be entitled to no further compensation or
other benefits under this Employment Agreement, except as to that portion of
any unpaid salary and other benefits accrued and earned by him hereunder up to
and including the effective date of such termination and all unvested options
shall be forfeited. If the Company terminates the Executive's employment
other than pursuant to subparagraph 5(a)(i) or 5(a)(ii) or the Executive
terminates his employment pursuant to subparagraph 2(c), all of the
compensation and benefits payable to the Executive pursuant to this Employment
Agreement shall be paid to the Executive for the remainder of the term of this
Employment Agreement (as that term is defined in subparagraph 2(a)) and all
options granted to the Executive shall vest immediately and become fully
exerciseable.
-8-
<PAGE> 10
6. Tax Adjustment Payments. If all or any portion of the amounts
payable to the Executive under this Employment Agreement (together with all
other payments of cash or property, whether pursuant to this Employment
Agreement or otherwise, including, without limitation, the issuance of common
stock of the Company, or the granting, exercise or termination of options
therefor) constitutes "excess parachute payments" within the meaning of Section
280G of the Code that are subject to the excise tax imposed by Section 4999 of
the Code (or any similar tax or assessment), the amounts payable hereunder shall
be increased to the extent necessary to place the Executive in the same
after-tax position as he would have been in had no such tax assessment been
imposed on any such payment paid or payable to the Executive under this
Employment Agreement or any other payment that the Executive may receive in
connection therewith. The determination of the amount of any such tax or
assessment and the incremental payment required hereby in connection therewith
shall be made by the accounting firm employed by the Executive within thirty
(30) calendar days after such payment and said incremental payment shall be made
within five (5) calendar days after determination has been made. If, after the
date upon which the payment required by this Paragraph 6 has been made, it is
determined (pursuant to final regulations or published rulings of the Internal
Revenue Service, final judgment of a court of competent jurisdiction, Internal
Revenue Service audit assessment, or otherwise) that the amount of excise or
other similar taxes or assessments payable by the Executive is greater than the
amount initially so determined, then the Company shall pay the Executive an
amount equal to the sum of: (i) such additional excise or other taxes, PLUS (ii)
any interest, fines and penalties resulting from such underpayment, PLUS (iii)
an amount necessary to reimburse the Executive for any income, excise or other
tax assessment payable by the Executive with respect to the amounts specified in
(i) and (ii) above, and the reimbursement provided by this clause (iii), in the
manner described above in this Paragraph 6. Payment thereof shall be made within
five (5) calendar days after the date upon which such subsequent determination
is made.
-9-
<PAGE> 11
7. Representations and Warranties of the Company.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, and has all requisite
corporate power and authority to enter into, execute and deliver this Employment
Agreement, fulfill its obligations hereunder and consummate the transactions
contemplated hereby.
(b) The execution and delivery of, performance of obligations under,
and consummation of the transactions contemplated by, this Employment Agreement
have been duly authorized and approved by all requisite corporate action by or
in respect of the Company, and this Employment Agreement constitutes the legally
valid and binding obligation of the Company, enforceable by the Executive in
accordance with its terms.
(c) No provision of the Company's governing documents or any agreement
to which it is a party or by which it is bound or of any material law or
regulation of the kind usually applicable and binding upon the Company prohibits
or limits its ability to enter into, execute and deliver this Employment
Agreement, fulfill its respective obligations hereunder and consummate the
transactions contemplated hereby.
8. Miscellaneous.
(a) The Executive represents and warrants that he is not a party to any
agreement, contract or understanding, whether employment or otherwise, which
would restrict or prohibit him from undertaking or performing employment in
accordance with the terms and conditions of this Employment Agreement.
(b) The provisions of this Employment Agreement are severable and if
any one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions and any partially
unenforceable provision, to the extent enforceable in any jurisdiction,
nevertheless shall be binding and enforceable.
(c) The rights and obligations of the Company under this Employment
Agreement shall inure to the benefit of, and shall be binding on, the Company
and its successors and assigns, and the rights and obligations (other than
obligations to perform services) of the Executive under this Employment
Agreement shall inure to the benefit of, and shall be binding upon, the
Executive and his heirs, personal representatives and assigns.
(d) Any controversy or claim arising out of or relating to this
Employment Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association then
pertaining in Detroit, Michigan, and judgment upon the award rendered by the
arbitrator or arbitrators
-10-
<PAGE> 12
may be entered in any court having jurisdiction thereof. The arbitrator or
arbitrators shall be deemed to possess the powers to issue mandatory orders and
restraining orders in connection with such arbitration.
(e) Any notice to be given under this Employment Agreement shall be
personally delivered in writing or shall have been deemed duly given when
received after it is posted in the United States mail, postage prepaid,
registered or certified, return receipt requested, and if mailed to the
Company, shall be addressed to its principal place of business, and if
mailed to the Executive, shall be addressed to him at his home address last
known on the records of the Company, or at such other address or addresses as
either the Company or the Executive may hereafter designate in writing to the
other.
(f) The failure of either party to enforce any provision or provisions
of this Employment Agreement shall not in any way be construed as a waiver of
any such provision or provisions as to any future violations thereof, or prevent
that party thereafter from enforcing each and every other provision of this
Employment Agreement. The rights granted the parties herein are cumulative and
the waiver of any single remedy shall not constitute a waiver of such party's
right to assert all other legal remedies available to it under the
circumstances.
(g) This Employment Agreement supersedes all prior agreements and
understandings between the parties and may not be modified or terminated orally.
No modification, termination or attempted waiver shall be valid unless in
writing and signed by the party against whom the same is sought to be enforced.
(h) This Employment Agreement shall be governed by and construed
according to the laws of the State of Delaware.
-11-
<PAGE> 13
(i) Where necessary or appropriate to the meaning hereof, the singular
and plural shall be deemed to include each other, and the masculine, feminine
and neuter shall be deemed to include each other.
CAPTEC NET LEASE REALTY, INC.
By:
------------------------------
Title:
---------------------------
-----------------------------
W. ROSS MARTIN
-12-
<PAGE> 14
EXHIBIT A
BONUS CALCULATION
The amount of the bonus to be paid by the Company to the Executive
under Paragraph 3(b) of the Employment Agreement shall be based on the increase
in the "funds from operations per share" of the Company from year to year. The
bonus for calendar 1996 under this Agreement shall be based on the increase from
the Company's pro forma 1995 "funds from operations per share" to the Company's
1996 "funds from operations per share." Each year thereafter, the "funds from
operations per share" for the current year shall be compared to the "funds from
operations per share" for the immediately preceding year. The amount of the
"funds from operations per share" shall be appropriately adjusted in connection
with share dividends, share splits and other changes in the Company's
capitalization and shall be determined each year by the Company's Compensation
Committee in conjunction with such accountants or other experts as may be
appropriate. The amount of the bonus each year shall be calculated as follows:
<TABLE>
<CAPTION>
GROWTH FROM PRIOR YEAR'S AMOUNT OF BONUS AS
"FUNDS FROM OPERATIONS PER SHARE" PERCENTAGE OF BASE SALARY Sa
- --------------------------------- ----------------------------
<S> <C>
Zero to less than 5% 10%
5% to less than 10% 25%
10% to less than 15% 50%
15% to less than 20% 75%
20% or higher 100%
</TABLE>
<PAGE> 15
EXHIBIT B
[SPLIT-DOLLAR AGREEMENT]
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NEW YORK 10010
LIFE INSURANCE SALES ILLUSTRATION
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
For Client:
Client:
Proposed Policy: Survivorship Whole Life (Form # 2J-90(96))
Base Policy provides Guaranteed Level Death Benefit payable only at second
death.
Base Policy provides Guaranteed Level Premiums payable for 55 years.
1st Insured's Risk Classification: MALE PREFERRED NONSMOKER age 47
2nd Insured's Risk Classification: FEMALE PREFERRED NONSMOKER age 45
For issue in the state of OH.
Divided Option: Dividends buy Paid-Up Additional Insurance.
<TABLE>
<CAPTION>
INITIAL CONTRACT PREMIUMS
BENEFITS INCLUDED ANNUAL SEMI-ANNUAL CHECK-O-MATIC YEARS TO PAY
- ----------------- ------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
2,500 Base Policy (Guaranteed) $ 28,475.00 $ 15,341.25 $ 2,557.50 55
----------- ----------- ----------
Total Initial Contract Premium $ 28,475.00 $ 15,341.25 $ 2,557.50
</TABLE>
This policy insures two individuals with the death benefit payable only at the
second death, except for any First- to-Die Rider. The primary purpose of this
policy is to provide for estate liquidity.
If you apply for this life insurance policy, MetLife will determine your
eligibility for coverage and premiums based on your actual risk classifications
and issue ages. You should compare the specifications shown above to those on
page 3 of any policy you may receive. If different, your MetLife representative
will explain any differences and provide you with a revised illustration.
WHAT IS GUARANTEED
The Contract Premium (Base Policy premium and all riders, except First-to-Die
Rider if any) shown in the illustration is guaranteed and can not be increased
by MetLife. MetLife also guarantees that the Death Benefit and the Cash Value
will never be less than the amount shown under the "Guaranteed" column headings
as long as the policyowner pays the required Contract Premiums, when due, and
does not borrow or surrender any Guaranteed Cash Value. THE GUARANTEED CASH
VALUE AND THE GUARANTEED DEATH BENEFIT DO NOT REFLECT REDUCTIONS THAT WOULD
RESULT FROM ANY POLICY LOANS FROM ANY POLICY LOANS OR SURRENDERS.
<PAGE> 16
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NEW YORK 10010
LIFE INSURANCE SALES ILLUSTRATION
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
WHAT IS NON-GUARANTEED
Amounts shown under the "Non-Guaranteed" columns reflect dividends. Dividends --
WHICH CAN NOT BE GUARANTEED, PREDICTED, OR EVEN ESTIMATED -- may be used to
increase your Death Benefit and/or Cash Value, used to reduce your Premium
Outlay, taken in cash, or applied under certain combinations of these uses. This
illustration is based on the 1996 dividend scale.
Since dividends will vary as changes occur MetLife's investment earnings
(interest), claims experience, and expenses, your actual Non-Guaranteed Cash
Value, Death Benefit, and Premium Outlay may differ (more or less) from what is
shown in the illustration.
In addition, the actual dividend option you choose and the extent to which you
borrow or surrender your policy's cash value will also cause your Non-Guaranteed
Cash Value and Death Benefit, as well as your Premium Outlay to be more or less
than what is shown in the illustration.
The purpose in showing the "Non-Guaranteed" columns is to assist you in
understanding how the policy works, NOT how it will perform.
ACCELERATED PAYMENT ARRANGEMENT -- Dividends can also be used to reduce the
number of years premium payments must be made in cash as shown in the Premium
Outlay column.
Additions Rider Cash Value if any.
Since dividends are NON-GUARANTEED, the actual number of years you will have to
pay the Contract Premium which continues to be required for 55 years, in cash,
may differ from what is shown in this illustration. If dividends are reduced,
some additional out-of-pocket cash outlays may be required by you even after
cash outlays have been discontinued under the Accelerated Payment Arrangement.
<PAGE> 17
The following table demonstrated how dividends may affect policy values.
<TABLE>
<CAPTION>
NON-GUARANTEED
NON-GUARANTEED CURRENT DIV. SCALE (LESS 1% OF THE
INTEREST COMPONENT)
GUARANTEED CURRENT DIV. SCALE
POLICY CONTRACT DEATH CASH PREMIUM DEATH CASH PREMIUM DEATH CASH
YEAR PREMIUM BENEFIT VALUE OUTLAY BENEFIT VALUE OUTLAY BENEFIT VALUE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5 28475 25000000 8000 28475 2653674 108340 28475 2630333 104036
10 28475 25000000 247500 28475 2931903 351579 28475 2848424 331463
20 28475 25000000 707500 0 2631836 759613 8851 2553315 728574
age 65 28475 25000000 602500 0 2644931 654683 11500 2550686 620750
age 65 28475 25000000 707500 0 2631836 759613 8851 2553315 728574
</TABLE>
For the table above as well as the Standard Ledger section shown on the
following pages, Contract Premiums and Premium Outlay are assumed to be paid on
the first day of each policy year, and Cash Values and Death Benefits are shown,
do not show the impact of any loans or cash surrenders. The Non-Guaranteed Death
Benefit and Cash Value columns, which are based on the Premium Outlay shown,
reflect any illustrated loans or cash surrenders. Other Non-Guaranteed columns
shown in this illustration that reflect dividend balances only show the impact
of any illustrated cash surrenders.
<PAGE> 18
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NEW YORK 10010
LIFE INSURANCE SALES ILLUSTRATION
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
Proposed Insureds: and
Acknowledges
This illustration provides a summary of certain guaranteed and
non-guaranteed values and certain other provisions relating to the policy
described in this illustration. The policy must be read carefully to see exactly
what benefits are provided and what conditions apply. All rights and obligations
will be governed by the terms and conditions set forth in the policy itself if
and when issued. You have the absolute right to return the policy for any reason
to MetLife or to the sales representative from whom you purchased this policy
within 10 days after you receive it (or a longer period if stated in your
policy) and receive a refund of any premiums paid.
We have received all 14 pages of the illustration and understand that
if any of the pages are missing this illustration is not valid. We understand
that any non-guaranteed elements illustrated are subject to change. This means
that the Premium Outlay, non-guaranteed cash values, and non-guaranteed death
benefits may be more or less than those shown in the illustration. No
representations have been made to us to the contrary. We also understand that
under no circumstances (except for policy loans or surrenders) will the values
and benefits ever be less than those shown as guaranteed for as long as the
required contract premiums are paid.
Date:
Signature of Applicant (policyowner)
Date:
Signature of Applicant (policyowner)
Date:
Signature of 1st Insured (if other than policyowner)
Date:
Signature of 2nd Insured (if other than policyowner)
I certify that this illustration has been presented to the applicants in its
entirety and that I have explained that any non-guaranteed elements illustrated
are subject to change. I have made no representations that are inconsistent with
the illustration.
Date:
Signature of Representative
<PAGE> 19
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
STANDARD LEDGER
PREPARED FOR: AND
PRESENTED BY: Agent
MALE PREFERRED NONSMOKER 47
FEMALE PREFERRED NONSMOKER 45
ISSUE STATE: OH
FACE AMOUNT OF INSURANCE - 'GUARANTEED DEATH BENEFIT':
$2,500,000.00
TARGET AMOUNT OF INSURANCE: $2,500,000.00
TARGET AMOUNT OF INSURANCE: $ 28,475.00
DIVIDENDS BUY PAID-UP ADDITIONAL INSURANCE 1996 DIVIDEND SCALE, 1996
PORTFOLIO
<TABLE>
<CAPTION>
NON GUARANTEED
GUARANTEED CASH
VALUE OF
POL CONTRACT CASH DEATH PREMIUM AMOUNT ANNUAL LOAN ANNUAL ADDITIONAL CASH ADDITIONAL DEATH
YEAR PREMIUM VALUE BENEFIT OUTLAY SURR. LOAN INTEREST DIVIDEND INSURANCE VALUE INSURANCE BENEFIT
B-O-Y E-O-Y B-O-Y B-O-Y B-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 28475 0 2500000 28475 0 0 0 0 0 0 0 25000000
2 28475 2500 2500000 28475 0 0 0 5000 4999 7499 31973 2531903
3 28475 25000 2500000 28475 0 0 0 5850 11248 36248 68061 2568061
4 28475 52500 2500000 28475 0 0 0 6775 18917 71417 108339 2608339
5 28475 8000 2500000 28475 0 0 0 7925 28340 108340 153674 2653674
6 28475 112500 2500000 28475 0 0 0 9250 39827 152327 204546 2704508
7 28475 142500 2500000 28475 0 0 0 9975 52936 195436 257584 2757584
8 28475 177500 2500000 28475 0 0 0 10800 67886 245386 313115 2813115
9 28475 212500 2500000 28475 0 0 0 11675 84858 297358 371162 2871162
10 28475 247500 2500000 28475 0 0 0 12625 104079 351579 431903 2931903
</TABLE>
The Contract Premium is required in each policy year. Any Premium
Outlay shown to be less than the Contract Premium relies on dividends and/or
certain other policy values to make up the difference. Dividends which are based
on the 1996 dividend scale cannot be guaranteed and are likely to be changed by
MetLife over time. As a result, your policy's Premium Outlay, non-guaranteed
values and benefits are likely to be more or less favorable than those
illustrated. But your Premium Outlay will not exceed the required Contract
Premium (unless you increase the SIB premium or repay any loan) and your values
and benefits will not be less than the amounts shown under the columns
designated as guaranteed (except for any surrenders and loans). This
illustration is not valid unless accompanied by the Supplemental Footnotes
beginning on page 10.
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIO-LD
<PAGE> 20
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
STANDARD LEDGER
PREPARED FOR: AND
PRESENTED BY: Agent
MALE PREFERRED NONSMOKER 47
FEMALE PREFERRED NONSMOKER 45
ISSUE STATE: OH
FACE AMOUNT OF INSURANCE - 'GUARANTEED DEATH BENEFIT':
$ 2,500,000.00
TARGET AMOUNT OF INSURANCE $ 2,500,000.00
INITIAL ANNUAL CONTRACT
PREMIUM (see Page 1) $28,475.00
DIVIDENDS BUY PAID-UP ADDITIONAL INSURANCE 1996 DIVIDEND SCALE, 1996
PORTFOLIO
<TABLE>
<CAPTION>
NON GUARANTEED
GUARANTEED CASH
ANNUAL VALUE OF
POL CONTRACT CASH DEATH PREMIUM AMOUNT ANNUAL LOAN ANNUAL ADDITIONAL CASH ADDITIONAL DEATH
YEAR PREMIUM VALUE BENEFIT OUTLAY SURR. LOAN INTEREST DIVIDEND INSURANCE VALUE INSURANCE BENEFIT
B-O-Y E-O-Y B-O-Y B-O-Y B-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
# 11 28475 287500 2500000 0 28475 0 0 13675 95143 382643 374757 2874757
# 12 28475 327500 2500000 0 28475 0 0 14800 86614 414114 324000 2824000
# 13 28475 367500 2500000 0 28475 0 0 15950 78564 446064 279242 2779242
# 14 28475 412500 2500000 0 28475 0 0 17325 71250 483750 240760 2740750
# 15 28475 457500 2500000 0 28475 0 0 18700 64744 522244 208101 2708101
# 16 28475 112500 2500000 0 28475 0 0 20200 59228 561728 181194 2681194
# 17 28475 142500 2500000 0 28475 0 0 21900 54983 607483 160208 2660208
# 18 28475 177500 2500000 0 28475 0 0 13675 52183 654683 144931 2644131
# 19 28475 212500 2500000 0 28475 0 0 25650 51141 703641 135497 2635497
# 20 28475 247500 2500000 0 28475 0 0 27750 52113 759613 131836 2631136
</TABLE>
The Contract Premium is required in each policy year. Any Premium
Outlay shown to be less than the Contract Premium relies on dividends and/or
certain other policy values to make up the difference. Dividends which are based
on the 1996 dividend scale cannot be guaranteed and are likely to be changed by
MetLife over time. As a result, your policy's Premium Outlay, non-guaranteed
values and benefits are likely to be more or less favorable than those
illustrated. But your Premium Outlay will not exceed the required Contract
Premium (unless you increase the SIB premium or repay any Loan) and your values
and benefits will not be less than the amounts shown under the columns
designated as guaranteed (except for any surrenders and loans). This
illustration is not valid unless accompanied by the Supplemental Footnotes
beginning on page 10. # The Premium Outlay for these years illustrates the use
of dividends which are not guaranteed an/or other policy values. As dividends
vary, the Premium Outlay may be more or less than the amount shown. Please refer
to page 13 for an explanation of the Accelerated Payment Arrangement
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 21
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
STANDARD LEDGER
PREPARED FOR: AND
PRESENTED BY: Agent
MALE PREFERRED NONSMOKER 47
FEMALE PREFERRED NONSMOKER 45
ISSUE STATE: OH
FACE AMOUNT OF INSURANCE - 'GUARANTEED DEATH BENEFIT':
$ 2,500,000.00
TARGET AMOUNT OF INSURANCE $ 2,500,000.00
INITIAL ANNUAL CONTRACT
PREMIUM (see Page 1) $28,475.00
DIVIDENDS BUY PAID-UP ADDITIONAL INSURANCE
1996 DIVIDEND SCALE, 1996 PORTFOLIO
<TABLE>
<CAPTION>
NON GUARANTEED
GUARANTEED CASH
ANNUAL VALUE OF
POL CONTRACT CASH DEATH PREMIUM AMOUNT ANNUAL LOAN ANNUAL ADDITIONAL CASH ADDITIONAL DEATH
YEAR PREMIUM VALUE BENEFIT OUTLAY SURR. LOAN INTEREST DIVIDEND INSURANCE VALUE INSURANCE BENEFIT
B-O-Y E-O-Y B-O-Y B-O-Y B-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
# 21 28475 760000 2500000 0 28475 0 0 30025 55426 815426 134009 2634009
# 22 28475 817500 2500000 0 28475 0 0 32675 61629 879129 142541 2642541
# 23 28475 872500 2500000 0 28475 0 0 35475 71084 943584 157423 2657483
# 24 28475 932500 2500000 0 28475 0 0 38350 84105 1016605 178515 2678505
# 25 28475 990000 2500000 -282063 28475 282062 22565 41400 101127 786499 205917 2401289
# 26 28475 1050000 2500000 0 28475 0 24370 44675 122660 843662 239872 2410814
# 27 28475 1112500 2500000 0 28475 0 26320 48225 149310 906492 280764 2425446
# 28 28475 1172500 2500000 0 28475 0 28425 52050 181696 970453 328982 2445289
# 29 28475 1232500 2500000 0 28475 0 30699 56075 220436 1038494 384873 2470431
# 30 28475 1292500 2500000 0 28475 0 33155 60300 266156 1111059 448801 2501204
</TABLE>
The Contract Premium is required in each policy year. Any Premium
Outlay shown to be less than the Contract Premium relies on dividends and/or
certain other policy values to make up the difference. Dividends which are based
on the 1996 dividend scale cannot be guaranteed and are likely to be changed by
MetLife over time. As a result, your policy's Premium Outlay, non-guaranteed
values and benefits are likely to be more or less favorable than those
illustrated. But your Premium Outlay will not exceed the required Contract
Premium (unless you increase the SIB premium or repay any Loan) and your values
and benefits will not be less than the amounts shown under the columns
designated as guaranteed (except for any surrenders and loans). This
illustration is not valid unless accompanied by the Supplemental Footnotes
beginning on page 10. # The Premium Outlay for these years illustrates the use
of dividends which are not guaranteed an/or other policy values. As dividends
vary, the Premium Outlay may be more or less than the amount shown. Please refer
to page 13 for an explanation of the Accelerated Payment Arrangement
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 22
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
STANDARD LEDGER
PREPARED FOR: AND
PRESENTED BY: Agent
MALE PREFERRED NONSMOKER 47
FEMALE PREFERRED NONSMOKER 45
ISSUE STATE: OH
FACE AMOUNT OF INSURANCE - 'GUARANTEED DEATH BENEFIT':
$ 2,500,000.00
TARGET AMOUNT OF INSURANCE $ 2,500,000.00
INITIAL ANNUAL CONTRACT
PREMIUM (see Page 1) $28,475.00
DIVIDENDS BUY PAID-UP ADDITIONAL INSURANCE
1996 DIVIDEND SCALE, 1996 PORTFOLIO
<TABLE>
<CAPTION>
NON GUARANTEED
GUARANTEED CASH
ANNUAL VALUE OF
POL CONTRACT CASH DEATH PREMIUM AMOUNT ANNUAL LOAN ANNUAL ADDITIONAL CASH ADDITIONAL DEATH
YEAR PREMIUM VALUE BENEFIT OUTLAY SURR. LOAN INTEREST DIVIDEND INSURANCE VALUE INSURANCE BENEFIT
B-O-Y E-O-Y B-O-Y B-O-Y B-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
# 31 28475 1352500 2500000 0 28475 0 35808 64450 319267 1188362 520735 1537360
# 32 28475 1412500 2500000 0 28475 0 38672 68600 380280 1270703 600844 2578767
# 33 28475 1470000 2500000 0 28475 0 41766 72525 449499 1355656 688972 2625129
# 34 28475 1527500 2500000 0 28475 0 45107 76300 527297 1445847 785136 2676186
# 35 28475 1582500 2500000 0 28475 0 48716 80050 614152 1538986 889586 2731920
# 36 28475 1637500 2500000 0 28475 0 52613 83700 710565 1637786 1002674 2792395
# 37 28475 1690000 2500000 0 28475 0 56822 87350 817017 1739916 1124811 2857110
# 38 28475 1740000 2500000 0 28475 0 61368 91050 934064 1845595 1256629 2928160
# 39 28475 1787500 2500000 0 28475 0 66278 94625 1062095 1954848 1398469 3003722
# 40 28475 1832500 2500000 0 28475 0 71580 97900 1201354 2067527 1550475 3084143
</TABLE>
The Contract Premium is required in each policy year. Any Premium Outlay shown
to be less than the Contract Premium relies on dividends and/or certain other
policy values to make up the difference. Dividends which are based on the 1996
dividend scale cannot be guaranteed and are likely to be changed by MetLife over
time. As a result, your policy's Premium Outlay, non-guaranteed values and
benefits are likely to be more or less favorable than those illustrated. But
your Premium Outlay will not exceed the required Contract Premium (unless you
increase the SIB premium or repay any Loan) and your values and benefits will
not be less than the amounts shown under the columns designated as guaranteed
(except for any surrenders and loans). This illustration is not valid unless
accompanied by the Supplemental Footnotes beginning on page 10. # The Premium
Outlay for these years illustrates the use of dividends which are not guaranteed
an/or other policy values. As dividends vary, the Premium Outlay may be more or
less than the amount shown. Please refer to page 13 for an explanation of the
Accelerated Payment Arrangement
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 23
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
STANDARD LEDGER
PREPARED FOR: AND
PRESENTED BY: Agent
MALE PREFERRED NONSMOKER 47
FEMALE PREFERRED NONSMOKER 45
ISSUE STATE: OH
FACE AMOUNT OF INSURANCE - 'GUARANTEED DEATH BENEFIT':
$ 2,500,000.00
TARGET AMOUNT OF INSURANCE $ 2,500,000.00
INITIAL ANNUAL CONTRACT
PREMIUM (see Page 1) $28,475.00
DIVIDENDS BUY PAID-UP ADDITIONAL INSURANCE
1996 DIVIDEND SCALE, 1996 PORTFOLIO
<TABLE>
<CAPTION>
NON GUARANTEED
GUARANTEED CASH
ANNUAL VALUE OF
POL CONTRACT CASH DEATH PREMIUM AMOUNT ANNUAL LOAN ANNUAL ADDITIONAL CASH ADDITIONAL DEATH
YEAR PREMIUM VALUE BENEFIT OUTLAY SURR. LOAN INTEREST DIVIDEND INSURANCE VALUE INSURANCE BENEFIT
B-O-Y E-O-Y B-O-Y B-O-Y B-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
# 41 28475 1877500 2500000 0 28475 0 77306 100825 1351969 2185836 1712589 3168955
# 42 28475 1917500 2500000 0 28475 0 83491 103375 1514046 2304422 1884666 3257542
# 43 28475 1957500 2500000 0 28475 0 90170 105500 1687705 2427911 2066418 3349124
# 44 28475 1995000 2500000 0 28475 0 97384 106850 1872537 2552859 2256830 3442152
# 45 28475 2035000 2500000 0 28475 0 105174 107875 2068978 2681426 2455673 3535821
# 46 28475 2072500 2500000 0 28475 0 113588 108875 2278072 2817132 2663229 3629789
# 47 28475 2110000 2500000 0 28475 0 122675 109350 2499974 2953859 2878397 3722268
# 48 28475 2152500 2500000 0 28475 0 132489 111650 2740186 3104082 3105907 3817503
# 49 28475 2195000 2500000 0 28475 0 143088 113375 2999167 3262475 3344253 3912831
# 50 28475 2240000 2500000 0 28475 0 154535 115100 3278076 3431849 3594343 4008115
</TABLE>
The Contract Premium is required in each policy year. Any Premium Outlay shown
to be less than the Contract Premium relies on dividends and/or certain other
policy values to make up the difference. Dividends which are based on the 1996
dividend scale cannot be guaranteed and are likely to be changed by MetLife over
time. As a result, your policy's Premium Outlay, non-guaranteed values and
benefits are likely to be more or less favorable than those illustrated. But
your Premium Outlay will not exceed the required Contract Premium (unless you
increase the SIB premium or repay any Loan) and your values and benefits will
not be less than the amounts shown under the columns designated as guaranteed
(except for any surrenders and loans). This illustration is not valid unless
accompanied by the Supplemental Footnotes beginning on page 10. # The Premium
Outlay for these years illustrates the use of dividends which are not guaranteed
an/or other policy values. As dividends vary, the Premium Outlay may be more or
less than the amount shown. Please refer to page 13 for an explanation of the
Accelerated Payment Arrangement
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE,
NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 24
SURVIVORSHIP WHOLE LIFE (METLIFE ESTATE SAVER)
STANDARD LEDGER
PREPARED FOR: AND
PRESENTED BY: Agent
MALE PREFERRED NONSMOKER 47
FEMALE PREFERRED NONSMOKER 45
ISSUE STATE: OH
FACE AMOUNT OF INSURANCE - 'GUARANTEED DEATH BENEFIT':
$2,500,000.00
TARGET AMOUNT OF INSURANCE $2,500.000.00
INITIAL ANNUAL CONTRACT PREMIUM (see Page 1):
$28,475.00
DIVIDENDS BUY PAID-UP ADDITIONAL INSURANCE 1996 DIVIDEND SCALE, 1996
PORTFOLIO
<TABLE>
<CAPTION>
NON GUARANTEED
GUARANTEED CASH
ANNUAL VALUE OF
POL CONTRACT CASH DEATH PREMIUM AMOUNT ANNUAL LOAN ANNUAL ADDITIONAL CASH ADDITIONAL DEATH
YEAR PREMIUM VALUE BENEFIT OUTLAY SURR. LOAN INTEREST DIVIDEND INSURANCE VALUE INSURANCE BENEFIT
B-O-Y E-O-Y B-O-Y B-O-Y B-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y E-O-Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
#51 28475 2287500 2500000 0 28475 0 166898 118300 3579203 3613578 3858106 4104910
#52 28475 2332500 2500000 0 28475 0 180250 118750 3901122 3800247 4135086 420170
#53 28475 2380000 2500000 0 28475 0 194760 119275 4248592 4000547 4430001 4301966
#54 28475 2420000 2500000 0 28475 0 210244 119700 4613789 4195500 4744744 4406455
#55 28475 2500000 2500000 0 28475 0 227063 120150 4936993 4371641 4936993 4371641
</TABLE>
The Contract Premium is required in each policy year. Any Premium
Outlay shown to be Less than the Contract Premium relies on dividends and/or
certain other policy values to make up the difference. Dividends which are based
on the 1996 dividend scale cannot be guaranteed and are likely to be changed by
MetLife over time. As a result, your policy's Premium Outlay, non-guaranteed
values and benefits are likely to be more or less favorable than those
illustrated. But your Premium Outlay will not exceed the required Contract
Premium (unless you increase the SIE premium or repay any loan) and your values
and benefits will not be less than the amounts shown under the columns
designated as guaranteed (except for any surrenders and loans). This
illustration is not valid unless accompanied by the Supplemental Footnotes
beginning on page 10.
# The Premium Outlay for three years illustrates the use of dividends
which are not guaranteed and/or other policy values. As dividends vary, the
Premium Outlay may be more or less than the amount shown. Please refer to page
13 for an explanation of the Accelerated Payment Arrangement.
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NY 10010-3690
95121H1 (EXP 1296) MLIC-LD
<PAGE> 25
THE EXPLANATORY NOTES
STANDARD LEDGER
Premium Outlay -- Shows the results if the January 1996 dividend scale continues
without change. Dividends are not guaranteed and may increase or decrease in the
future. If the future dividends decrease, it is possible that dividends and any
Paid-Up Additions Rider Cash Value will not be sufficient in some future years
to fund the full Contract Premium, and some additional out-of-pocket cash outlay
will be required. The amount of any additional cash outlay will depend on the
level of coverage to remain in force. This column also reflects any cash
surrenders and/or loans.
Guaranteed Cash Value - The total as of the end of the policy year of the
Guaranteed Cash Value of the base policy, plus the Guaranteed Cash Value of the
Supplemental Insurance Benefit, if any (calculated using guaranteed maximum term
rates and no dividends), plus the Paid-Up Additions Rider Guaranteed Cash Value,
if any. All value assume no dividends are paid, no loans or cash surrenders are
made, and all Contract Premiums have been paid, when due, through that year.
Guaranteed Death Benefit - The total of the Face Amount of insurance under the
base policy, any guaranteed coverage under Supplemental Insurance Benefit
coverage (calculated using guaranteed maximum term rates and no dividends), any
Four Year Term Insurance Rider coverage, and any Guaranteed Paid-Up Additions
Rider Death Benefit. It does not include the Death Benefit of any First-to-Die
Rider.
Non-Guaranteed Cash Value- The total as of the end of the year of the Guaranteed
Cash Value of the base policy, plus the Non-Guaranteed Paid-Up Additions Rider
Cash Value, if any, plus the Cash Value of Paid- Up Insurance purchased by
dividends and under the Supplemental Insurance Benefit, if any, plus accumulated
dividends, if any, plus the end of year dividend, if any, minus any outstanding
loans and loan interest due. This column reflects any cash surrenders shown.
Non-Guaranteed Additional Insurance - Includes the Death Benefit of Paid-Up
Additional Insurance purchase by dividends and under the Supplemental Insurance
Benefit, if any. It does not include any values under the Paid-Up Additions
Rider.
Non-Guaranteed Death Benefit - Includes the Face Amount of insurance under the
base policy, the Death Benefit of Paid-Up Additional Insurance purchased by
dividends, if any, plus the accumulated dividends, if any, the Death Benefit of
the Paid-Up Additions Rider, if any, the Death Benefit of the Supplemental
Insurance Benefit, if any, the Death Benefit of the Four Year Term Rider
Insurance, if any, minus any outstanding loan and loan interest due. It does not
include the Death Benefit of the First-to-Die Rider, if any. This column
reflects any cash surrenders shown.
Amount Surrendered - Includes any amounts surrendered from any dividend balances
and/or Paid-Up Rider values.
Dividend Information - Dividends, which are based on the January 1996 scale,
cannot be guaranteed, and are likely to be changed by MetLife over time. As a
result, your policy's Premium Outlay and non- guaranteed values and benefits are
likely to be more or less favorable than those illustrated. However, your
Premium Outlay will not exceed the required Contract Premium (unless you
increase the SIB premium or repay any loan), and your values and benefits will
not be less than the amounts shown in the guaranteed values columns (except for
any surrenders and loans).
Tax Note - The inclusion of the Paid-UP Additions Rider, the Four Year Term
Rider, or the First-to-Die Rider may cause this policy to be considered a
modified endowment contract (MEC) for federal income tax purposes. If so,
<PAGE> 26
amounts you receive, including loans proceeds, will be subject to federal income
tax to the extent of any gain in your policy. Taxable amounts are also generally
subject to a 10 percent additional tax unless you are at least age 59 1/2 when
such amounts are received. Please consult your tax or legal advisor for possible
tax implications.
Issue of Insurance - Any application for insurance will be subject to MetLife's
underwriting rules.
Loan Interest- This illustration is based on an adjustable loan interest rate of
8.00%. Actual rates may differ and are subject to change on each policy
anniversary.
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE,
NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIO-LD
<PAGE> 27
Interest Adjusted Indexes - These indexes provide a means for evaluating the
comparative cost of the policy under stated assumptions. They can be useful in
comparing similar plans of insurance, a lower index being better than a higher
one. These indexes reflect the time value of money.
Indexes are approximate because they involve assumptions, including the rate of
interest used, the dividends being paid in cash and the continuation of current
dividend scales. Indexes apply to the basic policy only. They exclude the
Supplemental Insurance Benefit, if any, as well as any optional riders such as
disability waiver.
Interest adjusted indexes based on a 5.00% interest rate for the basic policy:
<TABLE>
<CAPTION>
END OF END OF
10 YRS 20 YRS
<S> <C> <C>
LIFE INSURANCE NET PAYMENT COST INDEX 8.53 6.82
LIFE INSURANCE SURRENDER COST INDEX 1.03 1.34
EQUIVALENT LEVEL ANNUAL DIVIDEND 286 4.57
</TABLE>
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE,
NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 28
After premiums for your policy have been paid for a number of years, the
Accelerated Payment arrangement allows you to choose to pay future premiums, as
they fall due, through the use of accumulated dividends, and Paid-Up Additions
Rider cash value, if any. When you wish to start this procedure, ask your
Metropolitan Life Sales Representative to confirm that the dividends credited to
your policy and the Paid-Up Additions Rider cash value, if any, together with
future dividends based on the scale then in effect, are sufficient to accomplish
this objective. If values are sufficient, the procedure will make future premium
payments annually (no out-of-pocket cash outlay from you). Your Sales
Representative will assist you in making this change, if necessary, and in
putting this procedure in effect.
The number of years illustrated that out-of-pocket premium payments are required
under the Accelerated Payment arrangement is based upon the dividend scale in
effect at the time the policy is issued. Dividends, however, are not guaranteed.
Changes in dividend scales may increase or decrease the number of years for
which out-of-pocket premiums need to be paid. Also, if future dividend scales
decrease after this Accelerate Payment procedure is started, it is possible that
values may not be sufficient in some future years to pay the then full current
premium, again requiring out-of-pocket payment of the insufficient amount.
The Accelerated Payment arrangement increases your flexibility. When dividends
are sufficient, you may stop your out-of-pocket outlay or continue to pay your
premiums as you normally do. Even if you have chosen to pay premiums by the
Accelerated Payment arrangement, you may return to paying your premiums directly
at any time.
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE,
NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 29
BENEFITS THAT MAY BE AVAILABLE
The following are descriptions of benefits provided under the contract or by
riders that may be included with your policy, only at issue. These benefits, are
subject to certain limitations and exclusions which are not described below,
and, may not be available with all policies and in all states. For full details,
ask to see a specimen contract and/or rider.
DISABILITY WAIVER OF PREMIUMS BENEFIT
This benefit will be available, at the policyowner's option, an either or both
of the insureds. Provides that, if a covered insured becomes totally disabled,
as described in the rider, before age 60 and such disability lasts for at least
six months, the full premium for the base policy and the Four Year Term
Insurance Rider and the First-to- Die Rider will be waived while total
disability continues. Premiums for any Paid-Up Additions Rider benefit or for
the Supplemental Insurance Benefit will not be paid by this benefit. If the
totally disabled insured dies, the premium payments will resume. There is also a
limited waiver benefit for total disability occurring between ages 60 and 65.
PAID-UP ADDITIONAL INSURANCE BENEFIT
Provides for the purchase of additional paid-up insurance payable at the death
of the second insured to die and which generates additional cash values. This
rider also provides the potential for greater premium flexibility and for
advancing the year when cash premium payments are no longer required under the
Accelerated Payment arrangement.
FOUR YEAR TERM RIDER (ESTATE PROTECTION RIDER)
Application where the policy is to be transferred to a trust, or other third
party owner, shortly after issue. This rider is intended to offset the
possibility that the proceeds of the policy could be includible in the taxable
estate of the second insured to die if such a transfer were to occur within
years of death.
FIRST-TO-DIE RIDER
This rider provides level tern insurance on both insured lives with the death
benefit payable at the death of the first insured to die. The term of the
coverage can be either 10, 15, or 20 years, subject to issue age limitations.
SUPPLEMENTAL INSURANCE BENEFIT (SIB)
This benefit allows the policyholder to buy a combination of term insurance and
paid-up additional insurance to supplement the fact amount of insurance. If this
benefit is to be used, it must be elected at the time of issue.
POLICY SPLIT OPTION
This option allows the policyholder to convert the Survivorship Whole Life base
policy and any Supplemental Insurance Benefit, any Paid-Up Additions Rider, and
any accumulated dividends into two separate single life policies, one on the
life of each of the insureds. This option is only available when the two
insureds are married to each other at the time the policy was issued and may
only be exercised in certain situations and is not available in all states.
METROPOLITAN LIFE INSURANCE COMPANY
ONE MADISON AVENUE, NEW YORK, NY 10010-3690
951211HI (EXP 1296) MLIC-LD
<PAGE> 30
POLICY FACT SHEET
<TABLE>
<CAPTION>
<S> <C> <C>
INSURED #1 INSURED #2
NAME
SEX MALE FEMALE
AGE LAST BIRTHDAY 47 (45)
RATING CLASS PREFERRED (47) PREFERRED
SMOKING STATUS NONSMOKER NONSMOKER
SPECIAL RATING CLASS NONE (0) NONE (0)
NONE (0) NONE (0)
ISSUE STATE OH
COVERAGES:
GUARANTEED BASIC FACT AMOUNT $2,500,000
NON GUARANTEED SUPPLEMENTAL INSURANCE BENEFIT $ 0
FOUR YEAR TERM RIDER $ 0
FIRST-TO-DIE RIDER $ 0
DISABILITY WAIVER INSURED 1 NO
DISABILITY WAIVER INSURED 2 NO
NON GUARANTEED PAID-UP ADDITIONS RIDER NO
INITIAL PREMIUMS:
BASIC POLICY PREMIUM $ 28,475.00 15,341.25 2,557.50
DISABILITY WAIVER INSURED 1 $ 0.00 0.00 0.00
DISABILITY WAIVER INSURED 2 $ 0.00 0.00 0.00
NON GUARANTEED SUPPL INS BEN (0) $ 0.00 0.00 0.00
ADDITIONAL DUMP-IN (SIB) $ 0.00
PLANNED SIB BILLABLE PREMIUM $ 0.00 0.00 0.00
FOUR YEAR TERM RIDER $ 0.00 0.00 0.00
FIRST-TO-DIE RIDER $ 0.00 0.00 0.00
NON GUARANTEED PAID-UP RIDER $ 0.00
ADDITIONAL DUMP-IN (PUAR) $ 0.00
7 PAY GUIDELINE PREMIUM $ 58,750.00
UNDERWRITING AMOUNT FOR PUAR $ 0.00
PRF NSM PREMIUM FOR PUAR $ 28,400.00
NON GUARANTEED INITIAL PUAR DEATH BENEFIT $ 0.00
NON GUARANTEED DEATH BENEFIT $2,500,000.00
INITIAL AMOUNT OF SIB PAID-UP ADDITIONS $ 0
INITIAL AMOUNT OF SIB ONE-YEAR TERM INS $ 0
</TABLE>
ACCOUNT REPRESENTATIVE:
THIS FORM MUST BE ATTACHED TO APPLICATION
<PAGE> 1
Exhibit 10.4
AGREEMENT OF LIMITED PARTNERSHIP
OF
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
<PAGE> 2
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
INDEX
Page
1. Name and Place of Business.................................. A-1
2. Definitions................................................. A-2
3. Purpose..................................................... A-10
4. Term........................................................ A-10
5. General Partners............................................ A-10
6. Limited Partners............................................ A-11
7. Partnership Capital......................................... A-12
8. Liability of Limited Partners............................... A-12
9. Compensation to the General Partners and
their Affiliates............................................ A-13
10. Partnership Expenses........................................ A-16
11. Allocation of Income and Loss and Distributions............. A-18
12. Transferability of Units.................................... A-24
13. Books, Records, Accountings and Reports..................... A-27
14. Rights, Authority, Powers, Responsibilities
and Duties of the Managing General Partner................. A-29
15. Rights and Powers of the Limited Partners................... A-42
16. Removal, Bankruptcy or Dissolution of a
General Partner and Transfer of a General
Partner's Interest.......................................... A-45
17. Certain Transactions........................................ A-46
18. Termination and Dissolution of the Partnership.............. A-47
19. Special Power of Attorney................................... A-48
20. Liability and Indemnification............................... A-50
21. Miscellaneous............................................... A-51
<PAGE> 3
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
AGREEMENT OF LIMITED PARTNERSHIP
AGREEMENT of LIMITED PARTNERSHIP ("Partnership Agreement") entered
into as of the_____ day of __________________, 1994, by and among Captec
Franchise Capital Corporation III, a Michigan corporation (the "Managing General
Partner") and Patrick L. Beach (the "Individual General Partner"), as General
Partners and Patrick L. Beach as the Initial Limited Partner (the "Initial
Limited Partner"), with offices at 24 Frank Lloyd Wright Drive, P.O. Box 544,
Ann Arbor, Michigan 48106-0544, and Patrick L. Beach, as the Initial Limited
Partner, with offices at 24 Frank Lloyd Wright Drive, P.O. Box 544, Ann Arbor,
Michigan 48106-0544.
WHEREAS, the Managing General Partner, the Individual General Partner
and the Initial Limited Partner formed a limited partnership under the laws of
the State of Delaware on February 18, 1994 by filing a Certificate of Limited
Partnership (the "Certificate") with the Delaware Secretary of State to be
governed by this Partnership Agreement;
NOW, THEREFORE, in consideration of mutual promises made herein, the
parties hereto hereby agree as follows:
1. NAME AND PLACE OF BUSINESS
The name of the limited partnership to be governed hereby is Captec
Franchise Capital Partners L.P. III (the "Partnership"). Its registered office
in Delaware is The Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801. The Partnership's registered agent at that address is The
Corporation Trust Company. The Managing General Partner shall have full power
and authority to change the Partnership's registered office or registered agent.
The Partnership's principal place of business is 24 Frank Lloyd Wright Drive,
P.O. Box 544, Ann Arbor, Michigan 48106-0544, or such other place as the
Managing General Partner may hereafter determine. The General Partners shall
from time to time execute or cause to be executed the Certificate and all such
certificates (including limited partnership and fictitious name certificates) or
other documents or cause to be done all such filing, recording, publishing or
other acts as may be necessary or appropriate to comply with the requirements
for the formation and the operation of a limited partnership under the laws of
the State of Delaware and for the purpose of establishing and protecting the
limited liability of the Limited Partners, under the laws of any other
jurisdiction in which the Partnership may conduct business.
A-1
<PAGE> 4
2. DEFINITIONS
The following terms used in this Partnership Agreement shall (unless
otherwise expressly provided herein or unless the context otherwise requires)
have the following respective meanings:
"Acquisition Expenses" shall mean expenses, including but not limited
to credit reports, escrow fees, appraisal reports, attorneys' fees and title
insurance, accountants' fees and miscellaneous expenses, and travel and
communication expenses related to selection and acquisition of investments,
whether or not acquired.
"Acquisition Fees" shall mean the total of all fees and commissions
paid by any Person to any Person, including the General Partners and their
Affiliates in connection with the selection, evaluation, acquisition,
construction, and/or development of, Property or Equipment by the Partnership,
whether or not acquired, including but not limited to, real estate commissions,
selection fees, finder's fees, Development Fees, nonrecurring management fees,
consulting fees, payments for covenants not to compete, guarantee fees,
financing fees or other similar fees or commissions, however designated and
however treated for tax or accounting purposes, or any fees of a similar nature,
however designated. As used herein, "Development Fee" shall mean a fee for
packaging of a Partnership's property, including negotiating and approving
plans, and undertaking to assist in obtaining zoning and necessary variances and
necessary financing for the specific property, either initially or at a later
date.
"Act" shall mean the Securities Act of 1933, as amended.
"Additional Closing Date" shall mean each date between the Initial
Closing Date and the Final Closing Date on which a closing for Units sold
pursuant to the Prospectus occurs.
"Adjusted Investment" shall mean the Original Contributions
attributable to a Unit, reduced by the total amount of Net Sale or Refinancing
Proceeds distributed.
"Adjusted Net Asset Value" shall mean the book value of all Assets
minus all liabilities of the Partnership.
"Affiliate" of a Person shall mean: (i) any Person directly or
indirectly controlling, controlled by or under common control with another
Person; (ii) any Person owning or controlling 10% or more of the outstanding
voting securities of such other Person; (iii) any officer, director, trustee, or
partner of such Person; and (iv) if such other Person is an officer, director or
partner, any company for which such Person acts in any such capacity.
Notwithstanding the foregoing, the term Affiliate shall not apply to any Person
who shall serve solely as an independent director,
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trustee or partner of the General Partners or of an Affiliate of the General
Partners nor shall a partner in a partnership or joint venture with (a) the
Partnership or (b) an Affiliate of the General Partners, shall be deemed an
Affiliate of the General Partners solely by virtue of such relationship.
"Appraised Value" shall mean the value of any real property according
to an appraisal made by an independent qualified appraiser who is a member in
good standing of the American Institute of Real Estate Appraisers (an MAI
appraiser).
"Assets" means collectively all Partnership Properties and
Equipment.
"Capital Account" shall mean, with respect to any Partner, the
Capital Account maintained for such Partner in accordance with the following
provisions:
(i) to each Partner's Capital Account there shall be
credited such Partner's Original Contribution, such Partner's
distributive share of Income, and any items in the nature of income
or gain that are specifically allocated to such Partner, and the
amount of any Partnership liabilities that are assumed by such
Partner or that are secured by any Partnership property distributed
to such Partner.
(ii) to each Partner's Capital Account there shall be
debited the amount of cash and the Gross Asset Value of any
Partnership property distributed to such Partner pursuant to any
provision of this Partnership Agreement, such Partner's distributive
share of losses, and any items in the nature of expenses or losses
that are specifically allocated to such Partner, and the amount of
any liabilities of such Partner that are assumed by the Partnership
or that are secured by any property contributed by such Partner to
the Partnership.
In the event any interest in the Partnership is transferred in
accordance with the terms of this Partnership Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to the
transferred interest. In the event the Gross Asset Values of Partnership assets
are adjusted pursuant hereto, the Capital Accounts of all Partners shall be
adjusted simultaneously to reflect the aggregate net adjustment.
The foregoing provisions and the other provisions of this Partnership
Agreement relating to the maintenance of Capital Accounts are intended to comply
with Treasury Regulation Section 1.704-1(b), and shall be interpreted and
applied in a manner consistent with such Regulations. In the event the Managing
General Partner shall determine that it is prudent to modify the manner in which
the Capital Accounts, or any debits or credits
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thereto, are computed in order to comply with such Regulations, the Managing
General Partner may make such modification. The Managing General Partner shall
adjust the amounts debited or credited to Capital Accounts with respect to (a)
any property contributed to the Partnership or distributed to the Partners; and
(b) any liabilities that are secured by such contributed or distributed property
or are assumed by the Partnership or the Partners in the event the Managing
General Partner shall determine such adjustments are necessary or appropriate
pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv). The Managing General
Partner also shall make any appropriate modifications in the event unanticipated
events might otherwise cause this Partnership Agreement not to comply with
Treasury Regulations Section 1.704-1(b).
"Capital Contribution" shall mean the Original Contribution.
"Cash Flow" means, with respect to any period, all cash receipts
derived from payments of all forms of income on Assets held by the Partnership
including all rents from and other revenues paid in connection with Partnership
Assets (as distinguished from Original Contributions and exclusive of any Net
Sale or Refinancing Proceeds), without deduction for depreciation, plus amounts,
if any, from reserves attributable to such cash receipts with respect to any
prior period, if no longer deemed necessary for Partnership operations, less
cash receipts used to pay operating expenses and to repurchase any Units or set
aside from such cash receipts by the Managing General Partner for working
capital reserves.
"Certificate" shall mean the Certificate of Limited Partnership of
Captec Franchise Capital Partners L.P. III as filed with the Secretary of State
of the State of Delaware, and all amendments thereto.
"Closing Date" shall mean each date designated by the General
Partners on which subscribers for Units are admitted as Limited Partners as a
result of purchases occurring during the offering period.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
corresponding provisions of subsequent revenue laws.
"Current Preferred Return" shall mean a cumulative, non-compounded
return equal to ten percent (10%) per annum on a Limited Partner's Adjusted
Investment, calculated to commence on the first day of the month following the
month in which the Limited Partner is admitted to the Partnership as a Limited
Partner.
"Delaware Act" shall mean the Delaware Revised Uniform Limited
Partnership Act as in effect and as it may be amended.
"Depreciation" shall mean, for each fiscal year or other
period, an amount equal to the depreciation, amortization, or other
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cost recovery deduction allowable with respect to an asset for such year or
other period, except that if the Gross Asset Value of an asset differs from its
adjusted basis for federal income tax purposes at the beginning of such year or
other period, Depreciation shall be an amount which bears the same ratio to such
beginning Gross Asset Value as the federal income tax depreciation,
amortization, or other cost recovery deduction for such year or other period
bears to such beginning adjusted tax basis.
"Disposition" shall mean any Partnership transaction with respect to
Property or Equipment not in the ordinary course of its business including,
without limitation, sales, exchanges, or other dispositions of Property or
Equipment held by the Partnership, and recoveries of damage awards and insurance
proceeds with respect to Property or Equipment.
"Distributions" shall mean any cash or other property distributed to
the Limited Partners and the General Partners arising from their interests in
the Partnership, but shall not include any payments to the Managing General
Partner under the provisions of Sections 9 or 10.
"Equipment" shall mean any equipment acquired for lease by the
Partnership, whether directly or indirectly through a nominee, agent,
partnership, trust, joint venture or otherwise, but does not include leases.
"Final Closing Date" shall mean the date on which the last closing
for Units sold pursuant to the Prospectus occurs.
"Front-End Fees" shall mean fees and expenses paid by any party for
any services rendered in connection with and during the Partnership's
organizational or acquisition phase including Organizational and Offering
Expenses, Acquisition Fees, Acquisition Expenses and any other similar fees.
"Full Payout Lease" shall mean a lease under which the present value
of non-cancelable rental payments payable during the initial term of the lease
is at least sufficient to permit a lessor to recover the purchase price of
equipment.
"General Partners" shall mean Captec Franchise Capital Corporation
III and Patrick L. Beach in their respective capacities as general partners of
the Partnership, or any other Person, corporation or other entity which succeeds
either of them in such capacity, as well as any additional general partners.
"Gross Asset Value" shall mean, with respect to any asset, the
asset's adjusted basis for federal income tax purposes, except as follows:
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(i) The initial Gross Asset Value of any asset contributed
by a Partner to the Partnership shall be the gross fair market value
of such asset, as determined by the contributing Partner and the
Partnership;
(ii) The Gross Asset Values of all Partnership assets shall
be adjusted to equal their respective gross fair market values, as
determined by the Managing General Partner, as of the following
times: (a) the acquisition of an additional interest in the
Partnership by any new or existing Partner in exchange for more than
the Original Contribution; (b) the distribution by the Partnership to
a Partner of more than a deminimus amount of Partnership property
other than money, unless all Partners receive simultaneous
distributions of undivided interests in the distributed property in
proportion to their interests in the Partnership; and (c) the
termination of the Partnership for federal income tax purposes
pursuant to Code Section 708(b)(1)(B); and
(iii) If the Gross Asset Value of an asset has been de-
termined or adjusted pursuant to subparagraph (i) or sub paragraph
(ii) hereof, such Gross Asset Value shall there after be adjusted by
the Depreciation taken into account with respect to such asset for
purposes of computing taxable income and loss.
"Gross Proceeds" shall mean the total proceeds from the sale of Units
before deductions for Front-End Fees.
"Individual General Partner" shall mean Patrick L. Beach in
his capacity as the individual general partner of the Partnership.
"Initial Closing Date" shall mean the date on which the first closing
for Units sold pursuant to the Prospectus occurs.
"Initial Limited Partner" shall mean Patrick L. Beach in his
capacity as the initial limited partner.
"Investment in Assets" shall mean the amount of Gross Proceeds used
to invest in Property and/or Equipment, including working capital reserves
allocable thereto and other cash payments, but excluding Front-End Fees.
"Limited Partners" shall mean the Initial Limited Partner and any
other Persons who are admitted to the Partnership as additional or substituted
Limited Partners. Reference to a "Limited Partner" shall refer to any one of
them.
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"Limited Partnership Interests" shall mean the ownership interest of
a Partner in the Partnership from time to time, including the right of such
Partner to any and all benefits to which such Partner may be entitled as
provided in this Partnership Agreement and in the Delaware Act, together with
the obligations of such Partner to comply with all the terms and provisions of
this Partnership Agreement and of the Delaware Act.
"Majority Vote" shall mean the affirmative vote of the holders of
more than 50% of the outstanding Units.
"Managing General Partner" shall mean Captec Franchise Capital
Corporation III, or its successors and assigns in its or their capacity as the
managing general partner of the Partnership.
"Minimum Number of Units" shall mean 1,150 Units.
"Net Income or Loss From Annual Operations" shall mean the income or
loss for the Partnership's calendar year computed under the accrual method of
accounting for purposes of the federal income tax (excluding any income or loss
attributable to a Disposition or involuntary conversion of any of the
Partnership Property).
"Net Income or Loss From Other Than Annual Operations" shall mean the
income or loss for the Partnership's calendar year computed under the accrual
method of accounting for purposes of the federal income tax arising from (i) a
Disposition or (ii) any other transaction not included in the determination of
Net Income or Loss From Annual Operations.
"Net Offering Proceeds" shall mean the total Gross Proceeds
less Organizational and Offering Expenses.
"Net Sale or Refinancing Proceeds" shall mean receipts from
Dispositions or refinancing of Partnership Properties or Equipment plus amounts,
if any, from reserves attributable to prior Dispositions if no longer deemed
necessary for Partnership operations, less the following:
(i) the amount paid or to be paid in connection with
or as an expense of such Disposition or refinancing;
(ii) the amount necessary for the payment of all debts and
obligations of the Partnership including, but not limited to, fees to
the Managing General Partner or its Affiliates and amounts, if any,
required to be paid to, arising from or otherwise related to the
particular Disposition or refinancing; and
(iii) any amount set aside by the Managing General Partner
for working capital reserves from such receipts.
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"Organizational and Offering Expenses" shall mean all expenditures
classified as syndication expenses pursuant to Code Section 709 and Treasury
Regulation Section 1.709-2(b), including, but not limited to, all those expenses
incurred in connection with the formation, qualification and registration of the
Partnership and in marketing, distributing and processing Units, including any
selling commissions and discounts under applicable federal and state law, and
any other expenses actually incurred and directly related to the offering and
sale of Units, including such expenses as: (a) fees and expenses paid to
attorneys in connection with the offering, (b) securities jurisdictional fees,
filing fees and taxes, (c) the costs of qualifying, printing, amending, sup-
plementing, mailing and distributing the Partnership's Prospectus including
telephone and telegraphic costs, (d) the costs of qualifying, printing,
amending, supplementing, mailing and distributing sales materials used in
connection with the issuance of Units, including telephone and telegraphic
costs, (e) remuneration of officers and employees of the General Partners and
its Affiliates and the Partnership while directly engaged in marketing,
distributing, processing and establishing records of Units and establishing
records and paying selling commissions, (f) accounting and legal fees and
expenses incurred in connection therewith by the General Partners or its
Affiliates, (g) reimbursements for accountable bona fide costs of due diligence
incurred by participating broker-dealers and (h) the 2% non-accountable expense
allowance payable to the General Partners pursuant to Section 9.1 hereof.
"Original Contribution" shall mean the amount of $1,000 for each
Unit, which amount shall be attributed to such Unit in the hands of subsequent
holders thereof, less the return of any amount of uninvested funds returned
pursuant to Paragraph 11.10 hereof.
"Participating Dealers" shall mean those broker-dealers who
as members of the National Association of Securities Dealers, Inc.
who are participating in the public offering of the Units.
"Partners" shall mean collectively the General Partners and the
Limited Partners, and reference to a "Partner" shall be to any one of the
Partners.
"Partnership" shall mean the limited partnership created under this
Partnership Agreement and any successor thereto.
"Partnership Agreement" shall mean this agreement of limited
Partnership, as amended and restated, and all amendments thereto.
"Partnership List" shall mean an alphabetical list of the names,
addresses and business telephone numbers of the Limited Partners along with the
number of units held by each.
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"Performance Preferred Return" shall mean a cumulative,
non-compounded return equal to eleven percent (11%) per annum on a Limited
Partner's Adjusted Investment, calculated to commence on the first day of the
month following the month in which the Limited Partner is admitted to the
Partnership as a Limited Partner.
"Person" shall mean any natural person, partnership, corporation,
association or other legal entity.
"Property" or "Properties" shall mean the real estate, together with
the buildings improvements, fixtures and Personal property associated therewith
(but excluding Equipment), acquired or to be acquired, by the Partnership.
"Prospectus" shall mean the prospectus contained in the registration
statement filed with the Securities and Exchange Commission for the registration
of the Units under the Securities Act of 1933, as amended, in the final form in
which said prospectus is filed with said Commission and as thereafter
supplemented.
"Purchase Prices" shall mean (i) the invoice price or contract price
at which the Partnership acquired Property and/or Equipment from the
manufacturer or a third party seller, or an amount no greater than the invoice
price or contract price, at which an Affiliate of the Partnership, acquired
Property and/or Equipment. The Purchase Price of Equipment and/or Property shall
include Acquisition Fees (except for purpose of the calculation of such Fees)
and all debt secured by liens and security interests on the Property and/or
Equipment, but shall exclude points and prepaid interest.
"Roll-Up Entity" shall mean a partnership, real estate investment
trust, corporation, trust or other entity that would be created or would survive
after the successful completion of a proposed Roll-Up Transaction.
"Roll-Up Transaction" shall mean any transaction or series of
transactions that directly or indirectly, through acquisition or otherwise,
involve the combination, merger or conversion of the Partnership.
"Qualified Plans" shall mean qualified pension, profit sharing and
other employee retirement benefit plans (including Keogh [H.R. 10] plans) and
trusts, bank commingled trust funds for such plans and individual retirement
accounts.
"Sponsor" shall mean any Person directly or indirectly instrumental
in organizing, wholly or in part, the Partnership or who will manage or
participate in the management of the Partnership and any Affiliate of such
Person, but does not include (i) any Person whose only relationship with the
Partnership or the General Partners is that of an asset manager whose only
compensation from
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the Partnership is as such, and (ii) wholly-independent third parties such as
attorneys, accountants and underwriters whose only compensation from the
Partnership is for professional services rendered in connection with the
offering of Units or the operations of the Partnership. A Person may also be a
Sponsor of the Partnership by: (i) taking the initiative, directly or
indirectly, and founding or organizing the business or enterprise of the
Partnership, either alone or in conjunction with one or more other Persons; (ii)
receiving a material participation in the Partnership in connection with the
founding or organizing of the business of the Partnership, in consideration of
services or property, or both the services and property; (iii) having a
substantial number of relationships and contacts with the Partnership; (iv)
possessing significant rights to control Partnership property; (v) receiving
fees for providing services to the Partnership which are paid on a basis that is
not customary in the industry; and (vi) providing goods or services to the
Partnership on a basis which was not negotiated at arms-length with the
Partnership.
"Substantially All of the Assets" shall mean, unless the context
otherwise dictates, assets representing 66-2/3% or more of the net book value of
all of the Partnership's Assets as of the end of the most recently completed
fiscal quarter.
"Tax-Exempt Entities" shall mean Qualified Plans and other entities
exempt from federal income taxation, such as endowment funds and foundations and
charitable, religious, scientific or educational organizations.
"Termination Date" shall mean one year after the effective date of
the Partnership's Prospectus.
"Unit" shall mean the ownership interest of the Limited
Partners in the Partnership.
3. PURPOSE
The principal purpose of the Partnership is to acquire, hold, lease,
mortgage, operate, sell or otherwise dispose of Properties and Equipment which
will be leased on a "triple net" basis primarily to operators of nationally
franchised fast-food, family style and dinner house restaurants as well as other
franchised service-type businesses, to take any and all actions and to engage in
any other business in which a limited partnership may lawfully engage under the
laws of the state which, in the opinion of the Managing General Partner, are
necessary to maintain and protect its interest therein.
4. TERM
The Partnership was formed as of the day of filing of the
Certificate of the Partnership with the Delaware Secretary of State
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and shall continue until the 31st day of December 2025, unless previously
terminated in accordance with the provisions of this Partnership Agreement.
5. GENERAL PARTNERS
5.1 CAPITAL CONTRIBUTIONS. Captec Franchise Capital Corporation III,
and Patrick L. Beach in their capacities as General Partners, have each
contributed $100 in cash to the Partnership. At all times during the existence
of the Partnership, the General Partners shall have a present and continuing
interest in Net Income or Loss From Other Than Annual Operations and
Distributions according to the provisions of Section 11.
5.2 CAPITAL ACCOUNTS. The Partnership shall establish for each
General Partner a Capital Account (to be maintained in accordance with
appropriate provisions of federal income tax law, including Treasury Regulation
Section 1.704-1(b)). In the event any interest in the Partnership is transferred
in accordance with the terms of this Partnership Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to the
transferred interest. In the event the Gross Asset Values of Partnership assets
are adjusted for purposes of computing income or loss, the Capital Accounts of
all General Partners shall be adjusted simultaneously to reflect the aggregate
net adjustment as if the Partnership recognized gain or loss equal to the amount
of such aggregate net adjustment. Loans by any General Partner to the
Partnership shall not be considered contributions to the capital of the
Partnership.
5.3 RESERVES. Since the Partnership's leases will be on a "triple
net" basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established. However, to the extent the Partnership has
insufficient funds for such purposes, the General Partners will advance to the
Partnership an aggregate amount of up to 1% of the Gross Proceeds for
maintenance and repairs.
6. LIMITED PARTNERS
6.1 INITIAL LIMITED PARTNER. The Initial Limited Partner has
contributed the sum of $100 to the capital of the Partnership and has received
.1 Unit. The .1 Unit of the Initial Limited Partner shall be redeemed
immediately following the admission to the Partnership of any other Limited
Partner in return for the sum of $100 and the Initial Limited Partner shall
withdraw as a Limited Partner.
6.2 CAPITAL ACCOUNTS. The Partnership shall establish for each
Limited Partner a Capital Account (to be maintained in accordance with
appropriate provisions of federal income tax law, including Treasury Regulation
Section 1.704-1(b)). In the event
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any interest in the Partnership is transferred in accordance with the terms of
this Partnership Agreement, the transferee shall succeed to the Capital Account
of the transferor to the extent it relates to the transferred interest. In the
event the Gross Asset Values of Partnership assets are adjusted for purposes of
computing income or loss, the Capital Accounts of all Limited Partners shall be
adjusted simultaneously to reflect the aggregate net adjustment as if the
Partnership recognized gain or loss equal to the amount of such aggregate net
adjustment. Loans by any Limited Partner to the Partnership shall not be
considered contributions to the capital of the Partnership.
6.3 AUTHORIZATION OF SALE OF UNITS. The Partnership is authorized to
issue not more than 20,000 Units (including the .1 Unit held by the Initial
Limited Partner, which .1 Unit shall be available for sale upon withdrawal of
said Initial Limited Partner). The proceeds of such offering shall be
contributed in cash to the capital of the Partnership.
6.4 ESCROW OF ORIGINAL CONTRIBUTIONS AND COMMENCEMENT OF PARTNERSHIP
OPERATIONS. All Original Contributions shall be received by the Partnership in
trust, and shall be deposited in an escrow account in any financial institution
designated by the Managing General Partner as escrow agent for the Original
Contributions. If 1,150 Units (the "Minimum Number of Units") are not sold on
or before one year after the effective date of the Partnership's Prospectus (the
"Termination Date"), all monies held in escrow shall be returned to subscribers
with any interest earned thereon (subject to deductions for back-up withholding,
if applicable). If the Minimum Number of Units is sold by the Termination Date,
all monies held in escrow together with any interest earned thereon will be
distributed promptly by the escrow agent to the Partnership on the Initial
Closing Date, and all selling commissions then due and payable shall be paid to
the participating broker-dealers by the Partnership, as agent for the purchasers
of Units, and the Managing General Partner may, in its sole discretion continue
the offering for a period to end not later than (i) the sale of all Units
offered by the Prospectus or (ii) two years after the effective date of the
Prospectus. After the Initial Closing Date, investors shall be admitted as
Limited Partners on at least a monthly basis. Subscriptions shall be accepted or
rejected by the General Partners within thirty (30) days of their receipt; if
rejected, all funds shall be returned to the investor within ten (10) business
days after rejection. Investors whose subscriptions are accepted by the General
Partners shall be admitted to the Partnership at the time their names are shown
on the books and records of the Partnership as Limited Partners.
6.5 NO ASSESSMENTS OR ADDITIONAL CONTRIBUTIONS. The Units
are non-assessable and no Limited Partner shall be required to make
additional contributions to the capital of the Partnership.
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7. PARTNERSHIP CAPITAL
7.1 WITHDRAWAL OF CAPITAL. No Partner shall have the right to
withdraw, or receive any return of, his Capital Contribution, except as
specifically provided herein. Except as provided in Paragraph 6.1, no Limited
Partner shall have priority over any other Limited Partner, as to the return of
his Capital Contribution or as to profits, losses or distributions.
7.2 RETURN OF CAPITAL. Under circumstances requiring a return of any
Capital Contribution, no Partner shall have the right to receive property other
than cash.
8. LIABILITY OF LIMITED PARTNERS
8.1 NO PERSONAL LIABILITY. Limited Partners shall not be bound by,
or be personally liable for, the expenses, liabilities or obligations of the
Partnership, and no Limited Partner shall be required to lend funds to the
Partnership or to make any further Capital Contribution to the Partnership.
8.2 OBLIGATION TO REFUND PRIOR DISTRIBUTIONS. If the Partnership
does not have sufficient assets to discharge its liabilities, and under the
Delaware Act, Limited Partners are liable to the Partnership for previous
Distributions as determined by court of competent jurisdiction, then
notwithstanding the provisions of this Partnership Agreement, such Limited
Partner shall be required to repay all or any part of such Distributions, such
obligation shall be the obligation of such Limited Partner and not the
obligation of the General Partners.
9. COMPENSATION TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The General Partners and their Affiliates will receive compensation
from the Partnership only as specified by Sections 9, 10, 11, and Paragraphs
14.2.7 and 14.2.8 hereof. Front-End Fees shall be reduced to the extent
necessary to comply with Paragraph 14.6 hereof.
9.1 SECURITIES COMMISSIONS. Participating Dealers, including
Affiliates of the General Partners will receive selling commissions in an amount
equal to 8.0% of the purchase price of all Units placed by them directly.
Additionally, an amount of up to .5% may be paid to prospective Participating
Dealers by the General Partners from amounts received by them for Organizational
and Offering Expenses for accountable expenses incurred in connection with due
diligence activities of such prospective Participating Dealers subject to volume
discounts.
9.2 NON-ACCOUNTABLE EXPENSE ALLOWANCE. The General Partners
and/or their Affiliates shall receive a non-accountable expense
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allowance from the Partnership (the "Non-Accountable Expense Allowance"),
aggregating 2.0% of Gross Proceeds.
9.3 ORGANIZATIONAL AND OFFERING EXPENSES. The Managing General
Partner or an Affiliate shall be reimbursed for all Organizational and Offering
Expenses up to a maximum amount equal to 3.0% of Gross Proceeds, (less amounts
paid directly by the Partnership), excluding selling commissions and the
Non-Accountable Expense Allowance referenced in Paragraph 9.2 hereof, but
including amounts paid to participating dealers as accountable bona fide due
diligence expenses in an amount of up to .5% of Gross Proceeds.
9.4 ACQUISITION FEES AND EXPENSES. The General Partners or an
Affiliate shall be entitled to receive Acquisition Fees equal to the lesser of
(1) 4.0% of Gross Proceeds plus an additional .0624% for each 1% of indebtedness
(calculated as the aggregate amount of Partnership indebtedness secured by
Partnership Assets as a percentage of the aggregate Purchase Prices of such
Assets) incurred in acquiring Properties and/or Equipment, but in no event will
Acquisition Fees exceed 5.0% of the aggregate Purchase Prices of Properties
and/or Equipment; or (2) compensation customarily charged in arm's-length
transactions by others rendering similar services as an on-going activity in the
same geographic location for property or equipment comparable to the Property or
Equipment to be purchased by the Partnership. The General Partners or an
Affiliate will pay all Acquisition Expenses from amounts received as Acquisition
Fees.
9.5 ASSET MANAGEMENT FEES. The Managing General Partner or an
Affiliate shall receive an asset management fee equal to the lesser of
competitive fees for similar services in the same geographic location or 1% of
gross rental revenues from Partnership Properties and Equipment. Such asset
management fee shall be payable on a monthly or quarterly basis as determined by
the Managing General Partner, provided however, that such fees will accrue and
be subordinated to receipt by the Limited Partners of their Current Preferred
Return. Notwithstanding the foregoing, in the event of a default under a triple
net lease which requires the Partnership to assume operations of a Property
and/or Equipment, such operations will be managed by an Affiliate of the General
Partners. In such event, the Affiliate will be entitled to an unsubordinated
management fee equal to 5% of gross revenues generated by the Property and/or
Equipment plus reimbursement for on-site expenses.
9.6 EQUIPMENT LIQUIDATION FEES. The Partnership will pay an
Affiliate for the resale of Equipment an amount equal to three
percent (3%) of the contract sales price of the Equipment.
9.7 REAL ESTATE LIQUIDATION FEES. The Partnership will pay an
Affiliate of the General Partner an amount equal to the lesser of (a) fifty
percent (50%) of the real estate commission
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customarily charged for similar services in the locale of the Property being
sold or (b) three percent (3%) of the gross sales price of a Property. Such fees
will accrue and be subordinated to receipt by the Limited Partners of aggregate
Distributions equal to a 12% per annum cumulative, non-compounded return on
their Adjusted Investment plus aggregate distributions of Net Sale or
Refinancing Proceeds equal to 100% of their Original Contributions.
Notwithstanding anything to the contrary herein, neither the General Partners
nor any of their Affiliates shall have an exclusive listing in connection with
the sale of a Property by the Partnership. There is neither limitation nor
subordination as to any real estate commission paid to entities unaffiliated
with the General Partners.
9.8 PAYMENT OF FEES. Should a General Partner be removed from the
Partnership, any portion of any of the foregoing fees or any other fee or
reimbursement payable under this Partnership Agreement which is then due but not
yet paid, shall be paid by the Partnership to the General Partner or their
Affiliates, as the case may be, in cash within thirty (30) days of the date of
removal as stated in the written notice of removal, unless such amount is
included in the purchase price of the General Partners' interest in the
Partnership as determined under Paragraph 16.3 hereof.
9.9 OTHER GOODS AND SERVICES. In extraordinary circumstances, the
General Partners and their Affiliates may provide other goods and services to
the Partnership if all of the following criteria are met: (i) the goods or
services must be necessary to the prudent operation of the Partnership; (ii) the
compensation, price or fee must be equal to the lesser of 90% of the
compensation, price or fee the Partnership would be required to pay to
unaffiliated parties who are rendering comparable services or selling or leasing
comparable goods on competitive terms in the same geographic location, or 90% of
the compensation, price or fee charged by the General Partners or their
Affiliates for rendering comparable services or selling or leasing comparable
goods on competitive terms; or (iii) if at least 95% of gross revenues
attributable to the business of rendering such services or selling or leasing
such goods are derived from Persons other than Affiliates, the compensation,
price or fee charged by an unaffiliated Person who is rendering comparable
services or selling or leasing comparable goods on competitive terms in the same
geographic location; (iv) the goods and services will be provided pursuant to a
written contract which may be modified in any material respect only by the vote
of a majority in interest of the Limited Partners and shall be terminable
without penalty on 60 days notice; and (v) the General Partners must receive at
least 33% of gross revenues for such goods and services from Persons other than
Affiliates. In addition, any such payment will be subject to the further
limitation described in Paragraph 10.2 below. Extraordinary circumstances shall
be presumed only when in the good faith belief of the General Partners there is
an emergency
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situation requiring immediate action by the General Partners or their Affiliates
and the goods or services are not immediately available from unaffiliated
parties. Services which may be performed in such extraordinary circumstances
include emergency maintenance of Partnership assets, janitorial and other
related services due to strikes or lock-outs, emergency tenant evictions and
repair services which require immediate action.
The Partnership or an Affiliate may provide insurance brokerage
services in connection with obtaining insurance on the Property so long as the
cost of providing such service, including the cost of the insurance, is no
greater than the lowest quote obtained from two unaffiliated insurance agencies
and the coverage and terms are likewise comparable. In no event may such
services be provided by the Partnership or an Affiliate unless they are
independently engaged in the business of providing such services to other than
Affiliates and at least 75% of their insurance brokerage service gross revenue
is derived from other than Affiliates.
The General Partners will not provide construction services to the
Partnership. The Partnership will obtain either a payment and performance bond
or a guaranty of performance for any Property which has not been constructed at
the time the Partnership acquires a particular Property.
9.10 REIMBURSEMENTS. The General Partners also will receive
reimbursement for (i) the actual cost to the General Partners or their
Affiliates of goods and materials used for and by the Partnership if obtained
from unaffiliated parties; and (ii) administrative services (as hereinafter
defined) necessary for the prudent operation of the Partnership. The amounts
charged to the Partnership for services performed pursuant to clause (ii) above
will not exceed the lesser of: (1) the actual cost of such services; or (2) 90%
of the amount which the Partnership would be required to pay to unaffiliated
parties for comparable services. The Partnership's annual report to the Limited
Partners, will include an itemized breakdown of the services performed and the
amount reimbursed to the General Partners or their Affiliates pursuant to clause
(ii) above, which information shall be verified by the independent public
accountants retained by the Partnership. "Administrative services" for purposes
of this Paragraph 9.10 include only ministerial services such as typing, record
keeping, preparation and dissemination of Partnership reports, preparation and
maintenance of records regarding Limited Partners, preparation and dissemination
of responses to investor inquiries and other communications with investors and
any other record keeping required for Partnership purposes. Notwithstanding the
foregoing, the General Partners and their Affiliates also may be reimbursed for
actual expenses incurred when extraordinary on site action is required.
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10. PARTNERSHIP EXPENSES
10.1 PARTNERSHIP OBLIGATIONS. Except as otherwise
contemplated by Section 9 hereof, the Partnership shall pay
all expenses of the Partnership (which expenses may be billed
directly to the Partnership) which may include, but are not
limited to:
10.1.1 all costs of personnel employed by the Partnership;
10.1.2 all costs of borrowed money, taxes and assessment
on Partnership assets and other taxes applicable to the
Partnership;
10.1.3 except as otherwise provided in Paragraph 15.2.4,
fees and expenses of professionals retained by the
Partnership in connection with any of the foregoing,
including without limitation, attorneys, accountants,
consultants and appraisers;
10.1.4 printing, engraving and other expenses and taxes
incurred in connection with the issuance, distribution,
transfer, registration and recording of documents
evidencing ownership of an interest in the Partnership or
in connection with the business of the Partnership;
10.1.5 fees and expenses paid to independent contractors,
appraisers, mortgage bankers, brokers and servicers,
leasing agents, consultants, on-site managers, real estate
brokers, insurance brokers, consultants and other agents;
10.1.6 expenses in connection with the acquisition,
disposition, alteration, repair, remodeling, refurbishment,
leasing, initial financing, refinancing and operation of
Partnership Properties (including the costs and expenses of
insurance premiums, real estate brokerage and leasing
commissions and of maintenance of such Property as and if
necessary); provided, however, that nothing contained herein
shall be construed to permit payment of construction or
Development Fees to the General Partners or their
Affiliates;
10.1.7 the cost of insurance as required in connection with
the business of the Partnership; provided, however, that
nothing contained herein shall be construed to permit
payment of insurance costs of Affiliates or employees of the
General Partners;
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10.1.8 expenses of organizing, revising, amending,
converting, modifying or terminating the Partnership;
10.1.9 the cost of preparation and dissemination of
the informational material and documentation relating to
Partnership operations;
10.1.10 the cost incurred in connection with any litigation
in which the Partnership is involved, as well as in the
examination, investigation or other proceedings conducted by
any regulatory agency of the Partnership, including legal
and accounting fees incurred in connection therewith;
10.1.11 the cost of any computer equipment or services
used for or by the Partnership; and
10.1.12 the cost of any accounting, statistical or
bookkeeping equipment necessary for the maintenance of
the books and records of the Partnership.
10.2 Notwithstanding anything herein and except as contemplated by
Paragraph 9.3 hereof, to the contrary, neither the General Partners nor their
Affiliates shall be entitled to reimbursement for:
10.2.1 rent or depreciation, utilities, capital
equipment, other administrative items;
10.2.2 services for which the General Partners or
their Affiliates are entitled to be compensated by way
of a separate fee; and
10.2.3 salaries, fringe benefits, travel expenses, and
other administrative items incurred or allocated to any
controlling Persons of the General Partners or their
Affiliates.
10.2.3.1 Controlling Persons, for purposes
of this Paragraph 10.2 includes but is not
limited to any Person, whatever his title,
who performs functions for a General Partner
similar to those of:
10.2.3.1.1 Chairman or
member of the Board of
Directors;
10.2.3.1.2 Executive
Management, such as the
10.2.3.1.2.1 President,
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10.2.3.1.2.2 Vice-President or
Senior Vice-President,
10.2.3.1.2.3 Corporate Secre-
tary;
10.2.3.1.2.4 Treasurer;
10.2.3.1.2.5 Senior Manage-
ment, such as the Vice-President
of an operating division who
reports directly to Executive
Management; or
10.2.3.1.2.6 Those holding 5%
or more equity interest in the
General Partners or a Person
having the power to direct or
cause the direction of the
General Partners, whether
through the ownership of voting
securities, by contract, or
otherwise.
11. ALLOCATION OF INCOME AND LOSS AND DISTRIBUTIONS
11.1 ALLOCATION OF INCOME AND LOSS. The income and loss of the
Partnership for purposes of the federal income tax shall be allocated among the
Partners in accordance with this Paragraph 11.1. For purposes of this Section
11, Limited Partners shall mean and include all Limited Partners, other than the
Initial Limited Partner.
11.1.1 NET INCOME OR LOSS FROM ANNUAL OPERATIONS. Net Income
or Loss From Annual Operations shall be allocated 99% to the
Limited Partners and 1% to the General Partners.
11.1.2 NET INCOME FROM OTHER THAN ANNUAL OPERATIONS. Net Income From
Other Than Annual Operations shall be allocated to the Capital
Accounts of the Partners prior to the distribution of Net Sale or
Refinancing Proceeds and cash from reserves deemed no longer
necessary for Partnership operations as follows:
11.1.2.1 First, Net Income in an amount equal to the
aggregate deficit in the Partners' Capital Accounts, if
any, shall be allocated to each Partner in the same ratio
as the deficit in such Partner's Capital Account bears to
the aggregate of all such Partners' deficit Capital
Accounts;
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11.1.2.2 Second, to and among the Limited Partners until
each Limited Partner's Capital Account balance equals the
sum of his Performance Preferred Return and his Original
Contribution and subtracting from such sum the aggregate
amount of Distributions to each Limited Partner;
11.1.2.3 Third, to the General Partners in such amounts as
are necessary to cause the aggregate Capital Account
balances of the General Partners to be in a percentage
ratio of 10% of all Partnership Capital Account balances
of all Partners;
11.1.2.4 Fourth, to the Limited Partners in such amounts
as are necessary to cause the aggregate Capital Account
balances of the Limited Partners to be in a percentage
ratio of 90% of all Partnership Capital Account balances
of all Partners;
11.1.2.5 Fifth, to the General Partners in an amount
equal to their contributions of capital to the Partner
ship;
11.1.2.6 Thereafter, the balance of the Net Income, if
any, shall be allocated 90% to the Limited Partners and
10% to the General Partners.
11.1.3 NET LOSS FROM OTHER THAN ANNUAL OPERATIONS. Net Loss From
Other Than Annual Operations shall be allocated to the Capital
Accounts of the Partners prior to the distribution of Net Sale or
Refinancing Proceeds and cash from reserves deemed no longer
necessary for Partnership operations as follows:
11.1.3.1 First, to the Partners having positive Capital
Accounts in proportion to and to the extent of their
positive Capital Account balances, until all positive
Capital Account balances shall be reduced to zero;
11.1.3.2 Second, the balance of such losses shall be
allocated to those Partners bearing the ultimate risk of
law related to such losses in accordance with Treasury
Regulations promulgated pursuant to Code Section 704.
11.1.4 UNEXPECTED ALLOCATIONS. In the event any Partner unexpectedly
receives any adjustments, allocations, or distributions described in
Treasury Regulation Section 1.704- 1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d) (5), or 1.704- 1(b)(2)(ii)(d)(6), which causes
or increases a deficit balance in such Partner's Capital Account
shall be specially allocated items of income and gain in an amount
and manner
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sufficient to eliminate such deficit balance as quickly as
possible.
11.1.5. MINIMUM GAIN. Notwithstanding the foregoing, if there is a
net decrease in the Partnership's "minimum gain" (as defined in
Section 1.704-1(b)(4)(iv)(c) of the Regulations) during a Partnership
taxable year, all Partners with deficit Capital Account balances,
following an adjustment for items described in Section 1.704-
1(b)(4)(iv)(e) at the end of such year, will be allocated, before any
other allocation is made under Code Section 704(b), items of income
and gain for such years (and, if necessary, subsequent years) in the
amount and in the proportions needed to eliminate such deficits as
quickly as possible. Such allocation shall be interpreted in a manner
to conform with Section 1.704-1(b)(4)(iv) of the Regulations.
11.2 APPORTIONMENT OF INCOME AND LOSS. That portion of Net Income and
Loss From Annual Operations allocated to the Limited Partners shall be
apportioned among the Limited Partners in the ratio for any calendar month in
which the number of Units owned by each Limited Partner on the last day of such
calendar month bears to the total number of Units owned by all Limited Partners
as of that date, without regard to Capital Accounts. With respect to any
calendar month during which a Closing Date occurs, investors who purchase Units
on or prior to the last day of such month will be treated as having owned the
Units as of the last day of such month. Net Income and Loss From Annual
Operations will be apportioned monthly in the ratio of Limited Partnership
Interests owned as of the last day of such month. To the extent that any
discrepancies in Capital Accounts (as determined on a per Unit basis) arise
among the Limited Partners during the offering period, then, in the sole
discretion of the Managing General Partner, allocations of Net Income and Loss
From Annual Operations and/or Distributions shall first be made at the close of
the offering period or as soon as possible thereafter so as to equalize the
Capital Accounts of each Limited Partner on a per Unit basis, with any excess
allocated in the manner described herein.
11.3 COMPLIANCE WITH ALLOCATION LAWS. It is the intent of the
Partners that each Partner's distributive share of income, gain, loss,
deduction, or credit (or item thereof) shall be determined and allocated in
accordance with this Section 11 to the fullest extent permitted by Section
704(b) of the Code. In order to preserve and protect the determinations and
allocations provided for in this Section 11, the Managing General Partner is
authorized and directed to allocate income, gain, loss, deduction, or credit (or
any item thereof) arising in any year differently than otherwise provided for in
this Section 11 to the extent that allocating income, gain, loss, deduction, or
credit (or any item thereof) in the manner provided for in this Section 11 would
cause the determinations and allocations of each Partner's distributive
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share of such items not to be permitted by Section 704(b) of the Code and
Treasury Regulations promulgated thereunder. Any allocation made pursuant to
this Paragraph 11.3 shall be deemed to be a complete substitute for any
allocation otherwise provided for in this Section 11 and no amendment of this
Partnership Agreement or approval of any Partner shall be required.
In making any allocation (the "New Allocation") under this Paragraph
11.3, the Managing General Partner is authorized to act only after having been
advised by counsel to the Partnership that, under Section 704(b) of the Code and
the Treasury Regulations thereunder (i) the New Allocation is necessary, and
(ii) the New Allocation is the minimum modification of the allocations otherwise
provided for in this Section 11 necessary in order to assure that, either in the
then current year or in any preceding year, each Partner's distributive share of
income, gain, loss, deduction, or credit (or any item thereof) is determined and
allocated in accordance with this Section 11 to the fullest extent permitted by
Section 704(b) of the Code and the Treasury Regulations thereunder.
If the Managing General Partner is required by this Paragraph 11.3 to
make any New Allocation in a manner less favorable to the Limited Partners than
is otherwise provided for in Section 11, then the Managing General Partner is
authorized and directed, insofar as he is permitted to do so by Code Section
704(b), to allocate income, gain, loss, deduction or credit (or any item
thereof) arising in later years in such manner so as to bring the proportion of
income, gain, loss, deduction, or credit (or any item thereof) allocated to the
Limited Partners as nearly as possible to the proportion otherwise contemplated
by this Section 11.
11.4 TAX ALLOCATION: CODE SECTION 704(c). In accordance with Code
Section 704(c) and the Treasury Regulations thereunder, income, gain, loss and
deduction with respect to any property contributed to the capital of the
Partnership shall, solely for tax purposes, be allocated among the Partners so
as to take account of any variation between the adjusted basis of such property
to the Partnership for federal income tax purposes and its initial Gross Asset
Value.
In the event the Gross Asset Value of any Partnership property is
adjusted, subsequent allocations of income, gain, loss and deduction with
respect to such asset shall take account of any variation between the adjusted
basis of such asset for federal income tax purposes and its Gross Asset Value in
the same manner as under Code Section 704(c) and the Treasury Regulations
thereunder.
In the event of a combined taxable disposition of property pursuant
to which gain is to be allocated under this Paragraph 11.4 and other property
the gain from which is not allocated under this
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Paragraph 11.4, the gain to be allocated under this Paragraph 11.4 in any
calendar year shall bear the same relationship to the total gain to be
recognized in such year as the total gain to be allocated under this Paragraph
11.4 from the disposition of the properties bears to the total gain to be
allocated from the disposition of the properties.
Any elections or other decisions relating to such allocations shall
be made by the Managing General Partner in any manner that reasonably reflects
the purpose and intention of this Partnership Agreement. Allocations pursuant to
this Paragraph 11.4 are solely for purposes of federal, state and local taxes
and shall not affect, or in any way be taken into account in computing, any
Partner's capital account or share of Income, Losses, other items or
distributions pursuant to any provision of this Partnership Agreement.
11.5 DISTRIBUTIONS OF CASH FLOW. Distributions of Cash Flow shall be
apportioned 99% to the Limited Partners and 1% to the General Partners,
provided, however, in each calendar year, to the extent distributions of Cash
Flow to the Limited Partners are insufficient to provide them with their Current
Preferred Return, then the General Partners' distribution amounts will be paid
over to the Limited Partners and will accrue and be payable to the General
Partners in a subsequent year after Limited Partners have received distributions
of Cash Flow in an amount equal to their Current Preferred Return, or if there
are insufficient distributions of Cash Flow, then the General Partners' accrued
amount shall be deemed to be fees owed to the General Partners for purposes of
determining Net Sale or Refinancing Proceeds. Such distributions of Cash Flow
will be apportioned quarterly among the Limited Partners of record as of a
record date declared within thirty (30) days after the end of each quarter and
will be paid no less frequently than quarterly. Cash Flow shall not be
reinvested in Properties or Equipment.
11.6 NET SALE OR REFINANCING PROCEEDS AND RESERVES. Distributions of
Net Sale or Refinancing Proceeds shall be apportioned among the Limited Partners
in the same manner as Cash Flow and will be distributed 90% to the Limited
Partners and 10% to the General Partners; provided, however, that the General
Partners' 10% of Net Sale or Refinancing Proceeds shall be subordinated to
receipt by the Limited Partners of Distributions from all sources in an amount
equal to their Performance Preferred Return plus aggregate distributions of Net
Sale or Refinancing Proceeds in an amount equal to Limited Partners' Original
Contributions.
11.7 LIQUIDATING DISTRIBUTIONS. Unless otherwise required by the
Delaware Act, the net cash proceeds of a sale, exchange or other disposition of
all or Substantially All of the Assets of the Partnership constituting a
dissolution of the Partnership shall be distributed in accordance with the
Partners Capital Account bal-
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ances. Notwithstanding anything herein to the contrary, the Partnership shall
not distribute assets in kind.
11.8 GENERAL PARTNERS' INTEREST. In no event will the General
Partners be allocated less than 1% of Net Income or Loss From Annual Operations
for tax purposes. To the extent that the Partnership shall be entitled to any
deduction for federal income tax purposes as a result of any interest in Net
Income, Net Loss and Distributions granted to the General Partners, such
deduction shall be allocated for federal income tax purposes to the General
Partners. As among the General Partners, the allocations of profit and loss and
Distributions of Cash Flow and Net Sale or Refinancing Proceeds, shall be
divided as they may mutually agree from time to time, without the need for
consent of the Limited Partners.
11.9 CONSENT TO ALLOCATION METHOD. The methods hereinabove set forth
by which Distributions and allocations of Net Income and Loss From Annual
Operations and Net Income and Loss From Other Than Annual Operations are made
and apportioned are hereby expressly consented to by each investor as an express
condition to becoming a Partner.
11.10 UNUTILIZED NET PROCEEDS. In the event that any portion of the
Net Proceeds are not invested or committed for investment within the later of
twenty-four (24) months from the date of the Prospectus or twelve (12) months
after the offering has terminated (except for any amounts set aside for
operating expenses or reserves), such portion of the Net Proceeds shall be
distributed to the investors who purchased Units as a return of capital without
reduction for Front-End Fees which would have been payable to the General
Partners or their Affiliates if such funds had been committed to investment. For
purposes of this Paragraph 11.10, funds will be deemed to have been committed to
investment and will not be returned to the extent written agreements in
principle or letters of understanding were at any time executed, regardless of
whether any such investment may or may not be consummated, and to the extent any
funds have been reserved to make contingent payments in connection with any
Asset regardless of whether any such payments may or may not be made.
11.11 ESCHEAT OF DISTRIBUTIONS. If, upon the termination and
dissolution of the Partnership, there remains outstanding on the books of the
Partnership a material amount of Distribution checks which have not been
negotiated for payment by Limited Partner, the Managing General Partner may, if
deemed to be in the best interests of the Partnership, cause such amounts to be
redistributed prorata to Limited Partners of record on such final distribution
date who have previously cashed all of their Distribution checks; provided,
however, that the Partnership shall not be liable for any subsequent claims for
payment of such redistributed Distributions. The Managing General Partner is
not required to make such a redistribution, in which case such amounts will
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eventually escheat to the state or as otherwise required in accordance with
appropriate statutory authority. Notwithstanding the foregoing, unclaimed funds
of Persons who, for purposes of the Partnership's records are Ohio residents,
shall be distributed in accordance with the Ohio unclaimed funds statute in
effect as of the date on which the Partnership shall have unclaimed funds.
11.12 SECTION 709 EXPENSES. Syndication and other non-deductible and
non-amortizable expenses, as defined in Code Section 709, shall be allocated to,
and under the capital account maintenance rules reduce, the Capital Accounts of
the Partners actually incurring such expense.
11.13 WITHHOLDING TAXES. In the event that the Partnership is
required to pay any withholding tax or other liability or obligation to any
state, federal or foreign taxing authority that arises because of any act or
status of any Limited Partner particularly including the status of a Limited
Partner (or the Person owning such Unit), as a foreign Person under the Code,
and such tax or liability attributable to any year is in excess of the
distributions attributable to such Limited Partner for such year, the
Partnership will pay such funds on behalf of such Limited Partner and will treat
such payment as a loan to such Limited Partner which will bear interest at the
prime rate of First National Bank of Chicago payable in full from the next
distribution of Net Sale or Refinancing Proceeds. Each Partner hereby grants the
Partnership a security interest in all Net Sale or Refinancing Proceeds
distributable to such Limited Partner or with respect to such Units in the
amount of the loan discussed in this Paragraph 11.13 and the Partnership shall
have a right of set-off against any such distributions of Net Sale or
Refinancing Proceeds. Any tax required to be withheld with respect to a Limited
Partner will be charged to that Limited Partner's Capital Account as if such tax
had been distributed to such Partner.
12. TRANSFERABILITY OF UNITS
12.1 RESTRICTIONS ON TRANSFERS OF UNITS BY LIMITED PARTNERS. A
Limited Partner may only assign his Units by a duly executed, written instrument
of assignment, the terms of which are not in contravention of any of the
provisions of this Partnership Agreement. The Partnership need not recognize
for any purpose any assignment of the Units of a Limited Partner unless there
shall have been filed with the Partnership and recorded on the Partnership's
books a duly executed and acknowledged counterpart of such written instrument of
assignment, and such instrument evidences the written acceptance by the assignee
of all of the terms and provisions of this Partnership Agreement, represents
that such assignment was made in accordance with all applicable laws and
regulations and in all other respects is satisfactory in form and substance to
the Managing General Partner. Notwithstanding the
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foregoing, no Limited Partner may sell, assign, transfer or
exchange any Units:
12.1.1 if in the opinion of counsel for the Partnership such sale,
assignment, transfer or exchange may result, when considered with all
other sales, assignments, transfers and exchanges of Units in the
Partnership within the previous twelve (12) months, in the
Partnership being considered to have been terminated within the
meaning of Code Section 708 unless the Partnership and the
transferring holder shall have received a ruling by the Service that
the proposed sale or exchange will not cause such termination;
12.1.2 if counsel for the Partnership shall be of the opinion that
such sale, assignment, transfer or exchange would cause a violation
of applicable federal and state securities laws. In connection
therewith, Limited Partners may be required to furnish an opinion of
counsel satisfactory to counsel to the Partnership that such sale,
assignment, transfer or exchange complies with applicable federal and
state securities laws;
12.1.3 if the transferor or the transferee would hold Units
representing an Original Contribution of less than $5,000 unless 100%
of the transferor's Units are being transferred, except for transfers
by gift or inheritance, intra-family transfers, transfers resulting
from family dissolutions and transfers to Affiliates; or
12.1.4 if the Managing General Partner determines in its sole
discretion that such assignment would prevent the Partnership from
being able to satisfy either the 2% or 5% "safe harbors" contained in
Service Advance Notice 88-75 or in corresponding regulations or the
Partnership has received an opinion of counsel or a favorable service
ruling that such transfer would not result in the Partnership being
classified as a "publicly-traded partnership" for federal income tax
purposes.
Any attempted sale, assignment, transfer or exchange in contravention
of the provisions of this Paragraph shall, in the sole discretion of the
Managing General Partner, be voided and deemed ineffectual and shall not bind or
be recognized by the Partnership.
12.2 SPECIAL EXERCISE OF THE RIGHTS OF A LIMITED PARTNER. If a
Limited Partner dies, his executor, administrator or trustee, or, if he is
adjudicated incompetent, his committee, guardian or conservator, or if he
becomes bankrupt, the trustee or receiver of his estate, shall have all the
rights of a Limited Partner for the purpose of settling or managing his estate
and such power as the decedent or incompetent possessed to assign all or any
part of his
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Units and to join with the assignee thereof in satisfying conditions precedent
to such assignee becoming a substituted Limited Partner. The death, dissolution,
adjudication of incompetence or bankruptcy of a Limited Partner shall not
dissolve the Partnership.
12.3 SUBSTITUTED LIMITED PARTNER. No Person shall have the right to
become a substituted Limited Partner in place of his assignor unless all of the
conditions set forth in Paragraph 12.1 are satisfied and:
12.3.1 the Limited Partner and his assignee shall execute and
acknowledge such other instruments as the Managing General Partner
may deem necessary or desirable to effect such substitution,
including (a) the written acceptance and adoption by the assignee of
the provisions of this Partner ship Agreement, as the same may be
amended and his execution, acknowledgment; (b) delivery to the
Managing General Partner of a special power of attorney, the form and
content of which are described herein; and (c) a statement that the
assignee is acquiring the Units for investment purposes only and not
with an intent of further distribution of the Units.
12.3.2 a transfer fee of $100 (which may be increased in the
discretion of the Managing General Partner) shall have been paid to
the Partnership to cover all reasonable expenses connected with such
substitution.
12.4 CONSENT. By executing or adopting this Partnership Agreement,
each Limited Partner hereby consents to the admission of substituted Limited
Partners by the Managing General Partner, in accordance with the foregoing.
12.5 EFFECTIVE DATE; RECORDS. No attempted transfer of Units or
substitution shall be effective, and the Partnership and the Managing General
Partner shall be entitled to treat the assignor of such Units as the absolute
owner thereof in all respects, and shall incur no liability for allocations of
Net Income, Net Loss or Distributions or transmittal of reports and notices
required to be given to Limited Partners hereunder which are made in good faith
to such assignor, until the "effective date", which shall be the first day of
the calendar month following completion (no later than five (5) days prior to
the beginning of such month) of the requirements set forth in Paragraphs 12.1
and 12.3 above. The Managing General Partner shall cause the records of the
Partnership and this Partnership Agreement to be amended to reflect the
admission and/or substitution of substituted Limited Partners as of the first
day of any month following the satisfaction of the conditions set forth in
Paragraph 12.3.
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13. BOOKS, RECORDS, ACCOUNTINGS AND REPORTS
13.1 LOCATION OF RECORDS; COPIES. The Partnership's books and
records, the Partnership Agreement and any amendments thereto and any separate
certificate of limited partnership and any amendments thereto shall be
maintained at the principal office of the Partnership or such other place as the
Managing General Partner may determine and shall be open to inspection and
examination of Limited Partners or their duly authorized representatives at all
reasonable times. The Limited Partners shall receive copies of this Partnership
Agreement and any amendments hereto and the certificate of limited partnership
and any amendments thereto, upon a request in writing to the Managing General
Partner and payment of any necessary duplication fees.
An alphabetical list of the names, addresses, and business telephone
numbers of the Limited Partners along with the number of Units held by each of
them (the "Partnership List") shall be maintained as part of the books and
records of the Partnership and shall be available for inspection by any Limited
Partner or its designated agent at the principal office of the Partnership upon
the request of the Limited Partner. The Partnership List shall be updated at
least quarterly to reflect changes in the information contained therein. A copy
of the Partnership List shall be mailed to any Limited Partner requesting the
Partnership List within ten days after receipt of the request. The copy of the
Partnership List shall be printed in alphabetical order, on white paper, and in
a readily readable type size (in no event smaller than ten-point type). A
reasonable charge for copy work may be charged by the Partnership. The purposes
for which a Limited Partner may request a copy of the Partnership List include,
without limitation, matters relating to the Limited Partner's voting rights
under the Partnership Agreement, and the exercise of the Limited Partner's
rights under federal proxy laws. If the General Partners, or an Affiliate having
charge of the Partnership List, neglect or refuse to exhibit, produce or mail a
copy of the Partnership List as requested, the General Partners or the Affiliate
shall be liable to any Limited Partner requesting the list for the costs,
including attorneys' fees, incurred by that Limited Partner for compelling the
production of the Partnership List, and for actual damages suffered by any
Limited Partner by reason of such refusal or neglect. It shall be a defense that
the actual purpose and reason for the request for inspection or for a copy of
the Partnership List is to secure such list of Limited Partners or other
information for the purpose of selling such list or copies thereof, or of using
the same for a commercial purpose other than in the interest of the applicant as
a Limited Partner relative to the affairs of the Partnership. The Managing
General Partner may require that the Limited Partner requesting the Partnership
List to represent that the Partnership List is not requested for a commercial
purpose unrelated to the Limited Partner's interest in the Partnership. The
remedies provided hereunder to Limited
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Partners requesting copies of the Partnership List are in addition to and shall
not in any way limit, other remedies available to Limited Partners under federal
laws or the laws of any state. The Partnership shall maintain a record of the
information obtained to indicate that a Limited Partner meets the suitability
standards employed in connection with the offer and sale of Units and a
representation that the purchaser is purchasing for his own account, or, in lieu
of such representation, information indicating that the party for whose account
the purchase is made meets such suitability standards.
13.2 REPORTS ON ACQUISITIONS. Within sixty (60) days after the end of
each quarter and until Net Offering Proceeds shall be fully invested, the
Managing General Partner shall cause to be prepared and distributed to each
Person who was a Limited Partner at any time during the quarter then ended, a
special report of all acquisitions describing the terms of such investment, and
the amount of Net Offering Proceeds which then remains unexpended, stated in
terms of both dollar amount and percentage.
13.3 TAX INFORMATION. Within seventy-five (75) days after the end of
each fiscal year, the Managing General Partner shall send to each Person who was
a Limited Partner on the first day of any month during the year then ended, such
tax information as shall be necessary for the preparation by such Person of his
federal income tax return. A reconciliation between generally accepted
accounting principles and income tax information will not be provided to the
Limited Partners, however, such reconciliation will be available in the office
of the Partnership for inspection and review by any interest Limited Partner.
13.4 ANNUAL REPORTS. Within one hundred twenty (120) days after the
end of each fiscal year, the Managing General Partner shall send to each Person
who was a Limited Partner on the last day of the year then ended: (i) audited
financial statements of the Partnership, and (ii) an audited report showing
Distributions per Unit during such year, which report shall separately identify
Distributions from: (a) Cash Flow generated during the year; (b) Cash Flow
generated during prior periods which had been held as re serves; (c) cash from
initial working capital reserves; (d) annual net rental revenues on a per
Property bases; and (e) Net Sale or Refinancing Proceeds. The annual report
shall also include a break-down of the costs reimbursed to the General Partners,
which report shall have been verified by the Partnership's accountants to ensure
that the allocation of costs to the Partnership is appropriate, which
verification shall at a minimum provide for (i) a review of the time records of
individual employees, the cost of whose services were reimbursed; and (ii) a
review of the specific nature of the work performed by each such employee. The
annual report shall also include, at Partnership expense, commencing with the
Partnership's first fiscal year of operations or portion thereof, a statement of
compensation and fees paid by the
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Partnership to the General Partners and their Affiliates, including an itemized
presentation of expense reimbursements to the General Partners and their
Affiliates or any other transactions between the Partnership and the General
Partners or their Affiliates, which information shall be verified by the
independent public accountants retained by the Partnership. The method of
verification shall at a minimum provide: (i) a review of the time records of
individual employees the costs of whose services are reimbursed; and (ii) a
review of the specific nature of the work performed by each such employee during
such year.
13.5 QUARTERLY REPORTS. The Managing General Partner shall prepare,
at Partnership expense, commencing with the first fiscal quarter after the
Initial Closing Date, a quarterly report covering each of the first three
quarterly fiscal year periods of partnership operations in each fiscal year,
unaudited financial statements and containing the information regarding the
Partnership and its activities required by Form 10-Q. Copies of such statements
and other pertinent information shall be distributed to each Limited Partner
within sixty (60) days after the close of the quarterly period covered by the
report of the Partnership.
14. RIGHTS, AUTHORITY, POWERS, RESPONSIBILITIES AND DUTIES OF THE
MANAGING GENERAL PARTNER
14.1 SERVICES OF MANAGING GENERAL PARTNER. The Managing General
Partner shall only be responsible for the following services to the
Partnership:
14.1.1 supervising the organization of the Partnership and the
offering and sale of Units;
14.1.2 arranging for (a) the identification of suitable investments
for the Partnership; (b) a review of the significant factors in
deciding whether or not to make a particular investment; and (c) the
making of such final investment decision;
14.1.3 supervising Partnership management, which includes: (a)
establishing policies for the operation of the Partnership; (b)
causing the Partnership's agents or employees to arrange for the
provision of services necessary to the operation of the Partnership
(including any necessary property management, accounting and legal
services and services relating to distributions by the Partnership);
(c) when necessary or appropriate, approving actions to be taken by
the Partnership; (d) providing advice, consultation, analysis and
supervision with respect to the functions of the Partnership in
making or acquiring investments (including compliance with federal,
state and local regulatory requirements and procedures); (e)
executing documents on
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behalf of the Partnership and (f) making all decisions as to
accounting matters; and
14.1.4 approving the terms of Dispositions, including
establishing the terms of, and arranging for, any such transactions.
14.2 POWERS OF MANAGING GENERAL PARTNER. The conduct of the
Partnership's business shall be controlled solely by the Managing General
Partner in accordance with this Partnership Agreement. The Managing General
Partner shall have the fiduciary responsibility for the safekeeping and use of
all funds and assets of the Partnership, whether or not in the Managing General
Partner's possession or control. The Managing General Partner shall have all
authority, rights and powers conferred by law and those required or appropriate
to the management of the Partnership's business which, by way of illustration
but not by way of limitation, shall, subject only to the provisions of Paragraph
14.4 following, include the right, authority and power:
14.2.1 to offer and sell Units to the public directly or through any
Affiliate of the Managing General Partner or any other broker-dealer
who is a member of the National Association of Securities Dealers,
Inc. and is authorized to sell Units and to employ personnel, agents
and dealers for such purpose;
14.2.2 to invest Net Offering Proceeds temporarily prior to
investment in Assets in short-term, highly liquid investments
determined by the Managing General Partner, in its sole discretion,
to have appropriate safety of principal;
14.2.3 to make or purchase Assets or interests therein in its own
name or in the name of a nominee, a trust or otherwise and
temporarily hold title thereto for the purpose of facilitating such
origination or acquisition or for any other purpose related to the
business of the Partnership; provided that in the event of the
acquisition of such Assets by the Partnership from the Managing
General Partner or its Affiliates, (i) the purchase price paid by the
Partnership may not exceed the cost of the Assets to the Affiliated
seller thereof plus all closing costs and Acquisition Fees paid by
the Partnership and (ii) no compensation or other benefit may accrue
to the Managing General Partner or its Affiliates except as otherwise
permitted herein and except that they may be reimbursed for the cost
of carrying the investment; accordingly, all income generated and
expenses associated with Assets so acquired shall be treated as
belonging to the Partnership; in no event shall the Partnership
purchase Assets from the Managing General Partner or its Affiliates
if the Managing General Partner or its Affiliates have held the
Assets for a period in excess of
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twelve (12) months prior to commencement of the Partnership's
offering; furthermore, the General Partners or their Affiliates may
not sell Assets to the Partnership pursuant to this subparagraph if
the cost of the Assets exceeds the funds reasonably anticipated to be
available to the Partnership to purchase the Assets. Notwithstanding
the foregoing, no assets or interests therein may be purchased from
affiliated Programs. As used herein, "Program" shall be defined as: a
limited or general partnership, joint venture, unincorporated
association or similar organization other than a corporation formed
and operated for the primary purpose of investment in and the
operation of or gain from a interest in real property including such
entities formed to make or invest in mortgage loans.
14.2.4 to originate, acquire, hold, lease, exchange, foreclose on,
sell, dispose of and otherwise deal with all or any part of
Partnership Assets (including the grant of easements or servitudes
thereon) in such amounts and upon such terms, including by private
contract or at public sale, as the Managing General Partner deems in
its sole discretion to be in the best interests of the Partnership;
14.2.5 on behalf of the Partnership, to employ Persons in the
operation and management of the business of the Partner ship
including, but not limited to, agents, employees, managers,
accountants, attorneys, consultants and others, on such terms and for
such compensation as the Managing General Partner shall determine,
subject, however, to the limitations with respect thereto as set
forth in Section 9, and provided that agreements with the Managing
General Partner or its Affiliates for the services set forth in
Section 9 shall contain the terms and limitations as to fees and
expenses as set forth in Section 9 and provided further that any of
such agreements shall be terminated immediately upon dissolution of
the Partnership under Paragraph 18.1;
14.2.6 to open accounts and deposit and maintain funds in the name
of the Partnership in banks or savings and loan associations;
14.2.7 to allow the Partnership to borrow money from the General
Partners or their Affiliates on a short-term basis, at any time and
from time to time and in connection there with to pay interest and
other financing charges or fees which shall not exceed the interest
and other financing charges or fees which would be charged by
unrelated lending institutions on comparable loans for the same
purpose. Except as permitted by this Paragraph 14.2.8, the General
Partners and their Affiliates shall be prohibited from providing
financing to the Partnership. Furthermore, on loans made available by
a General Partner or its Affiliates,
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the General Partner and its Affiliates shall not receive interest or
similar charges or fees in excess of those charged by unrelated
lending institutions on comparable loans for the same purpose in the
locality. There shall be no prepayment penalty on any loan by the
General Partners to the Partnership. Nothing herein shall be
construed as prohibiting a bona fide prepayment provision in the
financing agreement. An "all-inclusive" or "wraparound" note and deed
of trust (the "all-inclusive note" herein) may be used to finance the
purchase of property by the Partnership only if the following
conditions are complied with: (i) the General Partners or their
Affiliates under the all-inclusive note shall not receive interest on
the amount of the underlying encumbrance included in the all
inclusive note in excess of that payable to the lender on that
underlying encumbrance; (ii) the Partnership shall receive credit on
its obligation under the all-inclusive note for payments made
directly on the underlying encumbrance; and (iii) a paying agent,
ordinarily a bank, escrow company or savings and loan association,
shall collect payments (other than any initial payment of prepaid
interest or loan points not to be applied to the underlying
encumbrance) on the all-inclusive note and make disbursement
therefrom to the holder of the underlying encumbrance prior to making
any disbursement to the holder of the all-inclusive note, subject to
the requirements of subparagraph (i) above, or, in the alternative,
all payments on the all-inclusive and underlying note shall be made
directly by the Partnership. In no event, however, shall the General
Partners or any of their Affiliates provide permanent financing to
the Partnership for any of the Partnership's Properties.
Additionally, to the extent that the Partnership has insufficient
funds to fund working capital reserves, the General Partners will
advance to the Partnership an aggregate amount of up to 1% of the
offering proceeds for this purpose, with interest and other financing
charges or fees to be paid consistently with the foregoing;
14.2.8 to prepare or cause to be prepared reports, statements and
other relevant information for distribution to the Limited Partners,
including annual and quarterly reports. The Partnership shall, upon
request, provide to the state securities administrator any report or
statement required to be distributed to the Limited Partners;
14.2.9 to require in all Partnership obligations that the General
Partners shall not have any personal liability thereon and that the
Person or entity contracting with the Partnership is to look solely
to the Partnership and its assets for satisfaction, and in the event
that any such obligations have personal liability, the General
Partners may require their satisfaction prior to contracts without
such personal liability; provided, however, that the inclusion of
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the aforesaid provisions shall not materially affect the cost of the
service or material being supplied and all Partnership obligations
are satisfied in accordance with prudent business practices as to
time and manner of payment;
14.2.10 to cause the Partnership to make or revoke any of the
elections permitted by the Code;
14.2.11 to select as its accounting year a calendar year or such
fiscal year as approved by the Internal Revenue Service;
14.2.12 to determine the appropriate accounting method or methods to
be used by the Partnership in maintaining its books and records;
14.2.13 to cause the Partnership to repurchase Units upon request
from a Limited Partner, at 90% of the Adjusted Net Asset Value per
Unit as of the end of the prior fiscal year, to the extent that there
are funds available, commencing not less than one year after the
offering of Units has concluded, in the Managing General Partner's
absolute discretion, but only to the extent that such repurchase will
not impair the capital or the operations of the Partnership;
14.2.14 to assure any Person dealing with the Partnership or the
General Partners that he may rely upon a certificate signed by the
Managing General Partner as authority with respect to: (a) the
identity of the General Partners or any Limited Partners; (b) the
existence or nonexistence of any fact or facts which constitute a
condition precedent to acts by the General Partners or in any other
manner germane to the affairs of the Partnership; (c) the Persons who
are authorized to execute and deliver any instrument or document of
the Partnership; or (d) any act or failure to act by the Partnership
or as to any other matter whatsoever involving the Partnership or any
Partner;
14.2.15 (a) to take such steps as the Managing General Partner
determines are advisable or necessary in order to preserve the tax
status of the Partnership as a pass-through entity for federal income
tax purposes including, without limitation, imposing additional
restrictions on transfers of Units (provided such restrictions on
transfers do not cause the Partnership's assets to be deemed to be
"plan assets" with respect to investors which are Qualified Plans) or
(b) to compel a dissolution and termination of the Partnership or
restructuring of the Partnership's activities to the extent necessary
(i) to comply with any exemption in final plan asset regulations
adopted by the Department of Labor, including, but not limited to,
establishing a fixed percent age of Units permitted to be held by
Qualified Plans or other
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tax-exempt investors or discontinuing sales to such entities after a
given date, in the event that either (A) the assets of the
Partnership constitute "plan assets" for purposes of ERISA or (B) the
transactions contemplated hereunder constitute prohibited
transactions under ERISA or the Code and an exemption for such
transactions is not obtainable from the Department of Labor or (ii)
to obtain a prohibited transaction exemption from the Department of
Labor.
14.2.16 in addition to any amendments otherwise authorized herein,
to amend this Partnership Agreement from time to time without the
approval of the Limited Partners,
(a) to add to the representations, duties or obligations
of the Managing General Partner or its Affiliates or
surrender any right or power granted to the Managing
General Partner or its Affiliates herein, for the benefit
of the Limited Partners;
(b) to cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with law or
with any other provision herein, or to add any other
provisions with respect to matters or questions arising
under this Partnership Agreement which will not be
inconsistent with law or with the provisions of this
Partnership Agreement;
(c) to delete or add any provision of this Partnership
Agreement required to be so deleted or added by the staff
of the Securities and Exchange Commission or by a state
securities commissioner or similar such official, which
addition or deletion is deemed by such commission or
official to be for the benefit or protection of the
Limited Partners;
(d) to change the name of the Partnership to any lawful
name which it may select;
(e) to reflect the addition or substitution of Limited
Partners or the reduction of capital accounts upon the
return of capital to Partners or to reflect the admission
of additional General Partners (who may be admitted
without the consent of the Limited Partners);
(f) to amend the provisions of Section 11 of this
Partnership Agreement or any other provisions of this
Partnership Agreement if, in the opinion of counsel to the
Partnership and the General Partners, such modification
is necessary to (i) cause the allocations and
Distributions contained in Section 11 to have substantial
economic effect in accordance with the most recently
proposed or final regulations relating to Section
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704 of the Code or any other statutory provision or
regulation relating to such allocations or (ii) cause the
periodic allocations to be respected, such as on a monthly
basis, under Section 706 of the Code or any other statute
or provision or regulation relating to such periodic
allocations or (iii) cause the provisions of this
Partnership Agreement to comply with any applicable
federal legislation enacted after the date of this
Partnership Agreement; provided, however, no such
amendment shall be effected unless, in the opinion of
counsel, such amendment does not adversely affect the
rights or interests of any of the Limited Partners;
(g) to make any amendments that the Managing General
Partner reasonably believes are appropriate to lessen the
possibility that Units would be "plan assets," as that
term is used in ERISA, and to maintain the status of the
Partnership as a pass-through entity for federal income
tax purposes;
(h) to alter the division of profit and loss allocations
among the General Partners and of Distribution rights
among the General Partners in accordance with Paragraph
11.5 hereof; and
(i) to substitute any entity for the Individual General
Partner, provided such substituted General Partner either
(a) in the opinion of counsel to the Partner ship,
complies with Paragraph 14.9 hereof, or (b) has a liquid
net worth of at least 10% of the Adjusted Investments, as
of the date of such substitution or the general partner(s)
of such substituted General Partner (if a partnership) or
the substituted General Partner (if an individual), shall
have a net worth, independent of any investment in the
Partnership of at least 10% of the Adjusted Investments as
of the date of such substitution.
14.2.17 to borrow money from banks and other financial institutions
and for sums so borrowed issue a promissory note (or any other
evidence of indebtedness) as a General Partner of this Partnership,
and secure repayment thereof by pledging, mortgaging or granting a
security interest in all or any part of the Partnership assets. No
such Person loaning money to the Partnership shall be bound to verify
the validity, expediency or propriety of such borrowing.
14.2.18 to execute, acknowledge and deliver any and all instruments
to effectuate all of the foregoing, and to take all such action in
connection therewith as the Managing General Partner shall deem
necessary or appropriate.
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14.3 GENERAL RIGHTS AND POWERS. The General Partners shall, except as
otherwise provided in this Partnership Agreement, have all the rights and powers
and shall be subject to all the restrictions and liabilities of a partner in a
partnership without limited partners.
14.4 LIMITATIONS. Neither the General Partners nor any of
their Affiliates shall have the authority to:
14.4.1 enter into contracts with the Partnership which would bind the
Partnership after the removal, adjudication of bankruptcy or
insolvency of the last remaining General Partner or continue the
business with Partnership assets after the occurrence of such event;
14.4.2 alter the primary purpose of the Partnership as set
forth in Section 3;
14.4.3 cause the Partnership to invest in any Assets through joint
ventures or general partnerships with a publicly registered Affiliate
unless: (a) the affiliated program has investment objectives and
policies substantially identical to those of the Partnership; (b) no
duplicate management fees are paid; (c) the compensation paid to the
Sponsor by the Partnership and the Affiliate is substantially
identical with regard to each program; (d) the Affiliated program
makes its investments on substantially the same terms and conditions
as the Partnership, although the amounts invested do not have to be
comparable; and (e) the Partnership has a right of first refusal to
purchase the investment if the other program wishes to sell the
investment;
14.4.4 cause the Partnership to invest in any Asset with unaffiliated
parties through joint ventures or general partnerships except on
substantially the same terms and conditions (although not
necessarily the same percentage interest) as such unaffiliated
parties; provided, however, that no such investment shall be entered
into by the Partnership (i) if it involves the payment of duplicative
property management or other fees which would have the effect of
circumventing any of the restrictions on and prohibited transactions
involving conflicts of interest contained in this Partnership
Agreement, and (ii) unless the Partnership acquires a controlling
interest in such joint venture or partnership. For purposes of the
above, "controlling interest" means an equity interest possessing the
power to direct or cause the direction of the management and policies
of the partnership or joint venture, including the authority to: (a)
review all contracts entered into by the partnership or joint venture
that will have a material effect on its business or assets; (b) cause
a sale or refinancing of the property or its interest therein subject
in certain cases where required by
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the partnership or joint venture agreement, to limits as to time,
minimum amounts and/or a right of refusal by the joint venture
partner or consent of the joint venture partner; (c) approve budgets
and major capital expenditures, subject to a stated minimum amount;
(d) veto any sale or refinancing of the property, or alternatively,
to receive a specified preference on sale or refinancing proceeds;
and (e) exercise a right of first refusal on any desired sale or
refinancing by the joint venture partner of its interest in the
assets except for the transfer to an Affiliate of the joint venture
partner.
14.4.5 cause the Partnership to exchange Units for Partner
ship Property;
14.4.6 cause the Partnership to invest in limited partner ships,
unless such investment is as a general partner and is substantially
identical to a direct purchase of the underlying property (i.e.,
where the investment includes the purchase of substantially all of
the interests of such partnership) or the investment is in a joint
venture. In both cases such investment must (i) be on terms which
entail the acquisition of a "controlling interest" as defined
elsewhere herein; (ii) prohibit the payment of duplicative fees and
otherwise limit compensation to that permitted by Section 9 hereof;
and (iii) otherwise comply with the limitations on dealings with
Affiliated parties as set forth in this Partnership Agreement;
14.4.7 invest in junior trust deeds or similar obligations, except
that junior trust deeds or similar obligations may be taken back from
purchasers of Properties and/or Equipment in connection with the sale
thereof by the Partnership;
14.4.8 take any action with regard to any property owned through
another entity or partnership which they would not have been
empowered to take had the Partnership owned the property directly;
14.4.9 do any act in contravention of this Partnership Agreement or
which would, in the opinion of the Managing General Partner, make it
impossible to carry on the ordinary business of the Partnership;
14.4.10 perform any act (other than an act required by this
Partnership Agreement or any act taken in good faith reliance upon
counsel's opinion) which would, at the time such act occurred,
subject any Limited Partner to liability as a general partner in any
jurisdiction;
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14.4.11 employ, or permit the employment of, the funds or
assets of the Partnership in any manner except for the exclusive
benefit of the Partnership;
14.4.12 commingle Partnership funds with those of any other
Person or entity;
14.4.13 operate the Partnership in such a manner as to have the
Partnership classified as an "investment company" for purposes of the
Investment Company Act of 1940;
14.4.14 except as specifically provided for in this Partner ship
Agreement, cause the Partnership to invest in or under write the
securities of other issuers for any purposes;
14.4.15 cause the Partnership to invest in real estate contracts of
sale unless such contracts of sale are in record able form and are
appropriately recorded in the chain of title;
14.4.16 cause the Partnership to invest in Property unless it first
obtains an owner's title insurance policy or commitment as to the
condition of title or its equivalent and an appraisal prepared by an
independent MAI appraiser;
14.4.17 cause the Partnership to invest in unimproved real property
(except that such prohibition will not apply to an interest in
unimproved, non-income-producing real estate acquired as part of an
investment so long as such unimproved real property constitutes less
than 10% of Gross Proceeds);
14.4.18 give an exclusive right to sell or exclusive employment to
sell any property for the Partnership to a General Partner or any
Affiliate;
14.4.19 permit receipt by a General Partner or any Affiliate of any
rebates or "give-ups" or permit a General Partner or any Affiliate to
participate in any reciprocal business arrangements which would have
the effect of circumventing any of the provisions of this Partnership
Agreement;
14.4.20 make loans to a General Partner or any Affiliate;
14.4.21 directly or indirectly pay or award any finder's fee,
commission, or other compensation to any Person engaged by a
potential investor for investment advice as an inducement to such
advisor to advise the purchase of Units; provided, however, that this
provision shall not prohibit payment by the Partnership of normal
sales commissions to registered broker-dealers or other properly
licensed Persons (including an Affiliate of a General Partner) in
connection with the offering and sale of Units;
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14.4.22 purchase or lease property from or sell or lease property to
the General Partners or any of their Affiliates except as
contemplated by Paragraphs 14.2.3 and 14.4.3 hereof;
14.4.23 permit the Limited Partners to contract away the
fiduciary duty owed to the Limited Partners under common
law; or
14.4.24 following the termination of the Offering, allow the total
amount of secured indebtedness with respect to a particular Property
or Equipment package to exceed 80% of the Purchase Price thereof. In
no event will such indebtedness exceed an amount equal to 30% of the
sum of Gross Proceeds plus the aggregate amount of Partnership
indebtedness secured by Partnership Assets (approximately 35% of the
aggregate Purchase Price of Assets) on a portfolio basis when
incurred.
14.4.25 enter into any "Roll-Up Transaction" without the consent of
Limited Partners owning at least two-thirds of the Units then
outstanding. As used herein, "Roll-Up Transaction" shall mean any
transaction or series of transactions that directly or indirectly,
through acquisition or otherwise, involve the combination, merger, or
conversion of the Partnership. This paragraph 14.4.25. cannot be
amended or deleted from the Partnership Agreement without the consent
of the Limited Partners owning at least two-thirds of the Units then
outstanding.
14.4.25.1. In connection with a proposed Roll-Up
Transaction, an appraisal of all Partnership assets shall
be obtained from a competent "independent expert."
"Independent expert", as used herein, shall mean a Person
with no material current or prior business or personal
relationship with the Sponsor or its Affiliates who is
engaged to a substantial extent in the business of
rendering opinions regarding the value of assets of the
type held by the Partnership, and who is qualified to
perform such work. If the appraisal will be included in a
prospectus used to offer the securities of a "Roll-Up
Entity," the appraisal shall be filed with the Securities
and Exchange Commission, and with such states as may
require, an exhibit to the registration statement of the
"Roll-Up Entity." A "Roll-Up Entity" shall mean a
partnership, real estate investment trust, corporation,
trust or other entity that would be created or would
survive after the successful completion of a proposed
Roll-Up Transaction. The Partnership's assets shall be
appraised on a consistent basis. The appraisal shall be
based on a evaluation of all relevant information, and
shall indicate the value of the Partnership's
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assets as of the date immediately prior to the
announcement of the proposed Roll-Up Transaction. The
appraisal shall assume an orderly liquidation of the
Partnership's assets over a 12 month period. The terms of
the engagement of the independent expert shall clearly
state that the engagement is for the benefit of the
Partnership and its Limited Partners. A summary of the
appraisal, indicating all material assumptions underlying
the appraisal, shall be included in a report to the
Limited Partners in connection with a proposed Roll-Up
Transaction. Accordingly, if such appraisal is included in
the Partnership's prospectus, the Partnership shall be
subject to liability for violation of Section 11 of the
Securities Act of 1933, as amended and comparable
provisions under state laws for any material
misrepresentations or material omissions in the appraisal.
14.4.25.2. In connection with a proposed Roll-Up Trans-
action, the Person sponsoring the Roll-Up Transaction
shall offer to the Limited Partners who vote "no" on the
proposal the choice of: (i) accepting the securities of
the Roll-Up Entity offered in the proposed Roll-Up
Transaction; or (ii) one of the following: (A) remaining
as Limited Partners in the Partnership and preserving
their interest therein on the same terms and conditions as
existed previously; or (B) receiving cash in an amount
equal to the Limited Partner's pro-rata share of the
appraised value of the net assets of the Partnership.
14.4.25.3. The Partnership shall not participate in any
proposed Roll-Up Transaction which would result in Limited
Partners having democracy rights in the Roll- Up Entity
which are less than those provided for under paragraph
15.1. If the Roll-Up Entity is a corporation, the voting
rights of the Limited Partners shall correspond to the
voting rights provided for in paragraph 15.1. to the
greatest extent possible.
14.4.25.4. The Partnership shall not participate in any
proposed Roll-Up Transaction which includes provisions
that would operate to materially impede or frustrate the
accumulation of shares by any purchaser of the securities
of the Roll-Up Entity (except to the minimum extent
necessary to preserve the tax status of the Roll-Up
Entity). The Partnership shall not participate in any
proposed Roll-Up Transaction which would limit the ability
of a Limited Partner to exercise the voting rights of its
securities of the Roll-Up Entity on the basis of the
number of Units held by that Limited Partner.
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14.4.25.5. The Partnership shall not participate in any
proposed Roll-Up Transaction in which the Limited Part-
ner's rights of access to the records of the Roll-Up
Entity would be less than those provided for under
paragraph 13.1.
14.4.25.6. The Partnership shall not participate in any
proposed Roll-Up Transaction in which any of the cost of
the Roll-Up Transaction would be borne by the Partnership
if the Roll-Up Transaction is not approved by the Limited
Partners.
14.5 NO PERSONAL LIABILITY. The General Partners shall have no
personal liability for the repayment of the Original Contributions of any
Limited Partner or to repay the Partnership any portion or all of any negative
balance in its capital account, except as otherwise provided in Section 20.
14.6 ACCOUNTING MATTERS. The Managing General Partner shall make all
decisions as to accounting matters in connection with the accounting methods
adopted by the Partnership in accordance with generally accepted accounting
principles and procedures applied on a consistent basis and shall make all
decisions with respect to tax accounting matters in accordance with tax
accounting principles. The Managing General Partner may rely on the
Partnership's independent certified public accountants to determine whether such
decisions are in accordance with generally accepted accounting principles.
14.7 TAX MATTERS PARTNER. The Managing General Partner is hereby
designated as the "Tax Matters Partner" in accordance with Section 6231(a)(7) of
the Code and, in connection therewith and in addition to all other powers given
thereunder, shall have all other powers needed to fully perform hereunder
including, without limitation, the power to retain all attorneys and accountants
of its choice and the right to settle any audits without the consent of the
Limited Partners. The designation made in this Paragraph 14.7 is hereby
expressly consented to by each Partner as an express condition to becoming a
Partner.
14.8 FUNDS AND ASSETS. The Managing General Partner shall have a
fiduciary responsibility for the safekeeping and use of all funds and assets of
the Partnership, whether or not in its immediate possession or control, and
shall not employ, or permit another to employ, such funds or assets in any
manner except for the exclusive benefit of the Partnership.
14.9 NET WORTH OF INDIVIDUAL GENERAL PARTNER. The Individual General
Partner and any successor Individual General Partner shall use his best efforts
to meet the requirements, necessary to assure that the Partnership will be
classified as a partnership for federal income tax purposes, of the Code, as
interpreted from time
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to time by the Internal Revenue Service, including the capitalization
requirements presently contained in Revenue Procedure 72-13, or any successor
thereto, any other agency of the federal government or courts of law.
14.10 PRESERVATION OF TAX STATUS. The Managing General Partner shall
use its best efforts to take such actions as are necessary to preserve the
Partnership's status as a partnership or other pass-through entity for tax
purposes in light of any amendments to the Code or administrative or judicial
interpretations thereof.
15. RIGHTS AND POWERS OF THE LIMITED PARTNERS
15.1 VOTING RIGHTS.
15.1.1 The Limited Partners by Majority Vote may, without
the concurrence of the General Partners, vote to:
(a) remove a General Partner (provided that the
General Partners, insofar as they may act as Limited
Partners due to the ownership of Units of the
Partnership, will abstain from voting Units held by
them with regard to removal of a General Partner);
(b) elect a new General Partner;
(c) terminate and dissolve the Partnership pursuant
to Section 18;
(d) amend the Partnership Agreement, provided such
amendment is not for any of the purposes set forth
in Paragraph 14.2.16 of the Partnership Agreement;
(e) sell all or Substantially All of the Assets of
the Partnership in a single sale, or in multiple
sales in the same twelve-month period, except in the
liquidation and winding-up of the business of the
Partnership upon its termination and dissolution or
in the ordinary course of business and except that
the Managing General Partner may sell Assets in any
twelve-month period without a vote, provided the
aggregate book value amount of such Asset does not
exceed 66-2/3% of the Original Contributions of the
Limited Partners;
(f) materially change the Partnership's investment
objectives or policies;
(g) approve the assignment of a General Partner's
interest in the Partnership, except as otherwise
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provided in Paragraph 16.5 of the Partnership
Agreement; and
(h) extend the term of the Partnership.
In determining the existence of the requisite percentage in interest
of Units necessary to approve the foregoing matters, Units owned by
the General Partners or their Affiliates will not be included.
15.1.2 A Limited Partner shall be entitled to cast one vote for each
Unit which he owns, as at a meeting, in person, by written proxy or
by a signed writing directing the manner in which he desires that his
votes be cast, which writing must be received by the Managing General
Partner prior to such meeting, or (b) without a meeting, by a signed
writing directing the manner in which he desires that his votes be
cast, which writing must be received by the Managing General Partner
prior to the date upon which the votes of Limited Partners are to be
counted. Units owned by the General Partners and their Affiliates may
not be voted by, nor may the General Partners and their Affiliates
consent with respect to such Units, on matters submitted to the
Limited Partners regarding the removal of a General Partner or
regarding any transaction between the Partnership and the General
Partners and their Affiliates. In determining the existence of the
requisite percentage and interest of Units necessary to approve a
matter on which the General Partners and their Affiliates may not
vote or consent, any Units owned by the General Partners and their
Affiliates shall not be included.
15.2 MEETINGS. Meetings of the Limited Partners for any purpose may
be called by the Managing General Partner at any time and shall be called by the
Managing General Partner within ten (10) days after receipt of a written request
for such a meeting signed by ten percent (10%) or more in interest of the
Limited Partners as of the date of receipt of such written request. Any such
request shall state the purpose of the proposed meeting and the matters proposed
to be acted upon thereat. Meetings shall be held at the principal office of the
Partnership or at such other place as may be designated by the Managing General
Partner so long as such meeting is held at a time and place convenient to
Limited Partners.
15.3 CONSENT WITHOUT A MEETING. The Managing General Partner may and,
upon receipt of a request in writing signed by ten percent (10%) or more in
interest of the Limited Partners, the Managing General Partner shall, submit any
matter upon which the Limited Partners are entitled to act, to the Limited
Partners for a vote by written consent without a meeting. For purposes of
obtaining a written vote under this Partnership Agreement, the Managing General
Partner may require a written response within a specified time, but
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not less than fifteen (15) days and no more than sixty (60) days from receipt of
said request, and the failure of a Limited Partner to file such a written
response within such time shall constitute a vote which is consistent with the
Managing General Partner's recommendation with respect to such proposal so long
as a quorum is otherwise obtainable.
15.4 NOTICE OF MEETING. Notification of any meeting to be held
pursuant to Paragraph 15.3 shall be given not less than fifteen (15) days nor
more than sixty (60) days after receipt of a request in writing signed by ten
percent (10%) or more in interest of the Limited Partners by the Managing
General Partner, to each Limited Partner at its record address, or at such other
address which he may have furnished in writing to the Managing General Partner.
Such notification shall state the place, date and hour of the meeting, and shall
indicate that the notification is being issued at or by the direction of the
Partner or Partners calling the meeting. The notification shall state the
purpose or purposes of the meeting. For the purpose of determining the Limited
Partners entitled to vote at any meeting of the Limited Partners, or any
adjournment thereof, or to vote by written consent without a meeting, the
Managing General Partner or the Limited Partners requesting such meeting or vote
may fix, in advance, a date as the record date for any such determination of
Limited Partners. Such date shall not be more than sixty (60) days nor less than
ten (10) days before any such meeting or submission of a matter to the Limited
Partners for a vote by written consent. If a meeting is adjourned to another
time or place, and if an announcement of the adjournment of time or place is
made at the meeting, it shall not be necessary to give notification of the
adjourned meeting. The presence in person or by proxy of a majority in interest
of the Limited Partners shall constitute a quorum at meetings of the Limited
Partners; provided, however, that if there be no such quorum, holders of a
majority in interest of the Units so present or so represented may adjourn the
meeting from time to time without further notification, until a quorum shall
have been obtained. No notification of the time, place or purpose of any meeting
of Limited Partners need be given to any Limited Partner who attends in person
or is represented by proxy, except for a Limited Partner attending a meeting for
the express purpose of objecting at the beginning of the meeting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened, or to any Limited Partner entitled to such notification who,
in writing, executed and filed with the records of the meeting, either before or
after the time thereof, waives such notification.
15.5 PROXIES. The laws of the State of Delaware pertaining to the
validity and use of corporate proxies shall govern the validity and use of
proxies given by Limited Partners.
15.6 CONDUCT OF MEETING. At each meeting of Limited Partners, the
Managing General Partner shall appoint such officers and
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adopt such rules for the conduct of such meeting as the Managing General Partner
shall deem appropriate.
15.7 LIMITATIONS. No Limited Partner shall have the right or power
to: (i) bring an action for partition against the Partnership or (ii) cause the
termination and dissolution of the Partnership by court decree or otherwise,
except as set forth in this Partnership Agreement or as provided by law. Other
than upon the termination and dissolution of the Partnership as provided by this
Partnership Agreement, there has been no time agreed upon when the contribution
of each Limited Partner may be returned.
16. REMOVAL, BANKRUPTCY OR DISSOLUTION OF A GENERAL PARTNER AND
TRANSFER OF A GENERAL PARTNER'S INTEREST
16.1 REMOVAL. The General Partners may be removed from the
Partnership upon a Majority Vote. Written notice of the removal of the General
Partners shall be served either by certified or by registered mail, return
receipt requested, or by personal service. Such notice shall set forth the date
upon which the removal is to become effective.
16.2 SALE OF INTEREST. Upon the removal, adjudication of bankruptcy,
dissolution or other cessation to exist of either of the General Partners
("Terminated Partner"), the interest of such Terminated Partner in the Net
Income, Net Loss and Distributions of the Partnership may be purchased by a
successor General Partner (elected by Majority Vote of the Limited Partners) for
a purchase price determined according to the provisions of Paragraph 16.3.
Effective as of the removal, withdrawal, dissolution or other departure of the
Managing General Partner from the Partnership, should the Individual General
Partner remain as a General Partner of the Partnership, the Individual General
Partner shall assume all rights, obligations and responsibilities of the
Managing General Partner.
16.3 PURCHASE PRICE. The Terminated Partner shall receive the fair
market value of its interest in the Partnership, deter mined by agreement
between the Terminated Partner and the successor General Partner or, if they
cannot agree, by arbitration in accordance with the then current rules of the
American Arbitration Association in Detroit, Michigan. The cost of any such
required arbitration shall be borne equally by the Terminated General Partner
and the Partnership. For this purpose, the fair market value of the interest of
the Terminated Partner shall be deemed to be the amount the Terminated Partner
would receive upon dissolution and termination of the Partnership under
Paragraph 18.2.1 assuming such dissolution or termination occurred on the date
of the dissolving event and assuming the assets of the Partnership were sold for
their then fair market value without compulsion of the Partnership to sell such
assets. Payment shall be made by a promissory note at the announced prime rate
of interest of the bank
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at which the majority of the Partnership's cash is on deposit as of the date of
determination of the fair market value of the Terminated Partner's interest in
the Partnership. Such promissory note shall be for a term of not less than five
(5) years, shall be secured by the acquiring Partner's assignment of the future
Distributions by the Partnership to the acquiring Partner. The principal amount
of said promissory note together with accrued interest shall be payable in equal
fully amortizing installments until such time as the principal amount together
with accrued interest is paid in full. Notwithstanding anything to the contrary
herein, said promissory note, if not previously paid in full, shall become due
and payable in full by the acquiring Partner at such time as the Partnership is
finally wound up and liquidated.
16.4 NO VOLUNTARY DISSOLUTION OR WITHDRAWAL. Until the dissolution of
the Partnership, the General Partners shall not take any voluntary steps to
dissolve themselves or to voluntarily withdraw from the Partnership. Nothing in
this Partnership Agreement shall be deemed to limit the ability of the Managing
General Partner to pledge or hypothecate its interest in the Partnership to
third parties.
16.5 NO LIMITATION ON MERGER OR REORGANIZATION. Nothing in this
Partnership Agreement shall be deemed to prevent the merger or reorganization of
the Managing General Partner into or with any other corporation, partnership or
other entity, or the transfer of all the capital stock or partnership interests
of the Managing General Partner and the assumption of the rights and duties of
the Managing General Partner by, in the case of a merger, reorganization or
consolidation, the surviving corporation or partnership or by operation of law.
17. CERTAIN TRANSACTIONS
The General Partners, any Limited Partner, any Affiliates, any
shareholder, officer, director, partner or employee thereof, or any Person
owning a legal or beneficial interest therein, may engage in or possess an
interest in any other business or venture of every nature and description,
independently or with others including, but not limited to, the ownership,
financing, leasing, operation, management, brokerage and development of real
property. Except as set forth in the Prospectus, neither the General Partners
nor any Affiliate of the General Partners shall be obligated to present any
particular investment opportunity to the Partnership, even if such opportunity
is of a character which, if presented to the Partnership, could be taken by the
Partnership and each of them shall have the right to make for its own account
(individually or as trustee) or to recommend to others any such particular
investment opportunity. The General Partners shall not be required to devote all
of their time or business efforts to the affairs of the Partnership, but shall
devote so much of such time and
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attention to the Partnership as is reasonably necessary and advisable to manage
the affairs of the Partnership to the best advantage of the Partnership.
18. TERMINATION AND DISSOLUTION OF THE PARTNERSHIP
18.1 TERMINATING EVENTS. The Partnership shall be terminated
and dissolved upon the earliest to occur of the following:
18.1.1 the withdrawal, removal, adjudication of bankruptcy,
insolvency, dissolution or other cessation of existence as a legal
entity (collectively, the "Withdrawal") of the last remaining General
Partner unless, within ninety (90) days of the date of such event,
the Limited Partners by a majority vote (unless a unanimous vote is
required under the Delaware Act) elect to continue the business of
the Partnership and elect a successor General Partner as of the date
of the Withdrawal;
18.1.2 a Majority Vote (which may, but need not be solicited by the
General Partner) in favor of dissolution and termination of the
Partnership;
18.1.3 the expiration of the term of the Partnership; or
18.1.4 the disposition of all assets held by the Partnership and
receipt of final payment with respect to all investments.
18.2 LIQUIDATION AND DISTRIBUTION OF ASSETS. Upon a dissolution and
termination of the Partnership for any reason, the Managing General Partner
shall take full account of the Partnership's assets and liabilities, shall
liquidate the assets as promptly as is consistent with obtaining the fair value
thereof, and shall apply and distribute the proceeds therefrom in the following
order:
18.2.1 first, to the payment of creditors of the Partnership but
excluding secured creditors whose obligations will be assumed or
otherwise transferred on the liquidation of Partnership assets; and
18.2.2 second, after allowance for the expenses of liquidation and
the setting up of any reserves for contingencies which the Managing
General Partner considers necessary, to the Partners in proportion to
and to the extent of the positive balances in their Capital
Accounts, after Net Income arising from a Disposition and Net Loss
has been allocated in accordance with Paragraph 11.1 hereof.
18.2.3 notwithstanding anything to the contrary, the Managing General
Partner has the right to defer liquidation if, in the opinion of the
Managing General Partner, the sale of
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Partnership assets in liquidation would result in a material
underrealization on the Partnership's assets.
18.2.4 notwithstanding anything herein to the contrary, the
Partnership shall not make any distributions in kind.
18.3 ADDITIONAL TERMINATING EVENT. In addition to the events
described in Paragraph 18.1, the Managing General Partner may also compel a
termination and dissolution of the Partnership, upon notice to all Limited
Partners but without the consent of any Limited Partner, if, in the opinion of
counsel to the Partnership, either (i) the Partnership's assets constitute "plan
assets," as such term is defined for purposes of ERISA, or (ii) any of the
transactions contemplated hereunder constitute "prohibited transactions" under
ERISA and no exemption for such transactions is obtainable from the United
States Department of Labor.
19. SPECIAL POWER OF ATTORNEY
19.1 By completing and signing the Partnership's Subscription
Documents or any transfer form, each Limited Partner grants to the General
Partners and to each officer of the Managing General Partner and their designees
and each of them a power of attorney irrevocably making, constituting and
appointing each of them with full power of substitution and resubstitution, as
its or their attorney-in-fact with full power and authority to act in its or
their name on its or their behalf to execute complete and/or correct in a manner
consistent with the Prospectus and the Partnership Agreement and to execute,
acknowledge, swear to and file the following documents, subject to all of the
provisions of the Partnership Agreement:
19.1.1 the Partnership Agreement, the Certificate, and any separate
certificates of limited partnership to be filed in the appropriate
public offices in the State of Delaware (and any other state for
which the General Partners shall deem it advisable to file, upon
advice of counsel) and in such form as shall be necessary under the
laws of such state to give effect to the provisions of the
Partnership Agreement and to preserve the character of the
Partnership as a limited partnership, and any amended Certificate,
including any amendment to the Certificate or to the Partnership
Agreement to reflect the admission of additional Limited Partners in
accordance with the terms of the Partnership Agreement or the
substitution of a Limited Partner or General Partner in accordance
with the provisions of the Partnership Agreement;
19.1.2 any other instrument or document which the General Partners
deem to be in the best interests of the Partnership to file and which
is not inconsistent with this Partnership Agreement;
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19.1.3 any document which may be required in connection with
borrowings by the Partnership, including, without limitation,
documents required by any financial institution;
19.1.4 any documents which may be required in connection with any
filings with state securities commissions or other state authorities;
19.1.5 any amendment to this Partnership Agreement which in the
opinion of the General Partners does not adversely impact the
interests of the Limited Partners, or is necessary to clarify any
ambiguities, misstatements or omissions from this Partnership
Agreement;
19.1.6 any instruments or other documents necessary to effect any of
the amendments to this Partnership Agreement in accordance with
Paragraph 14.2.16 hereof.
19.2 The power of attorney granted by each Limited Partner:
19.2.1 is a special power of attorney coupled with an interest which
is irrevocable and shall survive and not be affected by the death,
incompetency, disability or incapacity of the granting Limited
Partner;
19.2.2 may be exercised by the attorney-in-fact appointed as set
forth in Paragraph 19.1 hereof either by signing separately as
attorney-in-fact for the Limited Partners or, after listing all of
the Limited Partners executing any instrument, by a single signature
of such attorney-in-fact for all of them; and
19.2.3 shall survive the delivery of an assignment by a Limited
Partner of the whole or any portion of his Units except that, where
the assignee thereof has been approved by the Managing General
Partner for admission to the Partnership as a substituted Limited
Partner, this power of attorney given by the assignor shall survive
the delivery of such assignment for the sole purpose of enabling the
General Partners and each officer of the Managing General Partner and
their designees and each of them to execute, acknowledge, swear to
and file any instrument or document necessary to effect such
substitution.
19.3 Each Limited Partner is fully aware that he and each other
Limited Partner have executed this power of attorney, and that each Limited
Partner will rely on the effectiveness of such powers with a view to the orderly
administration of the Partnership's affairs.
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20. LIABILITY AND INDEMNIFICATION
20.1 The General Partners and their Affiliates shall have no
liability to the Partnership or to any Partner for any loss suffered by the
Partnership which arises out of any action or inaction of a General Partner or
the Affiliate of a General Partner if the General Partners or the Affiliates, in
good faith, determined that such course of conduct was in the best interests of
the Partnership and such course of conduct did not constitute negligence or
misconduct of the General Partner or the Affiliate. The General Partners shall
not be liable because of any taxing authorities disallow or adjust any income,
nor shall the General Partners be liable for actions taken or not taken in
accordance with the provisions of this Partnership Agreement, provided that the
same were not the result of negligence, breach of contract or misconduct.
Furthermore, the General Partners shall not have any liability for the repayment
of Capital Contributions of the Limited Partners except as provided in this
Partnership Agreement, nor shall the General Partners be obligated, except as
required by law, to make additional Capital Contributions or advances to the
Partnership. The General Partners and their Affiliates shall be indemnified by
the Partnership against any losses, judgments, liabilities, expenses and amounts
paid in settlement of any claims sustained by them in connection with the
Partnership, provided that the same were not the result of negligence or
misconduct on the part of the General Partners or their Affiliates, provided
however, that such indemnification shall be recoverable only out of the assets
of the Partnership and not from the Limited Partners, provided further, that the
General Partners or their Affiliates, in good faith, determine that their course
of conduct was in the best interest of the Partnership.
20.1.1 Notwithstanding the above, the General Partners and their
Affiliates and any Person acting as a broker-dealer shall not be
indemnified for any losses, liabilities or expenses arising from or
out of an alleged violation of federal or state securities laws
unless (i) there has been a successful adjudication on the merits of
each count involving alleged securities law violations as to the
particular indemnitee, or (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction as to
the particular indemnitee or (iii) a court of competent jurisdiction
approves a settlement of the claims against a particular indemnitee
and finds that indemnification of the settlement and related costs
should be made.
20.1.2 In any claim for indemnification for federal or state
securities law violations, the party seeking indemnification shall
place before the court the position of the Securities and Exchange
Commission and the positions of certain state securities divisions,
including California, Oklahoma and Tennessee, and in such other
states in which the claimants
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allege Units were offered or sold, with respect to the issue of
indemnification for securities law violations.
20.1.3 The Partnership shall not pay for any insurance covering
liability of the General Partners and their Affiliates for actions or
omissions for which indemnification is not permitted hereunder;
provided, however, that nothing contained herein shall preclude the
Partnership from purchasing and paying for such types of insurance,
including extended coverage liability and casualty and workers
compensation, as would be customary for any Person owning comparable
assets and engaged in a similar business from naming the General
Partners and their Affiliates as additional insured parties
thereunder, provided that such addition does not add to the premiums
payable by the Partnership.
20.1.4 The provision of advances from Partnership funds to the
General Partners or their Affiliates for legal expenses and other
costs incurred as a result of any legal action initiated against a
General Partner by a Limited Partner of the Partnership is
prohibited.
20.1.5 The provision of advances from Partnership funds to the
General Partners or their Affiliates for legal expenses and other
costs incurred as a result of a legal action is permissible if the
following three conditions are satisfied: (1) the legal action
relates to acts or omissions with respect to the performance of
duties or services by General Partners or their Affiliates on behalf
of the Partnership; (2) the legal action is initiated by a third
party who is not a Limited Partner of the Partnership; and (3) the
General Partners or their Affiliates undertake to repay the advanced
funds to the Partnership in cases in which they would not be entitled
to indemnification under Paragraph 20.1 hereof.
21. MISCELLANEOUS
21.1 COUNTERPARTS. This Partnership Agreement may be executed in
several counterparts and as so executed shall constitute one Partnership
Agreement, binding on all of the parties hereto, notwithstanding that all of the
parties are not signatories to the original or the same counterpart.
21.2 BINDING PROVISIONS. The terms and provisions of this
Partnership Agreement shall be binding upon and shall inure to the benefit of
the successors and assigns of the respective Partners.
21.3 SEVERABILITY. In the event any phrase, sentence or paragraph of
this Partnership Agreement is declared by a court of competent jurisdiction to
be void, such phrase, sentence or
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paragraph shall be deemed severed from the remainder of the Partnership
Agreement and the balance of the Partnership Agreement shall remain in effect.
21.4 NOTICE. All notices under this Partnership Agreement shall be in
writing and shall be given to the party entitled thereto by personal service or
by mail, posted to the address maintained by the Partnership for such Person or
at such other address as he may specify in writing.
21.5 HEADINGS. Titles or captions contained in this Partnership
Agreement are inserted only as a matter of convenience and for reference. Such
titles and captions in no way define, limit, extend or describe the scope of
this Partnership Agreement nor the intent of any provision hereof.
21.6 MEANINGS. Whenever required by the context hereof, the singular
shall include the plural, and vice-versa; the masculine gender shall include the
feminine and neuter genders, and vice-versa; and the word "Person" shall include
a corporation, partnership, firm or other form of association.
21.7 LIST OF PARTNERS. The names, addresses and Original
Contributions of the Partners are set forth on Exhibit l attached hereto, which
exhibit shall be maintained at the principal place of business of the
Partnership.
21.8 GOVERNING LAW. Notwithstanding the place where this Partnership
Agreement may be executed by any of the parties hereto, the parties expressly
agree that all the terms and provisions hereof shall be construed under the laws
of the State of Delaware and that the Delaware Act, as amended, shall govern the
partnership aspects of this Partnership Agreement.
21.9 OTHER JURISDICTIONS. In the event the business of the
Partnership is carried on or conducted in states in addition to the State of
Delaware, then the parties agree that this Partnership shall exist under the
laws of each state in which business is actually conducted by the Partnership,
and they severally agree to execute such other and further documents as may be
required or requested in order that the Managing General Partner legally may
qualify this Partnership in such states. The power of attorney granted to the
Managing General Partner in Section 20 shall constitute the authority of the
Managing General Partner to perform the ministerial duty of qualifying this
Partnership under the laws of any state in which it is necessary to file
documents or instruments of qualification. A Partnership office or principal
place of business in any state, including the State of Michigan, may be
designated from time to time by the Managing General Partner.
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21.10 POWER TO RECONSTITUTE. In the event that the State of Delaware
amends its Revised Uniform Limited Partnership Act in any manner which precludes
the Partnership, at any time, from obtaining an opinion of tax counsel to the
effect that the Partnership will be treated as a pass-through entity for federal
income tax purposes and not as an association taxable as a corporation, then the
Managing General Partner may, in its sole discretion, reconstitute the
Partnership under the laws of another state.
IN WITNESS WHEREOF, the parties hereto have executed this Partnership
Agreement of Limited Partnership as of the date first above written.
GENERAL PARTNERS:
CAPTEC FRANCHISE CAPITAL CORPORATION III
By: ____________________________________
Patrick L. Beach
President and
Chief Executive Officer
____________________________________
Patrick L. Beach
INITIAL LIMITED PARTNER:
By: ____________________________________
Patrick L. Beach
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<PAGE> 1
Exhibit 10.5
EXHIBIT B
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
<PAGE> 2
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
INDEX
Page
-----
1. NAME AND PLACE OF BUSINESS........................................B-1
2. DEFINITIONS.......................................................B-1
3. PURPOSE...........................................................B-8
4. TERM.............................................................B-10
5. GENERAL PARTNERS.................................................B-10
6. LIMITED PARTNERS.................................................B-11
7. PARTNERSHIP CAPITAL..............................................B-12
8. LIABILITY OF LIMITED PARTNERS....................................B-13
9. COMPENSATION TO THE GENERAL PARTNERS AND THEIR
AFFILIATES.......................................................B-13
10. PARTNERSHIP EXPENSES.............................................B-16
11. ALLOCATION OF INCOME AND LOSS AND DISTRIBUTIONS..................B-18
12. TRANSFERABILITY OF UNITS.........................................B-25
13. BOOKS, RECORDS, ACCOUNTINGS AND REPORTS..........................B-24
14. RIGHTS, AUTHORITY, POWERS, RESPONSIBILITIES AND
DUTIES OF THE MANAGING GENERAL PARTNER...........................B-26
15. RIGHTS AND POWERS OF THE LIMITED PARTNERS........................B-37
16. REMOVAL, BANKRUPTCY OR DISSOLUTION OF
A GENERAL PARTNER AND TRANSFER OF A
GENERAL PARTNER'S INTEREST.......................................B-40
17. CERTAIN TRANSACTIONS.............................................B-41
18. TERMINATION AND DISSOLUTION OF THE PARTNERSHIP...................B-41
19. SPECIAL POWER OF ATTORNEY........................................B-42
20. LIABILITY AND INDEMNIFICATION....................................B-44
21. MISCELLANEOUS....................................................B-45
<PAGE> 3
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
AMENDED AND RESTATED AGREEMENT of LIMITED PARTNERSHIP ("Partnership
Agreement") entered into as of the 31st day of October, 1996, by and among
Captec Franchise Capital Corporation IV, a Michigan corporation (the "Managing
General Partner") and Patrick L. Beach (the "Individual General Partner"), as
General Partners and Patrick L. Beach as the Initial Limited Partner (the
"Initial Limited Partner"), with offices at 24 Frank Lloyd Wright Drive, P.O.
Box 544, Ann Arbor, Michigan 48106-0544, and Patrick L. Beach, as the Initial
Limited Partner, with offices at 24 Frank Lloyd Wright Drive, P.O. Box 544, Ann
Arbor, Michigan 48106-0544.
WHEREAS, Captec Franchise Capital Partners L.P. IV is a limited
partnership presently existing under Delaware law and governed by a Partnership
Agreement dated as of July 30, 1996 (the "Former Partnership Agreement")." The
Managing General Partner, the Individual General Partner and the Initial Limited
Partners wish to amend and restate the Former Partnership Agreement as set forth
below;
NOW, THEREFORE, in consideration of mutual promises made herein, the
parties hereto hereby agree as follows:
1. NAME AND PLACE OF BUSINESS
The name of the limited partnership to be governed hereby is Captec
Franchise Capital Partners L.P. IV (the "Partnership"). Its registered office in
Delaware is The Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801. The Partnership's registered agent at that address is The
Corporation Trust Company. The Managing General Partner shall have full power
and authority to change the Partnership's registered office or registered agent.
The Partnership's principal place of business is 24 Frank Lloyd Wright Drive,
P.O. Box 544, Ann Arbor, Michigan 48106-0544, or such other place as the
Managing General Partner may hereafter determine. The General Partners shall
from time to time execute or cause to be executed the Certificate and all such
certificates (including limited partnership and fictitious name certificates) or
other documents or cause to be done all such filing, recording, publishing or
other acts as may be necessary or appropriate to comply with the requirements
for the formation and the operation of a limited partnership under the laws of
the State of Delaware and for the purpose of establishing and protecting the
limited liability of the Limited Partners, under the laws of any other
jurisdiction in which the Partnership may conduct business.
2. DEFINITIONS
The following terms used in this Partnership Agreement shall (unless
otherwise expressly provided herein or unless the context otherwise requires)
have the following respective meanings:
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"Acquisition Expenses" shall mean expenses, including but not limited
to credit reports, escrow fees, appraisal reports, attorneys' fees and title
insurance, accountants' fees and miscellaneous expenses, and travel and
communication expenses related to selection and acquisition of investments,
whether or not acquired.
"Acquisition Fees" shall mean the total of all fees and commissions
paid by any Person to any Person, including the General Partners and their
Affiliates in connection with the selection, evaluation, acquisition,
construction, and/or development of, Property or Equipment by the Partnership,
whether or not acquired, including but not limited to, real estate commissions,
selection fees, finder's fees, Development Fees, nonrecurring management fees,
consulting fees, payments for covenants not to compete, guarantee fees,
financing fees or other similar fees or commissions, however designated and
however treated for tax or accounting purposes, or any fees of a similar nature,
however designated. As used herein, "Development Fee" shall mean a fee for
packaging of a Partnership's property, including negotiating and approving
plans, and undertaking to assist in obtaining zoning and necessary variances and
necessary financing for the specific property, either initially or at a later
date.
"Act" shall mean the Securities Act of 1933, as amended.
"Additional Closing Date" shall mean each date between the Initial
Closing Date and the Final Closing Date on which a closing for Units sold
pursuant to the Prospectus occurs.
"Adjusted Investment" shall mean the Original Contributions
attributable to a Unit, reduced by the total amount of Net Sale or Refinancing
Proceeds distributed.
"Adjusted Net Asset Value" shall mean the book value of all Assets
minus all liabilities of the Partnership.
"Affiliate" of a Person shall mean: (i) any Person directly or
indirectly controlling, controlled by or under common control with another
Person; (ii) any Person owning or controlling 10% or more of the outstanding
voting securities of such other Person; (iii) any officer, director, trustee, or
partner of such Person; and (iv) if such other Person is an officer, director or
partner, any company for which such Person acts in any such capacity.
Notwithstanding the foregoing, the term Affiliate shall not apply to any Person
who shall serve solely as an independent director, trustee or partner of the
General Partners or of an Affiliate of the General Partners nor shall a partner
in a partnership or joint venture with (a) the Partnership or (b) an Affiliate
of the General Partners, be deemed an Affiliate of the General Partners solely
by virtue of such relationship.
"Appraised Value" shall mean the value of any real property according
to an appraisal made by an independent qualified appraiser who is a member in
good standing of the American Institute of Real Estate Appraisers (an MAI
appraiser).
"Assets" means collectively all Partnership Properties and Equipment.
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"Capital Account" shall mean, with respect to any Partner, the Capital
Account maintained for such Partner in accordance with the following provisions:
(i) to each Partner's Capital Account there shall be credited
such Partner's Original Contribution, such Partner's distributive share
of Income, and any items in the nature of income or gain that are
specifically allocated to such Partner, and the amount of any
Partnership liabilities that are assumed by such Partner or that are
secured by any Partnership property distributed to such Partner.
(ii) to each Partner's Capital Account there shall be debited
the amount of cash and the Gross Asset Value of any Partnership
property distributed to such Partner pursuant to any provision of this
Partnership Agreement, such Partner's distributive share of losses, and
any items in the nature of expenses or losses that are specifically
allocated to such Partner, and the amount of any liabilities of such
Partner that are assumed by the Partnership or that are secured by any
property contributed by such Partner to the Partnership.
In the event any interest in the Partnership is transferred in
accordance with the terms of this Partnership Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to the
transferred interest. In the event the Gross Asset Values of Partnership assets
are adjusted pursuant hereto, the Capital Accounts of all Partners shall be
adjusted simultaneously to reflect the aggregate net adjustment.
The foregoing provisions and the other provisions of this Partnership
Agreement relating to the maintenance of Capital Accounts are intended to comply
with Treasury Regulation Section 1.704-1(b), and shall be interpreted and
applied in a manner consistent with such Regulations. In the event the Managing
General Partner shall determine that it is prudent to modify the manner in which
the Capital Accounts, or any debits or credits thereto, are computed in order to
comply with such Regulations, the Managing General Partner may make such
modification. The Managing General Partner shall adjust the amounts debited or
credited to Capital Accounts with respect to (a) any property contributed to the
Partnership or distributed to the Partners; and (b) any liabilities that are
secured by such contributed or distributed property or are assumed by the
Partnership or the Partners in the event the Managing General Partner shall
determine such adjustments are necessary or appropriate pursuant to Treasury
Regulation Section 1.704-1(b) (2) (iv). The Managing General Partner also shall
make any appropriate modifications in the event unanticipated events might
otherwise cause this Partnership Agreement not to comply with Treasury
Regulations Section 1.704-1(b).
"Capital Contribution" shall mean the Original Contribution.
"Cash Flow" means, with respect to any period, all cash receipts
derived from payments of all forms of income on Assets held by the Partnership
including all rents from and other revenues paid in connection with Partnership
Assets (as distinguished from Original Contributions and exclusive of any Net
Sale or Refinancing Proceeds), without
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deduction for depreciation, plus amounts, if any, from reserves attributable to
such cash receipts with respect to any prior period, if no longer deemed
necessary for Partnership operations, less cash receipts used to pay operating
expenses and to repurchase any Units or set aside from such cash receipts by the
Managing General Partner for working capital reserves.
"Certificate" shall mean the Certificate of Limited Partnership of
Captec Franchise Capital Partners L.P. IV as filed with the Secretary of State
of the State of Delaware, and all amendments thereto.
"Closing Date" shall mean each date designated by the General Partners
on which subscribers for Units are admitted as Limited Partners as a result of
purchases occurring during the offering period.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
corresponding provisions of subsequent revenue laws.
"Current Preferred Return" shall mean a cumulative, noncompounded
return equal to ten percent (10%) per annum on a Limited Partner's Adjusted
Investment, calculated to commence on the first day of the month following the
month in which the Limited Partner is admitted to the Partnership as a Limited
Partner.
"Delaware Act" shall mean the Delaware Revised Uniform Limited
Partnership Act as in effect and as it may be amended.
"Depreciation" shall mean, for each fiscal year or other period, an
amount equal to the depreciation, amortization, or other cost recovery deduction
allowable with respect to an asset for such year or other period, except that if
the Gross Asset Value of an asset differs from its adjusted basis for federal
income tax purposes at the beginning of such year or other period, Depreciation
shall be an amount which bears the same ratio to such beginning Gross Asset
Value as the federal income tax depreciation, amortization, or other cost
recovery deduction for such year or other period bears to such beginning
adjusted tax basis.
"Disposition" shall mean any Partnership transaction with respect to
Property or Equipment not in the ordinary course of its business including,
without limitation, sales, exchanges, or other dispositions of Property or
Equipment held by the Partnership, and recoveries of damage awards and insurance
proceeds with respect to Property or Equipment.
"Distributions" shall mean any cash or other property distributed to
the Limited Partners and the General Partners arising from their interests in
the Partnership, but shall not include any payments to the Managing General
Partner under the provisions of Sections 9 or 10.
"Equipment" shall mean any equipment acquired for lease by the
Partnership, whether directly or indirectly through a nominee, agent,
partnership, trust, joint venture or otherwise, but does not include leases.
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"Final Closing Date" shall mean the date on which the last closing for
Units sold pursuant to the Prospectus occurs.
"Front-End Fees" shall mean fees and expenses paid by any party for any
services rendered in connection with and during the Partnership's organizational
or acquisition phase including Organizational and Offering Expenses, Acquisition
Fees, Acquisition Expenses and any other similar fees.
"Full Payout Lease" shall mean a lease under which the present value of
non-cancelable rental payments payable during the initial term of the lease is
at least sufficient to permit a lessor to recover the purchase price of
equipment.
"General Partners" shall mean Captec Franchise Capital Corporation IV
and Patrick L. Beach in their respective capacities as general partners of the
Partnership, or any other Person, corporation or other entity which succeeds
either of them in such capacity, as well as any additional general partners.
"Gross Asset Value" shall mean, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset
contributed by a Partner to the Partnership shall be the gross
fair market value of such asset, as determined by the
contributing Partner and the Partnership;
(ii) The Gross Asset Values of all Partnership assets
shall be adjusted to equal their respective gross fair market
values, as determined by the Managing General Partner, as of
the following times: (a) the acquisition of an additional
interest in the Partnership by any new or existing Partner in
exchange for more than the Original Contribution; (b) the
distribution by the Partnership to a Partner of more than a de
minimus amount of Partnership property other than money,
unless all Partners receive simultaneous distributions of
undivided interests in the distributed property in proportion
to their interests in the Partnership; and (c) the termination
of the Partnership for federal income tax purposes pursuant to
Code Section 708(b) (1) (B); and
(iii) If the Gross Asset Value of an asset has been
determined or adjusted pursuant to subparagraph (i) or
subparagraph (ii) hereof, such Gross Asset Value shall
thereafter be adjusted by the Depreciation taken into account
with respect to such asset for purposes of computing taxable
income and loss.
"Gross Proceeds" shall mean the total proceeds from the sale
of Units before deductions for Front-End Fees.
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"Individual General Partner" shall mean Patrick L. Beach
in his capacity as the individual general partner of the Partnership.
"Initial Closing Date" shall mean the date on which the first
closing for Units sold pursuant to the Prospectus occurs.
"Initial Limited Partner" shall mean Patrick L. Beach in his
capacity as the initial limited partner.
"Investment in Assets" shall mean the amount of Gross Proceeds
used to invest in Property and/or Equipment, including working capital
reserves allocable thereto and other cash payments, but excluding
Front-End Fees.
"Limited Partners" shall mean the Initial Limited Partner and
any other Persons who are admitted to the Partnership as additional or
substituted Limited Partners. Reference to a "Limited Partner" shall
refer to any one of them.
"Limited Partnership Interests" shall mean the ownership interest of a
Partner in the Partnership from time to time, including the right of such
Partner to any and all benefits to which such Partner may be entitled as
provided in this Partnership Agreement and in the Delaware Act, together with
the obligations of such Partner to comply with all the terms and provisions of
this Partnership Agreement and of the Delaware Act.
"Majority Vote" shall mean the affirmative vote of the holders of more
than 50% of the outstanding Units.
"Managing General Partner" shall mean Captec Franchise Capital
Corporation IV, or its successors and assigns in its or their capacity as the
managing general partner of the Partnership.
"Minimum Number of Units" shall mean 2,000 Units.
"Net Income or Loss From Annual Operations" shall mean the income or
loss for the Partnership's calendar year computed under the accrual method of
accounting for purposes of the federal income tax (excluding any income or loss
attributable to a Disposition or involuntary conversion of any of the
Partnership Property).
"Net Income or Loss From Other Than Annual Operations" shall mean the
income or loss for the Partnership's calendar year computed under the accrual
method of accounting for purposes of the federal income tax arising from (i) a
Disposition or (ii) any other transaction not included in the determination of
Net Income or Loss From Annual Operations.
"Net Offering Proceeds" shall mean the total Gross Proceeds less
Organizational and Offering Expenses.
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"Net Sale or Refinancing Proceeds" shall mean receipts from
Dispositions or refinancing of Partnership Properties or Equipment plus amounts,
if any, from reserves attributable to prior Dispositions if no longer deemed
necessary for Partnership operations, less the following:
(i) the amount paid or to be paid in connection with or as
an expense of such Disposition or refinancing;
(ii) the amount necessary for the payment of all debts and
obligations of the Partnership including, but not limited to, fees to
the Managing General Partner or its Affiliates and amounts, if any,
required to be paid to, arising from or otherwise related to the
particular Disposition or refinancing; and
(iii) any amount set aside by the Managing General Partner for
working capital reserves from such receipts.
"Offering" shall mean the offering of Units pursuant to the Prospectus.
"Organizational and Offering Expenses" shall mean all expenditures
classified as syndication expenses pursuant to Code Section 709 and Treasury
Regulation Section 1.709-2(b), including, but not limited to, all those expenses
incurred in connection with the formation, qualification and registration of the
Partnership and in marketing, distributing and processing Units, including any
selling commissions and discounts under applicable federal and state law, and
any other expenses actually incurred and directly related to the offering and
sale of Units, including such expenses as: (a) fees and expenses paid to
attorneys in connection with the offering, (b) securities jurisdictional fees,
filing fees and taxes, (c) the costs of qualifying, printing, amending,
supplementing, mailing and distributing the Partnership's Prospectus including
telephone and telegraphic costs, (d) the costs of qualifying, printing,
amending, supplementing, mailing and distributing sales materials used in
connection with the issuance of Units, including telephone and telegraphic
costs, (e) remuneration of officers and employees of the General Partners and
its Affiliates and the Partnership while directly engaged in marketing,
distributing, processing and establishing records of Units and establishing
records and paying selling commissions, (f) accounting and legal fees and
expenses incurred in connection therewith by the General Partners or its
Affiliates, (g) reimbursements for accountable bona fide costs of due diligence
incurred by Participating Dealers and their registered representatives, (h)
escrow fees and expenses in connection with the Offering, and (i) the 2%
non-accountable expense allowance payable to the General Partners pursuant to
Section 9.1 hereof.
"Original Contribution" shall mean the amount of $1,000 for each Unit,
which amount shall be attributed to such Unit in the hands of subsequent holders
thereof, less the return of any amount of uninvested funds returned pursuant to
Paragraph 11.10 hereof.
"Participating Dealers" shall mean those broker-dealers who as
members of the National Association of Securities Dealers, Inc. who are
participating in the public offering of the Units.
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"Partners" shall mean collectively the General Partners and the Limited
Partners, and reference to a "Partner" shall be to any one of the Partners.
"Partnership" shall mean the limited partnership created under this
Partnership Agreement and any successor thereto.
"Partnership Agreement" shall mean this agreement of limited
Partnership, as amended and restated, and all amendments thereto.
"Partnership List" shall mean an alphabetical list of the names,
addresses and business telephone numbers of the Limited Partners along with the
number of units held by each.
"Performance Preferred Return" shall mean a cumulative, noncompounded
return equal to ten and one-half percent (10.5%) per annum on a Limited
Partner's Adjusted Investment, calculated to commence on the first day of the
month following the month in which the Limited Partner is admitted to the
Partnership as a Limited Partner.
"Person" shall mean any natural person, partnership, corporation,
association or other legal entity.
"Property" or "Properties" shall mean the real estate, together with
the buildings improvements, fixtures and Personal property associated therewith
(but excluding Equipment), acquired or to be acquired, by the Partnership.
"Prospectus" shall mean the prospectus contained in the registration
statement filed with the Securities and Exchange Commission for the registration
of the Units under the Securities Act of 1933, as amended, in the final form in
which said prospectus is filed with said Commission and as thereafter
supplemented.
"Purchase Prices" shall mean (i) the invoice price or contract price at
which the Partnership acquired Property and/or Equipment from the manufacturer
or a third party seller, or an amount no greater than the invoice price or
contract price, at which an Affiliate of the Partnership, acquired Property
and/or Equipment. The Purchase Price of Equipment and/or Property shall include
Acquisition Fees (except for purpose of the calculation of such Fees) and all
debt secured by liens and security interests on the Property and/or Equipment,
but shall exclude points and prepaid interest.
"Roll-Up Entity" shall mean a partnership, real estate investment
trust, corporation, trust or other entity that would be created or would survive
after the successful completion of a proposed Roll-Up Transaction.
"Roll-Up Transaction" shall mean any transaction or series of
transactions that directly or indirectly, through acquisition or otherwise,
involve the combination, merger or conversion of the Partnership.
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"Qualified Plans" shall mean qualified pension, profit sharing and
other employee retirement benefit plans (including Keogh [H.R. 10] plans) and
trusts, bank commingled trust funds for such plans and individual retirement
accounts.
"Sponsor" shall mean any Person directly or indirectly instrumental in
organizing, wholly or in part, the Partnership or who will manage or participate
in the management of the Partnership and any Affiliate of such Person, but does
not include (i) any Person that is not an Affiliate whose only relationship with
the Partnership or the General Partners is that of an asset manager whose only
compensation from the Partnership is as such, and (ii) wholly-independent third
parties such as attorneys, accountants and underwriters whose only compensation
from the Partnership is for professional services rendered in connection with
the offering of Units or the operations of the Partnership. A Person may also be
a Sponsor of the Partnership by: (i) taking the initiative, directly or
indirectly, and founding or organizing the business or enterprise of the
Partnership, either alone or in conjunction with one or more other Persons; (ii)
receiving a material participation in the Partnership in connection with the
founding or organizing of the business of the Partnership, in consideration of
services or property, or both the services and property; (iii) having a
substantial number of relationships and contacts with the Partnership; (iv)
possessing significant rights to control Partnership property; (v) receiving
fees for providing services to the Partnership which are paid on a basis that is
not customary in the industry; and (vi) providing goods or services to the
Partnership on a basis which was not negotiated at arms-length with the
Partnership.
"Substantially All of the Assets" shall mean, unless the context
otherwise dictates, assets representing 66-2/3% or more of the net book value of
all of the Partnership's Assets as of the end of the most recently completed
fiscal quarter.
"Tax-Exempt Entities" shall mean Qualified Plans and other entities
exempt from federal income taxation, such as endowment funds and foundations and
charitable, religious, scientific or educational organizations.
"Termination Date" shall mean one year after the effective date of the
Partnership's Prospectus.
"Unit" shall mean the ownership interest of the Limited Partners in the
Partnership.
3. PURPOSE
The principal purpose of the Partnership is to acquire, hold, lease,
mortgage, operate, sell or otherwise dispose of (i) Properties and Equipment
which will be leased on a "triple net" basis primarily to operators of national
chain and nationally franchised fast-food, family style and dinner house
restaurants as well as other franchised or chain businesses, and (ii) Properties
which will be leased on a "double net" (with the Partnership being responsible
for maintenance of the roof, exterior walls and/or parking lot) or "triple net"
basis to prominent franchised or chain national retail concerns which are
operating at least ten other
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store locations; and to take any and all actions and to engage in any other
business in which a limited partnership may lawfully engage under the laws of
the state which, in the opinion of the Managing General Partner, are incidental
to the foregoing or are necessary or appropriate to the accomplishment of the
purposes of the partnership. The principal investment objectives of the
Partnership will be: (i) preservation and protection of capital; (ii)
distribution of cash flow generated by the Partnership's leases; (iii) capital
appreciation of Partnership Properties; (iv) generation of increased income and
protection against inflation through required escalations of base rents or
participation in gross revenues of lessees of Partnership Properties; and (v)
deferral of taxation of Partnership cash distributions for Limited Partners. The
Partnership's overall objectives will be to maximize long term returns with its
Properties and to enhance short term returns with its Equipment.
4. TERM
The Partnership was formed as of the day of filing of the Certificate
of the Partnership with the Delaware Secretary of State and shall continue until
the 31st day of December 2026, unless previously terminated in accordance with
the provisions of this Partnership Agreement.
5. GENERAL PARTNERS
5.1 CAPITAL CONTRIBUTIONS. Captec Franchise Capital Corporation IV, and
Patrick L. Beach in their capacities as General Partners, have each contributed
$100 in cash to the Partnership. At all times during the existence of the
Partnership, the General Partners shall have a present and continuing interest
in Net Income or Loss From Other Than Annual Operations and Distributions
according to the provisions of Section 11.
5.2 CAPITAL ACCOUNTS. The Partnership shall establish for each General
Partner a Capital Account (to be maintained in accordance with appropriate
provisions of federal income tax law, including Treasury Regulation Section
1.704-1(b)). In the event any interest in the Partnership is transferred in
accordance with the terms of this Partnership Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to the
transferred interest. In the event the Gross Asset Values of Partnership assets
are adjusted for purposes of computing income or loss, the Capital Accounts of
all General Partners shall be adjusted simultaneously to reflect the aggregate
net adjustment as if the Partnership recognized gain or loss equal to the amount
of such aggregate net adjustment. Loans by any General Partner to the
Partnership shall not be considered contributions to the capital of the
Partnership.
5.3 RESERVES. Since most of the Partnership's leases will be on a
"triple net" basis, it is not anticipated that a permanent reserve for
maintenance and repairs will be established. However, to the extent the
Partnership has insufficient funds for such purposes, the General Partners will
advance to the Partnership an aggregate amount of up to 1% of the Gross Proceeds
for maintenance and repairs.
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6. LIMITED PARTNERS
6.1 INITIAL LIMITED PARTNER. The Initial Limited Partner has
contributed the sum of $100 to the capital of the Partnership and has received
1/10 Unit. The 1/10 Unit of the Initial Limited Partner shall be redeemed
immediately following the admission to the Partnership of any other Limited
Partner in return for the sum of $100, whereupon the Initial Limited Partner
shall withdraw as a Limited Partner.
6.2 CAPITAL ACCOUNTS. The Partnership shall establish for each Limited
Partner a Capital Account (to be maintained in accordance with appropriate
provisions of federal income tax law, including Treasury Regulation Section
1.704-1(b)). In the event any interest in the Partnership is transferred in
accordance with the terms of this Partnership Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to the
transferred interest. In the event the Gross Asset Values of Partnership assets
are adjusted for purposes of computing income or loss, the Capital Accounts of
all Limited Partners shall be adjusted simultaneously to reflect the aggregate
net adjustment as if the Partnership recognized gain or loss equal to the amount
of such aggregate net adjustment. Loans by any Limited Partner to the
Partnership shall not be considered contributions to the capital of the
Partnership.
6.3 AUTHORIZATION OF SALE OF UNITS. The Partnership is authorized to
issue not more than 30,000 Units (including the 1/10 Unit held by the Initial
Limited Partner, which 1/10 Unit shall be available for sale upon withdrawal of
said Initial Limited Partner). The Persons purchasing such Units shall
contribute the purchase price to the capital of the Partnership. The General
Partners, their Affiliates and Participating Dealers may purchase up to ten per
cent (10%) of the authorized Units net of any selling commissions but otherwise
on the same terms as other purchasers.
6.4 ESCROW OF ORIGINAL CONTRIBUTIONS AND COMMENCEMENT OF PARTNERSHIP
OPERATIONS. All Original Contributions shall be received by the Partnership in
trust, and shall be deposited in an escrow account in any financial institution
designated by the Managing General Partner as escrow agent for the Original
Contributions. If the Minimum Number of Units is not sold on or before one year
after the effective date of the Partnership's Prospectus (the "Termination
Date"), all monies held in escrow shall be returned to subscribers with any
interest earned thereon (subject to deductions for back-up withholding, if
applicable). If the Minimum Number of Units is sold by the Termination Date, all
monies held in escrow together with any interest earned thereon will be
distributed promptly by the escrow agent to the Partnership on the Initial
Closing Date, and all selling commissions then due and payable shall be paid to
the participating broker-dealers by the Partnership, as agent for the purchasers
of Units, and the Managing General Partner may, in its sole discretion continue
the offering for a period to end not later than (i) the sale of all Units
offered by the Prospectus or (ii) two years after the effective date of the
Prospectus. After the Initial Closing Date, investors shall be admitted as
Limited Partners on at least a monthly basis. Subscriptions shall be accepted or
rejected by the General Partners within thirty (30) days of their receipt; if
rejected, all funds shall be returned to the investor within ten (10) business
days after rejection. Investors whose subscriptions are accepted by the General
Partners shall
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be admitted to the Partnership at the time their names are shown
on the books and records of the Partnership as Limited Partners.
6.5 NO ASSESSMENTS OR ADDITIONAL CONTRIBUTIONS. The Units are
non-assessable and no Limited Partner shall be required to make additional
contributions to the capital of the Partnership.
7. PARTNERSHIP CAPITAL
7.1 WITHDRAWAL OF CAPITAL. No Partner shall have the right to withdraw,
or receive any return of, his Capital Contribution, except as specifically
provided herein. Except as provided in Paragraph 6.1, no Limited Partner shall
have priority over any other Limited Partner, as to the return of his Capital
Contribution or as to profits, losses or distributions.
7.2 RETURN OF CAPITAL. Under circumstances requiring a return of any
Capital Contribution, no Partner shall have the right to receive property other
than cash.
8. LIABILITY OF LIMITED PARTNERS
8.1 NO PERSONAL LIABILITY. Limited Partners shall not be bound by, or
be personally liable for, the expenses, liabilities or obligations of the
Partnership, and no Limited Partner shall be required to lend funds to the
Partnership or to make any further Capital Contribution to the Partnership.
8.2 OBLIGATION TO REFUND PRIOR DISTRIBUTIONS. If the Partnership does
not have sufficient assets to discharge its liabilities, and under the Delaware
Act, Limited Partners are liable to the Partnership for previous Distributions
as determined by court of competent jurisdiction, then notwithstanding the
provisions of this Partnership Agreement, such Limited Partner shall be required
to repay all or any part of such Distributions, such obligation shall be the
obligation of such Limited Partner and not the obligation of the General
Partners.
9. COMPENSATION TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The General Partners and their Affiliates will receive compensation
from the Partnership only as specified by Sections 9, 10, 11, and Paragraphs
14.2.7 and 14.2.8 hereof. Front-End Fees shall be reduced to the extent
necessary to comply with Paragraph 14.6 hereof.
9.1 SECURITIES COMMISSIONS. Participating Dealers, including Affiliates
of the General Partners will receive selling commissions in an amount equal to
8.0% of the Gross Proceeds attributable to all Units placed by them directly,
subject to volume discounts. An additional amount not exceeding 0.5% of such
Gross Proceeds may be paid to prospective Participating Dealers by the General
Partners from amounts received by them for
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Organizational and Offering Expenses for accountable expenses incurred in
connection with due diligence activities of such prospective Participating
Dealers and their registered representatives.
9.2 NON-ACCOUNTABLE EXPENSE ALLOWANCE. The General Partners and/or
their Affiliates shall receive a non-accountable expense allowance from the
Partnership (the "Non-Accountable Expense Allowance"), aggregating 2.0% of Gross
Proceeds.
9.3 ORGANIZATIONAL AND OFFERING EXPENSES. The Managing General Partner
or an Affiliate shall be reimbursed for all Organizational and Offering Expenses
up to a maximum amount equal to 3.0% of Gross Proceeds, (less amounts paid
directly by the Partnership), excluding selling commissions and the
Non-Accountable Expense Allowance referenced in Paragraph 9.2 hereof, but
including amounts paid to participating dealers as accountable bona fide due
diligence expenses in an amount not exceeding 0.5% of Gross Proceeds.
9.4 ACQUISITION FEES AND EXPENSES. The General Partners or an Affiliate
shall receive Acquisition Fees equal to the lesser of (1) 4.0% of Gross Proceeds
plus an additional .0677% ("Debt Fee") for each 1% of indebtedness (calculated
as the aggregate amount of Partnership indebtedness secured by Partnership
Assets as a percentage of the aggregate Purchase Prices of such Assets) incurred
in acquiring Properties and/or Equipment, but in no event shall Acquisition Fees
exceed 5.0% of the aggregate Purchase Prices of Properties and/or Equipment; or
(2) compensation customarily charged in arm's-length transactions by others
rendering similar services as an on-going activity in the same geographic
location for property or equipment comparable to the Property or Equipment to be
purchased by the Partnership. Although the Debt Fee is included within the
definition of Acquisition Fees in calculating the 5.0% limitation, the Debt Fee
will be paid out of the proceeds of indebtedness rather than from Gross
Proceeds. The General Partners or an Affiliate shall pay all Acquisition
Expenses from amounts received as Acquisition Fees.
9.5 ASSET MANAGEMENT FEES. The Managing General Partner or an Affiliate
shall receive an asset management fee equal to the lesser of competitive fees
for similar services in the same geographic location or 1.0% of gross rental
revenues from Partnership Properties and Equipment. Such asset management fee
shall be payable on a monthly or quarterly basis as determined by the Managing
General Partner, provided however, that such fees will accrue and be
subordinated to receipt by the Limited Partners of their Current Preferred
Return. Notwithstanding the foregoing, in the event of a default under a lease
which requires the Partnership to assume operations of a Property and/or
Equipment, such operations will be managed by an Affiliate of the General
Partners. In such event, the Affiliate will be entitled to an unsubordinated
management fee equal to 5% of gross revenues generated by the Property and/or
Equipment plus reimbursement for on-site expenses.
9.6 EQUIPMENT LIQUIDATION FEES. The Partnership may pay an
Affiliate of the General Partner a liquidation fee for the resale of Equipment
in an amount equal to
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3.0% of the gross sales price of the Equipment.
9.7 REAL ESTATE LIQUIDATION FEES. The Partnership may pay an Affiliate
of the General Partners a liquidation fee for the resale of real estate in an
amount equal to the lesser of (a) fifty percent (50%) of the real estate
commission customarily charged for similar services in the locale of the
Property being sold or (b) three percent (3%) of the gross sales price of a
Property. Such fees shall accrue and be subordinated to receipt by the Limited
Partners of aggregate Distributions equal to a 10% per annum cumulative,
non-compounded return on their Adjusted Investment plus aggregate distributions
of Net Sale or Refinancing Proceeds equal to 100% of their Original
Contributions. Notwithstanding anything to the contrary herein, neither the
General Partners nor any of their Affiliates shall have an exclusive listing in
connection with the sale of a Property by the Partnership. The total
compensation paid by the Partnership to all persons and entities as real estate
liquidations fees or commissions in connection with any sale of Partnership
Properties shall not exceed the lesser of (i) six percent (6%) or (ii) that
commission or fee paid for the purchase or sale of property which is reasonable,
customary and competitive in light of the size, type and location of the
Property. In no event shall the Partnership pay, directly or indirectly, a
commission or fee to the General Partners or their Affiliates in connection with
the reinvestment or distribution of Net Sale or Refinancing Proceeds other than
as described in this Section 9.
9.8 PAYMENT OF FEES. Should a General Partner be removed from the
Partnership, any portion of any of the foregoing fees or any other fee or
reimbursement payable under this Partnership Agreement which is then due but not
yet paid, shall be paid by the Partnership to the General Partner or their
Affiliates, as the case may be, in cash within thirty (30) days of the date of
removal as stated in the written notice of removal, unless such amount is
included in the purchase price of the General Partners' interest in the
Partnership as determined under Paragraph 16.3 hereof.
9.9 OTHER GOODS AND SERVICES. In extraordinary circumstances, the
General Partners and their Affiliates may provide other goods and services to
the Partnership if all of the following criteria are met: (i) the goods or
services must be necessary to the prudent operation of the Partnership; (ii) the
compensation, price or fee must be equal to the lesser of 90% of the
compensation, price or fee the Partnership would be required to pay to
unaffiliated parties who are rendering comparable services or selling or leasing
comparable goods on competitive terms in the same geographic location, or 90% of
the compensation, price or fee charged by the General Partners or their
Affiliates for rendering comparable services or selling or leasing comparable
goods on competitive terms; or (iii) if at least 95% of gross revenues
attributable to the business of rendering such services or selling or leasing
such goods are derived from Persons other than Affiliates, the compensation,
price or fee charged by an unaffiliated Person who is rendering comparable
services or selling or leasing comparable goods on competitive terms in the same
geographic location; (iv) the goods and services must be provided pursuant to a
written contract which may be modified in any material respect only by the vote
of a majority in interest of the Limited Partners and shall be terminable
without penalty on 60 days notice; and (v) the General Partners must receive at
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least 33% of gross revenues for such goods and services from Persons other than
Affiliates. In addition, any such payment shall be subject to the further
limitation described in Paragraph 10.2 below. Extraordinary circumstances shall
be presumed only when in the good faith belief of the General Partners there is
an emergency situation requiring immediate action by the General Partners or
their Affiliates and the goods or services are not immediately available from
unaffiliated parties. Services which may be performed in such extraordinary
circumstances include emergency maintenance of Partnership assets, janitorial
and other related services due to strikes or lock-outs, emergency tenant
evictions and repair services which require immediate action.
The Partnership or an Affiliate may provide insurance brokerage
services in connection with obtaining insurance on the Property so long as the
cost of providing such service, including the cost of the insurance, is no
greater than the lowest quote obtained from two unaffiliated insurance agencies
and the coverage and terms are likewise comparable. In no event may such
services be provided by the Partnership or an Affiliate unless they are
independently engaged in the business of providing such services to other than
Affiliates and at least 75% of their insurance brokerage service gross revenue
is derived from other than Affiliates.
The General Partners will not provide construction services to the
Partnership. The Partnership will obtain either a payment and performance bond
or a guaranty of performance for any Property which has not been constructed at
the time the Partnership acquires a particular Property.
9.10 REIMBURSEMENTS. The General Partners shall also receive
reimbursement for (i) the actual cost to the General Partners or their
Affiliates of goods and materials used for and by the Partnership if obtained
from unaffiliated parties; and (ii) administrative services (as hereinafter
defined) necessary for the prudent operation of the Partnership. The amounts
charged to the Partnership for services performed pursuant to clause (ii) above
shall not exceed the lesser of: (l) the actual cost of such services; or (2) 90%
of the amount which the Partnership would be required to pay to unaffiliated
parties for comparable services. The Partnership's annual report to the Limited
Partners shall include an itemized breakdown of the services performed and the
amount reimbursed to the General Partners or their Affiliates pursuant to clause
(ii) above, which information shall be verified by the independent public
accountants retained by the Partnership. "Administrative services" for purposes
of this Paragraph 9.10 include only services such as typing, record keeping,
preparation and dissemination of Partnership reports, preparation and
maintenance of records regarding Limited Partners, preparation and dissemination
of responses to investor inquiries and other communications with investors and
any other record keeping required for Partnership purposes. Notwithstanding the
foregoing, the General Partners and their Affiliates also may be reimbursed for
actual expenses incurred when extraordinary on site action is required.
9.11 LIMITATION ON CLAIMS FOR FEES. In no event shall the General
Partners be entitled to collect any fees or reimbursement amounts not requested
within one year of the date they were earned.
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9.12 GUARANTEE OF GENERAL PARTNERS. The General Partners guarantee
payment of Organization and Offering Expenses (including selling commissions and
the Non-Accountable Expense Allowance) which exceed 13% of Gross Proceeds.
Payment of expenses pursuant to this guarantee will be without recourse to, or
reimbursement by, the Partnership.
10. PARTNERSHIP EXPENSES
10.1 PARTNERSHIP OBLIGATIONS. Except as otherwise contemplated
by Section 9 hereof, the Partnership shall pay all expenses of the Partnership
(which expenses may be billed directly to the Partnership) which may include,
but are not limited to:
10.1.1 all costs of personnel employed by the Partnership;
10.1.2 all costs of borrowed money, taxes and assessment
on Partnership assets and other taxes applicable to the
Partnership;
10.1.3 except as otherwise provided in Paragraph 15.2.4, fees
and expenses of professionals retained by the Partnership in
connection with any of the foregoing, including without
limitation, attorneys, accountants, consultants and
appraisers;
10.1.4 printing, engraving and other expenses and taxes
incurred in connection with the issuance, distribution,
transfer, registration and recording of documents evidencing
ownership of an interest in the Partnership or in connection
with the business of the Partnership;
10.1.5 fees and expenses paid to independent contractors,
appraisers, mortgage bankers, brokers and servicers, leasing
agents, consultants, on-site managers, real estate brokers,
insurance brokers, consultants and other agents;
10.1.6 expenses in connection with the acquisition,
disposition, alteration, repair, remodeling, refurbishment,
leasing, initial financing, refinancing and operation of
Partnership Properties (including the costs and expenses of
insurance premiums, real estate brokerage and leasing
commissions and of maintenance of such Property as and if
necessary); provided, however, that nothing contained herein
shall be construed to permit payment of construction or
Development Fees to the General Partners or their Affiliates;
10.1.7 the cost of insurance as required in connection with
the business of the Partnership; provided, however, that
nothing contained herein shall be construed to permit payment
of insurance costs of Affiliates or employees of the General
Partners;
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10.1.8 expenses of organizing, revising, amending,
converting, modifying or terminating the Partnership;
10.1.9 the cost of preparation and dissemination of the
informational material and documentation relating to
Partnership operations;
10.1.10 the cost incurred in connection with any litigation
in which the Partnership is involved, as well as in the
examination, investigation or other proceedings conducted by
any regulatory agency of the Partnership, including legal and
accounting fees incurred in connection therewith;
10.1.11 the cost of any computer equipment or services used
for or by the Partnership; and
10.1.12 the cost of any accounting, statistical or bookkeeping
equipment necessary for the maintenance of the books and
records of the Partnership.
10.2 Notwithstanding anything herein and except as contemplated by
Paragraph 9.3 hereof, to the contrary, neither the General Partners nor their
Affiliates shall be entitled to reimbursement for:
10.2.1 rent or depreciation, utilities, capital equipment,
other administrative items;
10.2.2 services for which the General Partners or their
Affiliates are entitled to be compensated by way of a
separate fee; and
10.2.3 salaries, fringe benefits, travel expenses, and other
administrative items incurred or allocated to any controlling
Persons of the General Partners or their Affiliates.
Controlling Persons, for purposes of this Paragraph 10.3
includes but is not limited to any Person, whatever his title,
who performs functions for a General Partner similar to those
of:
(a) Chairman or member of the Board of Directors;
(b) President;
(c) Executive Vice-President;
(d) Those Persons holding 5% or more of the
stock of the Managing General Partner;
or
(e) A Person having the power to direct or cause
the direction of the Managing General
Partner, whether
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through the ownership of voting securities,
by contract, or otherwise.
11. ALLOCATION OF INCOME AND LOSS AND DISTRIBUTIONS
11.1 ALLOCATION OF INCOME AND LOSS. The income and loss of the
Partnership for purposes of the federal income tax shall be allocated among the
Partners in accordance with this Paragraph 11.1. For purposes of this Section
11, Limited Partners shall mean and include all Limited Partners, other than the
Initial Limited Partner.
11.1.1 NET INCOME OR LOSS FROM ANNUAL OPERATIONS. Net Income
or Loss From Annual Operations shall be allocated 99% to the
Limited Partners and 1% to the General Partners.
11.1.2 NET INCOME FROM OTHER THAN ANNUAL OPERATIONS. Net
Income From Other Than Annual Operations shall be allocated
to the Capital Accounts of the Partners prior to the
distribution of Net Sale or Refinancing Proceeds and cash
from reserves deemed no longer necessary for Partnership
operations as follows:
(a) First, Net Income in an amount equal to the
aggregate deficit in the Partners' Capital Accounts,
if any, shall be allocated to each Partner in the
same ratio as the deficit in such Partner's Capital
Account bears to the aggregate of all such Partners'
deficit Capital Accounts;
(b) Second, to and among the Limited Partners until
each Limited Partner's Capital Account balance
equals the sum of his Performance Preferred Return
and his Original Contribution less the aggregate
amount of Distributions to each Limited Partner;
(c) Third, to the General Partners in such amounts
as are necessary to cause the aggregate Capital
Account balances of the General Partners to be in a
percentage ratio of 10% of all Partnership Capital
Account balances of all Partners;
(d) Fourth, to the Limited Partners in such amounts
as are necessary to cause the aggregate Capital
Account balances of the Limited Partners to be in a
percentage ratio of 90% of all Partnership Capital
Account balances of all Partners;
(e) Fifth, to the General Partners in an amount
equal to their contributions of capital to the
Partnership;
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(f) Thereafter, the balance of the Net Income, if
any, shall be allocated 90% to the Limited Partners
and 10% to the General Partners.
11.1.3 NET LOSS FROM OTHER THAN ANNUAL OPERATIONS. Net Loss
From Other Than Annual Operations shall be allocated to the
Capital Accounts of the Partners prior to the distribution of
Net Sale or Refinancing Proceeds and cash from reserves deemed
no longer necessary for Partnership operations, as follows:
(a) First, to the Partners having positive Capital
Accounts in proportion to and to the extent of their
positive Capital Account balances, until all
positive Capital Account balances shall be reduced
to zero;
(b) Second, the balance of such losses shall be
allocated to those Partners bearing the ultimate
risk of law related to such losses in accordance
with Treasury Regulations promulgated pursuant to
Code Section 704.
11.1.4 UNEXPECTED ALLOCATIONS. In the event any Partner
unexpectedly receives any adjustments, allocations, or
distributions described in Treasury Regulation Section
1.704-1(b)(2)(ii)(d) (4), 1.704-1(b)(2)(ii)(d)(5), or
1.704-1(b)(2)(ii)(d)(6), which causes or increases a deficit
balance in such Partner's Capital Account shall be specially
allocated items of income and gain in an amount and manner
sufficient to eliminate such deficit balance as quickly as
possible.
11.1.5 MINIMUM GAIN. Notwithstanding the foregoing, if there
is a net decrease in the Partnership's "minimum gain" (as
defined in Section 1.704-2(d)(1) of the Regulations) during a
Partnership taxable year, all Partners with deficit Capital
Account balances shall be allocated, before any other
allocation is made under Code Section 704(b), items of income
and gain for such years (and, if necessary, subsequent years)
in the amount and in the proportions needed to eliminate such
deficits as quickly as possible. Such allocation shall be
interpreted in a manner to conform with Section 1.704-2(f) of
the Regulations.
11.2 APPORTIONMENT OF INCOME AND LOSS. That portion of Net Income and
Loss From Annual Operations allocated to the Limited Partners shall be
apportioned among those Persons owning Units at any time during each calendar
month in proportion to allocation factors calculated by multiplying their
respective Units by the number of days in such calendar month that they were the
owners of record of such Units. To the extent that any discrepancies in Capital
Accounts (as determined on a per Unit basis) arise among the Limited Partners
during the offering period, then, in the sole discretion of the Managing General
Partner, allocations of Net Income and Loss From Annual Operations and/or
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Distributions shall first be made at the close of the offering period or as soon
as possible thereafter so as to equalize the Capital Accounts of each Limited
Partner on a per Unit basis, with any excess allocated in the manner described
herein.
11.3 COMPLIANCE WITH ALLOCATION LAWS. It is the intent of the Partners
that each Partner's distributive share of income, gain, loss, deduction, or
credit (or item thereof) shall be determined and allocated in accordance with
this Section 11 to the fullest extent permitted by Section 704(b) of the Code.
In order to preserve and protect the determinations and allocations provided for
in this Section 11, the Managing General Partner is authorized and directed to
allocate income, gain, loss, deduction, or credit (or any item thereof) arising
in any year differently than otherwise provided for in this Section 11 to the
extent that allocating income, gain, loss, deduction, or credit (or any item
thereof) in the manner provided for in this Section 11 would cause the
determinations and allocations of each Partner's distributive share of such
items not to be permitted by Section 704(b) of the Code and Treasury Regulations
promulgated thereunder. Any allocation made pursuant to this Paragraph 11.3
shall be deemed to be a complete substitute for any allocation otherwise
provided for in this Section 11 and no amendment of this Partnership Agreement
or approval of any Partner shall be required.
In making any allocation (the "New Allocation") under this Paragraph
11.3, the Managing General Partner is authorized to act only after having been
advised by counsel to the Partnership that, under Section 704(b) of the Code and
the Treasury Regulations thereunder (i) the New Allocation is necessary, and
(ii) the New Allocation is the minimum modification of the allocations otherwise
provided for in this Section 11 necessary in order to assure that, either in the
then current year or in any preceding year, each Partner's distributive share of
income, gain, loss, deduction, or credit (or any item thereof) is determined and
allocated in accordance with this Section 11 to the fullest extent permitted by
Section 704(b) of the Code and the Treasury Regulations thereunder.
If the Managing General Partner is required by this Paragraph 11.3 to
make any New Allocation in a manner less favorable to the Limited Partners than
is otherwise provided for in Section 11, then the Managing General Partner is
authorized and directed, insofar as he is permitted to do so by Code Section
704(b), to allocate income, gain, loss, deduction or credit (or any item
thereof) arising in later years in such manner so as to bring the proportion of
income, gain, loss, deduction, or credit (or any item thereof) allocated to the
Limited Partners as nearly as possible to the proportion otherwise contemplated
by this Section 11.
11.4 TAX ALLOCATION: CODE SECTION 704(C). In accordance with Code
Section 704(c) and the Treasury Regulations thereunder, income, gain, loss and
deduction with respect to any property contributed to the capital of the
Partnership shall, solely for tax purposes, be allocated among the Partners so
as to take account of any variation between the adjusted basis of such property
to the Partnership for federal income tax purposes and its initial Grass Asset
Value.
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In the event the Gross Asset Value of any Partnership property is
adjusted, subsequent allocations of income, gain, loss and deduction with
respect to such asset shall take account of any variation between the adjusted
basis of such asset for federal income tax purposes and its Gross Asset Value in
the same manner as under Code Section 704(c) and the Treasury Regulations
thereunder.
In the event of a combined taxable disposition of property pursuant to
which gain is to be allocated under this Paragraph 11.4 and other property the
gain from which is not allocated under this Paragraph 11.4, the gain to be
allocated under this Paragraph 11.4 in any calendar year shall bear the same
relationship to the total gain to be recognized in such year as the total gain
to be allocated under this Paragraph 11.4 from the disposition of the properties
bears to the total gain to be allocated from the disposition of the properties.
Any elections or other decisions relating to such allocations shall be
made by the Managing General Partner in any manner that reasonably reflects the
purpose and intention of this Partnership Agreement. Allocations pursuant to
this Paragraph 11.4 are solely for purposes of federal, state and local taxes
and shall not affect, or in any way be taken into account in computing, any
Partner's capital account or share of Income, Losses, other items or
distributions pursuant to any provision of this Partnership Agreement.
11.5 DISTRIBUTIONS OF CASH FLOW. Distributions of Cash Flow
shall be made to the Partners in the following order of priority and in the
following amounts:
(i) First, to the Limited Partners in an amount up to the amount
necessary so as to cause the aggregate amount of distributions
to the Limited Partners pursuant to this Section 11.5 to be
equal to their Current Preferred Return as of the last day of
the preceding month;
(ii) Second, to the General Partners in an amount up to that amount
necessary so as to cause the aggregate amount of distributions
to the General Partners pursuant to this Section 11.5 to be
equal to 1% of the aggregate amount of distributions to all of
the Partners pursuant to this Section 11.5; and
(iii) Third, 99% to the Limited Partners and 1% to the General
Partners
Such distributions of Cash Flow shall be apportioned quarterly among the Limited
Partners of record as of a record date declared within thirty (30) days after
the end of each quarter and shall be paid no less frequently than quarterly.
Limited Partners owning at least ten (10) Units may elect to receive their
quarterly distributions on a monthly basis, in which event their quarterly
distributions shall be paid in three (3) consecutive equal monthly installments
commencing on the quarterly distribution date. Such installment shall be paid to
Limited Partners of record as of the record date for quarterly distributions.
Cash Flow shall not be reinvested in Properties or Equipment.
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11.6 NET SALE OR REFINANCING PROCEEDS AND RESERVES. Distributions of
Net Sale or Refinancing Proceeds shall be apportioned among the Limited Partners
in the same manner as Cash Flow and made to the Partners in the following order
of priority:
(i) First, to the Limited Partners in an amount up to the amount
necessary so as to cause the aggregate amount of distributions
to the Limited Partners pursuant to this Section 11.6 and
Section 11.5 to be equal to the sum of (A) their Performance
Preferred Return as of the last day of the preceding month,
and (B) their Original Contributions;
(ii) Second, to the General Partners in an amount up to that amount
necessary so as to cause the aggregate amount of distributions
to the General Partners pursuant to this Section 11.6(ii) to
be equal to 10% of the aggregate amount of distributions to
all of the Partners pursuant to this Section 11.6; and
(iv) Third, 90% to the Limited Partners and 10% to the General
Partners.
11.7 LIQUIDATING DISTRIBUTIONS. Unless otherwise required by the
Delaware Act, the net cash proceeds of a sale, exchange or other disposition of
all or Substantially All of the Assets of the Partnership constituting a
dissolution of the Partnership shall be distributed in accordance with the
Partners Capital Account balances. Notwithstanding anything herein to the
contrary, the Partnership shall not distribute assets in kind.
11.8 GENERAL PARTNERS' INTEREST. In no event will the General Partners
be allocated less than 1% of Net Income or Loss From Annual Operations for tax
purposes. To the extent that the Partnership shall be entitled to any deduction
for federal income tax purposes as a result of any interest in Net Income, Net
Loss and Distributions granted to the General Partners, such deduction shall be
allocated for federal income tax purposes to the General Partners. As among the
General Partners, the allocations of profit and loss and Distributions of Cash
Flow and Net Sale or Refinancing Proceeds, shall be divided as they may mutually
agree from time to time, without the need for consent of the Limited Partners.
11.9 CONSENT TO ALLOCATION METHOD. The methods hereinabove set forth by
which Distributions and allocations of Net Income and Loss From Annual
Operations and Net Income and Loss From Other Than Annual Operations are made
and apportioned are hereby expressly consented to by each investor as an express
condition to becoming a Partner.
11.10 UNUTILIZED NET PROCEEDS. In the event that any portion of the Net
Proceeds is not invested or committed for investment within the later of
twenty-four (24) months from the date of the Prospectus or twelve (12) months
after the offering has terminated (except for any amounts set aside for
operating expenses or reserves), such portion of the Net Proceeds shall be
distributed to the investors who purchased Units as a return of capital without
reduction for Front-End Fees which would have been payable to the General
Partners or their Affiliates if such funds had been committed to investment. For
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purposes of this Paragraph 11.10, funds shall be deemed to have been committed
to investment and will not be returned to the extent written agreements in
principle or letters of understanding were at any time executed, regardless of
whether any such investment may or may not be consummated, and to the extent any
funds have been reserved to make contingent payments in connection with any
Asset regardless of whether any such payments may or may not be made.
11.11 ESCHEAT OF DISTRIBUTIONS. If, upon the termination and
dissolution of the Partnership, there remains outstanding on the books of the
Partnership a material amount of Distribution checks which have not been
negotiated for payment by Limited Partners, the Managing General Partner may, if
deemed to be in the best interests of the Partnership, cause such amounts to be
redistributed pro rata to Limited Partners of record on such final distribution
date who have previously cashed all of their Distribution checks; provided,
however, that the Partnership shall not be liable for any subsequent claims for
payment of such redistributed Distributions. The Managing General Partner is not
required to make such a redistribution, in which case such amounts will
eventually escheat to the state or as otherwise required in accordance with
appropriate statutory authority. Notwithstanding the foregoing, unclaimed funds
of Persons who, for purposes of the Partnership's records are Ohio residents,
shall be distributed in accordance with the Ohio unclaimed funds statute in
effect as of the date on which the Partnership shall have unclaimed funds.
11.12 SECTION 709 EXPENSES. Syndication and other nondeductible and
non-amortizable expenses, as defined in Code Section 709, shall be allocated to,
and under the capital account maintenance rules reduce, the Capital Accounts of
the Partners actually incurring such expense.
11.13 WITHHOLDING TAXES. In the event that the Partnership is required
to pay any withholding tax or other liability or obligation to any state,
federal or foreign taxing authority that arises because of any act or status of
any Limited Partner, including (but not limited to) the status of a Limited
Partner (or the Person owning such Unit), as a foreign Person under the Code,
and such tax or liability attributable to any year is in excess of the
distributions attributable to such Limited Partner for such year, the
Partnership shall pay such funds on behalf of such Limited Partner, and such
payment shall constitute a loan to such Limited Partner bearing interest at the
First Chicago NBD Bank prime rate and payable in full from the next distribution
of Net Sale or Refinancing Proceeds. Each Partner hereby grants the Partnership
a security interest in all Net Sale or Refinancing Proceeds distributable to
such Limited Partner or with respect to such Units in the amount of the loan
discussed in this Paragraph 11.13 and the Partnership shall have a right of
set-off against any such distributions of Net Sale or Refinancing Proceeds. Any
tax required to be withheld with respect to a Limited Partner will be charged to
that Limited Partner's Capital Account as if such tax had been distributed to
such Partner.
11.14 DISTRIBUTION REINVESTMENT PLAN. The Partnership has adopted
a Distribution Reinvestment Plan pursuant to which Limited Partners may elect to
have their distributions of Cash Flow, together with distributions from
Affiliates of the General Partner and other sources, applied to the purchase of
Units after sale of the Minimum Number of Units and
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prior to termination of the offering of Units. The Distribution Reinvestment
Plan is set forth in Exhibit 2 attached hereto.
12. TRANSFERABILITY OF UNITS
12.1 RESTRICTIONS ON TRANSFERS OF UNITS BY LIMITED PARTNERS. A Limited
Partner may assign his Units only by a duly executed, written instrument of
assignment, the terms of which are not in contravention of any of the provisions
of this Partnership Agreement. The Partnership need not recognize for any
purpose any assignment of the Units of a Limited Partner unless there shall have
been filed with the Partnership and recorded on the Partnership's books a duly
executed and acknowledged counterpart of such written instrument of assignment,
and such instrument evidences the written acceptance by the assignee of all of
the terms and provisions of this Partnership Agreement, represents that such
assignment was made in accordance with all applicable laws and regulations and
in all other respects is satisfactory in form and substance to the Managing
General Partner. Notwithstanding the foregoing, no Limited Partner may sell,
assign, transfer or exchange any Units:
12.1.1 if in the opinion of counsel for the Partnership such
sale, assignment, transfer or exchange may result, when
considered with all other sales, assignments, transfers and
exchanges of Units in the Partnership within the previous
twelve (12) months, in the Partnership being considered to
have been terminated within the meaning of Code Section 708
unless the Partnership and the transferring holder shall have
received a ruling by the Service that the proposed sale or
exchange will not cause such termination;
12.1.2 if counsel for the Partnership shall be of the opinion
that such sale, assignment, transfer or exchange might cause a
violation of applicable federal and state securities laws. In
connection therewith, Limited Partners may be required to
furnish an opinion of counsel satisfactory to counsel to the
Partnership that such sale, assignment, transfer or exchange
complies with applicable federal and state securities laws;
12.1.3 if the transferor or the transferee would hold Units
representing an Original Contribution of less than $5,000
unless 100% of the transferor's Units are being transferred to
such transferee, except for transfers by gift or inheritance,
intra-family transfers, transfers resulting from family
dissolutions and transfers to Affiliates; or
12.1.4 if the Managing General Partner determines in its sole
discretion that such assignment would prevent the Partnership
from being able to satisfy either the 2% or 5% "safe harbors"
contained in Service Advance Notice 88-75 or in corresponding
regulations or the Partnership has received an opinion of
counsel or a favorable service ruling that such
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transfer would not result in the Partnership being classified
as a "publicly-traded partnership" for federal income tax
purposes.
Any attempted sale, assignment, transfer or exchange in contravention
of the provisions of this Paragraph shall, in the sole discretion of the
Managing General Partner, be voided and deemed ineffectual and shall not bind or
be recognized by the Partnership.
12.2 SPECIAL EXERCISE OF THE RIGHTS OF A LIMITED PARTNER. If a Limited
Partner dies, his executor, administrator or trustee, or, if he is adjudicated
incompetent, his committee, guardian or conservator, or if he becomes bankrupt,
the trustee or receiver of his estate, shall have all the rights of a Limited
Partner for the purpose of settling or managing his estate and such power as the
decedent or incompetent possessed to assign all or any part of his Units and to
join with the assignee thereof in satisfying conditions precedent to such
assignee becoming a substituted Limited Partner. The death, dissolution,
adjudication of incompetence or bankruptcy of a Limited Partner shall not
dissolve the Partnership.
12.3 SUBSTITUTED LIMITED PARTNER. No Person shall have the
right to become a substituted Limited Partner in place of his assignor unless
all of the conditions set forth in Paragraph 12.1 are satisfied and:
12.3.1 the Limited Partner and his assignee shall execute and
acknowledge such other instruments as the Managing General
Partner may deem necessary or desirable to effect such
substitution, including (a) the written acceptance and
adoption by the assignee of the provisions of this Partnership
Agreement, as the same may be amended and his execution,
acknowledgment; (b) delivery to the Managing General Partner
of a special power of attorney, the form and content of which
are described herein; and (c) a statement that the assignee is
acquiring the Units for investment purposes only and not with
an intent of further distribution of the Units.
12.3.2 a transfer fee of $100 (which may be increased in the
discretion of the Managing General Partner) shall have been
paid to the Partnership to cover all reasonable expenses
connected with such substitution.
12.4 CONSENT. By executing or adopting this Partnership Agreement, each
Limited Partner hereby consents to the admission of substituted Limited Partners
by the Managing General Partner, in accordance with the foregoing.
12.5 EFFECTIVE DATE; RECORDS. No attempted transfer of Units or
substitution shall be effective, and the Partnership and the Managing General
Partner shall be entitled to treat the assignor of such Units as the absolute
owner thereof in all respects, and shall incur no liability for allocations of
Net Income, Net Loss or Distributions or transmittal of reports and notices
required to be given to Limited Partners hereunder which are made in good faith
to such assignor, until the "effective date", which shall be the first day of
the calendar month following completion (no later than five (5) days prior to
the beginning of such month) of the
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requirements set forth in Paragraphs 12.1 and 12.3 above. The Managing General
Partner shall cause the records of the Partnership and this Partnership
Agreement to be amended to reflect the admission and/or substitution of
substituted Limited Partners as of the first day of any month following the
satisfaction of the conditions set forth in Paragraph 12.3.
12.6 RIGHT TO TENDER UNITS FOR PURCHASE. Commencing in 1998 or the
closing of the offering of Units for sale, whichever occurs later, the
Partnership shall repurchase any part or all of a Limited Partner's Units at his
written request, upon the following terms and subject to the following
restrictions:
12.6.1 The repurchase price shall be an amount equal to (i)
85% of the tendering Limited Partner's Adjusted Investment, if
the repurchase occurs in 1998, (ii) 90% of the tendering
Limited Partner's Adjusted Investment, if the repurchase
occurs in 1999, or (iii) 100% of the tendering Limited
Partner's Adjusted Investment less (A) any Net Sale or
Refinancing Proceeds previously distributed in respect of such
Units and not applied to a reduction of Adjusted Investment
and (B) one-half of all prior distributions of Net Cash Flow
in respect of such Units, if the repurchase occurs in 2000 or
thereafter; distributions of Net Cash Flow in respect of Units
purchased in the secondary market after the closing of the
Offering shall be calculated as if such Units had been issued
at the mid-point of the offering of Units;
12.6.2 Limited Partners desiring to have their Units
repurchased must submit to the General Partners notification
of the number of Units for which they are requesting
repurchase, on a form supplied by the General Partners; the
notification must be postmarked either after February 1 but
before March 1 (the "February Redemption Period") or after
August 1 but before September 1 (the "August Redemption
Period"; collectively, the "Redemption Periods") in the year
of repurchase;
12.6.3 During 1998, no more than 1/2% of the outstanding Units
(as of January 1, 1998) will be redeemed during either
Redemption Period, and thereafter no more than 1% of the
outstanding Units (as of January 1 for the relevant year) will
be redeemed during any Redemption Period;
12.6.4 Repurchase requests with the earliest postmarks will be
honored first; Units tendered during the February Redemption
Period and August Redemption Period will be repurchased on the
April 1 and October 1, respectively, thereafter; any such
Units tendered during a Redemption Period which are not
repurchased will not be eligible for repurchase following a
subsequent Redemption Period unless re-tendered in such
Redemption Period;
12.6.5 The Partnership shall not be obligated to repurchase
any Units if the Partnership's annualized Net Cash Flow for
the three (3) months
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prior to the Redemption Period, calculated on an annualized
basis, is less than 10% of the Adjusted Investment at the
beginning of such period;
12.6.6 The Partnership shall not be obligated to repurchase
any Units unless the Managing General Partner determines in
his sole discretion that funds are available for that purpose
from Partnership revenues otherwise distributable to Limited
Partners or Partnership borrowings and that such repurchase
will not impair the capital or the operations of the
Partnership.
13. BOOKS, RECORDS, ACCOUNTINGS AND REPORTS
13.1 LOCATION OF RECORDS; COPIES. The Partnership's books and records,
the Partnership Agreement and any amendments thereto and any separate
certificate of limited partnership and any amendments thereto shall be
maintained at the principal office of the Partnership or such other place as the
Managing General Partner may determine and shall be open to inspection and
examination of Limited Partners or their duly authorized representatives at all
reasonable times. The Limited Partners shall receive copies of this Partnership
Agreement and any amendments hereto and the certificate of limited partnership
and any amendments thereto, upon a request in writing to the Managing General
Partner and payment of any necessary duplication fees.
An alphabetical list of the names, addresses, and business telephone
numbers of the Limited Partners along with the number of Units held by each of
them (the "Partnership List") shall be maintained as part of the books and
records of the Partnership and shall be available for inspection by any Limited
Partner or its designated agent at the principal office of the Partnership upon
the request of the Limited Partner. The Partnership List shall be updated at
least quarterly to reflect changes in the information contained therein. A copy
of the Partnership List shall be mailed to any Limited Partner requesting the
Partnership List within ten days after receipt of the request. The copy of the
Partnership List shall be printed in alphabetical order, on white paper, and in
a readily readable type size (in no event smaller than ten-point type). A
reasonable charge for copy work may be charged by the Partnership. The purposes
for which a Limited Partner may request a copy of the Partnership List include,
without limitation, matters relating to the Limited Partner's voting rights
under the Partnership Agreement, and the exercise of the Limited Partner's
rights under federal proxy laws. If the General Partners, or an Affiliate having
charge of the Partnership List, neglect or refuse to exhibit, produce or mail a
copy of the Partnership List as requested, the General Partners or the Affiliate
shall be liable to any Limited Partner requesting the list for the costs,
including attorneys' fees,' incurred by that Limited Partner for compelling the
production of the Partnership List, and for actual damages suffered by any
Limited Partner by reason of such refusal or neglect. It shall be a defense that
the actual purpose and reason for the request for inspection or for a copy of
the Partnership List is to secure such list of Limited Partners or other
information for the purpose of selling such list or copies thereof, or of using
the same for a commercial purpose other than in the interest of the applicant as
a Limited Partner relative to the affairs of the Partnership. The Managing
General Partner may require that the Limited Partner requesting the Partnership
List to represent that the Partnership List is not requested for a commercial
purpose unrelated to the Limited Partner's
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interest in the F Partnership. The remedies provided hereunder to Limited
Partners requesting copies of the Partnership List are in addition to and shall
not in any way limit, other remedies available to Limited Partners under federal
laws or the laws of any state. The Partnership shall maintain a record of the
information obtained to indicate that a Limited Partner meets the suitability
standards employed in connection with the offer and sale of Units and a
representation that the purchaser is purchasing for his own account, or, in lieu
of such representation, information indicating that the party for whose account
the purchase is made meets such suitability standards.
13.2 REPORTS ON ACQUISITIONS. Within sixty (60) days after the end of
each quarter and until Net Offering Proceeds shall be fully invested, the
Managing General Partner shall cause to be prepared and distributed to each
Person who was a Limited Partner at any time during the quarter then ended, a
special report containing: (1) the location and a description of the general
character of the Property acquired during the quarter; (2) the present or
proposed use of such Property and its suitability and adequacy for such use; (3)
the terms of any material lease affecting the Property; (4) the proposed method
of financing, if any, including estimated down payment, leverage ratio, prepaid
interest, balloon payment(s), prepayment penalties, "due-on-sale" or encumbrance
clauses and possible adverse effects thereof and similar details of the proposed
financing plan; and (5) a statement that title insurance has been or will be
obtained on the Property acquired, unless the seller has agreed to provide
indemnification to the Partnership substantially equivalent to that which would
be available under a title policy and the seller has represented to the General
Partners that it has a rating by Moody's of AA or better or by Standard and
Poor's of AA or better.
13.3 TAX INFORMATION. Within seventy-five (75) days after the end of
each fiscal year, the Managing General Partner shall send to each Person who was
a Limited Partner on the first day of any month during the year then ended, such
tax information as shall be necessary for the preparation by such Person of his
federal income tax return. A reconciliation between generally accepted
accounting principles and income tax information will not be provided to the
Limited Partners, however, such reconciliation will be available in the office
of the Partnership for inspection and review by any interested Limited Partner.
13.4 ANNUAL REPORTS. Within one hundred twenty (120) days after the end
of each fiscal year, the Managing General Partner shall send to each Person who
was a Limited Partner on the last day of the year then ended: (i) audited
financial statements of the Partnership, and (ii) an audited report showing
Distributions per Unit during such year, which report shall separately identify
Distributions from: (a) Cash Flow generated during the year; (b) Cash Flow
generated during prior periods which had been held as reserves; (c) cash from
initial working capital reserves; (d) annual net rental revenues on a per
Property basis; and (e) Net Sale or Refinancing Proceeds. The annual report
shall also include a break-down of the costs reimbursed to the General Partners,
which report shall have been verified by the Partnership's accountants to ensure
that the allocation of costs to the Partnership is appropriate, which
verification shall at a minimum provide for (i) a review of the time records of
individual employees, the cost of whose services were reimbursed; and (ii) a
review of the specific nature of the work performed by each such employee. The
annual
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<PAGE> 31
report shall also include, at Partnership expense, commencing with the
Partnership's first fiscal year of operations or portion thereof, a statement of
compensation and fees paid by the Partnership to the General Partners and their
Affiliates, including an itemized presentation of expense reimbursements to the
General Partners and their Affiliates or any other transactions between the
Partnership and the General Partners or their Affiliates, which information
shall be verified by the independent public accountants retained by the
Partnership. The method of verification shall at a minimum provide: (i) a review
of the time records of individual employees the costs of whose services are
reimbursed; and (ii) a review of the specific nature of the work performed by
each such employee during such year.
13.5 QUARTERLY REPORTS. The Managing General Partner shall prepare, at
Partnership expense, commencing with the first fiscal quarter after the Initial
Closing Date, a quarterly financial highlight report of the Partnership's
performance that shall be distributed to each Limited Partner within sixty (60)
days after the close of the quarterly period covered by such report. Upon
request, unaudited quarterly reports containing information required by Form
10-Q will be mailed to a Limited Partner not later than 60 days after the close
of each of the first three fiscal quarters of each fiscal year.
13.6 VALUATION REPORTS. Commencing with the year ended December 31,
1997, the Partnership shall provide Qualified Plans with an annual valuation of
Units within 120 days after the end of each fiscal year of the Partnership which
is intended to satisfy the requirements of ERISA. Such reports will be based
upon the Managing General Partner's estimate of the amount which would be
received if the Partnership's Properties and Equipment were sold as of the close
of the Partnership's fiscal year and if such proceeds (without reduction for
selling expenses), together with other Partnership funds, were distributed in
liquidation of the Partnership. Absent significant increases or decreases in the
value of assets, the net asset value of each Unit will be reported at cost and
deemed to be $1,000 for the first three annual statements of value following
termination of the Offering; thereafter, the value of the Units will be based on
an annual valuation, subject to quarterly adjustment in the General Partners'
discretion.
14. RIGHTS, AUTHORITY, POWERS, RESPONSIBILITIES AND DUTIES OF THE MANAGING
GENERAL PARTNER
14.1 SERVICES OF MANAGING GENERAL PARTNER. The Managing General
Partner shall only be responsible for the following services to the Partnership:
14.1.1 supervising the organization of the Partnership and
the offering and sale of Units;
14.1.2 arranging for (a) the identification of suitable
investments for the Partnership; (b) a review of the
significant factors in deciding whether or not to make a
particular investment; and (c) the making of a final
investment decision;
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14.1.3 supervising Partnership management, which includes: (a)
establishing policies for the operation of the Partnership;
(b) causing the Partnership's agents or employees to arrange
for the provision of services necessary to the operation of
the Partnership (including any necessary property management,
accounting and legal services and services relating to
distributions by the Partnership); (c) when necessary or
appropriate, approving actions to be taken by the Partnership;
(d) providing advice, consultation, analysis and supervision
with respect to the functions of the Partnership in making or
acquiring investments (including compliance with federal,
state and local regulatory requirements and procedures); (e)
executing documents on behalf of the Partnership and (f)
making all decisions as to accounting matters; and
14.1.4 approving the terms of Dispositions, including
establishing the terms of, and arranging for, any such
transactions.
14.2 POWERS OF MANAGING GENERAL PARTNER. The conduct of the
Partnership's business shall be controlled solely by the Managing General
Partner in accordance with this Partnership Agreement. The Managing General
Partner shall have the fiduciary responsibility for the safekeeping and use of
all funds and assets of the Partnership, whether or not in the Managing General
Partner's possession or control. The Managing General Partner shall have all
authority, rights and powers conferred by law and those required or appropriate
to the management of the Partnership's business which, by way of illustration
but not by way of limitation, shall, subject only to the provisions of Paragraph
14.4 following, include the right, authority and power:
14.2.1 to offer and sell Units to the public directly or
through any Affiliate of the Managing General Partner or any
other broker-dealer who is a member of the National
Association of Securities Dealers, Inc. and is authorized to
sell Units and to employ personnel, agents and dealers for
such purpose;
14.2.2 to invest Net Offering Proceeds temporarily prior to
investment in Assets in short-term, highly liquid investments
determined by the Managing General Partner, in its sole
discretion, to have appropriate safety of principal;
14.2.3 to make or purchase Assets or interests therein in its
own name or in the name of a nominee, a trust or otherwise and
temporarily hold title thereto for the purpose of facilitating
such origination or acquisition or for any other purpose
related to the business of the Partnership; provided that in
the event of the acquisition of such Assets by the Partnership
from the Managing General Partner or its Affiliates, (i) the
purchase price paid by the Partnership may not exceed the cost
of the Assets to the Affiliated seller thereof plus all
closing costs and Acquisition Fees paid by the Partnership and
(ii) no compensation or
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<PAGE> 33
other benefit may accrue to the Managing General Partner or
its Affiliates except as otherwise permitted herein and
except that they may be reimbursed for the cost of carrying
the investment; accordingly, all income generated and
expenses associated with Assets so acquired shall be treated
as belonging to the Partnership; in no event shall the
Partnership purchase Assets from the Managing General Partner
or its Affiliates if the Managing General Partner or its
Affiliates have held the Assets for a period in excess of
twelve (12) months prior to commencement of the Partnership's
offering; furthermore, the General Partners or their
Affiliates may not sell Assets to the Partnership pursuant to
this subparagraph if the cost of the Assets exceeds the funds
reasonably anticipated to be available to the Partnership to
purchase the Assets. Notwithstanding the foregoing, no assets
or interests therein may be purchased from affiliated
Programs. As used herein, "Program" shall be defined as: a
limited or general partnership, joint venture, unincorporated
association or similar organization other than a corporation
formed and operated for the primary purpose of investment in
and the operation of or gain from a interest in real property
including such entities formed to make or invest in mortgage
loans.
14.2.4 to originate, acquire, hold, lease, exchange, foreclose
on, sell, dispose of and otherwise deal with all or any part
of Partnership Assets (including the grant of easements or
servitudes thereon) in such amounts and upon such terms,
including by private contract or at public sale, as the
Managing General Partner deems in its sole discretion to be in
the best interests of the Partnership;
14.2.5 on behalf of the Partnership, to employ Persons in the
operation and management of the business of the Partnership
including, but not limited to, agents, employees, managers,
accountants, attorneys, consultants and others, on such terms
and for such compensation as the Managing General Partner
shall determine, subject, however, to the limitations with
respect thereto as set forth in Section 9, and provided that
agreements with the Managing General Partner or its Affiliates
for the services set forth in Section 9 shall contain the
terms and limitations as to fees and expenses as set forth in
Section 9 and provided further that any of such agreements
shall be terminated immediately upon dissolution of the
Partnership under Paragraph 18.1;
14.2.6 to open accounts and deposit and maintain funds in the
name of the Partnership in banks or savings and loan
associations;
14.2.7 to allow the Partnership to borrow money from the
General Partners or their Affiliates on a short-term basis, at
any time and from time to time and in connection therewith to
pay interest and other
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<PAGE> 34
financing charges or fees which shall not exceed the interest
and other financing charges or fees which would be charged by
unrelated lending institutions on comparable loans for the
same purpose. Except as permitted by this Paragraph 14.2.8,
the General Partners and their Affiliates shall be prohibited
from providing financing to the Partnership. Furthermore, on
loans made available by a General Partner or its Affiliates,
the General Partner and its Affiliates shall not receive
interest or similar charges or fees in excess of those charged
by unrelated lending institutions on comparable loans for the
same purpose in the locality. There shall be no prepayment
penalty on any loan by the General Partners to the
Partnership. Nothing herein shall be construed as prohibiting
a bona fide prepayment provision in the financing agreement.
An "all-inclusive" or "wraparound" note and deed of trust (the
"all-inclusive note" herein) may be used to finance the
purchase of property by the Partnership from the General
Partners or their Affiliates only if the following conditions
are complied with: (i) the General Partners or their
Affiliates under the all-inclusive note shall not receive
interest on the amount of the underlying encumbrance included
in the all inclusive note in excess of that payable to the
lender on that underlying encumbrance; (ii) the Partnership
shall receive credit on its obligation under the all-inclusive
note for payments made directly on the underlying encumbrance;
and (iii) a paying agent, ordinarily a bank, escrow company or
savings and loan association, shall collect payments (other
than any initial payment of prepaid interest or loan points
not to be applied to the underlying encumbrance) on the
all-inclusive note and make disbursement therefrom to the
holder of the underlying encumbrance prior to making any
disbursement to the holder of the all-inclusive note, subject
to the requirements of subparagraph (i) above, or, in the
alternative, all payments on the all-inclusive and underlying
note shall be made directly by the Partnership. In no event,
however, shall the General Partners or any of their Affiliates
provide permanent financing to the Partnership for any of the
Partnership's Properties. Additionally, to the extent that the
Partnership has insufficient funds to fund working capital
reserves, the General Partners shall advance to the
Partnership an aggregate amount of up to 1% of the offering
proceeds for this purpose, with interest and other financing
charges or fees to be paid consistently with the foregoing;
14.2.8 to prepare or cause to be prepared reports, statements
and other relevant information for distribution to the Limited
Partners, including annual and quarterly reports. The
Partnership shall, upon request, provide to the state
securities administrator any report or statement required to
be distributed to the Limited Partners;
14.2.9 to require in all Partnership obligations that the
General Partners shall not have any personal liability thereon
and that the Person or entity contracting with the Partnership
is to look solely to the Partnership and its assets for
satisfaction, and in the event that any such
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<PAGE> 35
obligations have personal liability, the General Partners may
require their satisfaction prior to contracts without such
personal liability; provided, however, that the inclusion of
the aforesaid provisions shall not materially affect the cost
of the service or material being supplied and all Partnership
obligations are satisfied in accordance with prudent business
practices as to time and manner of payment;
14.2.10 to cause the Partnership to make or revoke any of the
elections permitted by the Code;
14.2.11 to select as its accounting year a calendar year or
such fiscal year as approved by the Internal Revenue Service;
14.2.12 to determine the appropriate accounting method or
methods to be used by the Partnership in maintaining its books
and records;
14.2.13 to assure any Person dealing with the Partnership or
the General Partners that he may rely upon a certificate
signed by the Managing General Partner as authority with
respect to: (a) the identity of the General Partners or any
Limited Partners; (b) the existence or nonexistence of any
fact or facts which constitute a condition precedent to acts
by the General Partners or in any other manner germane to the
affairs of the Partnership; (c) the Persons who are authorized
to execute and deliver any instrument or document of the
Partnership; or (d) any act or failure to act by the
Partnership or as to any other matter whatsoever involving the
Partnership or any Partner;
14.2.14 (a) to take such steps as the Managing General Partner
determines are advisable or necessary in order to preserve the
tax status of the Partnership as a pass-through entity for
federal income tax purposes including, without limitation,
imposing additional restrictions on transfers of Units
(provided such restrictions on transfers do not cause the
Partnership's assets to be deemed to be "plan assets" with
respect to investors which are Qualified Plans) or (b) to
compel a dissolution and termination of the Partnership or
restructuring of the Partnership's activities to the extent
necessary (i) to comply with any exemption in final plan asset
regulations adopted by the Department of Labor, including, but
not limited to, establishing a fixed percentage of Units
permitted to be held by Qualified Plans or other tax-exempt
investors or discontinuing sales to such entities after a
given date, in the event that either (A) the assets of the
Partnership constitute "plan assets" for purposes of ERISA or
(B) the transactions contemplated hereunder constitute
prohibited transactions under ERISA or the Code and an
exemption for such transactions is not obtainable from the
Department of Labor or (ii) to obtain a prohibited transaction
exemption from the Department of Labor.
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14.2.15 in addition to any amendments otherwise authorized
herein, to amend this Partnership Agreement from time to time
without the approval of the Limited Partners,
(a) to add to the representations, duties or
obligations of the Managing General Partner or its
Affiliates or surrender any right or power granted
to the Managing General Partner or its Affiliates
herein, for the benefit of the Limited Partners;
(b) to cure any ambiguity, to correct or supplement
any provision herein which may be inconsistent with
law or with any other provision herein, or to add
any other provisions with respect to matters or
questions arising under this Partnership Agreement
which will not be inconsistent with law or with the
provisions of this Partnership Agreement;
(c) to delete or add any provision of this
Partnership Agreement required to be so deleted or
added by the staff of the Securities and Exchange
Commission or by a state securities commissioner or
similar such official, which addition or deletion
is deemed by such commission or official to be for
the benefit or protection of the Limited Partners;
(d) to change the name of the Partnership to any
lawful name which it may select;
(e) to reflect the addition or substitution of
Limited Partners or the reduction of capital
accounts upon the return of capital to Partners or
to reflect the admission of additional General
Partners (who may be admitted without the consent
of the Limited Partners);
(f) to amend the provisions of Section 11 of this
Partnership Agreement or any other provisions of
this Partnership Agreement if, in the opinion of
counsel to the Partnership and the General
Partners, such modification is necessary to (i)
cause the allocations and Distributions contained
in Section 11 to have substantial economic effect
in accordance with the most recently proposed or
final regulations relating to Section 704 of the
Code or any other statutory provision or regulation
relating to such allocations or (ii) cause the
periodic allocations to be respected, such as on a
monthly basis, under Section 706 of the Code or any
other statute or provision or regulation relating
to such periodic allocations or (iii) cause the
provisions of this Partnership Agreement to comply
with any applicable federal legislation
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<PAGE> 37
enacted after the date of this Partnership
Agreement; provided, however, no such amendment
shall be effected unless, in the opinion of
counsel, such amendment does not adversely affect
the rights or interests of any of the Limited
Partners;
(g) to make any amendments that the Managing
General Partner reasonably believes are appropriate
to lessen the possibility that Units would be "plan
assets," as that term is used in ERISA, and to
maintain the status of the Partnership as a
pass-through entity for federal income tax
purposes;
(h) to alter the division of profit and loss
allocations among the General Partners and of
Distribution rights among the General Partners in
accordance with Paragraph 11.5 hereof; and
(i) to substitute any entity for the Individual
General Partner, provided such substituted General
Partner either (a) in the opinion of counsel to the
Partnership, complies with Paragraph 14.9 hereof,
or (b) has a liquid net worth of at least 10% of
the Adjusted Investments, as of the date of such
substitution or the general partner(s) of such
substituted General Partner (if a partnership) or
the substituted General Partner (if an individual),
shall have a net worth, independent of any
investment in the Partnership of at least 10% of
the Adjusted Investments as of the date of such
substitution.
14.2.16 to borrow money from banks and other financial
institutions and for sums so borrowed issue a promissory note
(or any other evidence of indebtedness) as a General Partner
of this Partnership, and secure repayment thereof by pledging,
mortgaging or granting a security interest in all or any part
of the Partnership assets. No such Person loaning money to the
Partnership shall be bound to verify the validity, expediency
or propriety of such borrowing.
14.2.17 to execute, acknowledge and deliver any and all
instruments to effectuate all of the foregoing, and to take
all such action in connection therewith as the Managing
General Partner shall deem necessary or appropriate.
14.3 GENERAL RIGHTS AND POWERS. The General Partners shall, except as
otherwise provided in this Partnership Agreement, have all the rights and powers
and shall be subject to all the restrictions and liabilities of a partner in a
partnership without limited partners.
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14.4 LIMITATIONS. Neither the General Partners nor any of their
Affiliates shall have the authority to:
14.4.1 cause the Partnership to enter into contracts with the
General Partners or their Affiliates which would bind the
Partnership after the removal, adjudication of bankruptcy or
insolvency of the last remaining General Partner or continue
the business with Partnership assets after the occurrence of
such event;
14.4.2 alter the primary purpose of the Partnership as set
forth in Section 3;
14.4.3 cause the Partnership to invest in any Assets through
cotenancy arrangements, joint ventures or general partnerships
with a publicly registered Affiliate unless: (a) the
affiliated program has investment objectives and policies
substantially identical to those of the Partnership; (b) no
duplicate management fees are paid; (c) the compensation paid
to the Sponsor by the Partnership and the Affiliate is
substantially identical with regard to each program; (d) the
Affiliated program makes its investments on substantially the
same terms and conditions as the Partnership, although the
amounts invested do not have to be comparable; and (e) the
Partnership has a right of first refusal to purchase the
investment if the other program wishes to sell the investment;
14.4.4 cause the Partnership to invest in any Assets through
co-tenancy arrangements, joint ventures or general
partnerships with Affiliates other than publicly registered
Affiliates unless: (a) the investment is necessary to relieve
the General Partners from any commitment to purchase a
property entered into in compliance with Section 14.2.3 prior
to the closing of the Offering (b) the affiliated program has
investment objectives and policies substantially identical to
those of the Partnership; (c) no duplicate management fees are
paid; (d) the compensation paid to the Sponsor by the
Partnership and the Affiliate is substantially identical with
regard to each program; (e) the Affiliated program makes its
investments on substantially the same terms and conditions as
the Partnership, although the amounts invested do not have to
be comparable; and (f) the Partnership has a right of first
refusal to purchase the investment if the other program wishes
to sell the investment.
14.4.5 cause the Partnership to invest in any Asset with
unaffiliated parties through co-tenancy arrangements, joint
ventures or general partnerships except on substantially the
same terms and conditions (although not necessarily the same
percentage interest) as such unaffiliated parties; provided,
however, that no such investment shall be
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entered into by the Partnership (i) if it involves the payment
of duplicative property management or other fees which would
have the effect of circumventing any of the restrictions on
and prohibited transactions involving conflicts of interest
contained in this Partnership Agreement, and (ii) unless the
Partnership acquires a controlling interest in such joint
venture or partnership. For purposes of the above,
"controlling interest" means an equity interest possessing the
power to direct or cause the direction of the management and
policies of the partnership or joint venture, including the
authority to: (a) review all contracts entered into by the
partnership or joint venture that will have a material effect
on its business or assets, (b) cause a sale or refinancing of
the property or its interest therein subject in certain cases
where required by the partnership or joint venture agreement,
to limits as to time, minimum amounts and/or a right of
refusal by the joint venture partner or consent of the joint
venture partner; (c) approve budgets and major capital
expenditures, subject to a stated minimum amount; (d) veto any
sale or refinancing of the property, or alternatively, to
receive a specified preference on sale or refinancing
proceeds; and (e) exercise a right of first refusal on any
desired sale or refinancing by the joint venture partner of
its interest in the assets except for the transfer to an
Affiliate of the joint venture partner.
14.4.6 cause the Partnership to exchange Units for Partnership
Property;
14.4.7 cause the Partnership to invest in limited
partnerships, unless such investment is as a general partner
and is substantially identical to a direct purchase of the
underlying property (i.e., where the investment includes the
purchase of substantially all of the interests of such
partnership) or the investment is in a joint venture. In both
cases such investment must (i) be on terms which entail the
acquisition of a "controlling interest" as defined elsewhere
herein; (ii) prohibit the payment of duplicative fees and
otherwise limit compensation to that permitted by Section 9
hereof; and (iii) otherwise comply with the limitations on
dealings with Affiliated parties as set forth in this
Partnership Agreement;
14.4.8 invest in junior trust deeds or similar obligations,
except that junior trust deeds or similar obligations may be
taken back from purchasers of Properties and/or Equipment in
connection with the sale thereof by the Partnership;
14.4.9 take any action with regard to any property owned
through another entity or partnership which they would not
have been empowered to take had the Partnership owned the
property directly;
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14.4.10 do any act in contravention of this Partnership
Agreement or which would, in the opinion of the Managing
General Partner, make it impossible to carry on the ordinary
business of the Partnership;
14.4.11 perform any act (other than an act required by this
Partnership Agreement or any act taken in good faith reliance
upon counsel's opinion) which would, at the time such act
occurred, subject any Limited Partner to liability as a
general partner in any jurisdiction;
14.4.12 employ, or permit the employment of, the funds or
assets of the Partnership in any manner except for the
exclusive benefit of the Partnership;
14.4.13 commingle Partnership funds with those of any other
Person or entity;
14.4.14 operate the Partnership in such a manner as to have
the Partnership classified as an "investment company" for
purposes of the Investment Company Act of 1940;
14.4.15 except as specifically provided for in Section 14.2.2
or another provision of this Partnership Agreement, cause the
Partnership to invest in or underwrite the securities of other
issuers for any purposes;
14.4.16 cause the Partnership to invest in real estate
contracts of sale unless such contracts of sale are in
recordable form and are appropriately recorded in the chain of
title;
14.4.17 cause the Partnership to invest in Property unless it
first obtains an owner's title insurance policy or commitment
as to the condition of title or its equivalent and an
appraisal prepared by an independent MAI appraiser (the
Partnership shall retain the appraisal for at least five (5)
years and such appraisal shall be available for inspection and
duplication (at the Limited Partner's expense) by the Limited
Partners);
14.4.18 cause the Partnership to invest in unimproved real
property (except that such prohibition will not apply to an
interest in unimproved, non-income-producing real estate
acquired as part of an investment so long as such unimproved
real property constitutes less than 10% of Gross Proceeds);
14.4.19 give an exclusive right to sell or exclusive
employment to sell any property for the Partnership to a
General Partner or any Affiliate;
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14.4.20 permit receipt by a General Partner or any Affiliate
of any rebates or "give-ups" or permit a General Partner or
any Affiliate to participate in any reciprocal business
arrangements which would have the effect of circumventing any
of the provisions of this Partnership Agreement;
14.4.21 make loans to a General Partner or any Affiliate or
other Person;
14.4.22 directly or indirectly pay or award any finder's fee,
commission, or other compensation to any Person engaged by a
potential investor for investment advice as an inducement to
such advisor to advise the purchase of Units; provided,
however, that this provision shall not prohibit payment by the
Partnership of normal sales commissions to registered
broker-dealers or other properly licensed Persons (including
an Affiliate of a General Partner) in connection with the
offering and sale of Units;
14.4.23 purchase or lease property from or sell or lease
property to the General Partners or any of their Affiliates
except as contemplated by Paragraphs 14.2.3, 14.4.3, and
14.4.4 hereof;
14.4.24 permit the Limited Partners to contract away the
fiduciary duty owed to the Limited Partners under common law;
or
14.4.25 following the termination of the Offering, allow the
total amount of secured indebtedness with respect to a
particular Property or Equipment package to exceed 80% of the
Purchase Price thereof; in no event will such indebtedness
exceed an amount equal to 35% of the sum of Gross Proceeds
plus the aggregate amount of Partnership indebtedness secured
by Partnership Assets (approximately 40% of the aggregate
Purchase Price of Assets) on a portfolio basis when incurred;
14.4.26 enter into any "Roll-Up Transaction" without the
consent of Limited Partners owning at least two-thirds of the
Units then outstanding as used herein, "Roll-Up Transaction"
shall mean any transaction or series of transactions that
directly or indirectly, through acquisition or otherwise,
involve the combination, merger, or conversion of the
Partnership; this paragraph 14.4.25 cannot be amended or
deleted from the Partnership Agreement without the consent of
the Limited Partners owning at least two-thirds of the Units
then outstanding;
(a) in connection with a proposed Roll-Up
Transaction, an appraisal of all Partnership assets
shall be obtained from a competent "independent
expert"; "independent expert", as used herein,
shall mean a Person with no material current or
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prior business or personal relationship with the
Sponsor or its Affiliates who is engaged to a
substantial extent in the business of rendering
opinions regarding the value of assets of the type
held by the Partnership, and who is qualified to
perform such work; if the appraisal will be
included in a prospectus used to offer the
securities of a "Roll-Up Entity," the appraisal
shall be filed with the Securities and Exchange
Commission, and with such states as may require, an
exhibit to the registration statement of the
"Roll-Up Entity"; a "Roll-Up Entity" shall mean a
partnership, real estate investment trust,
corporation, trust or other entity that would be
created or would survive after the successful
completion of a proposed Roll-Up Transaction; the
Partnership's assets shall be appraised on a
consistent basis; the appraisal shall be based on a
evaluation of all relevant information, and shall
indicate the value of the Partnership's assets as
of the date immediately prior to the announcement
of the proposed Roll-Up Transaction; the appraisal
shall assume an orderly liquidation of the
Partnership's assets over a 12 month period; the
terms of the engagement of the independent expert
shall clearly state that the engagement is for the
benefit of the Partnership and its Limited
Partners; a summary of the appraisal, indicating
all material assumptions underlying the appraisal,
shall be included in a report to the Limited
Partners in connection with a proposed Roll-Up
Transaction; accordingly, if such appraisal is
included in the Partnership's prospectus, the
Partnership shall be subject to liability for
violation of Section 11 of the Securities Act of
1933, as amended and comparable provisions under
state laws for any material misrepresentations or
material omissions in the appraisal;
(b) in connection with a proposed Roll-Up
Transaction, the Person sponsoring the Roll-Up
Transaction shall offer to the Limited Partners who
vote "no" on the proposal the choice of: (i)
accepting the securities of the Roll-Up Entity
offered in the proposed Roll-Up Transaction; or
(ii) one of the following: (A) remaining as Limited
Partners in the Partnership and preserving their
interest therein on the same terms and conditions
as existed previously; or (B) receiving cash in an
amount equal to the Limited Partner's pro-rata
share of the appraised value of the net assets of
the Partnership;
(c) the Partnership shall not participate in any
proposed Roll-Up Transaction which would result in
Limited Partners having democracy rights in the
Roll-Up
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Entity which are less than those provided for
under paragraph 15.1; if the Roll-Up Entity is
a corporation, the voting rights of the Limited
Partners shall correspond to the voting rights
provided for in paragraph 15.1 to the greatest
extent possible;
(d) the Partnership shall not participate in any
proposed Roll-Up Transaction which includes
provisions that would operate to materially impede
or frustrate the accumulation of shares by any
purchaser of the securities of the Roll-Up Entity
(except to the minimum extent necessary to preserve
the tax status of the Roll-Up Entity); the
Partnership shall not participate in any proposed
Roll-Up Transaction which would limit the ability
of a Limited Partner to exercise the voting rights
of its securities of the Roll-Up Entity on the
basis of the number of Units held by that Limited
Partner;
(e) the Partnership shall not participate in any
proposed Roll-Up Transaction in which the Limited
Partner's rights of access to the records of the
Roll-Up Entity would be less than those provided
for under paragraph 13.1;
(f) the Partnership shall not participate in any
proposed Roll-Up Transaction in which any of the
cost of the Roll-Up Transaction would be borne by
the Partnership if the Roll-Up Transaction is not
approved by the Limited Partners;
14.4.27 issue Units in exchange for Property or Equipment or
in ways other than pursuant to the terms set forth in the
Prospectus;
14.4.28 issue securities senior to the Units except notes to
banks and other financial institutions;
14.4.29 invest in real estate mortgages except in connection
with the disposition of one or more of the Properties;
14.4.30 engage in the purchase and sale (or turnover) of
investments other than as set forth in the Prospectus;
14.4.31 repurchase the Units, except as provided in Paragraph
12.6;
14.4.32 cause the Partnership to invest less than 83% of the
Original Contributions in Assets; or
14.4.33 cause the Partnership to reinvest Net Sale or
Refinancing Proceeds received more than four years after the
date on which the Partnership terminates the Offering.
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14.5 NO PERSONAL LIABILITY. The General Partners shall have no personal
liability for the repayment of the Original Contributions of any Limited Partner
or to repay the Partnership any portion or all of any negative balance in its
capital account, except as otherwise provided in Section 20.
14.6 ACCOUNTING MATTERS. The Managing General Partner shall make all
decisions as to accounting matters in connection with the accounting methods
adopted by the Partnership in accordance with generally accepted accounting
principles and procedures applied on a consistent basis and shall make all
decisions with respect to tax accounting matters in accordance with tax
accounting principles. The Managing General Partner may rely on the
Partnership's independent certified public accountants to determine whether such
decisions are in accordance with generally accepted accounting principles.
14.7 TAX MATTERS PARTNER. The Managing General Partner is hereby
designated as the "Tax Matters Partner" in accordance with Section 6231(a) (7)
of the Code and, in connection therewith and in addition to all other powers
given thereunder, shall have all other powers needed to fully perform hereunder
including, without limitation, the power to retain all attorneys and accountants
of its choice and the right to settle any audits without the consent of the
Limited Partners. The designation made in this Paragraph 14.7 is hereby
expressly consented to by each Partner as an express condition to becoming a
Partner.
14.8 FUNDS AND ASSETS. The Managing General Partner shall have a
fiduciary responsibility for the safekeeping and use of all funds and assets of
the Partnership, whether or not in its immediate possession or control, and
shall not employ, or permit another to employ, such funds or assets in any
manner except for the exclusive benefit of the Partnership.
14.9 NET WORTH OF INDIVIDUAL GENERAL PARTNER. The Individual General
Partner and any successor Individual General Partner shall use his best efforts
to meet the requirements, necessary to assure that the Partnership will be
classified as a partnership for federal income tax purposes, of the Code, as
interpreted from time to time by the Internal Revenue Service, or any successor
thereto, any other agency of the federal government or courts of law.
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14.10 PRESERVATION OF TAX STATUS. The Managing General Partner shall
use its best efforts to take such actions as are necessary to preserve the
Partnership's status as a partnership or other pass-through entity for tax
purposes in light of any amendments to the Code or administrative or judicial
interpretations thereof.
15. RIGHTS AND POWERS OF THE LIMITED PARTNERS
15.1 VOTING RIGHTS.
15.1.1 The Limited Partners by Majority Vote may, without the
concurrence of the General Partners, vote to:
(a) remove a General Partner in accordance with
Section 16 (provided that the General Partners,
insofar as they may act as Limited Partners due to
the ownership of Units of the Partnership, will
abstain from voting Units held by them with regard
to removal of a General Partner);
(b) elect a new General Partner;
(c) terminate and dissolve the Partnership pursuant
to Section 18;
(d) amend the Partnership Agreement, provided such
amendment is not for any of the purposes set forth
in Paragraph 14.2.15 of the Partnership Agreement;
and
(e) approve or disapprove the sale of all or
Substantially All of the Assets of the Partnership
in a single sale, or in multiple sales in the same
twelve-month period, except in the liquidation and
winding-up of the business of the Partnership upon
its termination and dissolution or in the ordinary
course of business.
15.1.2 The General Partners must obtain the approval
of the Limited Partners by Majority Vote prior
to:
(a) effecting a material change in the
Partnership's investment objectives;
(b) assigning a General Partner's interest in the
Partnership, except as otherwise provided in
Paragraph 16.5 of this Agreement;
(c) extending the term of the Partnership; or
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(d) selling all or Substantially All of the Assets
of the Partnership in a single sale, or in multiple
sales in the same twelve-month period, except in
the liquidation and winding-up of the business of
the Partnership upon its termination and
dissolution or in the ordinary course of business.
15.1.3 In determining the existence of the requisite
percentage in interest of Units necessary to approve the
matters set forth in Sections 15.1.1 and 15.1.2, Units owned
by the General Partners or their Affiliates shall not be
included.
15.1.4 A Limited Partner shall be entitled to cast one vote
for each Unit which he owns, as at a meeting, in person, by
written proxy or by a signed writing directing the manner in
which he desires that his votes be cast, which writing must be
received by the Managing General Partner prior to such
meeting, or (b) without a meeting, by a signed writing
directing the manner in which he desires that his votes be
cast, which writing must be received by the Managing General
Partner prior to the date upon which the votes of Limited
Partners are to be counted. Units owned by the General
Partners and their Affiliates may not be voted by, nor may the
General Partners and their Affiliates consent with respect to
such Units, on matters submitted to the Limited Partners
regarding the removal of a General Partner or regarding any
transaction between the Partnership and the General Partners
and their Affiliates. In determining the existence of the
requisite percentage and interest of Units necessary to
approve a matter on which the General Partners and their
Affiliates may not vote or consent, any Units owned by the
General Partners and their Affiliates shall not be included.
15.2 MEETINGS. Meetings of the Limited Partners for any purpose may be
called by the Managing General Partner at any time and shall be called by the
Managing General Partner within ten (10) days after receipt of a written request
for such a meeting signed by ten percent (10%) or more in interest of the
Limited Partners as of the date of receipt of such written request. Any such
request shall state the purpose of the proposed meeting and the matters proposed
to be acted upon thereat. Meetings shall be held at the principal office of the
Partnership or at such other place as may be designated by the Managing General
Partner so long as such meeting is held at a time and place convenient to
Limited Partners.
15.3 CONSENT WITHOUT A MEETING. The Managing General Partner may and,
upon receipt of a request in writing signed by ten percent (10%) or more in
interest of the Limited Partners, the Managing General Partner shall, submit any
matter upon which the Limited Partners are entitled to act, to the Limited
Partners for a vote by written consent without a meeting. For purposes of
obtaining a written vote under this Partnership Agreement, the Managing General
Partner may require a written response within a specified time, but not less
than fifteen (15) days and no more than sixty (60) days from receipt of said
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request, and, provided such notice was sent by U.S. mail, return receipt
requested and the Limited Partner's receipt of such notice was confirmed, the
failure of a Limited Partner to file such a written response within such time
shall constitute a vote which is consistent with the Managing General Partner's
recommendation with respect to such proposal so long as a quorum is otherwise
obtainable.
15.4 NOTICE OF MEETING. Notification of any meeting to be held pursuant
to Paragraph 15.2 shall be given within ten (10) days after receipt of a request
in writing signed by ten percent (10%) or more in interest of the Limited
Partners by the Managing General Partner, to each Limited Partner at its record
address, or at such other address which he may have furnished in writing to the
Managing General Partner. Such notification shall state the place, date and hour
of the meeting (which shall be held not less than fifteen (15) nor more than
sixty (60) days after receipt of written request), and shall indicate that the
notification is being issued at or by the direction of the Partner or Partners
calling the meeting. The notification shall state the purpose or purposes of the
meeting. For the purpose of determining the Limited Partners entitled to vote at
any meeting of the Limited Partners, or any adjournment thereof, or to vote by
written consent without a meeting, the Managing General Partner or the Limited
Partners requesting such meeting or vote may fix, in advance, a date as the
record date for any such determination of Limited Partners. Such date shall not
be more than sixty (60) days nor less than ten (10) days before any such meeting
or submission of a matter to the Limited Partners for a vote by written consent.
If a meeting is adjourned to another time or place, and if an announcement of
the adjournment of time or place is made at the meeting, it shall not be
necessary to give notification of the adjourned meeting. The presence in person
or by proxy of a majority in interest of the Limited Partners shall constitute a
quorum at meetings of the Limited Partners; provided, however, that if there be
no such quorum, holders of a majority in interest of the Units so present or so
represented may adjourn the meeting from time to time without further
notification, until a quorum shall have been obtained. No notification of the
time, place or purpose of any meeting of Limited Partners need be given to any
Limited Partner who attends in person or is represented by proxy, except for a
Limited Partner attending a meeting for the express purpose of objecting at the
beginning of the meeting to the transaction of any business on the ground that
the meeting is not lawfully called or convened, or to any Limited Partner
entitled to such notification who, in writing, executed and filed with the
records of the meeting, either before or after the time thereof, waives such
notification.
15.5 PROXIES. The laws of the State of Delaware pertaining to the
validity and use of corporate proxies shall govern the validity and use of
proxies given by Limited Partners.
15.6 CONDUCT OF MEETING. At each meeting of Limited Partners, the
Managing General Partner shall appoint such officers and adopt such rules for
the conduct of such meeting as the Managing General Partner shall deem
appropriate.
15.7 LIMITATIONS. No Limited Partner shall have the right or power to:
(i) bring an action for partition against the Partnership or (ii) cause the
termination and dissolution of
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the Partnership by court decree or otherwise,
except as set forth in this Partnership Agreement or as provided by law. Other
than upon the termination and dissolution of the Partnership as provided by this
Partnership Agreement, there has been no time agreed upon when the contribution
of each Limited Partner may be returned.
16. REMOVAL, BANKRUPTCY OR DISSOLUTION OF A GENERAL PARTNER AND TRANSFER
OF A GENERAL PARTNER'S INTEREST
16.1 REMOVAL. The General Partners may be removed from the Partnership
upon a Majority Vote. Written notice of the removal of the General Partners
shall be served either by certified or by registered mail, return receipt
requested, or by personal service. Such notice shall set forth the date upon
which the removal is to become effective.
16.2 SALE OF INTEREST. Upon the removal, adjudication of bankruptcy,
dissolution or other cessation to exist of either of the General Partners
("Terminated Partner"), the interest of such Terminated Partner in the Net
Income, Net Loss and Distributions of the Partnership may be purchased by a
successor General Partner (elected by Majority Vote of the Limited Partners) for
a purchase price determined according to the provisions of Paragraph 16.3.
Effective as of the removal, withdrawal, dissolution or other departure of the
Managing General Partner from the Partnership, should the Individual General
Partner remain as a General Partner of the Partnership, the Individual General
Partner shall assume all rights, obligations and responsibilities of the
Managing General Partner.
16.3 PURCHASE PRICE. If a successor General Partner is elected as
provided in Section 16.2, the Partnership shall acquire the interest of the
Terminated Partner for a purchase price equal to the fair market value of the
Terminated Partner's interest in the Partnership, determined by agreement
between the Terminated Partner and the Partnership or, if they cannot agree, by
arbitration in accordance with the then current rules of the American
Arbitration Association in Detroit, Michigan. The cost of any such required
arbitration shall be borne equally by the Terminated General Partner and the
Partnership. For this purpose, the fair market value of the interest of the
Terminated Partner shall be deemed to be the amount the Terminated Partner would
receive upon dissolution and termination of the Partnership under Paragraph
18.2.1 assuming such dissolution or termination occurred on the date of the
dissolving event and assuming the assets of the Partnership were sold for their
then fair market value without compulsion of the Partnership to sell such
assets. Payment shall be made by a promissory note at the announced prime rate
of interest of the bank at which the majority of the Partnership's cash is on
deposit as of the date of determination of the fair market value of the
Terminated Partner's interest in the Partnership. Such promissory note shall be
for a term of five (5) years, or such other period as may be agreed upon between
the Terminated Partner and the Partnership and shall be a full recourse
obligation of the Partnership. The principal amount of said promissory note
together with accrued interest shall be payable in equal fully amortizing
installments until such time as the principal amount together with accrued
interest is paid in full. Notwithstanding anything to the contrary herein, said
promissory note, if not previously paid in full, shall become due and payable in
full by the acquiring Partner at such time as the Partnership is finally wound
up and liquidated.
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16.4 NO VOLUNTARY DISSOLUTION OR WITHDRAWAL. Until the dissolution of
the Partnership, the General Partners shall not take any voluntary steps to
dissolve themselves or to voluntarily withdraw from the Partnership. Nothing in
this Partnership Agreement shall be deemed to limit the ability of a General
Partner to transfer, pledge or hypothecate its interest in the Partnership to
third parties and no such action shall constitute a withdrawal from the
Partnership.
16.5 NO LIMITATION ON MERGER OR REORGANIZATION. Nothing in this
Partnership Agreement shall be deemed to prevent the merger or reorganization of
the Managing General Partner into or with any other corporation, partnership or
other entity, or the transfer of all the capital stock or partnership interests
of the Managing General Partner and the assumption of the rights and duties of
the Managing General Partner by, in the case of a merger, reorganization or
consolidation, the surviving corporation or partnership or by operation of law.
17. CERTAIN TRANSACTIONS
The General Partners, any Limited Partner, any Affiliates, any
shareholder, officer, director, partner or employee thereof, or any Person
owning a legal or beneficial interest therein, may engage in or possess an
interest in any other business or venture of every nature and description,
independently or with others including, but not limited to, the ownership,
financing, leasing, operation, management, brokerage and development of real
property. Except as set forth in the Prospectus, neither the General Partners
nor any Affiliate of the General Partners shall be obligated to present any
particular investment opportunity to the Partnership, even if such opportunity
is of a character which, if presented to the Partnership, could be taken by the
Partnership and each of them shall have the right to make for its own account
(individually or as trustee) or to recommend to others any such particular
investment opportunity. The General Partners shall not be required to devote all
of their time or business efforts to the affairs of the Partnership, but shall
devote so much of such time and attention to the Partnership as is reasonably
necessary and advisable to manage the affairs of the Partnership to the best
advantage of the Partnership.
18. TERMINATION AND DISSOLUTION OF THE PARTNERSHIP
18.1 TERMINATING EVENTS. The Partnership shall be terminated and
dissolved upon the earliest to occur of the following:
18.1.1 the withdrawal, removal, adjudication of bankruptcy,
insolvency, dissolution or other cessation of existence as a
legal entity (collectively, the "Withdrawal") of the last
remaining General Partner unless, within ninety (90) days of
the date of such event, the Limited Partners by a majority
vote (unless a unanimous vote is required under the Delaware
Act) elect to continue the business of the Partnership and
elect a successor General Partner as of the date of the
Withdrawal;
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18.1.2 a Majority Vote (which may, but need not be solicited
by the General Partner) in favor of dissolution and
termination of the Partnership;
18.1.3 the expiration of the term of the Partnership; or
18.1.4 the disposition of all assets held by the Partnership
receipt of final payment with respect to all investments.
Further, if the Partnership has not been liquidated within ten (10)
years of the date the Partnership last purchased a Property or an Equipment
package, the General Partners are required to call for a vote of the Limited
Partners as to whether they wish to liquidate the Partnership.
18.2 LIQUIDATION AND DISTRIBUTION OF ASSETS. Upon a dissolution and
termination of the Partnership for any reason, the Managing General Partner
shall take full account of the Partnership's assets and liabilities, shall
liquidate the assets as promptly as is consistent with obtaining the fair value
thereof, and shall apply and distribute the proceeds therefrom in the following
order:
18.2.1 first, to the payment of creditors of the Partnership
but excluding secured creditors whose obligations will be
assumed or otherwise transferred on the liquidation of
Partnership assets; and
18.2.2 second, after allowance for the expenses of liquidation
and the setting up of any reserves for contingencies which the
Managing General Partner considers necessary, to the Partners
in proportion to and to the extent of the positive balances in
their Capital Accounts, after Net Income arising from a
Disposition and Net Loss has been allocated in accordance with
Paragraph 11.1 hereof.
18.2.3 notwithstanding anything to the contrary, the Managing
General Partner has the right to defer liquidation if, in the
opinion of the Managing General Partner, the sale of
Partnership assets in liquidation would result in a material
underrealization on the Partnership's assets.
18.2.4 notwithstanding anything herein to the contrary, the
Partnership shall not make any distributions in kind.
18.3 ADDITIONAL TERMINATING EVENT. In addition to the events described
in Paragraph 18.1, the Managing General Partner may also compel a termination
and dissolution of the Partnership, upon notice to all Limited Partners but
without the consent of any Limited Partner, if, in the opinion of counsel to the
Partnership, either (i) the Partnership's assets constitute "plan assets," as
such term is defined for purposes of ERISA, or (ii) any of the transactions
contemplated hereunder constitute "prohibited transactions"
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under ERISA and no exemption for such transactions is obtainable from the United
States Department of Labor.
19. SPECIAL POWER OF ATTORNEY
19.1 By completing and signing the Partnership's Subscription Documents
or any transfer form, each Limited Partner grants to the General Partners and to
each officer of the Managing General Partner and their designees and each of
them a power of attorney irrevocably making, constituting and appointing each of
them with full power of substitution and resubstitution, as its or their
attorney-in-fact with full power and authority to act in its or their name on
its or their behalf to execute complete and/or correct in a manner consistent
with the Prospectus and the Partnership Agreement and to execute, acknowledge,
swear to and file the following documents, subject to all of the provisions of
the Partnership Agreement:
19.1.1 the Partnership Agreement, the Certificate, and any
separate certificates of limited partnership to be filed in
the appropriate public offices in the State of Delaware (and
any other state for which the General Partners shall deem it
advisable to file, upon advice of counsel) and in such form as
shall be necessary under the laws of such state to give effect
to the provisions of the Partnership Agreement and to preserve
the character of the Partnership as a limited partnership, and
any amended Certificate, including any amendment to the
Certificate or to the Partnership Agreement to reflect the
admission of additional General or Limited Partners in
accordance with the terms of the Partnership Agreement or the
substitution of a Limited Partner or General Partner in
accordance with the provisions of the Partnership Agreement;
19.1.2 any other instrument or document which the General
Partners deem to be in the best interests of the Partnership
to file and which is not inconsistent with this Partnership
Agreement;
19.1.3 any document which may be required in connection with
borrowings by the Partnership, including, without limitation,
documents required by any financial institution;
19.1.4 any documents which may be required in connection with
any filings with state securities commissions or other state
authorities;
19.1.5 any document necessary or appropriate in order to
qualify the Partnership to transact business in any state, or
to reconstitute the Partnership as provided in Paragraph
21.10.
19.1.6 any amendment to this Partnership Agreement which in
the opinion of the General Partners does not adversely impact
the interests of
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the Limited Partners, or is necessary to clarify any
ambiguities, misstatements or omissions from this Partnership
Agreement;
19.1.7 any instruments or other documents necessary to effect
any of the amendments to this Partnership Agreement in
accordance with Paragraph 14.2.15 hereof.
19.2 The power of attorney granted by each Limited Partner:
19.2.1 is a special power of attorney coupled with an interest
which is irrevocable and shall survive and not be affected by
the death, incompetency, disability or incapacity of the
granting Limited Partner;
19.2.2 may be exercised by the attorney-in-fact appointed as
set forth in Paragraph 19.1 hereof either by signing
separately as attorney-in-fact for the Limited Partners or,
after listing all of the Limited Partners executing any
instrument, by a single signature of such attorney-in-fact for
all of them; and
19.2.3 shall survive the delivery of an assignment by a
Limited Partner of the whole or any portion of his Units
except that, where the assignee thereof has been approved by
the Managing General Partner for admission to the Partnership
as a substituted Limited Partner, this power of attorney given
by the assignor shall survive the delivery of such assignment
for the sole purpose of enabling the General Partners and each
officer of the Managing General Partner and their designees
and each of them to execute, acknowledge, swear to and file
any instrument or document necessary to effect such
substitution.
19.3 Each Limited Partner is fully aware that he and each other Limited
Partner have executed this power of attorney, and that each Limited Partner will
rely on the effectiveness of such powers with a view to the orderly
administration of the Partnership's affairs.
20. LIABILITY AND INDEMNIFICATION
20.1 The General Partners and their Affiliates shall have no liability
to the Partnership or to any Partner for any loss suffered by the Partnership
which arises out of any action or inaction of a General Partner or the Affiliate
of a General Partner if the General Partners or the Affiliates, in good faith,
determined that such course of conduct was in the best interests of the
Partnership and such course of conduct did not constitute negligence or
misconduct of the General Partner or the Affiliate. The General Partners shall
not be liable because of any taxing authorities disallow or adjust any income,
nor shall the General Partners be liable for actions taken or not taken in
accordance with the provisions of this Partnership Agreement, provided that the
same were not the result of negligence, breach of contract or misconduct.
Furthermore, the General Partners shall not have any liability for
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the repayment of Capital Contributions of the Limited Partners except as
provided in this Partnership Agreement, nor shall the General Partners be
obligated, except as required by law, to make additional Capital Contributions
or advances to the Partnership. The General Partners and their Affiliates shall
be indemnified by the Partnership against any losses, judgments, liabilities,
expenses and amounts paid in settlement of any claims sustained by them in
connection with the Partnership, provided that the same were not the result of
negligence or misconduct on the part of the General Partners or their
Affiliates, provided however, that such indemnification shall be recoverable
only out of the assets of the Partnership and not from the Limited Partners,
provided further, that the General Partners or their Affiliates, in good faith,
determine that their course of conduct was in the best interest of the
Partnership.
20.1.1 Notwithstanding the above, the General Partners and
their Affiliates and any Person acting as a broker-dealer
shall not be indemnified for any losses, liabilities or
expenses arising from or out of an alleged violation of
federal or state securities laws unless (i) there has been a
successful adjudication on the merits of each count involving
alleged securities law violations as to the particular
indemnitee, or (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction
as to the particular indemnitee or (iii) a court of competent
jurisdiction approves a settlement of the claims against a
particular indemnitee and finds that indemnification of the
settlement and related costs should be made.
20.1.2 In any claim for indemnification for federal or state
securities law violations, the party seeking indemnification
shall place before the court the position of the Securities
and Exchange Commission and the positions of certain state
securities divisions, including California, Oklahoma and
Tennessee, and in such other states in which the claimants
allege Units were offered or sold, with respect to the issue
of indemnification for securities law violations.
20.1.3 The Partnership shall not pay for any insurance
covering liability of the General Partners and their
Affiliates for actions or omissions for which indemnification
is not permitted hereunder; provided, however, that nothing
contained herein shall preclude the Partnership from
purchasing and paying for such types of insurance, including
extended coverage liability and casualty and workers
compensation, as would be customary for any Person owning
comparable assets and engaged in a similar business from
naming the General Partners and their Affiliates as additional
insured parties thereunder, provided that such addition does
not add to the premiums payable by the Partnership.
20.1.4 The provision of advances from Partnership funds to the
General Partners or their Affiliates for legal expenses and
other costs
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incurred as a result of any legal action initiated against a
General Partner by a Limited Partner of the Partnership is
prohibited.
20.1.5 The provision of advances from Partnership funds to the
General Partners or their Affiliates for legal expenses and
other costs incurred as a result of a legal action is
permissible if the following three conditions are satisfied:
(1) the legal action relates to acts or omissions with respect
to the performance of duties or services by General Partners
or their Affiliates on behalf of the Partnership; (2) the
legal action is initiated by a third party who is not a
Limited Partner of the Partnership; and (3) the General
Partners or their Affiliates undertake to repay the advanced
funds to the Partnership in cases in which they would not be
entitled to indemnification under Paragraph 20.1 hereof.
21. MISCELLANEOUS
21.1 COUNTERPARTS. This Partnership Agreement may be executed in
several counterparts and as so executed shall constitute one Partnership
Agreement, binding on all of the parties hereto, notwithstanding that all of the
parties are not signatories to the original or the same counterpart.
21.2 BINDING PROVISIONS. The terms and provisions of this Partnership
Agreement shall be binding upon and shall inure to the benefit of the successors
and assigns of the respective Partners.
21.3 SEVERABILITY. In the event any phrase, sentence or paragraph of
this Partnership Agreement is declared by a court of competent jurisdiction to
be void, such phrase, sentence or paragraph shall be deemed severed from the
remainder of the Partnership Agreement and the balance of the Partnership
Agreement shall remain in effect.
21.4 NOTICE. All notices under this Partnership Agreement shall be in
writing and shall be given to the party entitled thereto by personal service or
by mail, posted to the address maintained by the Partnership for such Person or
at such other address as he may specify in writing.
21.5 HEADINGS. Titles or captions contained in this Partnership
Agreement are inserted only as a matter of convenience and for reference. Such
titles and captions in no way define, limit, extend or describe the scope of
this Partnership Agreement nor the intent of any provision hereof.
21.6 MEANINGS. Whenever required by the context hereof, the singular
shall include the plural, and vice-versa; the masculine gender shall include the
feminine and neuter genders, and vice-versa; and the word "Person" shall include
a corporation, partnership, firm or other form of association.
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21.7 LIST OF PARTNERS. The names, addresses and Original Contributions
of the Partners shall be set forth on Exhibit 1 attached hereto, which exhibit
shall be updated by the Managing General Partner as Partners are admitted to or
withdraw from the Partnership, by amendments to this Agreement. A current copy
of Exhibit 1 shall be maintained at the principal place of business of the
Partnership.
21.8 GOVERNING LAW. Notwithstanding the place where this Partnership
Agreement may be executed by any of the parties hereto, the parties expressly
agree that all the terms and provisions hereof shall be construed under the laws
of the State of Delaware and that the Delaware Act, as amended, shall govern the
partnership aspects of this Partnership Agreement.
21.9 OTHER JURISDICTIONS. In the event the business of the Partnership
is carried on or conducted in states in addition to the State of Delaware, then
the parties agree that this Partnership shall exist under the laws of each state
in which business is actually conducted by the Partnership, and they severally
agree to execute such other and further documents as may be required or
requested in order that the Managing General Partner legally may qualify this
Partnership in such states. The power of attorney granted to the Managing
General Partner in Section 20 shall constitute the authority of the Managing
General Partner to perform the ministerial duty of qualifying this Partnership
under the laws of any state in which it is necessary to file documents or
instruments of qualification. A Partnership office or principal place of
business in any state, including the State of Michigan, may be designated from
time to time by the Managing General Partner.
21.10 POWER TO RECONSTITUTE. In the event that the State of Delaware
amends its Revised Uniform Limited Partnership Act in any manner which precludes
the Partnership, at any time, from obtaining an opinion of tax counsel to the
effect that the Partnership will be treated as a pass-through entity for federal
income tax purposes and not as an association taxable as a corporation, then the
Managing General Partner may, in its sole discretion, reconstitute the
Partnership under the laws of another state.
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Agreement of Limited Partnership as of the date first above written.
GENERAL PARTNERS:
CAPTEC FRANCHISE CAPITAL CORPORATION IV
By:
----------------------------------------
Patrick L. Beach
President and
Chief Executive Officer
----------------------------------------
Patrick L. Beach
INITIAL LIMITED PARTNER:
By:
----------------------------------------
Patrick L. Beach
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EXHIBIT 1
NAMES, ADDRESSES AND ORIGINAL INVESTMENTS OF THE PARTNERS
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<PAGE> 57
EXHIBIT 2
---------
DISTRIBUTION REINVESTMENT PLAN
Capitalized terms contained herein shall have the same meanings set
forth in the Agreement unless otherwise defined or the context otherwise
indicates.
1. As agent for the participants in the Distribution Reinvestment Plan
(the "Participants"), the Partnership or an unaffiliated third party will apply
all distributions of Cash Flow during the offering period paid with respect to
Units (the "Distributions"), including distributions paid with respect to any
full or fractional Units acquired under the Distribution Reinvestment Plan, to
the purchase of Units for said Participants directly, if permitted under state
securities laws and, if not, through participating dealers registered in the
Participant's state of residence (either being referred to herein as the
"Reinvestment Agent") as hereunder described.
A participating dealer, or in the event there is no
participating dealer, the Partnership, assumes the responsibility for Blue Sky
compliance and performance of due diligence responsibilities and will ascertain
whether the Participants continue to meet the suitability standards of their
state of residence with respect to each reinvestment. Additionally, the
Participating Dealers involved in the Distribution Reinvestment Plan must obtain
in writing an agreement from the client by which the client agrees to the
payment of compensation to the Participating Dealer in connection with said
client's reinvestment.
Units will be purchased at the public offering price and
commissions equal to 8% of the Unit purchase price will be paid to the
Participating Dealer who originated the Participant's investment in the
Partnership. In addition, the General Partners or an Affiliate will be paid the
Non-Accountable Expense Allowance. In connection with the receipt of such
commissions, Participating Dealers will be required, at least annually, to
review the performance of the Partnership, the General Partners and their
affiliates to determine whether continued participation in the Plan is
consistent with their clients' investment intent and to affirmatively determine
whether continued participation is suitable for their clients.
Subsequent to the sale of the Minimum Number of Units and
prior to the Termination Date, Distributions paid by the Partnership will be
reinvested in Units for the Participants promptly following the payment date
with respect thereto and in no event later than 60 days from such receipt to the
extent such Distributions are available or distributed to the Limited Partners
at the public offering price to the extent Units are available. All such
investments of Distributions in Units will be effected by amendment of the
Partnership Agreement to reflect the issuance of additional Units to
Participants. Distributions, if any, will be timed to coordinate with scheduled
amendments of the Partnership Agreement such that no Distributions are held
pending investment in Units pursuant to the Distribution Reinvestment Plan. If a
Participant's Distribution is not large enough to buy a full Unit, he will be
issued a fractional Unit, computed to five decimal places. Participants will not
be permitted to contribute amounts in excess of their Distributions to purchase
Units under the
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Distribution Reinvestment Plan. If sufficient Units for all Participants are not
available, the Partnership will allocate available Units (or fractional Units)
to Participants' accounts on a pro rata basis.
2. Limited Partners may become Participants in the Distribution
Reinvestment Plan at any time by completing the appropriate authorization form
available from the Partnership. Participation in the Distribution Reinvestment
Plan will start with the next Distribution payable after receipt of a
Participant's authorization, provided it is received before the record date for
that Distribution.
3. The Partnership shall have no responsibility or liability as to the
value of the Partnership's Units or may change the value of the Units acquired
for a Participant's account or as to the rate of return or value of the
interest-bearing accounts or securities in which a Participant's Distributions
may be invested.
4. The Partnership will distribute to Participants proxy solicitation
materials, if any, which relate to Units held in the Distribution Reinvestment
Plan and the voting procedures will comply with the Partnership Agreement.
5. The Partnership will mail to each Participant a statement and
accounting showing the Distributions received, the number of Units purchased, as
soon as practicable after all Distributions paid on any payment date with
respect thereto have been invested. Tax information for income earned on Units
and the investment of funds under the Distribution Reinvestment Plan for the
calendar year will be sent to each Participant by the Partnership.
6. No Participant shall have any right to draw checks or drafts against
his account or to give instructions to the Partnership except as expressly
provided herein.
7. Participants will be charged for ministerial services incurred
in connection with the administration of the Distribution Reinvestment Plan.
8. Taxable Participants may incur a tax liability for Partnership
income allocated to them even though they have elected not to receive their
Distributions in cash but rather to have their Distributions held in their
account under the Distribution Reinvestment Plan.
9. A Participant may terminate an account at any time, without charge,
by written notice to the Partnership at 24 Frank Lloyd Wright Drive, P.O. Box
544, Ann Arbor, Michigan 48106-0544, or such other address as may be specified
by the Partnership. To be effective for any Distribution, such notice must be
received at least 10 days before the record date for such payment. The
Partnership may terminate a Participant's individual participation in the
Distribution Reinvestment Plan or the Distribution Reinvestment Plan itself at
any time by written notice mailed to a Participant, or to all Participants, as
the case may be, at the address or addresses shown on their account. Upon
termination of the Distribution Reinvestment Plan, or upon termination of an
individual Participant's involvement in the Distribution Reinvestment Plan, the
Partnership will send to each Participant certificates evidencing the Units in
such Participant's account.
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If a Participant disposes of all Units registered on the books
of the Partnership in his name, the Partnership will, by written notice mailed
to the Participant, determine from the Participant the disposition to be made of
the Units in the Participant's account with the Partnership. If the Partnership
does not receive instructions from the Participant within 60 days of such
notice, it may, in its discretion, terminate the Participant's further
participation in the Distribution Reinvestment Plan or continue to reinvest the
Distributions paid in respect of the Units in the account until otherwise
notified in writing.
10. The Partnership shall not be liable for any act done in good faith,
or for any good faith omission to act, including, without limitation, any claims
of liability: (a) arising out of failure to terminate a Participant's account
upon such Participant's death prior to receipt of notice in writing of such
death and (b) with respect to the time and the prices at which Units are
purchased or sold for a Participant's account.
11. Each Participant agrees to notify the Partnership promptly in
writing of any change of address. Notices to the Participant may be given by
letter addressed to the Participant at his last address of record with the
Partnership.
12. These terms and conditions of the Distribution Reinvestment Plan
may be amended or supplemented by the General Partners in their sole discretion
at any time by mailing an appropriate notice at least 30 days prior to the
effective date thereof to each Participant at his last address of record. Such
amendment or supplement shall be deemed conclusively accepted by each
Participant except those Participants from whom the Partnership receives written
notice of termination prior to the effective date thereof.
13. This Distribution Reinvestment Plan and a Participant's election to
participate in the Distribution Reinvestment Plan shall be governed by the laws
of the State of Delaware. The Partnership may terminate the Distribution
Reinvestment Plan by giving 10 days prior written notice to each Participant at
his last address of record. Notwithstanding the foregoing, the Distribution
Reinvestment Plan will terminate concurrently with the Offering.
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EXHIBIT 10.6
ADVISORY AGREEMENT
THIS ADVISORY AGREEMENT ("Agreement"), dated as of August __,
1997, by and between CAPTEC NET LEASE REALTY, INC., a Delaware corporation (the
"Company"), and CAPTEC NET LEASE REALTY ADVISORS, INC., a Delaware corporation
(the "Advisor").
WHEREAS, the Company is in the business of acquiring,
developing, managing, owning and disposing of income producing commercial real
properties (the "Properties") and leasing the Properties to qualified lessees
("the "Lessees") pursuant to long term net leases (the "Leases"); and
WHEREAS, the Company intends to qualify as a Real Estate
Investment Trust (a"REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"); and
WHEREAS, the Company desires to retain the services of the
Advisor with respect to the origination, acquisition, development, leasing,
management, ownership and disposition of the Properties, and to provide certain
services to the Company in connection with such Properties and Leases on the
terms set forth herein and consistent with the Company's initial and continued
qualification and operation in accordance with all requirements applicable to a
REIT; and
WHEREAS, the Advisor is willing to provide such services to
the Company on the terms set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual
covenants set forth in this Agreement, and for other good
<PAGE> 2
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
hereby agree as follows:
1. APPOINTMENT OF ADVISOR. The Company hereby
retains the Advisor on the terms hereinafter set forth, and the
Advisor hereby accepts such appointment.
2. DUTIES OF ADVISOR. The Advisor shall:
(i) identify and negotiate the acquisition, on terms
acceptable to the Company, of Properties which meet the
criteria established by the Company's Board of Directors with
respect to the kind and type of Properties to be acquired by
the Company;
(ii) negotiate Leases or such other agreements for
the development or ownership of the Properties which meet the
criteria established by the Board of Directors;
(iii) review and analyze the creditworthiness and
business prospects of prospective Lessees;
(iv) perform all necessary and reasonable
administrative and "back office" functions with respect to the
Properties and the Leases;
(v) advise the Company in connection with its
financing strategy including assisting the Company in the
negotiation of any borrowing which the Company may seek to
incur;
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<PAGE> 3
(vi) provide to the Company underwriting services and
analysis with respect to restaurant, retail and other chain
concepts and businesses.
(vii) monitor and enforce compliance with the terms
of the Leases;
(viii) maintain or cause to be maintained, on behalf
of the Company, such books and records of account concerning
the Properties and the Leases in accordance with generally
accepted accounting practices with respect to the Properties
and the Leases;
(ix) take all actions necessary to enable the Company
to comply with and abide by in all material respects with all
applicable laws and regulations;
(x) assist the Company in preparing reports to, and
meeting materials for, the Company and its stockholders;
(xi) prepare and deliver to the Company quarterly
financial statements within forty-five (45) days of the end of
each fiscal quarter, year end financial statements within
ninety (90) days of the end of the Company's fiscal year and
such schedules, reports summaries and other information
regarding the Company's portfolio as may be requested by the
Company from time to time;
(xii) take such other actions in connection with
3
<PAGE> 4
the Company's acquisition of Properties, and origination,
ownership and disposition of Leases, as are consistent with
the Company's investment criteria as established by the Board
of Directors;
(xiii) conduct legal and business diligence and
oversee the preparation of all legal documentation for the
development and leasing of all Properties;
(xiv) identify Properties for sale consistent with
the Company's investment objectives and prevailing economic
conditions; and
(xv) take such other actions and render such other
services as may reasonably be requested by the Company
consistent with the purpose of this Agreement.
3. ADVISOR'S RESOURCES. The Advisor shall, at its expense,
maintain such office space, facilities, equipment and personnel trained and
experienced in the business of acquiring, owning, management and net leasing
sufficient to enable the Advisor to fulfill its obligations under this
Agreement.
4. PAYMENT OF EXPENSES. The Advisor shall bear all expenses
attributable to the management services to be provided by the Advisor to the
Company hereunder, without reimbursement from the Company, except as otherwise
stated herein. The Company shall reimburse the Advisor for all direct fees and
expenses incurred and paid by the Advisor to third parties in performing its
obligations hereunder.
4
<PAGE> 5
5. COMPENSATION.
(a) The Company shall pay to the Advisor as compensation for
the ongoing management services provided by the Advisor to the Company under
this Agreement an annual fee (the "Management Fee") equal to the lesser of (i)
six-tenths of one percent (0.6%) of the aggregate capitalized cost (excluding
accumulated depreciation) of all assets owned by the Company's portfolio
including, but not limited to, all Properties, mortgage loans, leasehold
mortgages, secured equipment leases and joint venture and partnership interests
(the "Portfolio Value") or (ii) five percent (5.0%) of the Company's total
revenue computed in accordance with generally accepted accounting practices (the
"Total Revenues"). The Management Fee shall be paid on the first day of each of
January, April, July and October, and shall be calculated on the Portfolio Value
as of the last day of the prior quarter or the Total Revenues of the Company for
the prior quarter as stated in, or derived from, the Company's most recent
financial information (regardless of whether audited or unaudited) filed by the
Company with the United States Securities and Exchange Commission. The first
Management Fee shall be payable on January 1, 1998 and calculated based upon the
Portfolio Value or Annual Revenues as of December 31, 1997, and shall be
prorated for that portion of the fiscal quarter for which this Agreement is in
effect.
(b) The Company shall pay to the Advisor as
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<PAGE> 6
compensation for services rendered by the Advisor in connection with the
acquisition of Properties by the Company an incentive acquisition fee (the
"Incentive Acquisition Fee") based on the acquisition cost, exclusive of any
Incentive Acquisition Fee (the "Acquisition Cost") of each Property identified
by the Advisor and acquired by the Company during the term of this Agreement.
The Incentive Acquisition Fee shall be in an amount equal to a percentage of the
Acquisition Cost (the "Acquisition Fee Percentage") based upon whether the
annual straight line rent on the Lease for which the Acquisition Fee is payable
divided by the Acquisition Cost excceds, if at all, the sums, specified on
Exhibit A of (i) the average yield on 30 year U.S. Treasury obligations for the
30 days prior to the date of commitment (the "T - Rate") plus (ii) the "Basis
Point Factor" as set forth on Exhibit A to this Agreement (the "Benchmark
Rate"); and provided further that for purposes of this Agreement the annual
straight line rent for any Lease which is subject to increases based upon the
Consumer Price Index shall include assumed increases equal to the greater of the
average of the CPI for the 3 years prior to the date of acquisition or two
percent (2%). The Incentive Acquisition Fee shall be paid by the Company on the
date of the acquisition of any Property for which an Incentive Acquisition
Fee is payable under this Agreement. The Incentive Acquisition Fee shall be
refunded to the Company by the Advisor in the event that any rent due within
the first twelve months under the Lease for which the Incentive Acqusition
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<PAGE> 7
Fee is paid is delinquent for more than 90 days and such delinquency is not
therafter cured.
(c) Nothing in this Agreement shall preclude or restrict the Company
from the direct acquisition of Properties or the negotiation and execution of
Leases without the assistance of the Advisor, and the Advisor shall not be
entitled to the Incentive Acquisition Fee for any Properties so acquired by the
Company.
6. REIT STATUS. Notwithstanding anything in this Agreement to
the contrary, the Advisor shall not take any action which would (a) adversely
affect the status of the Company as a REIT, (b) subject the Company to
regulation under the Investment Company Act of 1940, or (c) violate any law,
rule, regulation or policy of any governmental body or agency having
jurisdiction over the Company or otherwise prohibited by the Company's
Certificate of Incorporation, its Bylaws or resolutions of the Board of
Directors all as in effect from time to time. In the event the Company
authorizes or directs the Advisor to take any actions which, in the judgment of
the Advisor would violate any of the foregoing, the Advisor shall so advise the
Company in writing specifying the basis for its position and shall take no
further action with respect to such matters unless and until it receives
clarification and instructions from the Board of Directors.
7. LIMITATION OF LIABILITY AND INDEMNIFICATION OF
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<PAGE> 8
ADVISOR. Niether the Advisor nor any person or entity relied on by the Advisor
pursuant to the express authority of Section 12 hereof shall be deemed to be a
fiduciary of the Company or to owe a fiduciary duty to the Company. The Advisor
shall have no liability to the Company based upon or arising out of any action
or decision by the Board of Directors, or any direct or indirect, foreseeable or
unforeseeable consequence thereof, in following or declining to follow any
advice or recommendation of the Advisor. The Company shall indemnify and hold
harmless the Advisor and its Affiliates, including, but not limited to, any
person or entity relied upon by the Advisor pursuant to the express authority
granted in Section 12, and their respective officers, directors, partners and
employees from and against any and all liabilities, claims, damages or losses
arising in the performance of their duties in good faith hereunder, and related
expenses which shall include reasonable attorneys fees, subject only to such
limitations as may be imposed on such indemnification by the Certificate of
Incorporation, the Bylaws or the laws of the State of Delaware.
8. INDEMNIFICATION BY ADVISOR. The Advisor shall
indemnify and hold harmless the Company and its officers, directors and
employees from and against any and all liabilities, claims, damages or losses,
and related expenses including reasonable attorney's fees, which arise directly
from the fraud, willful misconduct of the Advisor, or the reckless disregard by
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<PAGE> 9
the Advisor of its responsibilities under this Agreement.
9. BOOKS AND RECORDS. All books and records compiled by the
Advisor in the course of discharging its responsibilities under this Agreement
shall be the property of the Company and shall be delivered by the Advisor to
the Company immediately upon any termination of this Agreement and regardless of
the grounds for such termination (including, but not limited to, a breach by the
Company of this Agreement). The Advisor shall not maintain or assert any lien
agreement or upon any of the books and records and all such books and records
concerning the Properties and/or the Leases.
10. TERM AND TERMINATION.
(a) This Agreement shall become effective on the date hereof
and shall continue on through December 31, 1998 ("Initial Term") and shall be
automatically extended for successive one year terms thereafter without further
action by either the Company or the Advisor unless earlier terminated, as
provided herein. This Agreement shall be automatically renewed for additional
one (1) year terms unless either party gives written notice to the other party
of termination 90 days prior to the expiration of the then current term.
(b) The Company also may, at any time, terminate this
Agreement:
(i) immediately upon providing written notice to
the Advisor if the Advisor is determined by unanimous
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<PAGE> 10
vote of all Directors of the Company, taken after at least
fourteen (14) days prior written notice to the Advisor of such
vote, to have committed an act of actual fraud, willful
malfeasance, gross negligence, violation of applicable law or
reckless disregard of its duties and responsibilities under
this Agreement;
(ii) upon written notice effective immediately, given
not earlier than thirty (30) days after the Advisor shall (A)
authorize or agree to the commencement of a voluntary case or
other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any
bankruptcy, insolvency, receivership or other similar law now
or hereafter in effect or the appointment of a trustee,
receiver, liquidator, custodian or other similar official of
it or any substantial part of its property, (B) make a general
assignment for the benefit of its creditors, or (C) have an
involuntary or other proceeding commenced against it seeking
liquidation, reorganization or other relief with respect to it
or its debts under any bankruptcy, insolvency or other similar
law now or thereafter in effect, and such involuntary case or
other proceeding shall remain undismissed and unstayed for a
period exceeding sixty (60) days.
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(c) Upon any termination of this Agreement by the
Company, the Advisor shall, upon the Company's request, cooperate with and
assist the Company in finding a new entity to act as advisor to the Company and
in assisting the Company with the transition process.
11. NOTICES. Any notices, instructions or other
communications required or contemplated by this Agreement shall be deemed to
have been property given and to be effective upon delivery if delivered in
person or sent by telecopier or upon receipt if sent by courier service.
All such communications to the Company shall be addressed as
follows:
Captec Net Lease Realty, Inc.
24 Frank Lloyd Wright Drive
Lobby L, 4th Floor
P.O. Box 544
Ann Arbor, Michigan 48106-0544
Attention: Patrick L. Beach
Telecopier: (313) 994-1376
All such communications to the Advisor shall be addressed as
follows:
Captec Net Lease Realty Advisors, Inc.
24 Frank Lloyd Wright Drive
Lobby L, 4th Floor
P.O. Box 544
Ann Arbor, Michigan 48106-0544
Attention: W. Ross Martin
Telecopier: (313) 994-1376
Either party hereto may designate a different address by
written notice to the other party delivered in accordance with this Section 11.
11
<PAGE> 12
12. DELEGATION OF RESPONSIBILITIES. Notwithstanding anything
contained herein to the contrary, the Advisor may delegate any and all of its
responsibilities and obligations under this Agreement to certain affiliates (as
that term is defined by Rule 405 of the United States Securities and Exchange
Commission) including, but not limited to, Captec Financial Group, Inc., a
Michigan corporation. Any delegation of responsibilities by the Advisor shall
not be inconsistent with any express instructions of the Board of Directors;
shall not cause the Company to incur any financial responsibility to the delegee
(unless expressly authorized by the Company); and shall not relieve the Advisor
of its obligations to the Company with respect to the responsibilities delegated
and with respect to which delegated responsibilities the Advisor shall remain
liable to the Company. Nothing in this Section 12 shall prohibit the Advisor
from retaining non-Affiliated third parties to provide goods and services to the
Company or the Advisor in connection with the services to be provided by the
Advisor pursuant to this Agreement.
13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Michigan, without regard
to the conflict of laws principals thereof.
14. ENTIRE AGREEMENT. This Agreement reflects the entire
understanding of the parties hereto with respect to the
12
<PAGE> 13
subject matter hereof and supersedes and replaces all agreements between the
Company and the Advisor with respect to the subject matter hereof.
15. RELATIONSHIP OF PARTIES. The parties intend that
the Advisor shall act as an independent contractor in performing services for
the Company hereunder. Nothing contained herein is intended to, or shall be
construed to, constitute the Advisor as a partner, joint venturer or agent of
the Company.
16. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the parties to this Agreement and their
respective successors and permitted assigns, and no other person or entity shall
acquire or have any right under, or by virtue of, this Agreement. The Company
shall be entitled to assign this Agreement to any successor to all or
substantially all of its assets rights and/or obligations.
17. AMENDMENT, MODIFICATIONS AND WAIVER. This Agreement
hereto shall not be altered or otherwise amended in any respect, except pursuant
to an instrument in writing signed by the parties hereto. The waiver by a party
of a breach of any provisions of this Agreement shall not operate or be
construed as a waiver of any subsequent breach.
18. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, and all of
which shall constitute one and the same agreement.
13
<PAGE> 14
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first above written.
CAPTEC NET LEASE REALTY, INC.
By: ______________________
Name: Patrick L. Beach
Title: President
CAPTEC NET LEASE REALTY ADVISORS, INC.
By: ________________________
Name: W. Ross Martin
Title: Vice President
14
<PAGE> 15
SCHEDULE A
BENCHMARK RATE ACQUISITION FEE %
T - Rate + 300 bps 1.00%
T - Rate + 350 bps 1.50%
T - Rate + 400 bps 2.00%
T - Rate + 450 bps 2.50%
T - Rate + 500 bps 3.00%
T - Rate + 650 bps 3.25%
T - Rate + 700 bps 3.50%
T - Rate + 750 bps 4.00%
15
<PAGE> 1
Exhibit 10.8
AGREEMENT
This Agreement (this "AGREEMENT") is made and entered into as
of __________ 1997, by and between CAPTEC NET LEASE REALTY, INC., a Delaware
corporation with a principal place of business at 24 Frank Lloyd Wright Drive,
Ann Arbor, Michigan ("PURCHASER"), and ____________________, a Delaware
corporation with a principal place of business at 24 Frank Lloyd Wright Drive,
Ann Arbor, Michigan ("III Corp") and Patrick L. Beach, an individual and
resident of the State of Michigan with a principal place of business at 24 Frank
Lloyd Wright Drive, Ann Arbor, Michigan ("Beach") (III Corp. and Beach each
being hereinafter referred to individually as a "SELLER" and collectively as the
"SELLERS").
WHEREAS, III Corp and Beach are the general partners of Captec
Franchise Capital Partners L.P. III, a Delaware limited partnership (the
"Partnership") engaged in the business of the acquisition, ownership,
development and net leasing of commercial real properties ("the Business") and;
WHEREAS, Purchaser desires to acquire from each of III Corp
and Beach their general partnership interests in the Partnership which in the
aggregate constitute 100% of the general partnership interests in the
Partnership (the "General Partnership Interests") in exchange for cash as
hereinafter provided; and
<PAGE> 2
WHEREAS, Sellers desires to effect such exchange.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are acknowledged, the parties agree as follows:
ARTICLE I
REPRESENTATIONS AND WARRANTIES OF SELLERS
-----------------------------------------
The Sellers represent and warrant to Purchaser as
follows:
SECTION 1.01 ORGANIZATION AND QUALIFICATION. The Partnership
is a limited partnership duly organized, validly existing, and in good standing
under the laws of the State of Delaware with all requisite power and authority,
and all necessary consents, authorizations, approvals, orders, licenses,
certificates, and permits of and from, and declarations and filings with, all
federal, state, local, and other governmental authorities and all courts and
other tribunals to own, lease, license, and use its properties and assets and to
carry on the Business. The Partnership is in good standing as a foreign
limited partnership in every jurisdiction in which its ownership, leasing,
licensing, or use of property or assets or the conduct of its business makes
such qualification necessary.
SECTION 1.02 CAPITALIZATION AND ORGANIZATION. The ownership
interests in the Partnership (the "Partnership Interests") consist of the
General Partnership Interests and _______ units of limited
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<PAGE> 3
partnership interest which are owned and held beneficially and of record by the
persons identified on Exhibit "A" hereto. There is no commitment, plan, or
arrangement to issue, and no outstanding option, warrant, or other right calling
for the issuance of, any Partnership Interest, including, but not limited to,
the Units, or any security or other instrument convertible into, exercisable
for, or exchangeable for any Partnership Interest.
SECTION 1.03 FINANCIAL CONDITION.
(a) Sellers have delivered to Purchaser true and correct
copies of the following, initialled by each of Beach and the chief executive
officer of III Corp:
(1) Balance sheet of the Partnership as of the end of
each of the last two fiscal years;
(2) Balance sheet of the Partnership as of June 30,
1997; and
(3) Statement of income, statement of retained
earnings, and statement of cash flows of the Partnership for
each of the last two fiscal years and for the six months ended
July 31, 1997.
(b) Each such balance sheet presents fairly the financial
condition, assets, liabilities, and partners' equity of the Partnership as of
its date; each such statement of income and statement of retained earnings
presents fairly the results of operations of the Partnership for the period
indicated; and each such statement of cash flows presents fairly the information
purported to be shown therein. The financial statements referred
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<PAGE> 4
to in this Section 1.03 have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved, are
correct and complete, and are in accordance with the books and records of
Partnership.
(c) Since December 31, 1996, and since June 30, 1997:
(1) There has at no time been a material adverse change in the
financial condition, results of operations, business, properties,
assets, liabilities, or future prospects of the Partnership and the
Partnership has operated profitably.
(2) The Partnership has not authorized, declared, paid, or
effected any distribution in respect of the Partnership Interests or
any direct or indirect redemption, purchase, or other acquisition of
any Partnership Interests except as set forth in the Financial
Statements;
(3) The Business has been conducted in all respects only in
the ordinary course.
(4) The Partnership has not suffered an extraordinary loss
(whether or not covered by insurance) or waived any right of
substantial value.
(5) The Partnership shall pay any tax, other liability, or
expense accruing to Partnership and resulting from the preparation of,
or the transactions contemplated by, this Agreement. The Partnership
shall pay all such taxes, liabilities, and expenses which may result
from the transaction contemplated by this Agreement.
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<PAGE> 5
(d) As of the date hereof, Sellers know of nothing which
materially adversely affects or in the future will materially adversely affect
the financial condition, results of operations, Business, properties, assets,
liabilities, or future prospects of the Partnership.
SECTION 1.04 TAX AND OTHER LIABILITIES.
(a) The Partnership has no liability of any nature,
accrued or contingent, including without limitation liabilities for federal,
state, local, or foreign taxes and liabilities to customers or suppliers, and
has received no notice of any such alleged liabilities, other than the
following:
(1) Liabilities for which full provision has been
made on the balance sheet (the "LAST BALANCE SHEET") as of June 30,
1997 (the "LAST BALANCE SHEET DATE") referred to in Section 1.03; and
(2) Other liabilities arising since the Last Balance
Sheet Date and prior to the Closing (as defined in Section 3.02) in the
ordinary course of business which are not inconsistent with the
representations and warranties of the Sellers or any other provision of
this Agreement.
(b) Without limiting the generality of the foregoing, the
amounts set up as provisions for taxes on the Last Balance Sheet are sufficient
for all accrued and unpaid federal, state, local, and foreign taxes of the
Partnership, whether or not due and payable and whether or not disputed, under
tax laws as in effect on
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<PAGE> 6
the Last Balance Sheet Date or now in effect, for the period ended on such date
and for all fiscal years prior thereto. The United States Internal Revenue
Service (the "IRS") has not audited or settled any federal income tax
information returns of the Partnership.
(c) The Partnership has (i) filed all federal, state, local,
and foreign tax information and other returns required to be filed by it; (ii)
Sellers have delivered to Purchaser true and correct copies thereof; and (iii)
paid (or has established on the Last Balance Sheet a reserve for) all taxes,
assessments, and other governmental charges payable or remittable by it or
levied upon it or its properties, assets, income, or franchises which are due
and payable. There have been no reports as to adjustments received by
Partnership from any taxing authority during the past five years.
(d) Except as described in EXHIBIT A, the Partnership has paid
and discharged all federal, state, county, city, and other taxes, assessments,
excises and other levies relating to the Business or operations of the
Partnership, including, but not limited to, all sales and use taxes, real and
personal property taxes, income taxes, estimated taxes, excise taxes, gross
receipts taxes, franchise taxes, employment and payroll-related taxes, and
special assessments applicable to the Business. No claim for assessment or
collection of taxes (including any additions to tax, withholdings, penalties and
interest) has been made against Partnership, and no consent or agreement to
extend the period for any such assessment or collection is in effect. All monies
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<PAGE> 7
required by law to be withheld or collected by Partnership from its employees or
other persons for taxes for periods occurring prior to Closing have been duly
collected or withheld, and if due, have been paid to the respective governmental
agencies or, if not yet due, have been set aside in accounts for such purpose or
accrued, provided for, and entered upon the books of the Partnership.
SECTION 1.05 LITIGATION AND CLAIMS. There is no litigation,
arbitration, claim, governmental or other proceeding (formal or informal), or
investigation pending, threatened, or to the best of the Sellers' knowledge in
prospect (or any basis therefor known to Partnership) with respect to the
Partnership or the Business (as defined below), and the Partnership has not
received notice of any such prospective litigation, arbitration, claim,
proceeding or investigation. The Partnership is not in violation of, or in
default with respect to, any law, rule, regulation, order, judgment, or decree;
nor is the Partnership required to take any action in order to avoid such
violation or default.
SECTION 1.06 ASSETS. The assets of the Partnership are listed
on EXHIBIT B (the "ASSETS"). The Partnership has good and marketable title in
fee simple absolute to the Assets, and all such Assets are owned free and clear
of all liens, security interests, pledges, charges and encumbrances except as
set forth on EXHIBIT B.
SECTION 1.07 CONTRACTS AND OTHER INSTRUMENTS.
-7-
<PAGE> 8
(a) EXHIBIT B accurately and completely sets forth the
information required to be contained therein with respect to the Partnership.
(b) The Partnership has furnished to Purchaser the limited
partnership agreement of the Partnership (the "Partnership Agreement") and all
amendments thereto, as presently in effect, and true and correct copies of all
contracts, agreements, and instruments referred to in EXHIBIT B, initialled by
the Sellers.
(c) Neither the Partnership nor, to best of Sellers'
knowledge, any other party to any such contract or agreement is now or expects
in the future to be in violation or breach of, or in default with respect to
complying with, any material provision thereof, and each such contract,
agreement, instrument, lease, or license is in full force and is the legal,
valid, and binding obligation of the parties thereto and is enforceable as to
them in accordance with its terms. Each such contract or agreement is a valid
and continuing arrangement or understanding. Neither the Partnership, nor to the
best of Sellers' knowledge, any other party to any such arrangement or
understanding has given notice of termination or taken any action inconsistent
with the continuance of such arrangement or understanding, and the execution,
delivery, and performance of this Agreement will not prejudice any such
arrangement or understanding in any way.
(d) The Partnership is not a party to, or bound by, any
contract or agreement or subject to any charter or other restriction, which has
had or, to the knowledge of the Sellers, may
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<PAGE> 9
in the future have a material adverse effect on the financial condition, results
of operations, Business, or future prospects of the Partnership.
(e) The Partnership is not in violation or breach of, or in
default with respect to, any term of the Partnership Agreement or any other
constituent or governing document.
Section 1.08 EMPLOYEES.
(a) The Partnership has not or does not maintain or contribute to any
pension, profit-sharing, option, deferred compensation, severance, other
incentive plan, or any other type of employee benefit plan, fund or program
("EMPLOYEE BENEFIT PLAN") (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended, ("ERISA") or otherwise), nor has any
obligation to or customary arrangement with employees or former employees for
bonuses, incentive compensation, vacations, severance pay, insurance, or other
benefits, except as set forth in EXHIBIT C. There is no litigation, arbitration,
claim, governmental or other proceeding (formal or informal), or investigation
pending, threatened, or in prospect (or any basis therefor known to Partnership)
with respect to any such Employee Benefit Plan or related trust or with respect
to any fiduciary, administrator, or sponsor (in its capacity as such) of any
such Employee Benefit Plan.
SECTION 1.09 PATENTS, TRADEMARKS, ET CETERA. The Partnership
has not infringed, is not infringing, or has not
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<PAGE> 10
received notice of infringement with asserted Intangibles of others. To the
knowledge of the Partnership, there is no infringement by others of Intangibles
of the Partnership. As far as Sellers can foresee, there is no Intangible of
others which may materially adversely affect the financial condition, results of
operations, Business, properties, assets, liabilities, or future prospects of
the Partnership.
SECTION 1.10 AUTHORITY TO SELL. Each of III Corp and Beach
have all requisite corporate and individual power and authority to execute,
deliver, and perform this Agreement. All necessary corporate proceedings of III
Corp have been duly taken to authorize the execution, delivery, and performance
of this Agreement by III Corp (including, without limitation, action by III
Corp's stockholders). This Agreement has been duly authorized, executed, and
delivered by each of III Corp and Beach, is the legal, valid, and binding
obligation of each of them, and is enforceable as to each of them in accordance
with its terms. No consent, authorization, approval, order, license,
certificate, or permit of or from, or declaration or filing with, any federal,
state, local, or other governmental authority or any court or other tribunal is
required by either III Corp or Beach for the execution, delivery, or performance
of this Agreement. Except for the consent of third parties to contracts or other
agreements to which the Partnership may be bound requiring consent to the
transfer of the General Partnership Interests to the Purchaser no consent of any
party to any contract, agreement, instrument, lease, license, arrangement,
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<PAGE> 11
or understanding to which the Partnership, III Corp or Beach is a party is
required for the execution, delivery, or performance of this Agreement; and,
except with respect to consents of third parties to contracts and agreements,
the execution, delivery, and performance of this Agreement will not violate,
result in a breach of, conflict with, or (with or without the giving of notice
or the passage of time or both) entitle any party to terminate or call a
default under any such contract, agreement, instrument, lease, license,
arrangement, or understanding, or violate or result in a breach of any term of
the Partnership Agreement or any other constituent agreement of the Partnership
or violate, result in a breach of, or conflict with any law, rule, regulation,
order, judgment, or decree binding on the Partnership, III Corp or Beach or to
which any of the Partnership's operations, properties, the Assets or the
Business are subject.
SECTION 1.13 COMPLETENESS OF DISCLOSURE. No representation or
warranty by Sellers in this Agreement contains, or on the date of the Closing
will contain, any untrue statement of material fact, or omits, or on the date of
the Closing will omit, to state a material fact necessary to make the statements
made not misleading.
SECTION 1.14 ENVIRONMENTAL COMPLIANCE.
(a) The Partnership is in compliance in all material respects
with all laws, rules, and regulations relating to environmental protection with
respect to or affecting the Business, and the Partnership has not been notified
that it is potentially liable for costs incurred by any person as a result of a
release or
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<PAGE> 12
threat thereof under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, or any similar law, whether state, federal,
county, or local, with respect to or affecting the Business or the Partnership.
(b) The Partnership has accurately prepared and timely filed
with the appropriate jurisdictions all reports and filings required of the
Partnership, if any, pursuant to any federal, state, or local law, regulation,
statute, ordinance, or order applicable to Partnership or its operations and
related to environmental protection.
(c) The Partnership has not entered into or received any
consent decree, compliance order or administrative order relating to
environmental protection.
(d) The Partnership has not entered into or received, nor is
the Partnership in default under, any judgment, order, writ, injunction, or
decree of any federal, state, or municipal court or other governmental authority
applicable to the Partnership and relating to environmental protection. The
Partnership has not received notice of any lien which has arisen on any of the
Assets under federal, state, or local laws, rules, or regulations relating to
environmental protection.
(e) The Partnership has all material permits, licenses, and
other authorizations ("ENVIRONMENTAL PERMITS") required for conduct of the
Business and ownership of the Assets under federal, state, and local laws
relating to the protection of the
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<PAGE> 13
environment. EXHIBIT D contains a complete list and description of each
Environmental Permit, if any.
(f) The Partnership has not received notice, nor is the
Partnership aware of, any suit or action, claim, investigation, inquiry, or
proceeding pending or threatened against or affecting the Partnership or the
Assets relating to environmental matters.
(g) The Partnership has not, by its own act or omission,
disposed, emitted, discharged, released, or placed any hazardous or
toxic substances, pollutants, contaminants, petroleum, gas products or
asbestos-containing materials, which require special handling pursuant to law or
regulation (as any of such terms may be defined under federal, state, or local
law, collectively the "HAZARDOUS MATERIALS") on, in, at, or about any facilities
owned or used for or in connection with the Business during the Partnership's
occupancy of any real property which is or has previously been occupied by the
Partnership. The Partnership has not disposed, released, buried, or placed any
Hazardous Materials on any properties or facilities used by the Partnership for
the Business which have resulted in contamination or beneath any of the
properties or facilities used by the Partnership for the Business.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
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<PAGE> 14
Purchaser represents and warrants to Partnership as follows:
SECTION 2.01 ORGANIZATION. Purchaser is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware, with all requisite power and authority to own, lease, license, and use
its properties and assets and to carry on the business in which it is now
engaged and the business in which it contemplates engaging. The Purchaser has
all necessary consents, authorizations, approvals, orders, licenses,
certificates, and permits of and from, and declaration and filing with all
federal, state, local and other governmental authorities and all courts and
other tribunals to own, lease, license and use its properties and assets in the
conduct of its business as presently conducted.
SECTION 2.02 AUTHORITY TO BUY. Purchaser has all requisite
power and authority to execute, deliver, and perform this Agreement. All
necessary corporate proceedings of Purchaser have been duly taken to authorize
the execution, delivery, and performance of this Agreement by Purchaser. This
Agreement has been duly authorized, executed, and delivered by Purchaser, is the
legal, valid, and binding obligation of Purchaser, and is enforceable as to
Purchaser in accordance with its terms.
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<PAGE> 15
ARTICLE III
THE EXCHANGE
------------
SECTION 3.01 TERMS OF THE EXCHANGE. On the basis of the
representations, warranties, covenants, and agreements contained in this
Agreement and subject to the terms and conditions of this Agreement:
(a) Sellers shall sell, assign, transfer, and convey to
Purchaser at the Closing the General Partnership Interests Purchaser shall:
(1) Deliver at the Closing to the Sellers in the
aggregate $___________ representing the price to be paid by Purchaser
for the General Partnership Interests in cash or by certified or
official bank check or checks payable to the order of the Sellers, or
wire transfer to be allocated between the Sellers as may be agreed upon
between them;
(2) Assume at the Closing the General Partnership
Interests including all obligations and liabilities of Partnership
described in EXHIBIT B hereto and pursuant to this Agreement.
SECTION 3.02 THE CLOSING. The closing of the transactions
contemplated herein (the "CLOSING") shall take place at the offices of the
Partnership, 24 Frank Lloyd Wright Drive, Ann Arbor, Michigan local time, within
five (5) business days of the receipt by the Sellers of all third party consents
to the consummation of the transaction contemplated by this Agreement,
including, but not
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<PAGE> 16
limited to, any approval of the limited partners of the Partnership
required by the Partnership Agreement.
Section 3.03 TRANSACTIONS AT THE CLOSING. The following
transactions shall take place at the Closing:
(a) the Sellers shall deliver to Purchaser all such
instruments or documents as in the opinion of counsel to Purchaser may be
necessary or desirable to evidence or perfect the sale, assignment and transfer
of the General Partnership Interests to the Purchaser in each case free and
clear of all liens, mortgages, security interests, pledges, charges, and
encumbrances. The Sellers also shall deliver to Purchaser all books and records
concerning the Partnerships.
(b) Purchaser shall deliver to the Sellers the following:
(i) the Purchase Price in cash or by certified or official
bank check or checks payable to the order of Sellers in such amounts as
may be agreed upon between them;
(ii) an instrument of assumption of the General Partnership
Interests substantially in the form of EXHIBIT F hereto;
(iii) any other documents required to finalize the
transactions contemplated herein.
(c) Sellers shall deliver to the Purchaser all books and
records of, and other documents and information concerning or relating to, the
Partnership, the Business and/or the Assets.
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<PAGE> 17
ARTICLE IV
CONDITIONS TO OBLIGATIONS OF PURCHASER
--------------------------------------
The obligations of Purchaser under this Agreement are
subject, at the option of Purchaser, to the following conditions:
SECTION 4.01 ACCURACY OF REPRESENTATIONS AND COMPLIANCE WITH
CONDITIONS. All representations and warranties of the Sellers contained in this
Agreement shall be accurate when made and, in addition, shall be accurate as of
the Closing as though such representations and warranties were then made by the
Sellers and regardless of any investigation or knowledge or lack thereof on the
part of the Sellers or changes beyond their control. As of the Closing the
Sellers and the Partnership shall have performed and complied with all covenants
and agreements and satisfied all conditions required to be performed and
complied with by it at or before such time by this Agreement.
SECTION 4.02 OTHER CLOSING DOCUMENTS. The Sellers shall have
delivered to Purchaser at or prior to the Closing such other documents as
Purchaser may reasonably request in order to enable Purchaser to determine
whether the conditions to their obligations under this Agreement have been met
and otherwise to carry out the provisions of this Agreement.
SECTION 4.03 REVIEW OF PROCEEDINGS. All actions, proceedings,
instruments and documents required to carry out this Agreement or incidental
thereto and all other related legal matters shall be subject to the reasonable
approval of counsel to
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<PAGE> 18
Purchaser, and the Sellers shall have furnished such counsel such documents as
such counsel may have reasonably requested for the purpose of enabling them to
pass upon such matters.
SECTION 4.04 LEGAL ACTION. There shall not have been
instituted or threatened any legal proceeding relating to, or seeking to
prohibit or otherwise challenge the consummation of, the transactions
contemplated by this Agreement, or to obtain substantial damages with respect
thereto.
SECTION 4.05 APPROVAL OF THE LIMITED PARTNERS. If required
under applicable law or the Partnership Agreement, the consummation of any of
the transactions contemplated by this Agreement shall have been approved by the
affirmative vote of the Limited Partners.
SECTION 4.06 CONTRACTUAL CONSENTS NEEDED. The Sellers shall
have obtained at or prior to the Closing any consents required for the
consummation of the transactions contemplated by this Agreement from any party
to any contract, agreement, instrument, lease, license, arrangement, or
understanding to which the Partnership or either Seller is a party, or to which
the Business or the Assets are subject.
ARTICLE V
CONDITIONS TO THE OBLIGATIONS OF SELLERS
----------------------------------------
The obligations of Sellers under this Agreement are subject,
at the option of Partnership, to the following conditions:
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<PAGE> 19
SECTION 5.01 ACCURACY OF REPRESENTATIONS AND COMPLIANCE WITH
CONDITIONS. All representations and warranties of Purchaser contained in this
Agreement shall be accurate when made and, in addition, shall be accurate as of
the Closing as though such representations and warranties were then made in
exactly the same language by Purchaser and regardless of knowledge or lack
thereof on the part of Purchaser or changes beyond its control. As of the
Closing Purchaser shall have performed and complied with all covenants and
agreements and satisfied all conditions required to be performed and complied
with by any of them at or before such time by this Agreement.
SECTION 5.02 LEGAL ACTION. There shall not have been
instituted or threatened any legal proceeding relating to, or seeking to
prohibit or otherwise challenge the consummation of, the transactions
contemplated by this Agreement, or to obtain substantial damages with respect
thereto.
ARTICLE VI
COVENANTS AND AGREEMENTS OF PARTNERSHIP
---------------------------------------
Partnership covenants and agrees as follows:
SECTION 6.01 CONDUCT OF BUSINESS. The Partnership will
conduct, and the Sellers will cause the Partnership to conduct its affairs so
that at the Closing no representation or warranty of the Sellers will be
inaccurate, no covenant or agreement of the Partnership will be breached, and no
condition in this Agreement
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<PAGE> 20
will remain unfulfilled by reason of the actions or omissions of the Sellers or
the Partnership. Except as otherwise requested by Purchaser in writing, until
the Closing or the earlier rightful termination of this Agreement, the
Partnership will use its best efforts to preserve the Business and operations of
the Partnership intact, to keep available the services of its present personnel,
to preserve in full force and effect the contracts, agreements, instruments,
leases, licenses, arrangements, understandings and other Assets of the
Partnership, and to preserve the good will of its suppliers, customers, and
others having business relations with any of them. Until the Closing or earlier
rightful termination of this Agreement, the Partnership will conduct the
Business and operations in all respects only in the ordinary course.
SECTION 6.02 ADVICE OF CHANGES. Until the Closing or the
earlier rightful termination of this Agreement, the Partnership will immediately
advise Purchaser in a detailed written notice of any fact or occurrence or any
pending or threatened occurrence of which it obtains knowledge and which (if
existing and known at the date of the execution of this Agreement) would have
been required to be set forth or disclosed in or pursuant to this Agreement or
an Exhibit hereto, which (if existing and known at any time prior to or at the
Closing) would make the performance by any party of a covenant contained in this
Agreement impossible or make such performance materially more difficult than in
the absence of such fact or occurrence, or which (if existing and known at the
time of the Closing) would cause a condition to any party's obligations
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under this Agreement not to be fully satisfied, or which otherwise will
materially adversely affect the Business for any reason whatsoever.
SECTION 6.03 CONFIDENTIALITY. Sellers shall insure that all
confidential information concerning the Partnership which the Sellers and any of
their shareholders, officers, directors, employees, attorneys, or agents may now
possess or may hereafter create or obtain relating to the financial condition,
results of operations, business, properties, assets, liabilities, or future
prospects of Partnership, any Affiliate, or any customer or client of the
Partnership published, disclosed, or made accessible by any of them to any other
person or entity at any time or used by any of them except pending the Closing
in the Business and for the benefit of Partnership, in each case without the
prior written consent of Purchaser; provided, however, that the restrictions of
this sentence shall not apply (a) as may otherwise be required by law, (b) as
may be necessary or appropriate in connection with the enforcement of this
Agreement, or (c) to the extent such information shall have otherwise become
publicly available. The Partnership shall, and shall cause all other such
persons and entities to, deliver to Purchaser all tangible evidence of such
confidential information to which the restrictions of the foregoing sentence
apply at the Closing or the earlier rightful termination of this Agreement.
ARTICLE VII
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SURVIVAL; INDEMNIFICATION
-------------------------
SECTION 7.01. SURVIVAL. The several representations,
warranties and covenants of the Sellers contained in Articles I and VI of this
Agreement shall survive until the first anniversary of the Closing, irrespective
of any investigation made by or on behalf of any party.
SECTION 7.02 INDEMNIFICATION BY SELLERS. Sellers jointly and
severally agree to indemnify and hold Purchaser and its officers, directors,
controlling persons (if any), employees, attorneys, agents, stockholders,
successors and assigns, in each case past, present, or as they may exist at any
time after the date of this Agreement (the "INDEMNITEES") harmless from and
against any and all claims, suits, actions, proceedings (formal or informal),
actions, investigations, judgments, deficiencies, damages, settlements,
liabilities, losses, costs, expenses, and legal and other expenses (including
legal fees and expenses of attorneys chosen by any Indemnitee, penalties, and
interest), as and when incurred arising out of or based on (i) any breach of
any representation, warranty, covenant, or agreement of Sellers contained in
this Agreement.
SECTION 7.03. INDEMNIFICATION BY PURCHASER. Purchaser shall
indemnify, defend and hold each of the Sellers and their respective officers,
directors, controlling persons, employees, attorneys, agents, stockholders,
successors and assigns, in each case past, present, or as they may exist at any
time after the date
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of this Agreement (the "INDEMNIFIED PARTIES") harmless from and against any and
all claims, suits, actions, proceedings (formal or informal), investigations,
judgments, deficiencies, damages, settlements, liabilities, losses, costs,
expenses, and legal and other expenses (including legal fees and expenses of
attorneys chosen by any Indemnified Party), penalties and interest, as and when
incurred arising out of or based on (i) any breach of any representation,
warranty, covenant, or agreement of Purchaser contained in this Agreement, or
(ii) any and all claims against the Partnership of any kind or nature
concerning, related to or arising out of the Partnership or its Business;
provided, however, that Sellers shall not be entitled to indemnification for any
liability resulting from or arising out of any breach of fiduciary duty, willful
misconduct or gross negligence by the Seller.
ARTICLE VIII
MISCELLANEOUS
-------------
SECTION 8.01 FURTHER ACTIONS. At any time and from time to
time, each party agrees, at its expense, to take such actions and to execute and
deliver such documents as may be reasonably necessary to effectuate the purposes
of this Agreement.
SECTION 8.02 MODIFICATION. This Agreement and the Exhibits
hereto set forth the entire understanding of the parties with respect to the
subject matter hereof supersede all existing
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agreements among them concerning such subject matter, and may be modified only
by a written instrument duly executed by each party.
SECTION 8.03 NOTICES. Any notice or other communication
required or permitted to be given hereunder shall be in writing and shall be
mailed by certified mail, return receipt requested or delivered against receipt
to the party to whom it is to be given at the address of such party set forth in
the preamble to this Agreement (or to such other address as the party shall have
furnished in writing in accordance with the provisions of this Section 8.03)
with a copy to each of the other parties hereto. Any notice or other
communication given by certified mail (or by such comparable method) shall be
deemed given at the time of certification thereof (or comparable act), except
for a notice changing a party's address which will be deemed given at the time
of receipt thereof.
SECTION 8.04 WAIVER. Any waiver by any party of a breach of
any provision of this Agreement shall not operate as or be construed to be a
waiver of any other breach of that provision or of any breach of any other
provision of this Agreement. The failure of a party to insist upon strict
adherence to any term of this Agreement on one or more occasions will
not be considered a
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<PAGE> 25
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement. Any waiver must be
in writing and, in the case of a corporate party, be authorized by a resolution
of the Board of Directors or by an officer of the waiving party.
SECTION 8.05 BINDING EFFECT. The provisions of this Agreement
shall be binding upon and inure to the benefit of the Sellers and Purchaser and
their respective successors and assigns.
SECTION 8.06 NO THIRD PARTY BENEFICIARIES. This Agreement does
not create, and shall not be construed as creating, any rights enforceable by
any person not a party to this Agreement (except as provided in Section 8.05).
SECTION 8.07 SEVERABILITY. If any provision of this Agreement
is invalid, illegal, or unenforceable, the balance of this Agreement shall
remain in effect, and if any provision is inapplicable to any person or
circumstance, it shall nevertheless remain applicable to all other persons and
circumstances.
SECTION 8.08 HEADINGS. The headings in this Agreement are
solely for convenience of reference and shall be given no effect in the
construction or interpretation of this Agreement.
SECTION 8.09 COUNTERPARTS; GOVERNING LAW. This Agreement may
be executed in any number of counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument. It shall be governed by and construed in accordance with the laws of
the State of Michigan without giving effect to conflict of laws.
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IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first written above.
CAPTEC NET LEASE REALTY, INC.
By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
-------------------------------
Patrick L. Beach
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<PAGE> 1
Exhibit 10.9
CAPTEC NET LEASE REALTY, INC.
LONG-TERM INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS.
The purpose of the Captec Net Lease Realty, Inc. Long-Term
Incentive Plan (the "Plan") is to enable Captec Net Lease Realty, Inc. (the
"Company") to attract, retain and reward key employees of the Company and its
Affiliates and to strengthen the mutuality of interests between such key
employees and the Company's shareholders by offering such key employees equity
or equity-based incentives.
For purposes of the Plan, the following terms shall be defined as
set forth below:
(a) "Affiliate" means any entity (other than the Company and its
Subsidiaries) that is designated by the Board as a participating employer
under the Plan.
(b) "Award" means any award of Stock Options, Restricted Shares,
Deferred Shares, Share Purchase Rights, Share Appreciation Rights or Other
Share-Based Awards under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Change in Control" has the meaning set forth in Section 11(b).
(e) "Change in Control Price" has the meaning set forth in Section
11(d).
(f) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
(g) "Committee" means the Committee referred to in Section 2 of the
Plan.
(h) "Company" means Captec Net Lease Realty, Inc., a Delaware
corporation, or any successor corporation.
(i) "Deferred Shares" means an award of the right to receive Shares
at the end of a specified period granted pursuant to Section 7.
(j) "Disability" means disability as determined under
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procedures established by the Committee for purposes of the Plan.
(k) "Disinterested Person" has the meaning set forth in Rule
16b-3(c)(2)(i) as promulgated by the Securities and Exchange Commission
(the "Commission") under the Exchange Act, or any successor definition
adopted by the Commission.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the mean between the
highest and lowest quoted selling price, regular way, of the Shares on
such date on the New York Stock Exchange or, if no such sale of the Shares
occurs on the New York Stock Exchange on such date, then such mean price
on the next preceding day on which the Shares were traded. If the Shares
are no longer traded on the New York Stock Exchange, or other national
securities exchange or interdealer quotation system, then the Fair Market
Value of the Shares shall be determined by the Committee in good faith.
(n) "Incentive Stock Option" means any Stock Option intended to be
and designated as an "Incentive Stock Option" within the meaning of
Section 422 of the Code or any successor section thereto.
(o) "Non-Qualified Stock Option", means any Stock Option that is not
an Incentive Stock Option.
(p) "Other Share-Based Award" means an award granted pursuant to
Section 10 that is valued, in whole or in part, by reference to, or is
otherwise based on, Shares.
(q) "Outside Director" has the meaning set forth in Section 162(m)
of the Code and the regulations promulgated thereunder.
(r) "Plan" means the Captec Net Lease Realty, Inc. Long-Term
Incentive Plan, as amended from time to time.
(s) "Potential Change in Control" has the meaning set forth in
Section 11(c).
(t) "Restricted Shares" means an award of shares that is granted
pursuant to Section 6 and is subject to restrictions.
(u) "Section 16 Participant", means a participant under the Plan who
is then subject to Section 16 of the Exchange Act.
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<PAGE> 3
(v) "Shares" mean, the common shares, without par value, of the
Company.
(w) "Share Appreciation Right" means an award of a right to receive
an amount from the Company that is granted pursuant to Section 9.
(x) "Stock Option" or "Option" means any option to purchase Shares
(including Restricted Shares and Deferred Shares, if the Committee so
determines) that is granted Pursuant to Section 5.
(y) "Share Purchase Right" means an award of the right to purchase
Shares that is granted pursuant to Section 8.
(z) "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if each of
the corporations (other than the last corporation in the unbroken chain)
owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Compensation Committee of the
Board (the "Committee"). The Committee shall consist of _____________ directors
of the Company, as designated by the Board from time to time, all of whom shall
be Disinterested Persons and Outside Directors. Such directors shall be
appointed by the Board and shall serve as the Committee at the pleasure of the
Board. The functions of the Committee specified in the Plan shall be exercised
by the Board if and to the extent that no Committee exists which has the
authority to so administer the Plan.
The Committee shall have full power to interpret and administer the
Plan and full authority to select the individuals to whom Awards will be granted
and to determine the type and amount of Awards to be granted to each
participant, the consideration, if any, to be paid for such Awards, the timing
of such Awards, the terms and conditions of Awards granted under the Plan, the
terms and conditions of the related agreements which will be entered into with
participants and to certify that any performance goals are satisfied. As to the
selection of and grant of Awards to participants who are not Section 16
participants, the Committee may delegate its responsibilities to members of the
Company's management consistent with applicable law.
The Committee shall have the authority to adopt, alter
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and repeal such rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any agreements relating thereto);
to direct employees of the Company or other advisors to prepare such materials
or perform such analyses as the Committee deems necessary or appropriate; and
otherwise to supervise the administration of the Plan.
Any interpretation and administration of the Plan by the Committee,
and all actions and determinations of the Committee, shall be final, binding and
conclusive on the Company, its shareholders, Subsidiaries, Affiliates, all
participants in the Plan, their respective legal representatives, successors and
assigns, and all persons claiming under or through any of them. No member of the
Board or of the Committee shall incur any liability for any action taken or
omitted, or any determination made, in good faith in connection with the Plan.
SECTION 3. SHARES SUBJECT TO THE PLAN.
(a) Aggregate Shares Subject to the Plan. Subject to adjustment as
provided below in Section 3(c), the total number of Shares reserved and
available for Awards under the Plan is ________. Any Shares issued
hereunder may consist, in whole or in part, of authorized and unissued
shares or treasury shares.
(b) Forfeiture or Termination of Awards of Shares. If any Shares
subject to any Award granted hereunder are forfeited or an Award otherwise
terminates or expires without the issuance of Shares, the Shares subject
to such Award shall again be available for distribution in connection with
future Awards under the Plan as set forth in Section 3(a), unless the
participant who had been awarded such forfeited Shares or the expired or
terminated Award has theretofore received dividends or other benefits of
ownership with respect to such Shares. For purposes hereof, a participant
shall not be deemed to have received a benefit of ownership with respect
to such Shares by the exercise of voting rights or the accumulation of
dividends which are not realized because of the forfeiture of such Shares
or the expiration or termination of the related Award without issuance of
such Shares.
(c) Adjustment. In the event of any merger, reorganization,
consolidation, recapitalization, share dividend, share split, combination
of shares or other change in corporate structure of the Company affecting
the Shares, such substitution or adjustment shall be made in the aggregate
number of Shares reserved for issuance under the Plan, in the number and
option price of shares subject to
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outstanding options granted under the Plan, in the number and purchase
price of shares subject to outstanding Share Purchase Rights granted
under the Plan, and in the number of shares subject to Restricted Share
Awards, Deferred Share Awards and any other outstanding Awards granted
under the Plan as may be approved by the Committee, in its sole
discretion; provided that the number of shares subject to any Award shall
always be a whole number.
(d) Annual Award Limit. No Participant may be granted Stock Options
or Awards under the Plan with respect to an aggregate of more than
_________ Shares (subject to adjustment as provided in Section 3(c)
hereof) during any calendar year.
SECTION 4. ELIGIBILITY.
Officers and other key employees of the Company and its Subsidiaries and
Affiliates, if any, who are responsible for or contribute to the management,
growth or profitability of the business of the Company or its Subsidiaries or
Affiliates, if any, are eligible to be granted Awards under the Plan.
SECTION 5. STOCK OPTIONS.
(a) Grant. Stock Options may be granted alone, in addition to or in
tandem with other Awards granted under the Plan or cash awards made
outside the Plan. The Committee shall determine the individuals to whom,
and the time or times at which, grants of Stock Options will be made, the
number of Shares purchasable under each Stock Option and the other terms
and conditions of the Stock Option in addition to those set forth in
Sections 5(b) and 5(c). Any Stock Option granted under the Plan shall be
in such form as the Committee may from time to time approve.
Stock Options granted under the Plan may be of two types which shall
be indicated on their face: (i) Incentive Stock Options and (ii)
Non-Qualified Stock Options. Subject to Section 5(c) hereof, the Committee
shall have the authority to grant to any participant Incentive Stock
Options, Non-Qualified Stock Options or both types of Stock Options.
(b) Terms and Conditions. Options granted under the Plan shall be
evidenced by Option Agreements, shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem
desirable:
(1) Option Price. The option price per share of
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Shares purchasable under a Non-Qualified Stock Option or an
Incentive Stock Option shall be determined by the Committee at the
time of grant and shall be not less than 100% of the Fair Market
Value of the Shares at the date of grant (or, with respect to an
incentive stock option, 110% of the Fair Market Value of the Shares
at the date of grant in the case of a participant who at the date of
grant owns Shares possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or its
parent or Subsidiary corporations (as determined under Section
424(d), (e) and (f) of the Code)).
(2) Option Term. The term of each Stock Option shall be fixed
by the Committee and may not exceed ten years from the date the
Option is granted (or, with respect to Incentive Stock Options, five
years in the case of a participant who at the date of grant owns
Shares possessing more than ten percent of the total combined voting
power of all classes of stock of the Company or its parent or
subsidiary corporations (as determined under Section 424(d), (e) and
(f) of the Code)).
(3) Exercise. Stock Options shall be exercisable at such time
or times and subject to such terms and conditions as shall be
determined by the Committee at or after grant; provided, however,
that, except as provided in Section 5(b)(6) and Section 11, unless
otherwise determined by the Committee at or after grant, no Stock
Option shall be exercisable prior to six months and one day
following the date of grant. If any Stock Option is exercisable only
in installments or only after specified exercise dates, the
Committee may waive, in whole on in part, such installment exercise
provisions, and may accelerate any exercise date or dates, at any
time at or after grant based on such factors as the Committee shall
determine, in its sole discretion.
(4) Method of Exercise. Subject to any installment exercise
provisions that apply with respect to such Stock Option, and the six
month and one day holding period set forth in Section 5(b)(3), Stock
Options may be exercised in whole or in part, at any time during the
option period, by giving to the Company written notice of exercise
specifying the number of Shares to be purchased.
Such notice shall be accompanied by payment in full of the
option price of the Shares for which the Option is exercised, in
cash or Shares or by check or
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such other instrument as the Committee may accept. The value of each
such Share surrendered or withheld shall be 100% of the Fair Market
Value of the Shares on the date the option is exercised.
No Shares shall be issued pursuant to an exercise of an Option
until full payment has been made. A participant shall not have
rights to dividends or any other rights of a shareholder with
respect to any Shares subject to an Option unless and until the
participant has given written notice of exercise, has paid in full
for such Shares, has given, if requested, the representation
described in Section 14(a) and such Shares have been issued to him.
(5) Non-Transferability of Options. No Stock Option shall be
transferable by the participant other than by will or by the laws of
descent and distribution, and all Stock Options shall be
exercisable, during the participant's lifetime, only by the
Participant or, subject to Sections 5(b)(3) and 5(c), by the
participant's authorized legal representative if the participant is
unable to exercise an option as a result of the participant's
Disability; provided, however, that if so provided in the instrument
evidencing the Option, the Committee may permit any optionee to
transfer the Option during his lifetime to one or more members of
his family, or to one or more trusts for the benefit of one or more
members of his family, provided that no consideration is paid for
the transfer and that such transfer would not result in the loss of
any exemption under Rule 16b-3 for any Option that the Committee
does not permit to be so transferred. The transferee of an Option
shall be subject to all restrictions, terms, and conditions
applicable to the Option prior to its transfer, except that the
Option shall not be further transferable inter vivos by the
transferee. The Committee may impose on any transferable Option and
on the Common Shares to be issued upon the exercise of the Option
such limitations and conditions as the Committee deems appropriate.
(6) Termination by Death. Subject to Section 5(c), if any
participant's employment by the Company or any Subsidiary or
Affiliate terminates by reason of death, any Stock Option held by
such Participant may thereafter be exercised, to the extent such
Option was exercisable at the time of death or would have become
exercisable within one year from the time of death had the
participant continued to fulfill all conditions of the Option during
such period (or on such accelerated basis as the Committee may
determine at or after
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grant), by the estate of the participant (acting through its
fiduciary), for a period of one year (or such other period as
the Committee may specify at or grant) from the date of such
death. The balance of the Stock Option shall be forfeited.
(7) Termination by Reason of Disability. Subject to
Sections 5(b)(3) and 5(c), if a participant's employment by
the Company or any Subsidiary or Affiliate terminates by
reason of Disability, any Stock Option held by such
participant may thereafter be exercised, to the extent such
Option was exercisable at the time of termination or would
have become exercisable within one year from the time of
termination had the participant continued to fulfill all
conditions of the Option during such period (or on such
accelerated basis as the Committee may determine at or after
grant), by the participant or by the participant's duly
authorized legal representative if the participant is unable
to exercise the Option as a result of the participant's
Disability, for a period of one year (or such other period as
the Committee may specify at or after grant), from the date of
such termination of employment; provided, however, that in no
event may any such Option be exercised prior to six months and
one day from the date of grant; and provided, further, that if
the participant dies within such one-year period (or such
other period as the Committee shall specify at or after
grant), any unexercised Stock Option held by such participant
shall thereafter be exercisable by the estate of the
participant (acting though its fiduciary) to the same extent
to which it was exercisable at the time of death for a period
of one year from the date of such termination of employment.
The balance of the Stock Option shall be forfeited.
(8) Other Termination. Unless otherwise determined by
the Committee at or after the time of granting any Stock
Option, if a participant's employment by the Company or any
Subsidiary or Affiliate is terminated for any reason other
than death or Disability, all Stock Options held by such
participant shall thereupon terminate 90 days after the date
of such termination.
(c) Incentive Stock Options. Notwithstanding Sections 5(b)(6)
and (7), an Incentive Stock Option shall be exercisable by (i) a
participant's authorized legal representative (if the participant is
unable to exercise the Incentive Stock Option as a result of the
participant's Disability) only if, and to the extent, permitted by
Section
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422 of the Code and Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder and (ii) by the participant's
estate, in the case of death, or authorized legal representative, in
the case of Disability, no later than 10 years from the date the
Incentive Stock Option was granted (in addition to any other
restrictions or limitations which may apply). Anything in the Plan
to the contrary notwithstanding, no term or provision of the Plan
relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the
Plan be exercised, so as to disqualify the Plan under Section 422 of
the Code, or, without the consent of the participants affected, to
disqualify any Incentive Stock Option under such Section 422 or any
successor section thereto.
(d) Buyout Provisions. The Committee may at any time buy out
for a payment in cash, Shares, Deferred Shares or Restricted Shares
an option previously granted, based on such terms and conditions as
the Committee shall establish and agree upon with the participant,
provided that no such transaction involving a Section 16 participant
shall be structured or effected in a manner that would violate, or
result in any liability on the part of the participant under,
Section 16 of the Exchange Act or the rules and regulations
promulgated thereunder.
SECTION 6. RESTRICTED SHARES.
(a) Grant. Restricted Shares may be issued alone, in addition
to or in tandem with other Awards under the Plan or cash awards made
outside of the Plan. The Committee shall determine the individuals
to whom, and the time or times at which, grants of Restricted Shares
will be made, the number of Restricted Shares to be awarded to each
Participant, the price (if any) to be paid by the participant
(subject to Section 6(b)), the date or dates upon which Restricted
Share Awards will vest and the period or periods within which such
Restricted Share Awards may be subject to forfeiture, and the other
terms and conditions of such Awards in addition to those set forth
in Section 6(b).
The Committee may condition the grant of Restricted Shares
upon the attainment of specified performance goals or such other
factors as the Committee may determine in its sole discretion.
(b) Terms and Conditions. Restricted Shares awarded under the
Plan shall be subject to the following terms and conditions and
shall contain such additional terms and conditions, not inconsistent
with the provisions of the Plan, as the Committee shall deem
desirable. A Participant
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who receives a Restricted Share Award shall not have any rights with
respect to such Award, unless and until such participant has
executed an agreement evidencing the Award in the form approved from
time to time by the Committee and has delivered a fully executed
copy thereof to the Company, and has otherwise complied with the
applicable terms and conditions of such Award.
(1) The purchase price (if any) for Restricted Shares
shall be determined by the Committee at the time of grant.
(2) Awards of Restricted Shares must be accepted by
executing a Restricted Share Award agreement and paying any
price required under Section 6(b)(1).
(3) Each participant receiving a Restricted Share Award
shall be issued a stock certificate in respect of such
Restricted Shares. Such certificate shall be registered in the
name of such participant, and shall bear an appropriate legend
referring to the terms, conditions and restrictions applicable
to such Award.
(4) The Committee shall require that the stock
certificates evidencing such Restricted Shares be held in
custody by the Company until the restrictions thereon shall
have lapsed, and that, as a condition of any Restricted Shares
Award the Participant shall have delivered to the Company a
stock power, endorsed in blank, relating to the Shares covered
by such Award.
(5) Subject to the provisions of this Plan and the
Restricted Share Award agreement, during a period set by the
committee commencing with the date of such Award (the
"Restriction Period"), the participant shall not be permitted
to sell, transfer, pledge, assign or otherwise encumber the
Restricted Shares awarded under the Plan. Subject to these
limitations, the Committee, in its sole discretion, may
provide for the lapse of such restrictions in installments and
may accelerate or waive such restrictions, in whole or in
part, based on service, performance or such other factors and
criteria as the Committee may determine, in its sole
discretion.
(6) Except as provided in this Section 6(b)(6), Section
6(b)(5) and Section 6(b)(7) the participant shall have, with
respect to the Restricted Shares awarded, all of the rights of
a shareholder of the Company, including the right to vote the
Shares, and the right to receive any dividends. The Committee,
in its sole discretion, as determined at the time of award,
may permit or require the payment of cash
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dividends to be deferred and, if the Committee so determines,
reinvested, subject to Section 14(f), in additional Restricted
Shares to the extent Shares are available under Section 3, or
otherwise reinvested. Unless the Committee or Board determines
otherwise, share dividends issued with respect to Restricted
Shares shall be treated as additional Restricted Shares that
are subject to the same restrictions and other terms and
conditions that apply to the Shares with respect to which such
dividends are issued.
(7) No Restricted Shares shall be transferable by a
participant other than by will or by the laws of descent and
distribution.
(8) If a participant's employment by the Company or any
Subsidiary or Affiliate terminates by reason of death, any
Restricted Shares held by such participant shall thereupon
vest and all restrictions thereon shall lapse, to the extent
such Restricted Shares would have become vested or no longer
subject to restriction within one year from the time of death
had the participant continued to fulfill all of the conditions
of the Restricted Share Award during such period (or on such
accelerated basis as the Committee may determine at or after
grant). The balance of the Restricted Shares shall be
forfeited.
(9) If a participant's employment by the Company or any
Subsidiary or Affiliate terminates by reason of Disability,
any Restricted Shares held by such participant shall thereupon
vest and all restrictions thereon shall lapse, to the extent
such Restricted Shares would have become vested or no longer
subject to restriction within one year from the time of
termination had the participant continued to fulfill all of
the conditions of the Restricted Share Award during such
period (or on such accelerated basis as the Committee may
determine at or after grant). The balance of the Restricted
Shares shall be forfeited.
(10) Unless otherwise determined by the Committee at or
after the time of granting any Restricted Shares, if a
participant's employment by the Company or any Subsidiary or
Affiliate terminates for any reason other than death or
Disability, the Restricted Shares held by such participant
which are unvested or subject to restriction at the time of
termination shall thereupon be forfeited.
(c) Minimum Value Provisions. In order to better ensure that
award payments actually reflect the performance
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of the Company and service of the participant, the Committee may
provide in its sole discretion for a tandem performance-based or
other award designed to guarantee a minimum value, payable in cash
or Shares to the recipient of a Restricted Share Award, subject to
such performance, future service, deferral and other terms and
conditions as may be specified by the Committee.
SECTION 7. DEFERRED SHARES.
(a) Grant. Deferred Shares may be awarded alone, in addition
to or in tandem with other Awards granted under the Plan or cash
awards made outside the Plan. The Committee shall determine the
individuals to whom, and the time or times at which, Deferred Shares
shall be awarded, the number of Deferred Shares to be awarded to any
participant, the duration of the period (the "Deferral Period")
during which, and the conditions under which, receipt of the Shares
will be deferred, and the other terms and conditions of the Award in
addition to those set forth in Section 7(b).
The Committee may condition the grant of Deferred Shares upon
the attainment of specified performance goals or such other factors
as the Committee shall determine, in its sole discretion.
(b) Terms and Conditions. Deferred Share Awards shall be
subject to the following terms and conditions and shall contain such
additional terms and conditions, not inconsistent with the terms of
the Plan, as the Committee considers desirable:
(1) The purchase price for Deferred Shares shall be
determined at the time of grant by the Committee. Subject to
the provisions of the Plan and the Award agreement referred to
in Section 7(b)(9), Deferred Share Awards may not be sold,
assigned, transferred, pledged or otherwise encumbered during
the Deferral Period. At the expiration of the Deferral Period
(or the Elective Deferral Period referred to in Section
7(b)(8), when applicable), stock certificates shall be
delivered to the participant, or his legal representative, for
the shares covered by the Deferred Share Award. The Deferral
period applicable to any Deferred Share Award shall not be
less than six months and one day ("Minimum Deferral Period").
(2) Amounts equal to any dividends declared during the
Deferral Period with respect to the number of Shares covered
by a Deferred Share Award will be paid to the participant
currently, or deferred and
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<PAGE> 13
deemed to be reinvested in additional Deferred Shares, or
otherwise reinvested, all as determined at or after the time
of the Award by the Committee, in its sole discretion.
(3) No Deferred Shares shall be transferable by a
participant other than by will or by the laws of descent and
distribution.
(4) If a participant's employment by the Company or any
Subsidiary or Affiliate terminates by reason of death, any
Deferred Shares awarded to by such participant shall
thereafter vest and all restrictions thereon shall lapse, to
the extent such Deferred Shares would have become vested or no
longer subject to restriction within one year from the time of
death had the participant continued to fulfill all of the
conditions of the Deferred Share Award during such period (or
on such accelerated basis as the Committee may determine at or
after grant). The balance of the Deferred Shares shall be
forfeited.
(5) If a participant's employment by the Company or any
Subsidiary or Affiliate terminates by reason of Disability,
any Deferred Shares awarded to such participant shall
thereafter vest and all restrictions thereon shall lapse, to
the extent such Deferred Shares would have become vested or no
longer subject to restriction within one year from the time of
termination had the participant continued to fulfill all of
the conditions of the Deferred Shares Award during such period
(or on such accelerated basis as the Committee may determined
at or after grant), subject in all cases to the Minimum
Deferral Period requirement. The balance of the Deferred
Shares shall be forfeited.
(6) Unless otherwise determined by the Committee at or
after the time of granting any Deferred Share Award, if a
participant's employment by the Company or any Subsidiary or
Affiliate terminates for any reason other than death or
Disability, all Deferred Shares held by such participant which
are unvested or subject to restriction shall thereupon be
forfeited.
(7) Based on service, performance or such other factors
or criteria as the Committee may determine, the Committee may,
at or after grant, accelerate the vesting of all or any part
of any Deferred Share Award or waive a portion of the Deferral
Period for all or any part of such Award, subject in all cases
to the Minimum Deferral Period requirement.
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<PAGE> 14
(8) A participant may elect to further defer receipt of
a Deferred Share Award (or an installment of an Award) for a
specified period or until a specified event (the "Elective
Deferral Period"), subject in each case to the Committee's
approval and the terms of this Section 7 and such other terms
as are determined by the Committee, all in its sole
discretion. Subject to any exceptions approved by the
Committee, such election must be made at least 12 months prior
to completion of the Deferral Period for such Deferred Share
Award (or such installment).
(9) Each such Award shall be confirmed by, and subject
to the terms of, a Deferred Share Award agreement evidencing
the Award in the form approved from time to time by the
Committee.
(c) Minimum Value Provisions. In order to better ensure that
award payments actually reflect the performance of the Company and
service of the Participant, the Committee may provide, in its sole
discretion, for a tandem performance-based or other Award designed to
guarantee a minimum value, payable in cash or Shares to the recipient
of a Deferred Share Award, subject to such performance, future service,
deferral and other terms and conditions as may be specified by the
Committee.
SECTION 8. SHARE PURCHASE RIGHTS.
(a) Grant. Share Purchase Rights may be granted alone, in
addition to or in tandem with other Awards granted under the Plan or
cash awards made outside the Plan. The committee shall determine the
individuals to whom, and the time or times at which, grants of Share
Purchase Rights will be made, the number of Shares which may be
purchased pursuant to Share Purchase Rights, and the other terms and
conditions of the Share Purchase Rights in addition to those set forth
in Section 8(b). The Shares subject to the Share Purchase Rights may be
purchased at the Fair Market Value of such Shares on the date of grant;
Subject to Section 8(b) hereof, the Committee may also impose
such deferral, forfeiture or other terms and conditions as it shall
determine, in its sole discretion, on such Share Purchase Rights or the
exercise thereof.
Each Share Purchase Right Award shall be confirmed by, and be
subject to the terms of, a Share Purchase Rights Agreement which shall
be in form approved by the Committee.
(b) Terms and Conditions. Share Purchase Rights may
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<PAGE> 15
contain such additional terms and conditions not inconsistent with the
terms of the Plan as the Committee shall deem desirable, and shall
generally be exercisable for such period as shall be determined by the
Committee. However, Share Purchase Rights granted to Section 16
participants shall not become exercisable earlier than six months and
one day after the grant date. Share Purchase Rights shall not be
transferable by a participant other than by will or by the laws of
descent and distribution.
SECTION 9. SHARE APPRECIATION RIGHTS.
(a) Grant. Share Appreciation Rights may be granted in
connection with all or any part of an Option, either concurrently with
the grant of the Option or, if the Option is a Non-Qualified Stock
Option, by an amendment to the Option at any time thereafter during the
term of the Option. Share Appreciation Rights may be exercised in whole
or in part at such times under such conditions as may be specified by
the Committee in the participant's Option Agreement.
(b) Terms and Conditions. The following terms and
conditions will apply to all Share Appreciation Rights:
(1) Share Appreciation Rights shall entitle the
participant, upon exercise of all or any part of the Share
Appreciation Rights, to surrender to the Company unexercised
that portion of the underlying Option relating to the same
number of Shares as is covered by the Share Appreciation
Rights (or the portion of the Share Appreciation Rights so
exercised) and to receive in exchange from the Company an
amount (paid as provided in Section 9(b)(5)) equal to the
excess of (x) the Fair Market Value, on the date of exercise,
of the Shares covered by the surrendered portion of the
underlying Option over (y) the exercise price of the Shares
covered by the surrendered portion of the underlying Option.
The Committee may limit the amount that the participant will
be entitled to receive upon surrender of a Share Appreciation
Right.
(2) Upon the exercise of the Share Appreciation Right
and surrender of the related portion of the underlying Option,
the Option, to the extent surrendered, will not thereafter be
exercisable. The underlying Option may provide that such Share
Appreciation Rights will be payable solely in cash. The terms
of the underlying Option shall provide a method by which an
alternative fair market value of the Shares on the date of
exercise shall be calculated based on one of the following:
(x) the closing price of the Shares on the national exchange
on which they
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<PAGE> 16
are then traded on the business day immediately preceding the
day of exercise; (y) the highest closing price of the Shares
on the national exchange on which they have been traded,
during the 90 days immediately preceding the Change in
Control; or (z) the greater of (x) and (y).
(3) In addition to any further conditions upon
exercise that may be imposed by the Committee, the Share
Appreciation Rights shall be exercisable only to the extent
that the related Option is exercisable, except that in no
event will a Share Appreciation Right held by a Section 16
Participant be exercisable within the first six months after
it is awarded even though the related Option is or becomes
exercisable, and each Share Appreciation Right will expire no
later than the date on which the related Option expires. A
Share Appreciation Right may be exercised only at a time when
the Fair Market Value of the Shares covered by the Share
Appreciation Right exceeds the exercise price of the Shares
covered by the underlying Option. No Share Appreciation Right
held by a Section 16 Participant shall be exercisable by its
terms within the first six months after it is granted, and a
Section 16 Participant may exercise a Share Appreciation Right
only during a period beginning on the third business day and
ending on the twelfth business day following the release for
publication of quarterly or annual summary statements of the
Company's sales and earnings.
(4) Share Appreciation Rights may be exercised by the
participant giving written notice of the exercise to the
Company, stating the number of Share Appreciation Rights he
has elected to exercise and surrendering the portion of the
underlying Option relating to the same number of Shares as the
number of Share Appreciation Rights elected to be exercised.
(5) The manner in which the Company's obligation
arising upon the exercise of the Share Appreciation Right will
be paid will be determined by the Committee and shall be set
forth in the participant's Option Agreement. The Committee may
provide for payment in Shares or cash, or a fixed combination
of Shares or cash, or the Committee may reserve the right to
determine the manner of payment at the time the Share
Appreciation Right is exercised. Shares issued upon the
exercise of a Share Appreciation Right will be valued at their
Fair Market Value on the date of exercise.
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<PAGE> 17
SECTION 10. OTHER SHARE-BASED AWARDS.
(a) Grant. Other Awards of Shares and other Awards that are
valued, in whole or in part, by reference to, or are otherwise based
on, Shares, including, without limitation, performance shares,
convertible preferred shares, convertible debentures, exchangeable
securities and Share Awards or options valued by reference to Book
Value or subsidiary performance, may be granted alone, in addition to
or in tandem with other Awards granted under the Plan or cash awards
made outside of the Plan.
At the time the Shares or Other Share-Based Award is granted,
the Committee shall determine the individuals to whom and the time or
times at which such Shares or other Share-Based Awards shall be
awarded, the number of Shares to be used in computing an Award or which
are to be awarded pursuant to such Awards, the consideration, if any,
to be paid for such Shares or other Share-Based Awards, and all other
terms and conditions of the Awards in addition to those set forth in
Section 10(b).
The provisions of other Share-Based Awards need not be the
same with respect to each participant.
(b) Terms and Conditions. Other Share-Based Awards shall be
subject to the following terms and conditions and shall contain such
additional terms and conditions, not inconsistent with the terms of the
Plan, as the Committee shall deem desirable.
(1) Subject to the provisions of this Plan and the
Award agreement referred to in Section 10(b)(5) below, Shares
awarded or subject to Awards made under this Section 10 may
not be sold, assigned, transferred, pledged or otherwise
encumbered prior to the date on which the Shares are issued,
or, if later, the date on which any applicable restriction,
performance, holding or deferral period or requirement is
satisfied or lapses. All Shares or Other Share-Based Awards
granted under this Section 10 shall be subject to a minimum
holding period (including any applicable restriction,
performance and/or deferral periods ) of six months and one
day ("Minimum Holding Period").
(2) Subject to the provisions of this Plan and the
Award agreement and unless otherwise determined by the
Committee at the time of grant, the recipient of an Other
Share-Based Award shall be entitled to receive, currently or
on a deferred basis, interest or dividends or interest or
dividend equivalents with respect to the number of Shares
covered by the Award, as determined at
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<PAGE> 18
the time of the Award by the Committee, in its sole
discretion, and the Committee may provide that such amounts
(if any) shall be deemed to have been reinvested in additional
Shares or otherwise reinvested.
(3) Subject to the Minimum Holding Period, any Other
Share-Based Award and any Shares covered by any such Award
shall vest or be forfeited to the extent, at the times and
subject to the conditions, if any, provided in the Award
agreement, as determined by the Committee, in its sole
discretion.
(4) In the event of the participant's Disability or
death, or in cases of special circumstances, the Committee
may, in its sole discretion, waive, in whole or in part, any
or all of the remaining limitations imposed hereunder or under
any related Award agreement with respect to any part of all of
any Award under this Section 10, provided that the Minimum
Holding Period requirement may not be waived, except in case
of a participant's death.
(5) Each Award shall be confirmed by, and subject to
the terms of, an agreement or other instrument evidencing the
Award in the form approved from time to time by the Committee,
the Company and the participant.
(6) Shares (including securities convertible into
Shares) issued on a bonus basis under this Section 10 shall be
issued for no cash consideration. Shares (including securities
convertible into Shares) purchased pursuant to a purchase
right awarded under this Section 10 shall bear a price of at
least 85% of the Fair Market Value of the Shares on the date
of grant. The purchase price of such Shares, and of any Other
Share-Based Award granted hereunder, or the formula by which
such price is to be determined, shall be fixed by the
Committee at the time of grant.
(7) In the event that any "derivative security", as
defined in Rule 16a-1(c) (or any successor thereof)
promulgated by the Securities and Exchange Commission under
Section 16 of the Exchange Act, is awarded pursuant to this
Section 10 to any Section 16 participant, such derivative
security shall not be transferrable other than by will or by
the laws of descent and distribution.
SECTION 11. CHANGE IN CONTROL PROVISION.
(a) Impact of Event. At any time during the 365
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days commencing with the date of either (1) a "Change in Control" as
defined in Section 11(b) or (2) a "Potential Change in Control" as
defined in Section 11(c), a majority of the "Continuing Directors" as
defined in Section 11(e) (or one of the two Continuing Directors if
only two Continuing Directors are then serving on the Board of
Directors or the sole Continuing Director if only one Continuing
Director is then serving on the Board of Directors) may cause the
following provisions to take effect as stated and as of the date set
forth in a Written Action (the "Written Action") adopted to that
effect (that date, the "Accelerated Vesting Date") and if there are no
Continuing Directors, the following provisions will automatically take
effect:
(1) Any Stock Options awarded under the Plan not
previously exercisable and vested shall become fully
exercisable and vested;
(2) Any Share Appreciation Rights shall become
immediately exercisable;
(3) The restrictions applicable to any Restricted
Shares, Deferred Shares Awards, Share Purchase Rights Awards
and Other Share Based Awards shall lapse and such shares and
awards shall be deemed fully vested; and
(4) The value of all outstanding Awards, in each case
to the extent vested, shall, unless otherwise determined by
the Committee in its sole discretion at or after grant but
prior to any Change in Control or Potential Change in Control,
be paid to the participant in cash in exchange for the
surrender of those Awards on the basis of the "Change in
Control Price" as defined in Section 11(d) as of the
Accelerated Vesting Date;
but the provisions of Sections 11(a)(1) through (3) shall not apply
with respect to Awards granted to any Section 16 Participant which have
been held by such participant for less than six months and one day as
of the Accelerated Vesting Date.
(b) Definition of Change in Control. For purposes of Section
11(a), a "Change in Control" means the occurrence of any of the
following: (i) the Board or shareholders of the Company approve a
consolidation or merger that results in the shareholders of the Company
immediately prior to the transaction giving rise to the consolidation
or merger owning less than 50% of the total combined voting power of
all classes of stock entitled to vote of the surviving
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<PAGE> 20
entity immediately after the consummation of the transaction giving
rise to the merger or consolidation; (ii) the Board or shareholders of
the Company approve the sale of substantially all of the assets of the
Company or the liquidation or dissolution of the Company; (iii) any
person or other entity (other than the Company or a Subsidiary or any
Company employee benefit plan (including any trustee of any such plan
acting in its capacity as trustee)) purchases any Shares (or securities
convertible into Shares) pursuant to a tender or exchange offer without
the prior consent of the Board of Directors, or becomes the beneficial
owner of securities of the Company representing 25% or more of the
voting power of the Company's outstanding securities; or (iv) during
any two-year period, individuals who at the beginning of such period
constitute the entire Board of Directors cease to constitute a majority
of the Board of Directors, unless the election or the nomination for
election of each new director is approved by at least two-thirds of the
directors then still in office who were directors at the beginning of
that period.
(c) Definition of Potential Change in Control. For purposes of
Section 11(a), a "Potential Change in Control" means the happening of
any one of the following:
(1) The approval by the shareholders of the Company
of an agreement by the Company, the consummation of which
would result in a Change in Control of the Company as defined
in Section 11(b); or
(2) The acquisition of beneficial ownership, directly
or indirectly, by any entity, person or group (other than the
Company or a Subsidiary or any Company employee benefit plan
(including any trustee of any such plan acting in its capacity
as trustee)) of securities of the Company representing [15%]
or more of the combined voting power of the Company's
outstanding securities and the adoption by the Board of a
resolution to the effect that a Potential Change in Control of
the Company has occurred for purposes of this Plan.
(d) Change in Control Price. For purposes of this Section 11,
"Change in Control Price", means the greater of: (a) the highest price
per share paid in any transaction reported on the New York Stock
Exchange Composite Index (or, if the Shares are not then traded on the
New York Stock Exchange, the highest price paid as reported for any
national exchange on which the Shares are then traded) or paid or
offered in any bona fide transaction related to a Change in Control or
Potential Change in Control of the
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Company, at any time during the 60-day period immediately preceding the
occurrence of the Change in Control (or, when applicable, the
occurrence of the Potential Change in Control event), and (b) the
highest price per share paid in any transaction reported on the New
York Stock Exchange Composite Index (or, if the Shares are not then
traded on the New York Stock Exchange, the highest price paid as
reported for any national exchange on which the Shares are then
traded), at any time during the 60-day period immediately preceding the
date on which the Continuing Directors execute a Written Action
relating to that Change in Control or Potential Change in Control, in
each case as determined by the Committee.
(e) Definition of Continuing Director. For purposes of this
Section 11, a "Continuing Director" means an individual who was a
member of the Board of Directors immediately prior to the date of a
Change in Control or a Potential Change in Control and is a member of
the Board of Directors at the time a Written Action relating to that
Change in Control or Potential Change in Control is taken.
SECTION 12. AMENDMENTS AND TERMINATION.
The Board may at any time, in its sole discretion, amend,
alter or discontinue the Plan, but no such amendment, alteration or
discontinuation shall be made which would impair the rights of a participant
under an Award theretofore granted, without the participant's consent. The
Company shall submit to the shareholders of the Company for their approval any
amendments to the Plan which are required by Section 16 of the Exchange Act or
the rules and regulations thereunder, or Section 162(m) of the Code, to be
approved by the shareholders.
The Committee may at any time, in its sole discretion, amend
the terms of any Award, but no such amendment shall be made which would impair
the rights of a participant under an Award theretofore granted, without the
participant's consent; nor shall any such amendment be made which would make the
applicable exemptions provided by Rule 16b-3 under the Exchange Act unavailable
to any Section 16 participant holding the Award without the participant's
consent.
Subject to the above provisions, the Board shall have all
necessary authority to amend the Plan to make into account changes in applicable
securities and tax laws and accounting rules, as well as other developments.
SECTION 13. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for
incentive and deferred compensation. With respect to any
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<PAGE> 22
payments not yet made to a participant by the Company, nothing contained herein
shall give any such participant any rights that are greater than those of a
general creditor of the Company.
SECTION 14. GENERAL PROVISIONS.
(a) The Committee may require each Participant acquiring
Shares pursuant to an Award under the Plan to represent to and agree
with the Company in writing that the participant is acquiring the
Shares without a view to distribution thereof. The certificates for
such shares may include any legend which the Committee deems
appropriate to reflect any restrictions on transfer.
All Shares or other securities delivered under the Plan shall
be subject to such stop-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any stock
exchange upon which the Shares is then listed, and any applicable
federal or state securities laws, and the Committee may cause a legend
or legends to be put on any certificates for such shares to make
appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board
from adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such
arrangements may be either generally applicable or applicable only in
specific cases.
(c) Neither the adoption of the Plan, nor its operation, nor
any document describing, implementing or referring to the Plan, or any
part thereof, shall confer upon any participant under the Plan any
right to continue in the employ, or as a director, of the Company or
any Subsidiary or Affiliate, or shall in any way affect the right and
power of the Company or any Subsidiary or Affiliate to terminate the
employment, or service as a director, of any participant under the Plan
at any time with or without assigning a reason therefor, to the same
extent as the Company or any Subsidiary or Affiliate might have done if
the Plan had not been adopted.
(d) For purposes of this Plan, a transfer of a participant
between the Company and its Subsidiaries and Affiliates shall not be
deemed a termination of employment.
(e) No later than the date as of which an amount first becomes
includable in the gross income of the participant for federal income
tax purposes with respect to any award under the Plan, the Participant
shall pay to the Company, or make arrangements satisfactory to the
Committee regarding
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<PAGE> 23
the payment, of, any federal, state or local taxes or other items of
any kind required by law to be withheld with respect to such amount.
Subject to the following sentence, unless otherwise determined by the
Committee, withholding obligations may be settled with Shares,
including unrestricted Shares previously owned by the participant or
Shares that are part of the Award that gives rise to the withholding
requirement. Notwithstanding the foregoing, any election by a Section
16 participant to settle such tax withholding obligation with Shares
that is part of such Award shall be subject to approval by the
Committee, in its sole discretion. The obligations of the Company under
the Plan shall be conditional on such payment or arrangements and the
Company and its Subsidiaries and Affiliates shall, to the extent
permitted by law, have the right to deduct any such taxes from any
payment of any kind otherwise due to the participant.
(f) The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Shares (or in Deferred Shares or
other types of Awards) at the time of any dividend payment shall only
be permissible if sufficient Shares are available under Section 3 for
such reinvestment (taking into account then outstanding Stock Options,
Share Purchase Rights and other Plan Awards).
(g) The Plan, all Awards made and actions taken thereunder and
any agreements relating thereto shall be governed by and construed in
accordance with the laws of the State of Delaware.
(h) All agreements entered into with participants pursuant to
the Plan shall be subject to the Plan.
(i) The provisions of Awards need not be the same with respect
to each participant.
SECTION 15. SHAREHOLDER APPROVAL; EFFECTIVE DATE OF PLAN.
The Plan was adopted by the Board on ________, 1997 and is
subject to approval by the holders of the Company's outstanding Shares, in
accordance with applicable law. The Plan will become effective on the date of
such approval.
SECTION 16. TERM OF PLAN.
No Award shall be granted pursuant to the Plan on or after
_______________, 2007, but Awards granted prior to such date may extend beyond
that date.
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<PAGE> 1
Exhibit 10.10
DIRECTORS' DEFERRED COMPENSATION PLAN
CAPTEC NET LEASE REALTY, INC., a Delaware corporation (the
"Company"), desires to establish a Directors' Deferred Compensation Plan (the
"Plan") to assist it in attracting and retaining persons of competence and
stature to serve as outside directors by enabling them to defer receipt of the
fees payable to them by the Company for their services as directors.
Therefore, the Company hereby adopts the Plan as hereinafter
set forth:
1. EFFECTIVE DATE. The Plan shall apply to all elections to
defer made after its adoption and shall apply to all director's fees payable
with respect to periods commencing with the Company's fiscal quarter which
begins ______________.
2. PARTICIPATION. Each director of the Company (a) who is
duly elected or appointed to the Company's Board of Directors and (b) who
receives fees for services as a director, may elect to defer receipt of fees
otherwise payable to him, as provided for in the Plan. Each such director who
elects to defer fees shall be a Participant in the Plan.
3. ADMINISTRATION. The Company's Board of Directors appoints
Patrick L. Beach and W. Ross Martin, each of whom is a director or officer of
the Company who is not eligible to become a Participant, to act as an
Administrator of the Plan (collectively, the "Administrators"). The
Administrators shall serve at the pleasure of the Board of Directors and shall
administer, construe and interpret the Plan. The Administrators shall not be
liable for any act done or determination made in good faith. The Board of
Directors shall have the power to designate additional or replacement
Administrators at its discretion.
4. DEFERRALS.
(a) DEFERRAL ELECTION. Any eligible director may file with the
Administrators of the Plan, prior to January 1 of each year (except
for the year 1997, for which any filing must be made by the 10th day
after the adoption of the plan) an election in writing to
participate in the Plan for that year or for that year and
succeeding years. Each director who first becomes eligible to
participate after the date of the adoption of this Plan may make an
election for the portion of the year in which he first became
<PAGE> 2
eligible with respect to fees for services to be rendered after the
date of such election. When a deferral election is filed, no fees
will be paid for services so designated for that year (or portion
thereof) or, if the election so provides, for that year and for
succeeding years. If an election has been filed to participate in
the Plan for succeeding years and a Participant wishes to
discontinue deferral, an election to terminate participation in the
Plan for any year must be filed prior to January 1 of that year.
(b) ACCOUNTING. The Company shall maintain appropriate records
which shall list and reflect each Participant's credits and
valuations ("Deferral Accounts"). The Company shall credit to each
Participant's Deferral Account an amount equivalent to the fees that
would have been paid to him if he had not elected to participate in
the Plan. The credit shall be made on the date on which the fee
would have been paid absent a deferral election. No funds shall be
segregated into the Deferral Account of Participants; said accounts
shall represent a general unsecured obligation of the Company.
(c) VALUATION. Until the first distribution is made to a
Participant, amounts credited to a Deferral Account of such
Participant shall be increased or decreased as measured by the
market value of the Company's Common Shares, without par value (the
"Common Shares"), plus the value of dividends or other distributions
on the Company's Common Shares. Each amount credited to a Deferral
Account shall be assigned a number of Common Share Units (including
fractions of a Common Share) determined by dividing the amount
credited to the Deferral Account, whether in lieu of payment of fees
for service as a director or as a dividend or other distribution
attributable to such Common Share Units, by the fair market value of
a share of the Company's Common Shares on the date of credit. Fair
market value shall be the mean between the high and low selling
price of a share of the Company's Common Shares on the New York
Stock Exchange on the applicable date or, if no sales occurred on
such date, on the most recent earlier date on which sales occurred.
Each Common Share Unit shall have the
-2-
<PAGE> 3
value of a Common Share of the Company. The number of Common Share
Units shall be adjusted to reflect stock splits, stock dividends or
other capital adjustments effected without receipt of consideration
by the Company.
5. DISTRIBUTION. A Participant shall elect in writing, at the
time he makes each deferral election under subparagraph 4(a), the year in which
distribution of the credits to his Deferral Account to which the deferral
election relates shall commence, and whether distribution will be made in a lump
sum or in installments, as permitted in the second succeeding sentence of this
Section 5. Payment shall commence not earlier than the January 1 following the
year in which the Participant attains age 55, and not later than the January 1
following the year in which the Participant attains age 72. Commencing
immediately prior to the first distribution to a Participant and continuing
thereafter, amounts credited to the Deferral Account of such Participant shall
be credited with interest, compounded quarterly, calculated at a rate per annum
for each fiscal quarter of the Company equal to the prime rate of interest
published in THE WALL STREET JOURNAL on the first business day of that quarter.
Payment may be made in one lump sum, or in five or ten equal annual installments
of the Deferral Account balance allocated to such installment payments
determined as of the December 31 immediately preceding commencement of
distribution, with each payment accompanied by any interest credited during the
period preceding payment of the installment. The time of and method of
distribution of benefits may vary with each separate election, but each election
shall be irrevocable. The Deferral Accounts do not represent rights to acquire
the Company's Common Shares; payment shall only be made in cash.
6. DEATH OR DISABILITY.
(a) If a Participant's service is terminated by
reason of death or disability prior to the distribution of any portion
of his benefits, the Company shall, within ninety (90) days of the date
of service termination, commence distribution of benefits to the
Participant (or to the beneficiary or beneficiaries in the event of
death). Distribution shall
-3-
<PAGE> 4
be made in accordance with the method of distribution elected by the
Participant pursuant to paragraph 5 hereof. If a Participant's death or
disability occurs after distribution of benefits hereunder has begun,
the Company shall continue to make distributions to the Participant (or
to the beneficiary or beneficiaries in the event of death) in
accordance with the methods of distribution elected by the Participant
pursuant to paragraph 5 hereof.
(b) Each Participant may designate one or more
beneficiaries to receive distributions in the event of Participant's
death by filing with the Company a beneficiary designation on a form
provided. The designated beneficiary or beneficiaries may be changed by
a Participant at any time prior to his death by the delivery to the
Company of a new beneficiary designation form. If no beneficiary shall
have been designated, or if no designated beneficiary shall survive the
Participant, distributions pursuant to this provision shall be made to
the Participant's estate.
7. ASSIGNMENT AND ALIENATION OF BENEFITS. To the extend
permitted by law, the right of any Participant to any account, benefit or
payment hereunder shall not be subject in any manner to attachment or other
legal process for the debts of such Participant, and no account, benefit or
payment shall be subject to anticipation, alienation, sale, transfer, assignment
or encumbrance.
8. AMENDMENT OR TERMINATION. The Board of Directors of the
Company may terminate this Plan at any time or amend it at any time and from
time to time. No amendment or termination of this Plan shall affect the rights
of a Participant accrued prior thereto.
9. TAXES. The Company shall not be responsible for the tax
consequences under federal, state or local law of any election made by any
Participant under the Plan. All payments under the Plan shall be subject to
withholding and reporting requirements to the extent permitted by applicable
law.
10. APPLICABLE LAW. This Plan shall be interpreted under the
laws of the State of Delaware.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the Company has caused this Plan to be
adopted, and executed by its President, this ____ day of _____________, 1997.
CAPTEC NET LEASE REALTY, INC.
By: ____________________________
Patrick L. Beach, President
-5-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11 of
our reports dated March 25, 1997, except for the first paragraph of Note 1, for
which the date is September 4, 1997, on our audits of the financial statements
and financial statement schedule of Captec Net Lease Realty, Inc. We also
consent to the references to our firm under the captions "Experts" and "Selected
Financial Data."
COOPERS & LYBRAND, L.L.P.
Detroit, Michigan
September 5, 1997
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<TABLE> <S> <C>
<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> YEAR
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<CASH> 1,969,196
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<CURRENT-LIABILITIES> 0
<BONDS> 1,587,623
40,000,000
0
<COMMON> 1,000
<OTHER-SE> 169,592
<TOTAL-LIABILITY-AND-EQUITY> 42,292,052
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<TOTAL-REVENUES> 1,869,296
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<TOTAL-COSTS> 200,208
<OTHER-EXPENSES> 329,496
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