<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 18, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 18, 1997)
$110,000,000
abcd
% NOTES DUE 2007
----------------
Realty Income Corporation, a Delaware corporation (the "Company"), will
issue the % Notes due 2007 (the "Notes") offered hereby (the "Offering") in
an aggregate principal amount of $110,000,000. Interest on the Notes is payable
semiannually on each May and November , commencing November , 1997. The
Notes will mature on May , 2007 and are redeemable at any time at the option
of the Company, in whole or in part, at a redemption price equal to the sum of
(i) the principal amount of the Notes being redeemed plus accrued interest to
the redemption date and (ii) the Make-Whole Amount (as defined in "Description
of the Notes--Optional Redemption"), if any. The Notes are not subject to any
mandatory sinking fund.
The Notes will be represented by a single fully registered note in
book-entry form (the "Global Note") registered in the name of The Depository
Trust Company ("DTC") or its nominee. Currently, there is no market for the
Notes. In addition, the Company does not intend to list the Notes on any
securities exchange. Beneficial interests in the Global Note will be shown on,
and transfers thereof will be effected only through, records maintained by DTC
(with respect to beneficial interests of participants) or by participants or
persons that hold interests through participants (with respect to beneficial
interests of beneficial owners). Owners of beneficial interests in the Global
Note will be entitled to physical delivery of Notes in certificated form equal
in principal amount to their respective beneficial interests only under the
limited circumstances described under "Description of the Notes--Book Entry
System." Settlement for the Notes and all payments of principal, premium, if
any, and interest in respect of the Global Note will be made in immediately
available funds. The Notes will trade in DTC's Same-Day Funds Settlement System
until maturity or until the Notes are issued in definitive form, and secondary
market trading activity in the Notes will therefore settle in immediately
available funds. See "Description of the Notes--Same-Day Settlement and
Payment."
--------------------------
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
SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
<S> <C> <C> <C>
Per Note........................................... % % %
Total.............................................. $110,000,000 $ $
</TABLE>
(1) Plus accrued interest, if any, from May , 1997.
(2) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $180,000.
--------------------------
The Notes are offered by the several Underwriters, subject to prior sale,
when, as and if issued by the Company and delivered to and accepted by them,
subject to approval of certain legal matters by counsel for the Underwriters and
subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the Notes offered hereby will be made in
book-entry form through the facilities of DTC in New York, New York on or about
May , 1997.
--------------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
J.P. MORGAN & CO.
SALOMON BROTHERS INC
--------------------------
The date of this Prospectus Supplement is May , 1997.
<PAGE>
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Notes. Such
transactions may include stabilizing and the purchase of Notes to cover
syndicate short positions. For a description of these activities, see
"Underwriting."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The document listed below has been filed by the Company under the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), with the Securities
and Exchange Commission (the "Commission") and is incorporated herein by
reference:
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus Supplement
and prior to the termination of the offering of the Notes shall be deemed to be
incorporated by reference in this Prospectus Supplement and to be part hereof
from the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus Supplement to the extent that a statement
contained herein (or in the accompanying Prospectus) or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus Supplement.
Copies of all documents that are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this Prospectus Supplement
incorporates) will be provided without charge to each person, including any
beneficial owner, to whom this Prospectus Supplement is delivered, upon written
or oral request. Requests should be directed to the Corporate Secretary of the
Company, 220 West Crest Street, Escondido, California 92025 (telephone number:
(760) 741-2111).
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS SUPPLEMENT OR
THE ACCOMPANYING PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, AS USED
HEREIN THE TERMS "COMPANY" AND "REALTY INCOME" REFER TO REALTY INCOME
CORPORATION AND ITS SUBSIDIARIES ON A CONSOLIDATED BASIS FOR PERIODS FROM AND
AFTER AUGUST 15, 1994 (THE DATE OF THE CONSOLIDATION REFERRED TO UNDER "BUSINESS
AND PROPERTIES") AND TO THE COMPANY'S PREDECESSOR PARTNERSHIPS FOR PERIODS PRIOR
TO AUGUST 15, 1994. UNLESS OTHERWISE INDICATED, INFORMATION REGARDING THE
COMPANY'S PROPERTIES IS AS OF APRIL 1, 1997.
THE COMPANY
Realty Income Corporation ("Realty Income" or the "Company") is a fully
integrated, self-administered and self-managed real estate investment trust
("REIT") which management believes is the nation's largest publicly-traded owner
of freestanding, single-tenant, retail properties diversified geographically and
by industry and operated under net lease agreements. As of April 1, 1997, the
Company owned a diversified portfolio of 747 properties located in 42 states
with over 5.4 million square feet of leasable space. Over 99% of the Company's
properties were leased as of April 1, 1997.
Realty Income adheres to a focused strategy of acquiring freestanding,
single-tenant, retail properties leased to national and regional retail chains
under long-term, net lease agreements. The Company typically acquires, and then
leases back, retail store locations from retail chain store operators, providing
capital to the operators for continued expansion and other purposes. The
Company's net lease agreements generally are for initial terms of 10 to 20
years, require the tenant to pay a minimum monthly rent and property operating
expenses (taxes, insurance and maintenance), and provide for future rent
increases (typically subject to ceilings) based on increases in the consumer
price index or additional rent calculated as a percentage of the tenant's gross
sales above a specified level.
Since 1970 and through December 31, 1996, Realty Income has acquired and
leased back to national and regional retail chains over 700 properties
(including 25 properties that have been sold) and has collected in excess of 98%
of the original contractual rent obligations on those properties. Realty Income
believes that the long-term ownership of an actively managed, diversified
portfolio of retail properties leased under long-term, net lease agreements can
produce consistent, predictable income and the potential for long-term capital
appreciation. Management believes that long-term leases, coupled with tenants
assuming responsibility for property expenses under the net lease structure,
generally produce a more predictable income stream than many other types of real
estate portfolios. As of April 1, 1997, the Company's single-tenant properties
were leased pursuant to leases with an average remaining term (excluding
extension options) of approximately 8.4 years.
The Company is a fully integrated real estate company with in-house
acquisition, leasing, legal, financial underwriting, portfolio management and
capital markets expertise. The seven senior officers of the Company, who have
each managed the Company's properties and operations for between six and 27
years, owned approximately 3.9% of the Company's outstanding common stock as of
April 15, 1997. Realty Income had 36 employees as of April 15, 1997.
S-3
<PAGE>
THE OFFERING
All capitalized terms used herein and not defined herein have the meanings
provided in "Description of the Notes." For a more complete description of the
terms of the Notes specified in the following summary, see "Description of the
Notes" in this Prospectus Supplement and "Description of Debt Securities" in the
accompanying Prospectus.
Securities
Offered........... $110,000,000 aggregate principal amount of % Notes
due 2007 (the "Notes").
Maturity............ The Notes will mature on May , 2007.
Interest Payment
Dates............. Semiannually on May and November , commencing
November , 1997.
Ranking............. The Notes will be direct, senior unsecured obligations
of the Company and will rank equally with all other
senior unsecured indebtedness of the Company from time
to time outstanding. The Notes will be effectively
subordinated to all indebtedness and other liabilities
of the Company's subsidiaries, and will also be
effectively subordinated to any senior secured
indebtedness of the Company to the extent of the
collateral pledged as security therefor. As of March 31,
1997, such subsidiary indebtedness (not including
guarantees of borrowings under the Credit Facility
(defined below)) and other liabilities (primarily rents
received in advance) aggregated approximately $331,000
and the Company (excluding its subsidiaries) had
unsecured senior indebtedness aggregating approximately
$94.7 million (approximately $6.5 million (excluding the
Notes) on a pro forma basis after giving effect to this
Offering and the application of net proceeds therefrom)
and senior secured indebtedness aggregating
approximately $869,000.
Use of Proceeds..... To pay down amounts drawn under the Company's revolving
acquisition credit facility (the "Credit Facility") and
for other general corporate purposes. See "Use of
Proceeds."
Limitations on
Incurrence of
Debt.............. The Notes contain various covenants, including the
following:
(1) The Company will not, and will not permit any
Subsidiary to, incur any Debt if, after giving effect
thereto, the aggregate principal amount of all
outstanding Debt of the Company and its Subsidiaries on
a consolidated basis is greater than 60% of the sum of
(i) the Company's Total Assets as of the end of the
fiscal quarter covered by the Company's most recent
report on Form 10-K or 10-Q, as the case may be, prior
to the incurrence of such additional Debt and (ii) the
increase in Total Assets from the end of such quarter
including, without limitation, any increase in Total
Assets caused by the application of the proceeds of such
additional Debt (such increase together with the
Company's Total Assets is referred to as "Adjusted Total
Assets").
S-4
<PAGE>
<TABLE>
<S> <C>
(2) The Company will not, and will not permit any
Subsidiary to, incur any Secured Debt if, after giving
effect thereto, the aggregate principal amount of all
outstanding Secured Debt of the Company and its
Subsidiaries on a consolidated basis is greater than 40%
of the Company's Adjusted Total Assets.
(3) The Company will not, and will not permit any
Subsidiary to, incur any Debt if the ratio of
Consolidated Income Available for Debt Service to Annual
Debt Service Charge for the four consecutive fiscal
quarters most recently ended prior to the date on which
such additional Debt is to be incurred would be less
than 1.5 to 1.0, calculated on a pro forma basis after
giving effect to the incurrence of such additional Debt
and the application of the proceeds therefrom.
(4) The Company will maintain Total Unencumbered Assets
of not less than 150% of the aggregate outstanding
principal amount of Unsecured Debt of the Company and
its Subsidiaries on a consolidated basis.
Optional
Redemption........ The Notes are redeemable at any time at the option of
the Company, in whole or in part, at a redemption price
equal to the sum of (i) the principal amount of the
Notes being redeemed plus accrued interest to the
redemption date and (ii) the Make-Whole Amount, if any.
See "Description of the Notes-- Optional Redemption."
</TABLE>
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, INCLUDING THE
DOCUMENTS INCORPORATED AND DEEMED TO BE INCORPORATED HEREIN AND THEREIN BY
REFERENCE, CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION
21E OF THE EXCHANGE ACT. FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT TO
RISK AND UNCERTAINTIES, MANY OF WHICH CANNOT BE PREDICTED WITH ACCURACY AND SOME
OF WHICH MIGHT NOT EVEN BE ANTICIPATED. FUTURE EVENTS AND ACTUAL RESULTS,
FINANCIAL AND OTHERWISE, MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS" AND "BUSINESS AND
PROPERTIES--MATTERS PERTAINING TO CERTAIN PROPERTIES AND TENANTS" IN THIS
PROSPECTUS SUPPLEMENT AND IN THE SECTION ENTITLED "BUSINESS--OTHER ITEMS" IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
(THE "ANNUAL REPORT") INCLUDING THE SUBHEADINGS ENTITLED "--COMPETITION FOR
ACQUISITION OF REAL ESTATE," "--ENVIRONMENTAL MATTERS", "TAXATION OF THE
COMPANY," "--EFFECT OF DISTRIBUTION REQUIREMENTS," "--REAL ESTATE OWNERSHIP
RISKS," AND "--DEPENDENCE ON KEY PERSONNEL."
S-5
<PAGE>
RECENT DEVELOPMENTS
AMENDMENT OF CREDIT FACILITY. On March 7, 1997, the Company amended its
$130 million unsecured acquisition credit facility (the "Credit Facility") to
provide for lower pricing levels that are tied to the investment grade ratings
given by certain credit rating agencies to the Company's senior unsecured debt
and to remove leverage-induced increases on the interest rate charged on both
unused credit balances and on the amount borrowed. See "Use of Proceeds."
INVESTMENT GRADE CREDIT RATING. The Company received an investment grade
corporate senior debt credit rating from Duff & Phelps Credit Rating Company,
Moody's Investors Service, Inc., and Standard & Poor's Rating Group in December
1996. Duff & Phelps assigned a rating of BBB, Moody's assigned a rating of Baa3,
and Standard & Poor's assigned a rating of BBB-. These ratings are subject to
change based upon, among other things, the Company's results of operations and
financial condition.
ACQUISITION OF 62 NET LEASED, RETAIL PROPERTIES. During 1996, the Company
increased the size of its portfolio through a strategic program of acquisitions.
The Company acquired 62 additional properties (the "New Properties"), and
selectively sold seven properties, increasing the number of properties in its
portfolio by 8.0% from 685 properties to 740 properties during 1996. Of the New
Properties, 60 were occupied as of April 1, 1997 and the remaining two were
pre-leased and under construction pursuant to contracts under which the tenants
have agreed to develop the properties (with development costs funded by the
Company) and to begin paying rent when the premises open for business. The New
Properties were acquired for an aggregate cost of approximately $57.5 million
(excluding the estimated unfunded development costs totaling $1.8 million on
properties under construction) at March 31, 1997. The New Properties are located
in 22 states, will contain approximately 603,900 leasable square feet and are
100% leased under net leases, with an average initial lease term of 11.7 years.
The weighted average annual unleveraged return on the cost of the New Properties
(including the estimated unfunded development cost of properties under
construction) is estimated to be 10.6%, computed as estimated contractual net
operating income (which in the case of a net leased property is equal to the
base rent or, in the case of properties under construction, the estimated base
rent under the lease) for the first year of each lease, divided by total
acquisition and estimated development costs. Since it is possible that a tenant
could default on the payment of contractual rent, no assurance can be given that
the actual return on the cost of the New Properties will not differ from the
foregoing percentage.
During the first quarter of 1997, the Company acquired 11 retail properties
in six states for $15.9 million (excluding the estimated unfunded development
costs totaling $1.6 million on five such properties under construction) and
selectively sold four properties, increasing the number of properties in its
portfolio to 747 properties. The 11 properties acquired will contain
approximately 236,200 leasable square feet and are 100% leased under net leases,
with an average initial lease term of 14.0 years. The weighted average annual
unleveraged return on the cost of the 11 properties (including the estimated
unfunded development costs of the five properties under development) is
estimated to be 10.2%, computed as estimated contractual net operating income
(calculated as described in the preceding paragraph) for the first year of each
lease, divided by total acquisition and estimated development costs. However, as
described in the preceding paragraph, no assurance can be given that the actual
return on the cost of these 11 properties will not differ from the foregoing
percentage. During the first quarter of 1997, the Company also invested $2.0
million in nine development properties acquired in 1996.
REINCORPORATION OF THE COMPANY IN MARYLAND. The Company has submitted a
proposal to its stockholders to reincorporate the Company in the State of
Maryland. Assuming approval by the stockholders at the upcoming annual meeting,
the Company expects to effect the reincorporation in May 1997.
S-6
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be approximately $109 million (after deducting the discount to
the Underwriters and other estimated expenses of this Offering payable by the
Company). The Company intends to use the net proceeds to pay down outstanding
indebtedness under the Credit Facility, which had an outstanding balance at
April 15, 1997 of $93.7 million, and for other general corporate purposes. The
Credit Facility is a three year, revolving, unsecured acquisition credit
facility with a borrowing capacity of $130 million. Borrowings under the Credit
Facility currently bear interest at a spread of 1.25% over the London Interbank
Offered Rate ("LIBOR"). The Credit Facility also offers the Company other
interest rate options. The maturity date on the Credit Facility is November 27,
1999 and the effective interest rate was 6.85% at December 31, 1996. Pending
application for such purposes, such net proceeds may be invested in short-term
investments.
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of December 31, 1996 and as adjusted to give effect to the issuance and sale
of the Notes offered hereby and the use of the estimated net proceeds therefrom
to repay borrowings under the Credit Facility as described in "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
------------------------
HISTORICAL AS ADJUSTED
----------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
DEBT
Credit Facility(1)................................................ $ 70,000 $ --
Notes due 2007.................................................... -- 110,000
----------- -----------
Total debt...................................................... 70,000 110,000
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share, 5,000,000 shares
authorized, no shares issued or outstanding..................... -- --
Common stock, $1.00 par value per share; 40,000,000 shares
authorized; 22,979,537 issued and outstanding................... 22,980 22,980
Capital in excess of par value...................................... 516,004 516,004
Accumulated distributions in excess of net income................... (164,743) (164,743)
----------- -----------
Total stockholders' equity...................................... 374,241 374,241
----------- -----------
Total capitalization............................................ $ 444,241 $ 484,241
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) The amount drawn on the Credit Facility was $93.7 million at April 15, 1997
and is expected to be approximately $98 million on the closing date of the
Offering.
S-7
<PAGE>
BUSINESS AND PROPERTIES
OVERVIEW
The Company is a fully integrated, self-administered and self-managed REIT
which management believes is the nation's largest publicly-traded owner of
freestanding, single-tenant, retail properties diversified geographically and by
industry and operated under net lease agreements. As of April 1, 1997, the
Company owned a diversified portfolio of 747 properties located in 42 states
with over 5.4 million square feet of leasable space. Approximately 99% of the
Company's properties were leased as of April 1, 1997. Unless otherwise
indicated, information regarding the Company's properties is as of April 1,
1997.
Realty Income adheres to a focused strategy of acquiring freestanding,
single-tenant, retail properties leased to national and regional retail chains
under long-term, net lease agreements. The Company typically acquires, and then
leases back, retail store locations from retail chain store operators, providing
capital to the operators for continued expansion and other purposes. The
Company's net lease agreements generally are for initial terms of 10 to 20
years, require the tenant to pay a minimum monthly rent and property operating
expenses (taxes, insurance and maintenance), and provide for future rent
increases (typically subject to ceilings) based on increases in the consumer
price index or additional rent calculated as a percentage of the tenant's gross
sales above a specified level.
Since 1970 and through December 31, 1996, Realty Income has acquired and
leased back to national and regional retail chains over 700 properties
(including 25 properties that have been sold) and has collected in excess of 98%
of the original contractual rent obligations on those properties. Realty Income
believes that the long-term ownership of an actively managed, diversified
portfolio of retail properties leased under long-term, net lease agreements can
produce consistent, predictable income and the potential for long-term capital
appreciation. Management believes that long-term leases, coupled with tenants
assuming responsibility for property expenses under the net lease structure,
generally produce a more predictable income stream than many other types of real
estate portfolios. As of April 1, 1997, the Company's single-tenant properties
were leased pursuant to leases with an average remaining term (excluding
extension options) of approximately 8.4 years.
The Company was formed on September 9, 1993 in the State of Delaware. Realty
Income commenced operations as a REIT on August 15, 1994 through the merger of
25 public and private real estate limited partnerships (the "Partnerships") with
and into the Company (the "Consolidation"). Each of the partnerships was formed
between 1970 and 1989 for the purpose of acquiring and managing long-term, net
leased properties.
BUSINESS OBJECTIVES AND STRATEGY
GENERAL. The Company's primary business objective is to generate a
consistent and predictable level of FFO per share and distributions to
stockholders. Additionally, the Company generally will seek to increase FFO per
share and distributions to stockholders through active portfolio management and
the acquisition of additional properties. The Company also seeks to lower the
ratio of distributions to stockholders as a percentage of FFO in order to allow
internal cash flow to be used to fund additional acquisitions and for other
corporate purposes. The Company's portfolio management focus includes (i)
contractual rent increases on existing leases; (ii) rental increases at the
termination of existing leases when market conditions permit; and (iii) the
active management of the Company's property portfolio, including selective sales
of properties. The Company generally pursues the acquisition of additional
properties under long-term, net lease agreements with initial contractual base
rent which, at the time of acquisition and as a percentage of acquisition cost,
is in excess of the Company's estimated cost of capital.
INVESTMENT PHILOSOPHY. Realty Income believes that the long-term ownership
of an actively managed, diversified portfolio of retail properties under
long-term, net lease agreements can produce consistent, predictable income and
the potential for long-term capital appreciation. Under a net lease agreement,
the
S-8
<PAGE>
tenant agrees to pay a minimum monthly rent and property expenses (taxes,
maintenance, and insurance) plus, typically, future rent increases (typically
subject to ceilings) based on increases in the consumer price index or
additional rent calculated as a percentage of the tenant's gross sales above a
specified level. The Company believes that long-term leases, coupled with the
tenants assuming responsibility for property expenses, generally produce a more
predictable income stream than many other types of real estate portfolios, while
continuing to offer the opportunity for capital appreciation.
INVESTMENT STRATEGY. In identifying new properties for acquisition, Realty
Income focuses on providing expansion capital to middle market retail chains by
acquiring, then leasing back, their retail store locations. The Company
classifies retail tenants into three categories: venture, middle market, and
upper market. Venture companies are those which typically offer a new retail
concept in one geographic region of the country and operate between five and 50
retail outlets. In general, these retail chains are thinly capitalized and are
in the process of solving distribution, marketing, concept, geographic
adaptation, and other problems associated with a new, growing company. Middle
market retail chains are those which typically have 50 to 500 retail outlets,
operations in more than one geographic region, success through one or more
economic cycles, a proven, replicable concept, and an objective of further
expansion. The upper market retail chains typically consist of companies with
500 or more stores which operate nationally in a mature retail concept. They
generally have strong operating histories and access to several sources of
capital.
Realty Income focuses on acquiring properties leased to emerging, middle
market retail chains which the Company believes are more attractive for
investment because: (i) they generally have overcome many of the operational and
managerial obstacles that tend to adversely affect venture retailers; (ii) they
typically require capital to fund expansion but have more limited financing
options compared to upper market retailers; (iii) historically, they generally
have provided attractive risk-adjusted returns to the Company over time, since
their financial strength has in many cases tended to improve as their businesses
have matured; (iv) their relatively large size compared to venture retailers
allows them to spread corporate expenses among a greater number of stores; and
(v) compared to venture retailers, middle market retailers typically have the
critical mass to survive if a number of locations have to be closed due to
underperformance.
CREDIT STRATEGY. Realty Income provides sale leaseback financing primarily
to less than investment grade retail chains. Since 1970 and through December 31,
1996, Realty Income has acquired and leased back to national and regional retail
chains over 700 properties (including 25 properties that have been sold) and has
collected in excess of 98% of the original contractual rent obligations on those
properties. The Company believes that it is within this market that it can
receive a better risk adjusted return on the financing that it provides to
retailers.
Realty Income believes that the primary financial obligations of middle
market retailers typically include their bank and other debt, payment
obligations to suppliers and real estate lease obligations. Because the Company
owns the land and buildings on which the tenant conducts its retail business,
the Company believes that the risk of default on the retailers' lease
obligations is less than the retailers' unsecured general obligations. It has
been the Company's experience that since retailers must retain their profitable
retail locations in order to survive, in the event of a Chapter 11
reorganization they are less likely to reject a lease for a profitable location,
which would terminate their right to use the property. Thus, as the property
owner, the Company believes it will fare better than unsecured creditors of the
same retailer in the event of a Chapter 11 reorganization. In addition, Realty
Income believes that the risk of default on the real estate leases can be
further mitigated by monitoring the performance of the retailers' individual
unit locations and selling those units that are weaker performers.
In order to qualify for inclusion in the Company's portfolio, new
acquisitions must meet stringent investment and credit requirements. The
properties must generate attractive current yields, and the tenant must meet the
Company's credit standards and have a proven market concept. The Company has
S-9
<PAGE>
established a three part analysis that examines each potential investment based
on: 1) industry, company, market conditions and credit profile; 2) location
profitability, if available; and 3) overall real estate characteristics, value,
and comparative rental rates. Companies that have been approved for acquisitions
are generally those with fifty or more retail stores which are located in highly
visible areas, with easy access to major thoroughfares, attractive demographics,
and acquisition costs at or below appraised value.
ACQUISITION STRATEGY. Realty Income seeks to invest in industries that are
dominated by independent local operators and in which several well organized
regional and national chains are capturing market share through service, quality
control, economies of scale, mass media advertising, and selection of prime
retail locations. The Company executes its acquisition strategy by acting as a
source of capital to regional and national retail chain stores in a variety of
industries by acquiring, then leasing back, their retail store locations.
Relying on executives from its acquisitions, credit underwriting, portfolio
management, finance, accounting, operations, capital markets, and legal
departments, the Company undertakes thorough research and analysis in
identifying appropriate industries, tenants, and property locations for
investment. In selecting real estate for potential investment, the Company
generally will seek to acquire properties that have the following
characteristics:
- Freestanding, commercially zoned property with a single tenant;
- Properties that are important retail locations for national and regional
retail chains;
- Properties that are located within attractive demographic areas relative
to the business of their tenants, with high visibility and easy access to
major thoroughfares;
- Properties that can be purchased with the simultaneous execution or
assumption of long-term, net lease agreements, providing the opportunity
for both current income and future rent increases (typically subject to
ceilings) based on increases in the consumer price index or through the
payment of additional rent calculated as a percentage of the tenant's
gross sales above a specified level; and
- Properties that can be acquired at or below their appraised value at
prices generally ranging from $300,000 to $10 million.
PORTFOLIO MANAGEMENT STRATEGY. The active management of the property
portfolio is an essential component of the Company's long-term strategy. The
Company continually monitors its portfolio for changes that could affect the
performance of the industries, tenants, and locations in which it has invested.
Realty Income's Executive Committee meets at least monthly to review industry
and tenant research, due diligence, property operations and portfolio
management. This monitoring typically includes ongoing review and analysis of:
(i) the performance of various tenant industries; (ii) the operation,
management, business planning, and financial condition of the tenants; (iii) the
health of the individual markets in which the Company owns properties, from both
an economic and real estate standpoint; and (iv) the physical maintenance of the
Company's individual properties. The portfolio is analyzed on an ongoing basis
with a view towards optimizing performance and returns.
While the Company generally intends to hold its net lease properties for
long-term investment, the Company actively manages its portfolio of net lease
properties. The Company intends to pursue a strategy of identifying properties
that may be sold at attractive prices, particularly where the Company believes
reinvestment of the sales proceeds can generate a higher cash flow to the
Company than the property being sold. While the Company intends to pursue such a
strategy, it will only do so within the constraints of the income tax rules
regarding REIT status.
CAPITAL STRATEGY. The Company utilizes its $130 million, unsecured
acquisition Credit Facility as a vehicle for the short-term financing of the
acquisition of new properties. When outstanding borrowings under the Credit
Facility reach a certain level (generally in the range of $75 to $100 million),
the Company intends to refinance those borrowings with the net proceeds of
long-term or permanent financing, which
S-10
<PAGE>
may include the issuance of common stock, preferred stock or convertible
preferred stock, debt securities or convertible debt securities. However, there
can be no assurance that the Company will be able to effect any such refinancing
or that market conditions prevailing at the time of refinancing will enable the
Company to issue equity or debt securities upon acceptable terms. The Company
believes that it is best served by a conservative capital structure, with a
majority of its capital consisting of equity. On a pro forma basis assuming
issuance of the Notes and application of the estimated net proceeds therefrom
occurring on April 15, 1997, the Company's total indebtedness would have been
approximately 21% of its total market capitalization (defined as shares of the
Company's common stock outstanding multiplied by the last reported sales price
of the Common Stock on April 15, 1997 of $23.875 per share plus total
indebtedness).
The Company received an investment grade corporate credit rating from Duff &
Phelps Credit Rating Company, Moody's Investors Service, Inc., and Standard &
Poor's Rating Group in December 1996. Duff & Phelps assigned a rating of BBB,
Moody's assigned a rating of Baa3, and Standard & Poor's assigned a rating of
BBB-. These ratings are subject to change based upon, among other things, the
Company's results of operations and financial condition.
In December 1996, the Company entered into a treasury interest rate lock
agreement to hedge against the possibility of rising interest rates. Under the
interest rate lock agreement, the Company receives or makes a payment based on
the differential between a specified interest rate, 6.537%, and the actual
10-year treasury interest rate on a notional principal of $90 million. Based on
the 10-year treasury interest rate at March 31, 1997, the Company had an
unrecognized gain on the agreement of approximately $2,310,000. The Company is
using the treasury interest rate lock agreement to offset its interest rate risk
on $90 million of the $110 million of the Notes offered hereby.
COMPETITIVE STRATEGY. The Company believes that, to utilize its investment
philosophy and strategy most successfully, it must seek to maintain the
following competitive advantages:
(i) SIZE AND TYPE OF INVESTMENT PROPERTIES: The Company believes that
smaller ($300,000 to $10,000,000) retail net leased properties represent an
attractive investment opportunity in today's real estate environment. Due to
the complexities of acquiring and managing a large portfolio of relatively
small assets, the Company believes that these types of properties have not
experienced significant institutional participation or the corresponding
yield reduction experienced by larger income producing properties. The
Company believes the less intensive day to day property management required
by net lease agreements, coupled with the active management of a large
portfolio of smaller properties by the Company, is an effective investment
strategy.
In 1969, Realty Income identified a market niche and systematically
built a portfolio around this niche. Twenty-seven years later, the Company
believes that it is the nation's largest publicly-traded owner of
free-standing, single-tenant, retail properties diversified geographically
and by industry and operated under net lease agreements, with over 5.4
million square feet of leasable space.
The tenants of Realty Income's freestanding retail properties include
convenience stores, consumer electronics stores, child care centers,
restaurants, and other retailers providing goods and services which satisfy
basic human needs. In order to grow and expand, they generally need capital.
Since the acquisition of real estate is typically the single largest capital
expenditure of many such retailers, Realty Income's method of purchasing the
property and then leasing it back under a net lease arrangement allows the
retail chain to free up capital.
(ii) INVESTMENT IN NEW INDUSTRIES: While specializing in single tenant
properties, the Company will seek to further diversify its portfolio among a
variety of industries. The Company believes that diversification will allow
it to invest in industries that are currently growing and have
characteristics the Company finds attractive. These characteristics include,
but are not limited to, industries dominated by local operators where
national and regional chain operators can gain market share and dominance
through more efficient operations, as well as industries taking advantage of
major
S-11
<PAGE>
demographic shifts in the population base. For example, in the early 1970s,
Realty Income targeted the fast food industry to take advantage of the
country's increasing desire to dine away from home, and in the early 1980s,
it targeted the child day care industry, responding to the need for
professional child care as more women entered the work force.
(iii) DIVERSIFICATION: Diversification of the portfolio by industry
type, tenant and geographic location is key to the Company's objective of
providing predictable investment results for its stockholders. As the
Company expands it will seek to further diversify its portfolio. During 1996
and 1995, the Company added the consumer electronics and convenience store
industries, respectively, to the portfolio.
(iv) MANAGEMENT SPECIALIZATION: The Company believes that its
management's specialization in single tenant properties operated under net
lease agreements is important to meeting its objectives. The Company plans
to maintain this specialization and will seek to employ and train high
quality professionals in this specialized area of real estate ownership,
finance and management.
(v) TECHNOLOGY: The Company intends to stay at the forefront of
technology in its efforts to efficiently and economically carry out its
operations. The Company maintains a sophisticated information system that
allows it to analyze its portfolio's performance and actively manage its
investments. The Company believes that technology and information based
systems will play an increasingly important role in its competitiveness as
an investment manager and source of capital to a variety of industries and
tenants.
PROPERTIES
As of April 1, 1997, the Company owned a diversified portfolio of 747
properties in 42 states containing over 5.4 million square feet of leasable
space. The portfolio consisted of 159 after-market automotive retail locations
(80 automotive parts stores and 79 automotive service locations), one book
store, 318 child care centers, 36 consumer electronics stores, 42 convenience
stores, seven home furnishings stores, one office supply store, 171 restaurant
facilities and 12 other properties. Of the 747 properties, 684 or 91% were
leased to national or regional retail chain operators; 42 or 6% were leased to
franchisees of retail chain operators; 16 or 2% were leased to other tenant
types; and five or less than 1% were available for lease. At April 1, 1997, over
98% of the properties were under net lease agreements. Net leases typically
require the tenant to be responsible for property operating costs including
property taxes, insurance and expenses of maintaining the property.
The Company's net leased retail properties are retail locations leased to
national and regional retail chain store operators. At April 1, 1997, the
properties averaged approximately 7,300 square feet of leasable retail space on
approximately 43,500 square feet of land. Generally, buildings are single-story
properties with adequate parking on site to accommodate peak retail traffic
periods. The properties tend to be on major thoroughfares with relatively high
traffic counts and adequate access, egress and proximity to a sufficient
population base to constitute a sufficient market or trade area for the
retailer's business.
The following table sets forth certain geographic diversification
information regarding Realty Income's portfolio at April 1, 1997:
<TABLE>
<CAPTION>
PERCENT OF
APPROXIMATE TOTAL
NUMBER OF PERCENT LEASABLE ANNUALIZED ANNUALIZED
STATE PROPERTIES LEASED SQUARE FEET BASE RENT(1) BASE RENT
- ------------------------------- ------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Alabama........................ 6 100% 42,300 $ 319,000 0.5%
Arizona........................ 26 100 178,400 2,362,000 3.8
California..................... 53 98 1,001,900 10,593,000 17.1
Colorado....................... 42 98 233,500 2,984,000 4.8
Connecticut.................... 4 100 17,200 240,000 0.4
</TABLE>
S-12
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
APPROXIMATE TOTAL
NUMBER OF PERCENT LEASABLE ANNUALIZED ANNUALIZED
STATE PROPERTIES LEASED SQUARE FEET BASE RENT(1) BASE RENT
- ------------------------------- ------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Florida........................ 49 100 461,900 4,264,000 6.9
Georgia........................ 37 100 187,600 2,448,000 3.9
Idaho.......................... 11 100 52,000 656,000 1.1
Illinois....................... 25 100 182,600 2,081,000 3.4
Indiana........................ 23 100 122,800 1,438,000 2.3
Iowa........................... 8 100 51,700 456,000 0.7
Kansas......................... 15 100 129,000 1,441,000 2.3
Kentucky....................... 11 100 33,300 835,000 1.3
Louisiana...................... 2 100 10,700 126,000 0.2
Maryland....................... 6 100 34,900 505,000 0.8
Massachusetts.................. 4 100 20,900 440,000 0.7
Michigan....................... 5 100 26,900 353,000 0.6
Minnesota...................... 17 100 118,400 1,713,000 2.7
Mississippi.................... 11 100 106,600 792,000 1.3
Missouri....................... 27 100 163,600 1,842,000 2.9
Montana........................ 1 100 5,400 71,000 0.1
Nebraska....................... 8 100 47,100 509,000 0.8
Nevada......................... 5 100 29,100 353,000 0.6
New Hampshire.................. 1 100 6,400 122,000 0.2
New Jersey..................... 2 100 22,700 346,000 0.6
New Mexico..................... 3 100 12,000 103,000 0.2
New York....................... 5 100 38,300 539,000 0.9
North Carolina................. 20 100 82,200 1,337,000 2.1
Ohio........................... 48 100 210,500 3,426,000 5.5
Oklahoma....................... 9 100 60,200 543,000 0.9
Oregon......................... 18 100 98,500 1,133,000 1.8
Pennsylvania................... 4 100 28,300 420,000 0.7
South Carolina................. 20 95 85,000 1,152,000 1.9
South Dakota................... 1 100 6,100 79,000 0.1
Tennessee...................... 10 100 78,900 963,000 1.6
Texas.......................... 127 99 980,900 9,073,000 14.6
Utah........................... 7 100 45,400 591,000 1.0
Virginia....................... 16 100 79,000 1,256,000 2.0
Washington..................... 42 98 249,700 2,959,000 4.8
West Virginia.................. 2 100 16,800 147,000 0.2
Wisconsin...................... 11 100 60,500 738,000 1.2
Wyoming........................ 5 100 26,900 324,000 0.5
--- --- ------------ ------------- -----
Total/Average.................. 747 99% 5,446,100 $ 62,072,000 100.0%
--- --- ------------ ------------- -----
--- --- ------------ ------------- -----
</TABLE>
- ------------------------
(1) Annualized base rent is calculated by multiplying the monthly contractual
base rent as of April 1, 1997 for each of the properties by 12, except that,
for the properties under construction, estimated contractual base rent for
the first month of the respective leases is used instead of base rent as of
April 1, 1997. The estimated contractual base rent for the properties under
construction is based upon the estimated acquisition costs of the
properties. Annualized base rent does not include percentage rents (i.e.,
additional rent calculated as a percentage of the tenant's gross sales above
a specified level), if any, that may be payable under leases covering
certain of the properties.
S-13
<PAGE>
The following table sets forth certain information regarding the Company's
properties, classified according to the business of the respective tenants:
<TABLE>
<CAPTION>
APPROXIMATE REALTY INCOME APPROXIMATE
TOTAL OWNED LEASABLE ANNUALIZED
TENANT INDUSTRY SEGMENT LOCATIONS(1) LOCATIONS SQUARE FEET BASE RENT(2)
- ------------------------------------ ---------------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
AFTER-MARKET AUTOMOTIVE
CSK Auto, Inc. (formerly Northern Parts 580 79 409,200 $ 4,192,000
Automotive).......................
Discount Tire....................... Service 310 18 103,200 1,177,000
Econo Lube N' Tune.................. Service 210 18 49,400 1,257,000
Jiffy Lube.......................... Service 1,400 29 68,700 1,851,000
Q Lube.............................. Service 490 4 7,600 183,000
R&S Strauss......................... Service 110 2 31,200 431,000
Speedy Muffler King................. Service 1,080 7 40,900 531,000
Other............................... Parts/Service -- 2 6,500 90,000
--- ------------ ------------
TOTAL AFTER-MARKET AUTOMOTIVE..... 159 716,700 9,712,000
BOOK STORES
Barnes & Noble...................... Book Stores 1,010 1 30,000 450,000
--- ------------ ------------
TOTAL BOOK STORES................. 1 30,000 450,000
CHILD CARE
Children's World Learning Centers... Child Care 530 134 964,000 13,612,000
Kinder-Care Learning Centers........ Child Care 1,150 13 79,800 1,087,000
La Petite Academy................... Child Care 790 170 972,700 8,853,000
Other............................... Child Care -- 1 4,200 --
--- ------------ ------------
TOTAL CHILD CARE.................. 318 2,020,700 23,552,000
CONSUMER ELECTRONICS
Best Buy............................ Consumer Electronics 270 2 104,800 1,321,000
Rex Stores.......................... Consumer Electronics 230 34 408,300 2,694,000
--- ------------ ------------
TOTAL CONSUMER ELECTRONICS........ 36 513,100 4,015,000
CONVENIENCE STORES
7-ELEVEN............................ Convenience 20,240 3 9,700 235,000
Dairy Mart.......................... Convenience 1,020 22 66,500 1,513,000
East Coast Oil...................... Convenience 40 2 6,400 219,000
The Pantry, Inc..................... Convenience 400 14 34,400 1,333,000
Other............................... Convenience -- 1 2,100 31,000
--- ------------ ------------
TOTAL CONVENIENCE STORES.......... 42 119,100 3,331,000
HOME FURNISHINGS
Levitz.............................. Home Furnishings 130 4 376,400 2,496,000
Aaron Rents......................... Home Furnishings 290 3 161,600 464,000
--- ------------ ------------
TOTAL HOME FURNISHINGS............ 7 538,000 2,960,000
OFFICE SUPPLIES
Office Max.......................... Office Supplies 560 1 28,700 431,000
--- ------------ ------------
TOTAL OFFICE SUPPLIES............. 1 28,700 431,000
</TABLE>
S-14
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE REALTY INCOME APPROXIMATE
TOTAL OWNED LEASABLE ANNUALIZED
TENANT INDUSTRY SEGMENT LOCATIONS(1) LOCATIONS SQUARE FEET BASE RENT(2)
- ------------------------------------ ---------------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
RESTAURANTS
Don Pablo's......................... Dinner House 70 7 60,700 $ 604,000
Carvers............................. Dinner House 90 3 26,600 495,000
Other............................... Dinner House -- 13 108,300 1,015,000
Golden Corral....................... Family 460 87 512,500 6,747,000
Sizzler............................. Family 630 7 37,600 841,000
Other............................... Family -- 4 23,400 151,000
Hardees............................. Fast Food 3,100 3 10,300 144,000
Taco Bell........................... Fast Food 4,890 24 54,100 1,502,000
Whataburger......................... Fast Food 520 9 23,000 616,000
Other............................... Fast Food -- 14 39,800 747,000
--- ------------ ------------
TOTAL RESTAURANTS............... 171 896,300 12,862,000
TOTAL OTHER..................... Miscellaneous 12 583,500 4,759,000
--- ------------ ------------
TOTAL........................... 747 5,446,100 $ 62,072,000
--- ------------ ------------
--- ------------ ------------
</TABLE>
- --------------------------
(1) Approximate total number of retail locations in operation (including both
owned and franchised locations), based on information provided to the
Company by the respective tenants.
(2) Annualized base rent is calculated by multiplying the monthly contractual
base rent as of April 1, 1997 for each of the properties by 12, except that,
for the properties under construction, estimated contractual base rent for
the first month of the respective leases is used instead of base rent as of
April 1, 1997. The estimated contractual base rent for the properties under
construction is based upon the estimated acquisition costs of the
properties. Annualized base rent does not include percentage rents (i.e.,
additional rent calculated as a percentage of the tenant's gross sales above
a specified level), if any, that may be payable under leases covering
certain of the properties.
Of the 747 properties in the portfolio, 740 are single-tenant properties
with the remaining properties being multi-tenant properties. As of April 1,
1997, 735 or 99% of the single-tenant properties were net leased with an average
remaining lease term (excluding extension options) of approximately 8.4 years.
The
S-15
<PAGE>
following table sets forth certain information regarding the timing of initial
lease term expirations (excluding extension options) on the Company's 735 net
leased, single tenant retail properties:
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
LEASES ANNUALIZED ANNUALIZED
YEAR EXPIRING BASE RENT(2) BASE RENT
- ------------------------------------------------------ -------------- ------------- -------------
<S> <C> <C> <C>
1997.................................................. 25 $ 1,068,000 1.8%
1998.................................................. 4 168,000 0.3
1999.................................................. 20 900,000 1.5
2000.................................................. 27 1,335,000 2.3
2001.................................................. 49 3,796,000 6.5
2002.................................................. 74 5,878,000 10.1
2003.................................................. 68 5,163,000 8.9
2004.................................................. 110 8,896,000 15.3
2005.................................................. 86 6,044,000 10.4
2006.................................................. 29 2,446,000 4.2
2007.................................................. 82 4,949,000 8.5
2008.................................................. 39 3,174,000 5.5
2009.................................................. 12 896,000 1.5
2010.................................................. 34 2,729,000 4.7
2011.................................................. 31 3,541,000 6.1
2012.................................................. 8 714,000 1.2
2014.................................................. 2 265,000 0.5
2015.................................................. 25 4,789,000 8.2
2016.................................................. 7 1,351,000 2.3
2017.................................................. 2 83,000 0.1
2018.................................................. 1 39,000 0.1
--- ------------- -----
Total............................................... 735(1) $ 58,224,000 100.0%
--- ------------- -----
--- ------------- -----
</TABLE>
- ------------------------
(1) The table does not include seven multi-tenant properties and five vacant,
unleased properties owned by the Company. The lease expirations for
properties under construction are based on the estimated date of completion
of such properties.
(2) Annualized base rent is calculated by multiplying the monthly contractual
base rent as of April 1, 1997 for each of the properties by 12, except that,
for the properties under construction, estimated contractual base rent for
the first month of the respective leases is used instead of base rent as of
April 1, 1997. The estimated contractual base rent for the properties under
construction is based upon the estimated acquisition costs of the
properties. Annualized base rent does not include percentage rents (i.e.,
additional rent calculated as a percentage of the tenant's gross sales above
a specified level), if any, that may be payable under leases covering
certain of the properties.
DESCRIPTION OF LEASING STRUCTURE. At April 1, 1997, over 98% of the
Company's properties were leased pursuant to net leases. In most cases, the
leases are for initial terms of from 10 to 20 years and the tenant has an option
to extend the initial term. The leases generally provide for a minimum base rent
plus future increases (typically subject to ceilings) based on increases in the
consumer price index or additional rent based upon the tenant's gross sales
above a specified level (i.e., percentage rent). Where leases provide for rent
increases based on increases in the consumer price index, typically such
increases permanently become part of the base rent. Where leases provide for
percentage rent, this additional rent is typically payable only if the tenant's
gross sales for a given period (usually one year) exceed a specified level, and
then is typically calculated as a percentage of only the amount of gross sales
in excess of such level. In
S-16
<PAGE>
general, the leases require the tenant to pay property taxes, insurance, and
expenses of maintaining the property.
MATTERS PERTAINING TO CERTAIN PROPERTIES AND TENANTS
As of April 1, 1997, the Company's four largest tenants were Children's
World Learning Centers, La Petite Academy, Golden Corral and CSK Auto, Inc. (CSK
was formerly called Northern Automotive), which accounted for approximately
23.7%, 16.5%, 12.4% and 8.4%, respectively, of the Company's rental revenue for
the year ended December 31, 1996. The financial position and results of
operations of the Company and its ability to make distributions to stockholders
and debt service payments may be materially adversely affected by financial
difficulties experienced by any such major tenants or other tenants, including,
but not limited to, a bankruptcy, insolvency or general downturn in the business
of such tenants.
For the year ended December 31, 1996, approximately 42.0%, 24.3% and 15.3%
of the Company's rental revenues were attributable to tenants in the child care,
restaurant and after-market automotive industries, respectively. A downturn in
any of these industries generally, whether nationwide or limited to specific
sectors of the United States, could adversely affect tenants in those
industries, which in turn could materially adversely affect the financial
position and results of operations of the Company and its ability to make
distributions to stockholders and debt service payments. In that regard, a
substantial number of the Company's properties are leased to middle market
retail chains, which generally have more limited financial and other resources
than certain upper market retail chains and therefore are more likely to be
adversely affected by a downturn in their respective businesses or in the
national or regional economy generally.
Five of the Company's properties were vacant as of April 1, 1997 and
available for lease. Four of the vacant properties were previously leased to
restaurant operators and one was formerly leased to a child care operator.
As of April 1, 1997, 20 of the Company's properties which were under lease
were vacant and available for sublease by the tenant. These 20 properties (11
restaurants, four after-market automotive stores, three child care, one other
store and one medical building) were available for sublease and had tenants who
were current with their rent and other lease obligations.
As of April 1, 1997, 19 of the Company's properties had been sublet to
tenants in different industries than the original tenant. All of these tenants
were current with their rent and other lease obligations.
DEVELOPMENT OF CERTAIN PROPERTIES
Of the 62 New Properties acquired by the Company in 1996, 60 were occupied
as of April 1, 1997 and the remaining two were pre-leased and under construction
pursuant to contracts under which the tenants have agreed to develop the
properties (with development costs funded by the Company) and to begin paying
rent when the premises opens for business. In the case of development
properties, the Company typically enters into an agreement with a tenant
pursuant to which the tenant retains a contractor to construct the improvements
on the property and the Company funds the costs of such development. The tenant
is contractually obligated to complete the construction on a timely basis,
generally within eight months after the Company purchases the land and to pay
construction cost overruns to the extent they exceed the construction budget by
more than a predetermined amount. The Company typically also enters into a lease
with the tenant at the time the Company purchases the land, which generally
requires that the tenant begin paying base rent, calculated as a percentage of
the Company's acquisition cost for the property, including construction costs
and capitalized interest, when the premises opens for business. During 1996, the
Company acquired 18 development properties, 16 of which have been completed, are
operating and paying rent. Completion of the remaining two development
properties is anticipated in May 1997. The Company will continue to seek to
acquire land for development under similar arrangements.
S-17
<PAGE>
Of the 11 properties acquired during the first quarter of 1997, six were
occupied as of April 1, 1997 and the remaining five were pre-leased and under
construction pursuant to contracts under which the tenants have agreed to
develop the properties (with development costs funded by the Company) and to
begin paying rent when the premises open for business.
S-18
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial data for the Company and
the Predecessor (as defined below), as the case may be, for each of the five
years in the period ended December 31, 1996, and has been derived from financial
statements which have been audited by the Company's independent auditors, KPMG
Peat Marwick LLP. The following financial information should be read in
conjunction with the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, which is
incorporated by reference herein and in the accompanying Prospectus, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein. The following table also includes certain property
data.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR(2)
------------------------------------- ------------------------
AS OF OR FOR THE YEAR ENDED DECEMBER AS OF OR FOR THE YEAR
31, ENDED DECEMBER 31,
------------------------------------- ------------------------
1996 1995 1994(1) 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue:
Rental revenue............................... $ 56,777 $ 51,185 $ 47,905 $ 48,584 $ 48,694
Interest and other income.................... 180 370 958 434 340
----------- ----------- ----------- ----------- -----------
Total revenue.............................. 56,957 51,555 48,863 49,018 49,034
----------- ----------- ----------- ----------- -----------
Expenses:
Depreciation and amortization................ 16,422 14,849 13,790 14,689 14,811
General and administrative expenses and
advisor fees............................... 5,181 6,875 7,187 5,886 5,416
Property..................................... 1,640 1,607 2,095 1,768 1,867
Interest..................................... 2,367 2,642 396 5 --
Provision for impairment losses.............. 579 -- 135 935 --
Consolidation costs.......................... -- -- 11,201 -- --
----------- ----------- ----------- ----------- -----------
Total expenses............................. 26,189 25,973 34,804 23,283 22,094
----------- ----------- ----------- ----------- -----------
Income from operations......................... 30,768 25,582 14,059 25,735 26,940
Net gain on sales of properties................ 1,455 18 1,165 3,583 1,113
----------- ----------- ----------- ----------- -----------
Net income..................................... $ 32,223 $ 25,600 $ 15,224 $ 29,318 $ 28,053
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income per share(3)........................ $ 1.40 $ 1.27 $ 0.78 $ -- $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average common shares
outstanding(3)............................... 22,977,837 20,230,963 19,502,091 -- --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA
Properties, before accumulated depreciation.... $ 564,540 $ 515,426 $ 450,703 $ 451,738 $ 476,822
Total assets (book value)...................... 454,097 417,639 352,768 384,474 395,671
Total liabilities.............................. 79,856 36,218 17,352 2,570 2,150
Stockholders' equity........................... 374,271 381,421 335,416 381,904 393,418
OTHER DATA
FFO(4)......................................... 47,718 40,414 39,185 41,359 41,751
Capital expenditures........................... 37 296 222 94 13
RATIOS
Debt as a percentage of Total Assets(5)........ 12.8% 4.0% 3.0% 0.3% 0.3%
Secured Debt as a percentage of Total
Assets(5)(6)................................. 0.2% 0.2% -- -- --
Debt Service Coverage Ratio(7)................. 26x 20x 83x 8,990x --
Ratio of earnings to fixed charges(8).......... 14x 10x 39x 5,865x --
PORTFOLIO DATA (AT END OF PERIOD)
Number of properties........................... 740 685 630 631 634
Net rentable square feet....................... 5,226,700 4,673,700 4,064,800 4,052,800 4,468,200
</TABLE>
- --------------------------
(1) Realty Income commenced operations as a REIT on August 15, 1994 through the
merger of the Partnerships with and into the Company (the "Consolidation").
The Consolidation was accounted for as a reorganization of
S-19
<PAGE>
affiliated entities under common control in a manner similar to a
pooling-of-interests. Under this method, the assets and liabilities of the
Partnerships were carried over at their historical book values and their
operations have been recorded on a combined historical cost basis. The
pooling-of-interests method of accounting also requires the reporting of the
results of operations as though the entities had been combined as of the
beginning of the earliest period presented. Accordingly, the results of
operations for the year ended December 31, 1994 comprise those of the
separate Partnerships combined from January 1, 1994 through August 15, 1994
and those of the Company from August 16, 1994 through December 31, 1994.
Costs incurred to effect the Consolidation and integrate the continuing
operations of the separate Partnerships were expenses of the Company in
1994, the year in which the Consolidation was consummated.
(2) Prior to the Consolidation, the Company had no significant operations.
Therefore, the combined operations for the periods prior to the
Consolidation represent the operations of the Partnerships (the
"Predecessor").
(3) Due to the change in the capital structure caused by the Consolidation as
described in note (1) above, share and per share information would not be
meaningful for 1993 and 1992 and therefore has not been included.
(4) FFO is calculated by adding (i) net income before net gain on sale of
properties, (ii) depreciation and amortization, (iii) provision for
impairment losses and (iv) one-time Consolidation costs. Management
considers FFO to be an appropriate measure of the performance of an equity
REIT. FFO is used by financial analysts in evaluating REITs and can be one
measure of a REIT's ability to make cash distributions. Presentation of this
information will provide the reader with an additional measure to compare
the performance of different REITs; however, FFO is not comparable to "funds
from operations" reported by other REITs that do not define funds from
operations in accordance with the National Association of Real Estate
Investment Trusts ("NAREIT") definition. FFO is not necessarily indicative
of cash flow available to fund cash needs and should not be considered as an
alternative to net income as an indication of the Company's performance or
to cash flow from operating, investing and financing activities as a measure
of liquidity or ability to make cash distributions or pay debt service.
In March 1995, NAREIT issued a clarification of its definition of FFO. The
clarification provides that amortization of deferred financing costs should
no longer be added back to net income in arriving at FFO. Since the Company
includes amortization of deferred financing costs in interest expense, it
was not added back in computing the Company's FFO. The Company's FFO
presented herein therefore conforms with this clarification.
(5) For a definition of the terms "Debt," "Secured Debt" and "Total Assets," see
"Description of the Notes-- Additional Covenants of the Company."
(6) For 1996 and 1995, the Company's sole Secured Debt was a capitalized lease.
For 1992, 1993 and 1994, the Company did not have any Secured Debt.
(7) The Debt Service Coverage Ratio is defined as Consolidated Income Available
for Debt Service divided by the Annual Debt Service Charge. See "Description
of the Notes--Additional Covenants of the Company."
(8) Ratio of earnings to fixed charges is calculated by dividing earnings by
fixed charges. For this purpose, earnings consist of net income before
extraordinary items plus fixed charges (excluding interest costs
capitalized). Fixed charges are comprised of interest expense (including
interest costs capitalized) and the amortization of debt issuance costs. On
a pro forma basis, assuming that the Notes were issued at an assumed
interest rate of 7.90% per annum and the proceeds therefrom were applied to
repay indebtedness of the Company on January 1, 1996, the ratio of earnings
to fixed charges for the year ended December 31, 1996 would have been 4x.
S-20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was organized to operate as an equity REIT. The Company's
primary business objective is to generate a consistent and predictable level of
FFO per share and distributions to stockholders. Additionally, the Company
generally will seek to increase FFO per share and distributions to stockholders
through active portfolio management and the acquisition of additional
properties. The Company also seeks to lower the ratio of distributions to
stockholders as a percentage of FFO in order to allow internal cash flow to be
used to fund additional acquisitions and for other corporate purposes. The
Company's portfolio management focus includes: (i) contractual rent increases on
existing leases; (ii) rental increases at the termination of existing leases
when market conditions permit; and (iii) the active management of the Company's
property portfolio, including selective sales of properties. The Company
generally pursues the acquisition of additional properties under long-term, net
lease agreements with initial contractual base rent which, at the time of
acquisition and as a percentage of acquisition cost, is in excess of the
Company's estimated cost of capital.
The Company's common stock is listed on the NYSE under the symbol "O" and
commenced trading on October 18, 1994.
Realty Income was organized in the State of Delaware on September 9, 1993 to
facilitate the merger, which was effective on August 15, 1994, of 10 private and
15 public real estate limited partnerships (the "Partnerships") with and into
Realty Income.
Investors in the Partnerships who elected to invest in the equity of the
Company received a total of 19,503,080 shares of common stock. Certain investors
elected to receive Variable Rate Senior Notes due 2001 totaling $12.6 million.
These notes were redeemed, at par, by the Company on March 29, 1996.
The Consolidation was accounted for as a reorganization of affiliated
entities in a manner similar to a pooling-of-interests. Under this method, the
assets and liabilities of the Partnerships were carried over at their historical
book values and operations were recorded on a combined historical cost basis.
The pooling-of-interests method of accounting also requires the reporting of the
results of operations as though the entities had been combined as of the
beginning of the earliest period presented. Accordingly, the results of
operations for the year ended December 31, 1994 comprise those of the separate
entities combined from the beginning of the period through August 15, 1994 (the
date of the Consolidation) and those of the Company from August 16, 1994 through
December 31, 1994.
Prior to August 17, 1995, the Company's day-to-day affairs were managed by
R.I.C. Advisor, Inc. ("R.I.C. Advisor") which provided advice and assistance
regarding acquisitions of properties by the Company and performed the day-to-day
management of the Company's properties and business. On August 17, 1995, R.I.C.
Advisor was merged with and into Realty Income (the "Merger") and the advisory
agreement between Realty Income and R.I.C. Advisor was terminated. Realty Income
issued 990,704 shares of common stock as consideration for the outstanding
common stock of R.I.C. Advisor.
In July 1996, the Company expanded its board of directors to seven members.
The new directors are Richard J. VanDerhoff, President and Chief Operating
Officer of the Company, and Willard H. Smith Jr, formerly a Managing Director,
Equity Capital Markets Division, of Merrill Lynch & Co. from 1983 until his
retirement in August 1995.
In October 1996, the Company changed transfer agents from Chase Mellon
Shareholder Services to The Bank of New York.
S-21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH RESERVES
Realty Income was organized for the purpose of operating as an equity REIT
which acquires and leases properties and distributes to stockholders, in the
form of monthly cash distributions, a substantial portion of its net cash flow
generated from lease revenue. The Company intends to retain an appropriate
amount of cash as working capital reserves. At December 31, 1996, the Company
had cash and cash equivalents totaling $1.6 million.
Management believes that the Company's cash and cash equivalents on hand,
cash provided from operating activities and borrowing capacity are sufficient to
meet its liquidity needs other than the repayment of debt for the foreseeable
future, except that (as described below) the Company will require additional
sources of capital to fund property acquisitions.
CAPITAL FUNDING
Realty Income has a $130 million three-year, revolving, unsecured Credit
Facility that expires in November 1999. The credit facility currently bears
interest at 1.25% over the London Interbank Offered Rate ("LIBOR") and offers
the Company other interest rate options. As of April 15, 1997, $36.3 million of
borrowing capacity was available to the Company under the Credit Facility. At
that time, the outstanding balance was $93.7 million. On March 29, 1996, this
credit facility was used to redeem the Variable Rate Senior Notes due 2001 at
par, and has been and is expected to be used to acquire additional retail
properties leased to national and regional retail chains under long term lease
agreements. Any additional borrowings will increase the Company's exposure to
interest rate risk.
Realty Income will seek to meet its long-term capital needs for the
acquisition of properties through the issuance of public or private debt or
equity. In August 1995, the Company filed a universal shelf registration
statement with the Commission covering up to $200 million in value of common
stock, preferred stock or debt securities. After giving effect to the Offering,
approximately $159.8 million of securities will have been issued under this
registration statement.
In the fourth quarter of 1995, the Company issued 2,540,000 shares of common
stock at a price of $19.625 per share under the shelf registration. The net
proceeds were primarily used to repay borrowings under the Credit Facility.
These borrowings were used to acquire properties in 1995.
In December 1996, the Company entered into a treasury interest rate lock
agreement to hedge against the possibility of rising interest rates. Under the
interest rate lock agreement, the Company receives or makes a payment based on
the differential between a specified interest rate, 6.537%, and the actual
10-year treasury interest rate on a notional principal of $90 million. Based on
the 10-year treasury interest rate at March 31, 1997, the Company had an
unrecognized gain on the agreement of approximately $2,310,000.
During the fourth quarter of 1996, the Company received investment grade
corporate credit ratings for senior unsecured debt from Duff & Phelps Credit
Rating Company, Moody's Investors Services, Inc. and Standard and Poor's Rating
Group, of BBB, Baa3, and BBB-, respectively. These ratings are subject to change
based upon, among other things, the Company's results of operations and
financial condition.
PROPERTY ACQUISITIONS
During 1996, Realty Income purchased 62 New Properties in 22 states for
approximately $57.5 million (excluding the estimated unfunded development costs
of $1.8 million on properties under development) at March 31, 1997. These 62
properties will contain approximately 603,900 leasable square feet and are 100%
leased under net leases, with an average initial lease term of 11.7 years. The
weighted average annual unleveraged return on the cost of the 62 New Properties
(including the estimated unfunded development
S-22
<PAGE>
costs of properties under construction) is estimated to be 10.6%, computed as
estimated contractual net operating income (which in the case of a net leased
property is equal to the base rent or, in the case of properties under
construction, the estimated base rent under the lease) for the first year of
each lease divided by the total acquisition and estimated development costs.
Since it is possible that a tenant could default on the payment of contractual
rent, no assurance can be given that the actual return on the cost of the 62 New
Properties acquired in 1996 will not differ from the foregoing percentage.
Of the 62 New Properties acquired in 1996, 60 were occupied as of April 1,
1997 and the remaining two were pre-leased and under construction pursuant to
contracts under which the tenants have agreed to develop the properties (with
development costs funded by the Company) and to begin paying rent when the
premises open for business. All of the New Properties, including the properties
under development, are leased with initial terms of 7.8 to 20 years.
During 1996, the Company purchased a property which was adjacent to an
existing tenant for $102,000 and leased the property to that tenant. The Company
also invested $37,000 in existing properties, received equipment and other
assets valued at $58,000 as settlements for amounts receivable, and purchased
the outstanding Class A units in R.I.C. Trade Center, Ltd., Silverton Business
Center, Ltd. and Empire Business Center, Ltd. for an aggregate of $150,000.
After this purchase, Realty Income owned 100% of these partnerships, which were
then dissolved. These partnerships owned three mixed-use light industrial
business parks in San Diego, CA.
During the first quarter of 1997, the Company acquired 11 retail properties
in six states for $15.9 million (excluding the estimated unfunded development
costs totaling $1.6 million on five such properties under construction) and
selectively sold four properties, increasing the number of properties in its
portfolio to 747 properties. The 11 properties acquired will contain
approximately 236,200 leasable square feet and are 100% leased under net leases,
with an average initial lease term of 14.0 years. The weighted average annual
unleveraged return on the cost of the 11 properties (including the estimated
unfunded development costs of the five properties under development) is
estimated to be 10.2%, computed as estimated contractual net operating income
(calculated as described above) for the first year of each lease, divided by
total acquisition and estimated development costs. However, as described above,
no assurance can be given that the actual return on the cost of these 11
properties will not differ from the foregoing percentage. During the first
quarter of 1997, the Company also invested $2.0 million in nine development
properties acquired in 1996.
1996 ACQUISITION ACTIVITY
<TABLE>
<CAPTION>
INITIAL APPROXIMATE
LEASE TERM LEASABLE
TENANT INDUSTRY LOCATION (YEARS) SQUARE FEET
- ------------------------------- ---------------------- ---------------------------------- ----------- ------------
<S> <C> <C> <C> <C>
1ST QUARTER
Carver's....................... Restaurant Glendale, AZ 19.8 8,100
Econo Lube N' Tune............. Auto Service Chula Vista, CA 15.0 2,800
Broomfield, CO 15.0 2,800
Dallas, TX 15.0 2,700
Lewisville, TX 15.0 2,600
2ND QUARTER
Dairy Mart..................... Convenience Store Mt Washington, KY(1) 20.0 2,800
Tipp City, OH(1) 15.0 3,800
Econo Lube N' Tune............. Auto Service Arvada, CO 15.0 2,800
Jiffy Lube..................... Auto Service Centerville, OH 20.0 2,400
3RD QUARTER
Best Buy....................... Consumer Electronics Thousand Oaks, CA 20.0 59,200
Dairy Mart..................... Convenience Store Streetsboro, OH(1) 15.0 3,800
Wadsworth, OH(1) 15.0 2,700
Econo Lube N' Tune............. Auto Service Arvada, CO(1) 15.0 2,500
Virginia Beach, VA 15.0 2,800
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
INITIAL APPROXIMATE
LEASE TERM LEASABLE
TENANT INDUSTRY LOCATION (YEARS) SQUARE FEET
- ------------------------------- ---------------------- ---------------------------------- ----------- ------------
<S> <C> <C> <C> <C>
Bremerton, WA 15.0 2,800
Jiffy Lube..................... Auto Service Beavercreek, OH(1) 20.0 2,300
Huber Heights, OH(1) 20.0 2,300
Speedy Brake & Muffler......... Auto Service Hartford, CT 15.0 10,000
Indianapolis, IN 15.0 5,300
Milwaukee, WI 15.0 5,300
4TH QUARTER
Best Buy....................... Consumer Electronics Topeka, KS 20.0 45,600
East Coast Oil................. Convenience Store Stafford, VA 15.0 2,800
Warrenton, VA 15.0 3,600
Econo Lube N' Tune............. Auto Service Thornton, CO 15.0 2,800
Olathe, KS(1) 15.0 2,800
Independence, MO 15.0 2,800
Richmond, VA 15.0 2,900
Jiffy Lube..................... Auto Service Hamilton, OH(1) 20.0 2,300
Rex Stores..................... Consumer Electronics Oxford, AL 7.8 10,000
Tuscaloosa, AL 7.8 12,000
Bradenton, FL 7.8 6,300
Mary Esther, FL 7.8 8,200
Melbourne, FL 7.8 8,000
Merritt Island, FL 7.8 10,000
Ocala, FL 7.8 10,000
Pensacola, FL 7.8 64,600
Tallahassee, FL 7.8 10,600
Titusville, FL 7.8 12,000
Venice, FL 7.8 8,200
Rome, GA 7.8 10,000
Council Bluffs, IA 7.8 9,000
Des Moines, IA 7.8 10,000
Peoria, IL 7.8 8,800
Rockford, IL 7.8 10,100
Springfield, IL 7.8 10,300
Anderson, IN 7.8 15,600
Muncie, IN 7.8 12,500
Richmond, IN 7.8 6,500
Columbus, MS 7.8 10,000
Greenville, MS 7.8 9,100
Gulfport, MS 7.8 12,000
Hattiesburg, MS 7.8 12,000
Jackson, MS 7.8 15,100
Meridian, MS 7.8 9,000
Tupelo, MS 7.8 12,000
Vicksburg, MS 7.8 10,000
Lakewood, NY 7.8 14,100
Defiance, OH 7.8 7,200
Kettering, OH 7.8 10,600
Bristol, TN 7.8 12,400
Clarksville, TN 7.8 10,100
Vienna, WV 7.8 12,200
--- ------------
Average/Total.......................................... 11.7 603,900
--- ------------
--- ------------
</TABLE>
- --------------------------
(1) The Company acquired these properties as undeveloped land and is funding
construction and other costs relating to the development of the properties
by the tenants. The tenants have entered into leases with the Company
covering these properties and are contractually obligated to complete
construction on a timely basis and to pay construction cost overruns to the
extent they exceed the construction budget by more than a predetermined
percentage. As of December 31, 1996, the total acquisition and estimated
construction costs for the properties under development was $8.7 million, of
which $3.8 million had not been funded. As of April 1, 1997, tenants of
seven of these properties had assumed occupancy and begun paying rent
because development of such properties was substantially completed.
S-24
<PAGE>
DISTRIBUTIONS
Cash distributions paid for the years ended December 31, 1996, 1995 and 1994
were $48.1 million, $36.7 million and $44.7 million, respectively. The 1996 and
1994 cash distributions include a special distribution of $5.3 million and $5.8
million, respectively.
For the year ended December 31, 1996, the Company paid 11 monthly
distributions of $0.155 per share and increased the monthly distributions to
$0.1575 per share in December 1996. The regular distributions paid during 1996
totaled $1.8625 per share. In addition, the Company paid a special distribution
of $0.23 per share in January 1996. Total distributions paid in 1996 were
$2.0925 per share. For tax purposes, a portion of the special distribution, in
the amount of approximately $0.144 per share, was taxable as ordinary income in
1995 and the remaining $0.086 per share was included in each stockholders 1996
Form 1099. In December 1996, and January and February 1997, the Company declared
distributions of $0.1575 per share which were paid on January 15, 1997, February
17, 1997 and March 17, 1997, respectively.
For the year ended December 31, 1995, the Company paid monthly distributions
of $0.15 per share from January through July and increased its monthly
distributions to $0.155 per share in August. Monthly distributions of $0.155 per
share were paid in August through December 1995. The distributions paid for 1995
totaled $1.825 per share.
The 1994 distributions were made up of eight partnership and four corporate
monthly distributions in the aggregate amount of $38.9 million and the final
partnership distribution of $5.8 million. The 1994 final partnership
distributions were substantially comprised of proceeds from the sales of
properties sold during 1993.
From August 15, 1994, the date of the Consolidation, through December 31,
1994, the Company paid four monthly distributions of $0.15 per share, totaling
$0.60 per share. Prior to the Consolidation on August 15, 1994, the Company did
not have equivalent shares outstanding so no comparative per share information
is presented.
OTHER INFORMATION
As a result of the Merger on August 17, 1995, the Company assumed a defined
benefit pension plan (the "Plan") covering substantially all of its employees.
The board of directors of R.I.C. Advisor froze the Plan effective May 31, 1995.
For each Plan participant, the accrued benefit earned under the Plan as of May
31, 1995 was frozen. The Plan was terminated on January 2, 1996. As part of the
Plan's termination, the Company met its obligation to the Plan of $2.3 million
in February 1997.
In December 1996, the Company obtained a five year environmental insurance
policy on the property portfolio. Based upon the 740 properties in the portfolio
at December 31, 1996, the cost of the insurance will be approximately $80,000
per year. The limit of the policy is $10.0 million for each loss and $20.0
million in the aggregate, with a $100,000 deductible. There is a sublimit on
properties with underground storage tanks of $1.0 million per occurrence and
$5.0 million in the aggregate, with a deductible of $25,000.
FUNDS FROM OPERATIONS
FFO for 1996 was $47.7 million versus $40.4 million during 1995 and $39.2
million during 1994. Realty Income defines FFO as net income before net gain on
sales of properties and the one-time expenses of the 1994 Consolidation, plus
provision for impairment losses, plus depreciation and amortization. In
accordance with the recommendations of the National Association of Real Estate
Investment Trusts ("NAREIT"), amortization of deferred financing costs are not
added back to net income to calculate FFO. Amortization of financing costs are
included in interest expense in the consolidated statements of income.
S-25
<PAGE>
Management considers FFO to be an appropriate measure of the performance of
an equity REIT. FFO is used by financial analysts in evaluating REITs and can be
one measure of a REIT's ability to make cash distribution payments. Presentation
of this information provides the reader with an additional measure to compare
the performance of different REITs, although it should be noted that not all
REITs calculate FFO the same way so comparisons with such REITs may not be
meaningful.
FFO is not necessarily indicative of cash flow available to fund cash needs
and should not be considered as an alternative to net income as an indication of
the Company's performance or to cash flow from operating, investing, and
financing activities as a measure of liquidity or ability to make cash
distributions or to pay debt service.
Below is reconciliation of net income to FFO (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net Income................................................... $ 32,223 $ 25,600 $ 15,224
Plus Depreciation and Amortization........................... 16,422 14,849 13,790
Plus Provision for Impairment Losses......................... 579 -- 135
Plus Consolidation Costs..................................... -- -- 11,201
Less Depreciation of Furniture, Fixtures and Equipment....... (51) (17) --
Less Net Gain on Sales of Properties......................... (1,455) (18) (1,165)
--------- --------- ---------
Total FFO.................................................... $ 47,718 $ 40,414 $ 39,185
--------- --------- ---------
--------- --------- ---------
</TABLE>
For 1996, 1995 and 1994, FFO exceeded cash distributions, excluding the
non-recurring special distributions of $5.3 million in 1996 (pertaining to the
Merger) and $5.8 million in 1994 (final distribution for the predecessor
Partnerships), by $4.9 million, $3.7 million and $369,000, respectively.
RESULTS OF OPERATIONS
Prior to the Consolidation on August 15, 1994, the capital structure of the
Partnerships consisted of limited partner interests with no long term debt. In
the Consolidation, limited partners exchanged their partnership units for shares
of common stock or debt securities of the Company. The general partners did not
receive any shares of common stock or debt securities of the Company for their
general partner interests. Due to these changes in capital structure, which were
caused by the Consolidation, and additional expenses associated with the
operations of a publicly traded REIT, the results of operations for the year
ended December 31, 1994 are not necessarily comparable to 1996 and 1995.
COMPARISON OF 1996 TO 1995
Rental revenue was $56.8 million for 1996 versus $51.2 million for 1995, an
increase of $5.6 million. The increase in rental revenue was primarily due to
the acquisition of 124 properties from December 1994 through December 1996.
These properties generated revenue in 1996 and 1995 of $8.8 million and $3.8
million, respectively, an increase of $5.0 million. During 1997, the contractual
lease payments (not including any percentage rents or estimated rent from
properties under development) on these 124 properties are approximately $13.6
million.
At December 31, 1996, 723 or 98.8% of the Company's leases, on the 732
single-tenant properties, provide for increases in rents through (i) base rent
increases tied to a consumer price index with adjustment ceilings or (ii)
overage rent based on a percentage of the tenants' gross sales. Some leases
contain both types of clauses. Rental revenue generated on the 619 properties
owned for all of both 1995 and 1996 increased by $871,000 or 1.9%, to $48.0
million from $47.1 million. Percentage rent, which is included in rental
revenue, was $1.7 million for 1996 as compared to $1.6 million in 1995.
S-26
<PAGE>
The following table represents Realty Income's rental revenue by industry
for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- ----------------------------
RENTAL PERCENTAGE OF RENTAL PERCENTAGE OF
INDUSTRY REVENUE TOTAL REVENUE TOTAL
- --------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Automotive Parts....................... $ 4,814,000 8.5% $ 4,724,000 9.2%
Automotive Service..................... 3,859,000 6.8% 3,007,000 5.9%
Child Care............................. 23,854,000 42.0% 23,358,000 45.6%
Consumer Electronics................... 507,000 0.9% -- --
Convenience Stores..................... 2,647,000 4.7% 1,254,000 2.4%
Home Furnishings....................... 2,496,000 4.4% 1,471,000 2.9%
Restaurant............................. 13,836,000 24.3% 12,632,000 24.7%
Other.................................. 4,764,000 8.4% 4,739,000 9.3%
------------- ----- ------------- -----
Total.................................. $ 56,777,000 100.0% $ 51,185,000 100.0%
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
Unleased properties are a factor in determining gross revenue generated and
property costs incurred by the Company. At December 31, 1996, the Company had
nine properties that were not under lease as compared to four properties at
December 31, 1995. The remaining 731 properties were under lease agreements with
third party tenants as of December 31, 1996.
The significant portion of the remaining revenue earned during 1996 and 1995
was attributable to interest earned on cash invested in two funds which hold
short-term investments in United States government agency securities and
treasury securities. Interest revenue was $109,000 for 1996 as compared to
$276,000 during 1995. The decrease in interest revenue was due to lower average
cash balances held during 1996, which reflects the Company's desire to maintain
an appropriate amount of cash as working capital reserves and invest excess
available cash in properties.
Depreciation and amortization was $16.4 million in 1996 versus $14.8 million
in 1995. The $1.6 million increase was primarily due to the depreciation of
properties acquired during 1995 and 1996 and amortization of goodwill recorded
in connection with the Merger of R.I.C. Advisor.
Total advisor fees and general and administrative expenses decreased by $1.7
million to $5.2 million in 1996 versus $6.9 million in 1995. General and
administrative expenses were $5.2 million in 1996 versus $3.2 million in 1995
and advisor fees of $3.7 million in 1995. The $2.0 million increase in general
and administrative expenses was due primarily to the Merger of R.I.C. Advisor.
Subsequent to the Merger, the Company commenced paying for management,
accounting systems, office facilities and professional and support personnel
expenses (i.e., costs of being self-administered). Prior to August 17, 1995,
such costs were the responsibility of R.I.C. Advisor.
During the third quarter of 1996, the Company initiated a 401(k) plan. Costs
of $65,000 associated with the plan are included in general and administrative
expenses.
Property expenses were $1.6 million in 1996 and 1995. Property expenses are
broken down into costs associated with multi-tenant non-net lease properties,
unleased single-tenant properties and general portfolio expenses. Expenses
related to the multi-tenant and unleased single-tenant properties include, but
are not limited to, property taxes, maintenance, insurance, utilities, site
checks, bad debt expense and legal fees. General portfolio costs include, but
are not limited to, insurance, legal, site checks and title search fees.
Property expenses of $1.0 million were incurred on ten multi-tenant
properties during 1996, eight of which were owned at the end of 1996. Property
expenses of $1.0 million were incurred on eleven multi-tenant properties in
1995, ten of which were owned at the end of 1995. During 1996 two multi-tenant
S-27
<PAGE>
properties were sold and in 1995 one multi-tenant property was sold. Expenses
incurred in 1996 on ten unleased single-tenant properties totaled $250,000 as
compared to $161,000 in 1995 on seven unleased single-tenant properties. At
December 31, 1996, nine properties were available for lease, one of which was a
multi-tenant property. At December 31, 1995, four single-tenant properties were
available for lease. The $89,000 increase is due to property taxes, maintenance
and utilities on the additional vacant properties. General portfolio expenses in
1996 and 1995 totaled $337,000 and $441,000, respectively. The decrease in
general portfolio costs is primarily due to a decrease in insurance costs.
Interest expense is made up of four components which include: (i) interest
on outstanding loans and notes; (ii) commitment fees on the undrawn portion of
the Credit Facility; (iii) amortization of the Credit Facility origination
costs; which are offset by: (iv) interest capitalized on properties under
development. Interest capitalized on properties under development is included in
the cost of the completed property and amortized over the estimated useful life
of the property.
Interest expense decreased by $275,000 to $2.4 million in 1996 as compared
to $2.6 million for 1995. Interest incurred on loans and notes in 1996 and 1995
was $2.1 million and $2.4 million, respectively. Interest incurred was $266,000
lower in 1996 than in 1995 due to a decrease in the average outstanding balance
and lower interest rates on the Credit Facility and the notes that were redeemed
by the Company on March 29, 1996 (the "Redeemed Notes"). During 1996, the
average outstanding balance and interest rate were $30.7 million and 6.96% as
compared to $31.3 million and 7.68% during the comparable period in 1995.
Included in the interest incurred in 1996 and 1995 was capitalized interest
totaling $150,000 and $217,000, respectively. Commitment fees in 1996 were
$156,000 as compared to $127,000 in 1995. In 1996 and 1995, a commitment fee of
0.15% per annum was incurred on the undrawn portion of the Credit Facility.
Commitment fees increased in 1996 because the borrowing capacity was increased
to $130 million from $100 million in December 1995. Amortization of the Credit
Facility origination fees was $224,000 in 1996 as compared to $329,000 in 1995.
The amortized Credit Facility origination fees decreased in 1996 as compared to
1995, because in December 1995 the term of the Credit Facility was extended one
year, which extended the period of time over which unamortized fees are
amortized.
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. In 1996, a $579,000 charge was taken to reduce the net carrying
value on four properties because they became held for sale. No charge was
recorded for an impairment loss in 1995.
The Company anticipates property sales will occur in the normal course of
business. During 1996, the Company recorded a gain of $1.5 million on the sale
of two multi-tenant properties, five restaurant properties and the granting of
an easement on another property. During 1995, the Company recorded a net gain of
$18,000 on the sale of two child care properties and a multi-tenant property.
During 1996 and 1995, cash proceeds generated from these sales were $4.4 million
and $617,000, respectively.
For 1996, the Company recorded net income of $32.2 million versus $25.6
million in 1995. The $6.6 million increase in net income is primarily due to an
increase in rental revenue from 124 properties acquired from December 1994
through December 1996 of $5.0 million, an increase in the net gain on sales of
properties of $1.4 million and a net decrease in advisor fees and general and
administrative expenses of $1.7 million, offset by an increase in depreciation
and amortization expense of $1.6 million.
COMPARISON OF 1995 TO 1994
Rental revenue was $51.2 million for 1995 versus $47.9 million for 1994, an
increase of $3.3 million. The increase in rental revenue was primarily due to
the acquisition of 62 properties from December 1994 through December 1995. These
properties generated revenue of $3.8 million in 1995. This increase in rental
revenue was offset in part by a decline in revenue from properties owned during
both 1995 and 1994 that was primarily attributable to a decline in percentage
rents. Percentage rent was $1.6 million for 1995 as compared to $2.6 million in
1994.
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<PAGE>
The following table represents Realty Income's rental revenue by industry
for the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------- ----------------------------
RENTAL PERCENTAGE OF RENTAL PERCENTAGE OF
INDUSTRY REVENUE TOTAL REVENUE TOTAL
- --------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Automotive Parts....................... $ 4,724,000 9.2% $ 4,977,000 10.4%
Automotive Service..................... 3,007,000 5.9% 2,705,000 5.7%
Child Care............................. 23,358,000 45.6% 23,522,000 49.1%
Convenience Stores..................... 1,254,000 2.4% -- --
Home Furnishings....................... 1,471,000 2.9% -- --
Restaurant............................. 12,632,000 24.7% 12,047,000 25.1%
Other.................................. 4,739,000 9.3% 4,654,000 9.7%
------------- ----- ------------- -----
Total.................................. $ 51,185,000 100.0% $ 47,905,000 100.0%
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
Unleased properties are a factor in determining gross revenue generated and
property costs incurred by the Company. At December 31, 1995 and 1994, the
Company had four properties that were not under lease, while the remaining 681
and 626 properties, respectively, were under lease agreements with third party
tenants.
The significant portion of the remaining revenue earned during 1995 and 1994
was attributable to interest earned on cash invested in two funds which hold
short-term investments in United States government agency securities or direct
purchases of short-term United States government agency securities. Interest
revenue was $276,000 for 1995 as compared to $862,000 during 1994. The decrease
in interest revenue was due to a reduction of cash held, which was primarily
invested in properties.
Depreciation and amortization was $14.8 million in 1995 versus $13.8 million
in 1994. The $1.0 million increase was primarily due to the depreciation of 62
properties acquired from December 1994 through December 31, 1995 and
amortization of goodwill recorded in connection with the Merger of R.I.C.
Advisor.
Total advisor fees and general and administrative expenses decreased by
$312,000 to $6.9 million in 1995 versus $7.2 million in 1994. General and
administrative expenses were $3.2 million in 1995 versus $1.8 million in 1994.
R.I.C. Advisor fees were $3.7 million in 1995 versus $5.4 million in 1994. The
$1.4 million increase in general and administrative expenses and $1.7 million
decrease in advisor fees was due to the Merger of R.I.C. Advisor. Subsequent to
the Merger, the Company commenced paying for management, accounting systems,
office facilities, and professional and support personnel expenses (i.e., costs
of being self-administered). Such costs were the responsibility of R.I.C.
Advisor through August 17, 1995.
The advisor fees for 1995 were calculated in accordance with the terms of
the advisory agreement which became effective August 15, 1994 and was terminated
on August 17, 1995. Prior to August 16, 1994, advisor fees were calculated in
accordance with the terms of the partnership agreements of the Partnerships.
Administrative expense in 1994 included approximately $500,000 of one-time
expenses primarily associated with the distribution of stock certificates,
shareholder informational material and final partnership K-1's to shareholders
after the Consolidation had occurred. Other administrative expenses increased in
1995 compared to 1994 due to additional expenses associated with the operation
of a publicly traded REIT including, but not limited to, transfer agent fees,
NYSE fees, board of directors fees and property acquisition expenses.
S-29
<PAGE>
Property expenses decreased to $1.6 million in 1995 as compared to $2.1
million in 1994. The $488,000 decrease was primarily due to a decrease in
property taxes, maintenance and utilities.
Interest expense for 1995 was $2.6 million as compared to $396,000 for 1994.
Of the $2.2 million increase, $1.4 million was for interest paid on the Credit
Facility in 1995 and $665,000 for interest paid on the Redeemed Notes. Interest
incurred on loans and notes in 1995 and 1994 was $2.4 million and $354,000,
respectively. Interest incurred was higher in 1995 due to borrowings on the
Credit Facility and the Redeemed Notes issued as part of the Consolidation.
During 1995, the average outstanding balances and interest rates on the Credit
Facility and the Redeemed Notes were $31.3 million and 7.68%. Included in the
interest incurred in 1995 was capitalized interest totaling $217,000. No
interest was capitalized in 1994. Commitment fees in 1995 were $127,000 as
compared to $13,000 in 1994. In 1995 and 1994, a commitment fee of 0.15% per
annum was incurred on the undrawn portion of the Credit Facility. Amortization
of the Credit Facility origination fees was $329,000 in 1995 as compared to
$29,000 in 1994. Commitment fees and amortization of Credit Facility origination
fees increased in 1995 because the Credit Facility was not entered into until
November 1994.
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. In 1994, a $135,000 charge was taken to reduce the net carrying
value on one property because it became held for sale. No charge was recorded
for an impairment loss in 1995.
In 1994, the Company expensed Consolidation costs aggregating $11.2 million
which were nonrecurring costs incurred to effect the Consolidation. In a manner
similar to the pooling-of-interests method of accounting, the Consolidation
costs were charged to expense upon the consummation of the Consolidation. Such
costs included, but were not limited to, fees paid to underwriters, appraisers,
attorneys, and accountants, as well as costs associated with obtaining a
fairness opinion, soliciting the limited partners, and registering and listing
the common stock and the Redeemed Notes on the NYSE.
During 1995, the Company recorded a net gain of $18,000 on the sale of two
child care properties and a multi-tenant property. During 1994, the Company
recorded a gain of $1.2 million on the sale of five restaurant properties.
During 1995 and 1994 cash proceeds generated from these sales were $617,000 and
$3.8 million, respectively.
For 1995, the Company recorded net income of $25.6 million versus $15.2
million in 1994. The net income in 1994 was negatively impacted by one time
Consolidation costs of $11.2 million. Net income for 1994, excluding the
Consolidation costs, was $26.4 million.
IMPACT OF INFLATION
Tenant leases generally provide for increases in rent as a result of
increases in the tenant's sales volumes or increases (typically subject to
ceilings) in the consumer price index. Management expects that inflation will
cause these lease provisions to result in increases in rent over time. However,
inflation and increased costs may have an adverse impact on the tenants if
increases in the tenant's operating expenses exceed increases in revenue. At
December 31, 1996, approximately 98% of the properties are leased to tenants
under net leases in which the tenant is responsible for substantially all
property costs and expenses. These features in the leases reduce the Company's
exposure to rising expenses due to inflation.
S-30
<PAGE>
MANAGEMENT OF THE COMPANY
The following table sets forth the executive officers and members of the
Board of Directors of Realty Income:
<TABLE>
<CAPTION>
NAME TITLE AGE
- ------------------------------- ------------------------------------------------------ ---
<S> <C> <C>
William E. Clark............... Chairman of the Board and Chief Executive Officer;
Director 59
Richard J. VanDerhoff.......... President and Chief Operating Officer; Director 43
Thomas A. Lewis................ Vice Chairman of the Board and Vice President Capital
Markets; Director 44
John W. Wolfe.................. Vice President, Portfolio Acquisitions 48
Gary M. Malino................. Vice President, Chief Financial Officer and Treasurer 39
Michael R. Pfeiffer............ Vice President, General Counsel and Secretary 36
Richard G. Collins............. Vice President, Portfolio Management 49
Donald R. Cameron.............. Director 57
Roger P. Kuppinger............. Director 56
Michael D. McKee............... Director 51
Willard H. Smith Jr............ Director 60
</TABLE>
Set forth below is a summary of the business experience of the above-listed
persons.
WILLIAM E. CLARK has been the Chairman of the Board of Directors and Chief
Executive Officer and a Director of the Company since September 1993 and has
been involved as a principal in commercial real estate acquisition, development,
management and sales for over 30 years. His involvement includes land
acquisition, tenant lease negotiations, construction and sales of prime
commercial properties for regional and national fast-food restaurant, automotive
and retail chain store operations throughout the United States. He had been a
director and an officer of R.I.C. Advisor since 1969 until it was merged with
the Company on August 17, 1995 (the "Merger").
RICHARD J. VANDERHOFF has been President and Chief Operating Officer of
Realty Income since November 1994 and a Director of the Company since July 1996
and had been with R.I.C. Advisor from 1987 until the Merger. From August 1994 to
November 1994, he served as general counsel of the Company. Prior to 1987, he
was employed as Vice President, General Counsel and Secretary of FNCO
Corporation, an owner and operator of community newspaper companies located
throughout the midwest United States (1984-1987) and was in private law practice
specializing in real property and business law (1980-1984). He graduated from
Jacksonville University, B.S., and the University of San Diego School of Law,
J.D.
THOMAS A. LEWIS has been the Vice Chairman of the Board of Directors, Vice
President, Capital Markets and a Director of the Company since September 1993
and had been with R.I.C. Advisor from 1987 until the Merger. Prior to joining
R.I.C. Advisor, he served in various capacities, including Senior Vice President
with Johnstown Capital, a real estate management and syndication company
(1982-1987), and Investment Specialist with Sutro & Co., a member of the New
York Stock Exchange (1979-1982), and was employed by the Procter & Gamble
Company (1974-1979). He graduated from Chaminade University of Hawaii, B.A., and
holds NASD General Securities (Series 7) and Registered Principal (Series 24)
licenses.
JOHN H. WOLFE has been Vice President, Portfolio Acquisitions of the Company
since August 1995 and had been with R.I.C. Advisor from 1983 until the Merger.
He has announced his retirement from the
S-31
<PAGE>
Company, to be effective in June 1997. Prior to joining R.I.C. Advisor, he was
the Director of Development for Black Angus Restaurants (1978-1983) and owned
and operated a real estate investment company (1975-1978). He graduated from San
Diego State University, B.S.
GARY M. MALINO has been Chief Financial Officer of the Company since August
1994 and the Vice President, Chief Financial Officer and Treasurer of the
Company since August 1995 and had been with R.I.C. Advisor from 1985 until the
Merger. Prior to joining R.I.C. Advisor in 1985, he was a Certified Public
Accountant with Kendall & Forman, an accountancy corporation (1981-1985) and
Assistant Controller with McMillin Development Company, a real estate
development company (1979-1981). He graduated from San Diego State University,
B.S.
MICHAEL R. PFEIFFER has been Vice President, General Counsel and Secretary
of the Company since August 1995 and had been with R.I.C. Advisor from 1990
until the Merger. Prior to joining R.I.C. Advisor he was in private practice
specializing in real estate transactional law (1987-1990), and was employed as
Associate Counsel with First American Title Insurance Company (1986-1987). He
graduated from the University of Rhode Island, B.S., and the University of San
Diego School of Law, J.D. He is a licensed attorney and member of the State Bar
of California and the State Bar of Florida.
RICHARD G. COLLINS has been Vice President, Portfolio Management of the
Company since August 1995 and had been with R.I.C. Advisor from 1990 until the
Merger. The Company plans to appoint him Vice President, Portfolio Acquisitions
in connection with Mr. Wolfe's retirement from this position. Prior to joining
R.I.C. Advisor, he was involved as a principal in the acquisition and sale of
land and commercial real estate and a general partner for land and commercial
real estate partnerships (1979-1990) and a leasing and sales specialist in the
Office Properties Division for Grubb & Ellis Commercial Real Estate Services
(1974-1979). He graduated from San Diego State University, B.S.
DONALD R. CAMERON has been a Director of the Company since August 1994 and
is a co-founder and President of Cameron, Murphy & Spangler, Inc., a securities
broker-dealer firm located in Pasadena, California. He graduated from the
University of Glasgow, Scotland, B.Sc. Prior to founding Cameron, Murphy &
Spangler in 1975, he worked at the securities brokerage firm of Glore Forgan
Staats, Inc. and its successors (1969-1975). He is currently a director of Ayr
United Football and Athletic Club, Ltd. Mr. Cameron is chairman of the
Compensation Committee and is a member of the Audit Committee, the Special
Committee and the Corporate Governance Committee.
ROGER P. KUPPINGER has been a Director of the Company since August 1994 and
is a self-employed investment banker and financial advisor and is an active
investor in both private and public companies. Prior to March 1994, he was a
Managing Director at the investment banking firm Sutro & Co. Inc. He graduated
from Northwestern University, B.S. and M.B.A., and from LaSalle University in
Chicago, LL.B. Prior to joining Sutro in 1969, he worked at First Interstate
Bank, formerly named United California Bank (1964-1969). He has served on over
ten boards of directors for both public and private companies, and currently
serves on the board of directors of BRE Properties, Inc. Mr. Kuppinger is
chairman of the Audit Committee and is a member of the Compensation Committee,
the Special Committee and the Corporate Governance Committee.
MICHAEL D. MCKEE has been a Director of the Company since August 1994 and
has been Executive Vice President of The Irvine Company since March 1994 and has
served as Chief Financial Officer of The Irvine Company since January 1997.
Prior thereto, he was a partner in the law firm of Latham & Watkins. He
graduated from Azusa Pacific University, B.A., University of Southern
California, M.A., and University of California at Los Angeles, J.D. His business
and legal experience includes numerous acquisition and disposition transactions,
as well as a variety of public and private offerings of equity and debt
securities. He is currently a member of the board of directors of Health Care
Property Investors, Inc., Circus Circus Enterprises, Inc. and Irvine Apartment
Communities, Inc. Mr. McKee is chairman of the Special Committee and is a member
of the Compensation Committee, the Audit Committee and the Corporate Governance
Committee.
S-32
<PAGE>
WILLARD H. SMITH JR has been a Director of the Company since July 1996 and
was the Managing Director, Equity Capital Markets Division, of Merrill Lynch &
Co. from 1983 until his recent retirement. Prior to joining Merrill Lynch in
1979, he was employed by F. Eberstadt & Co. (1971-1979). Mr. Smith also serves
on the board of directors of four investment companies: Cohen & Steers Realty
Shares; Cohen & Steers Realty Income Fund; Cohen & Steers Total Return Realty
Fund; and Cohen & Steers Special Equity Fund, Inc. Additionally, he is a member
of the board of directors of Essex Property Trust and Highwoods Property Trust,
two NYSE listed real estate investment trusts, and Willis Lease Finance
Corporation, a Nasdaq listed company. Mr. Smith is chairman of the Corporate
Governance Committee and is a member of the Audit Committee, the Special
Committee and the Compensation Committee.
DESCRIPTION OF THE NOTES
The following description of the particular terms of the Notes offered
hereby supplements and, to the extent inconsistent therewith, replaces the
description of the general terms and provisions of the Debt Securities set forth
in the accompanying Prospectus. The following statements relating to the Notes
and the Indenture (as defined below) are summaries of provisions contained
therein and do not purport to be complete. Such statements are qualified by
reference to the provisions of the Notes and the Indenture, including the
definitions therein of certain terms. Unless otherwise expressly stated or the
context otherwise requires, all references to the "Company" appearing under this
caption "Description of the Notes" and under the caption "Description of Debt
Securities" in the accompanying Prospectus shall mean Realty Income Corporation
excluding its consolidated subsidiaries. Other capitalized terms used herein but
not otherwise defined shall have the meanings given to them in the accompanying
Prospectus.
The Notes constitute Debt Securities (which are more fully described in the
accompanying Prospectus), to be issued pursuant to an indenture (the
"Indenture") between the Company and The Bank of New York, as trustee (the
"Trustee"). The terms of the Notes include those provisions contained in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "TIA"). The Notes are subject to all such
terms, and investors are referred to the Indenture and the TIA for a statement
thereof.
GENERAL
The Notes will be a separate series of Debt Securities under the Indenture,
limited in aggregate principal amount to $110 million. Such series may not be
reopened for the issuance of additional Debt Securities of such series. The
Notes will be direct, senior unsecured obligations of the Company and will rank
equally with all other senior unsecured indebtedness of the Company from time to
time outstanding. The Notes will be effectively subordinated to all indebtedness
and other liabilities (including guarantees) of the Company's subsidiaries and
will also be effectively subordinated to any senior secured indebtedness of the
Company to the extent of any collateral pledged as security therefor. As of
March 31, 1997, such subsidiary indebtedness (not including guarantees of
borrowings under the Credit Facility) and other liabilities (primarily rents
received in advance) aggregated approximately $331,000 and the Company
(excluding its subsidiaries) had unsecured senior indebtedness aggregating
approximately $94.7 million (approximately $6.5 million (excluding the Notes) on
a pro forma basis after giving effect to this Offering and the application of
the net proceeds therefrom) and senior secured indebtedness aggregating
approximately $869,000. See "Use of Proceeds" and "Capitalization." Subject to
certain limitations set forth in the Indenture and as described below under
"--Additional Covenants of the Company," the Indenture will permit the Company
and its subsidiaries to incur additional secured and unsecured indebtedness.
The Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and integral multiples thereof. The Notes will be
evidenced by a global Note (the "Global Note") in book-entry form, except under
the limited circumstances described below under "--Book Entry System." Notices
or demands to or upon the Company in respect of the Notes and the Indenture may
be served and, in the event that Notes are issued in definitive certificated
form, Notes may be surrendered for payment,
S-33
<PAGE>
registration of transfer or exchange, at the office or agency of the Company
maintained for such purpose in the Borough of Manhattan, The City of New York,
which shall initially be the corporate trust office of the Trustee, which on the
date of this Prospectus Supplement is located at Attention: Corporate Trust
Administration, 101 Barclay Street, 21st Floor, New York, New York 10286.
Reference is made to the section titled "Description of Debt
Securities--Certain Covenants" in the accompanying Prospectus and "--Additional
Covenants of the Company" below for a description of certain covenants
applicable to the Notes. Compliance with such covenants generally may not be
waived unless the holders of a majority in principal amount of the outstanding
Notes consent to such waiver. In addition, the defeasance and covenant
defeasance provisions of the Indenture described under "Description of Debt
Securities--Discharge, Defeasance and Covenant Defeasance" in the accompanying
Prospectus will apply to the Notes; such covenant defeasance will be applicable
with respect to the covenants described in the accompanying Prospectus under
"Description of Debt Securities--Certain Covenants" (except the covenant
requiring the Company to preserve and keep in full force and effect its
corporate existence) and the covenants described below under "--Additional
Covenants of the Company".
Except as described under "Description of Debt Securities--Merger,
Consolidation or Sale of Assets" in the accompanying Prospectus or "--Additional
Covenants of the Company" below, the Indenture does not contain any provisions
that would afford holders of the Notes protection in the event of (i) a highly
leveraged or similar transaction involving the Company, (ii) a change of control
or the management of the Company, or (iii) a reorganization, restructuring,
merger or similar transaction involving the Company that may adversely affect
the holders of the Notes. In addition, subject to the limitations set forth
under "Description of Debt Securities--Merger, Consolidation or Sale of Assets"
in the accompanying Prospectus, the Company may, in the future, enter into
certain transactions such as the sale of all or substantially all of its assets
or the merger or consolidation of the Company with another entity that would
increase the amount of the Company's indebtedness or substantially reduce or
eliminate the Company's assets, which may have an adverse affect on the
Company's ability to service its indebtedness, including the Notes.
The Company has no present intention of engaging in a highly leveraged or
similar transaction involving the Company. In addition, certain restrictions on
ownership and transfers of the Company's capital stock designed to preserve its
status as a REIT may act to prevent or hinder any such transaction or change of
control.
INTEREST AND MATURITY
The Notes will mature on May , 2007 (the "Maturity Date"). The Notes are
not subject to any sinking fund provisions. The Notes are subject to redemption
at the Company's option and are not subject to repayment or repurchase by the
Company at the option of the Holders (as defined below). See
"--Optional Redemption."
The Notes will bear interest at the rate per annum set forth on the cover
page of this Prospectus Supplement from the date of issuance or from the
immediately preceding Interest Payment Date (as defined below) to which interest
has been paid, payable semi-annually in arrears on each May and November
(the "Interest Payment Dates"), commencing November , 1997, to the persons
(the "Holders") in whose names the Notes are registered in the security register
applicable to the Notes at the close of business on the or
(the "Regular Record Dates"), as the case may be, immediately prior to such
Interest Payment Dates regardless of whether such Regular Record Date is a
Business Day. Interest on the Notes will be computed on the basis of a 360-day
year of twelve 30-day months.
If any Interest Payment Date, the Maturity Date, any date fixed for
redemption or any other day on which the principal of, premium, if any, or
interest on a Note becomes due and payable falls on a day that is not a Business
Day, the required payment shall be made on the next Business Day as if it were
made on the date such payment was due and no interest shall accrue on the amount
so payable for the period from
S-34
<PAGE>
and after such Interest Payment Date, Maturity Date, redemption date or other
date, as the case may be. "Business Day" means any day, other than a Saturday or
Sunday, that is not a day on which banking institutions in The City of New York
are authorized or required by law, regulation or executive order to close.
ADDITIONAL COVENANTS OF THE COMPANY
Reference is made to the section titled "Description of Debt Securities" in
the accompanying Prospectus for a description of certain covenants applicable to
the Notes. In addition to the foregoing, the following covenants of the Company
will apply to the Notes for the benefit of the Holders of the Notes:
LIMITATION ON INCURRENCE OF TOTAL DEBT. The Company will not, and will not
permit any Subsidiary to, incur any Debt, other than Intercompany Debt if,
immediately after giving effect to the incurrence of such additional Debt and
the application of the proceeds therefrom on a pro forma basis, the aggregate
principal amount of all outstanding Debt of the Company and its Subsidiaries on
a consolidated basis determined in accordance with GAAP is greater than 60% of
the sum of (i) the Company's Total Assets as of the end of the latest fiscal
quarter covered in the Company's Annual Report on Form 10-K or Quarterly Report
on Form 10-Q, as the case may be, most recently filed with the Commission (or,
if such filing is not required under the Exchange Act, with the Trustee) prior
to the incurrence of such additional Debt and (ii) the increase, if any, in
Total Assets from the end of such quarter including, without limitation, any
increase in Total Assets caused by the application of the proceeds of such
additional Debt (such increase together with the Company's Total Assets is
referred to as the "Adjusted Total Assets").
LIMITATION ON INCURRENCE OF SECURED DEBT. The Company will not, and will
not permit any Subsidiary to, incur any Secured Debt other than Intercompany
Debt if, immediately after giving effect to the incurrence of such additional
Secured Debt and the application of the proceeds therefrom on a pro forma basis,
the aggregate principal amount of all outstanding Secured Debt of the Company
and its Subsidiaries on a consolidated basis determined in accordance with GAAP
is greater than 40% of the Company's Adjusted Total Assets.
DEBT SERVICE COVERAGE. The Company will not, and will not permit any
Subsidiary to, incur any Debt, other than Intercompany Debt, if the ratio of
Consolidated Income Available for Debt Service to the Annual Debt Service Charge
for the period consisting of the four consecutive fiscal quarters most recently
ended prior to the date on which such additional Debt is to be incurred is less
than 1.5 to 1.0, on a pro forma basis after giving effect to the incurrence of
such Debt and the application of the proceeds therefrom, and calculated on the
assumption that (i) such Debt and any other Debt incurred by the Company or any
of its Subsidiaries since the first day of such four-quarter period and the
application of the proceeds therefrom (including to refinance other Debt since
the first day of such four-quarter period) had occurred on the first day of such
period, (ii) the repayment or retirement of any other Debt of the Company or any
of its Subsidiaries since the first day of such four-quarter period had occurred
on the first day of such period (except that, in making such computation, the
amount of Debt under any revolving credit facility, line of credit or similar
facility shall be computed based upon the average daily balance of such Debt
during such period), and (iii) in the case of any acquisition or disposition by
the Company or any Subsidiary of any asset or group of assets since the first
day of such four-quarter period, including, without limitation, by merger, stock
purchase or sale, or asset purchase or sale, such acquisition or disposition had
occurred on the first day of such period with the appropriate adjustments with
respect to such acquisition or disposition being included in such pro forma
calculation. If the Debt giving rise to the need to make the foregoing
calculation or any other Debt incurred after the first day of the relevant
four-quarter period bears interest at a floating rate then, for purposes of
calculating the Annual Debt Service Charge, the interest rate on such Debt shall
be computed on a pro forma basis as if the average interest rate which would
have been in effect during the entire such four-quarter period had been the
applicable rate for the entire such period.
S-35
<PAGE>
MAINTENANCE OF TOTAL UNENCUMBERED ASSETS. The Company will maintain at all
times Total Unencumbered Assets of not less than 150% of the aggregate
outstanding principal amount of the Unsecured Debt of the Company and its
Subsidiaries, computed on a consolidated basis in accordance with GAAP.
As used herein:
"ANNUAL DEBT SERVICE CHARGE" as of any date means the amount which is
expensed in any 12-month period for interest on Debt of the Company and its
Subsidiaries.
"CONSOLIDATED INCOME AVAILABLE FOR DEBT SERVICE" for any period means
Consolidated Net Income plus, without duplication, amounts which have been
deducted in determining Consolidated Net Income during such period for (i)
Consolidated Interest Expense, (ii) provision for taxes of the Company and its
Subsidiaries based on income, (iii) amortization (other than amortization of
debt discount) and depreciation, (iv) provisions for losses from sales or joint
ventures, (v) provision for impairment losses, (vi) increases in deferred taxes
and other non-cash charges, (vii) charges resulting from a change in accounting
principles, and (viii) charges for early extinguishment of debt, and less,
without duplication, amounts which have been added in determining Consolidated
Net Income during such period for (a) provisions for gains from sales or joint
ventures, and (b) decreases in deferred taxes and other non-cash items.
"CONSOLIDATED INTEREST EXPENSE" for any period, and without duplication,
means all interest (including the interest component of rentals on capitalized
leases, letter of credit fees, commitment fees and other like financial charges)
and all amortization of debt discount on all Debt (including, without
limitation, payment-in-kind, zero coupon and other like securities) but
excluding legal fees, title insurance charges, other out-of-pocket fees and
expenses incurred in connection with the issuance of Debt and the amortization
of any such debt issuance costs that are capitalized, all determined for the
Company and its Subsidiaries on a consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" for any period means the amount of consolidated
net income (or loss) of the Company and its Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP.
"DEBT" means any indebtedness of the Company or any Subsidiary, whether or
not contingent, in respect of (i) money borrowed or evidenced by bonds, notes,
debentures or similar instruments, (ii) indebtedness secured by any mortgage,
pledge, lien, charge, encumbrance, trust deed, deed of trust, deed to secure
debt, security agreement or any security interest existing on property owned by
the Company or any Subsidiary, (iii) letters of credit or amounts representing
the balance deferred and unpaid of the purchase price of any property except any
such balance that constitutes an accrued expense or trade payable or (iv) any
lease of property by the Company or any Subsidiary as lessee that is reflected
on the Company's consolidated balance sheet as a capitalized lease in accordance
with GAAP, in the case of items of indebtedness under (i) through (iii) above to
the extent that any such items (other than letters of credit) would appear as
liabilities on the Company's consolidated balance sheet in accordance with GAAP,
and also includes, to the extent not otherwise included, any obligation by the
Company or any Subsidiary to be liable for, or to pay, as obligor, guarantor or
otherwise (other than for purposes of collection in the ordinary course of
business), indebtedness of another person (other than the Company or any
Subsidiary) of the type referred to in (i), (ii), (iii) or (iv) above (it being
understood that Debt shall be deemed to be incurred by the Company or any
Subsidiary whenever the Company or such Subsidiary shall create, assume,
guarantee or otherwise become liable in respect thereof).
"EXECUTIVE GROUP" means, collectively, those individuals holding the offices
of Chairman, President, Chief Executive Officer, Chief Operating Officer, or any
Vice President of the Company.
"GAAP" means generally accepted accounting principles, as in effect from
time to time, as used in the United States applied on a consistent basis.
S-36
<PAGE>
"INTERCOMPANY DEBT" means indebtedness owed by the Company or any Subsidiary
solely to the Company or any Subsidiary.
"SECURED DEBT" means Debt secured by any mortgage, lien, charge,
encumbrance, trust deed, deed of trust, deed to secure debt, security agreement,
pledge, conditional sale or other title retention agreement, capitalized lease,
or other security interest or agreement granting or conveying security title to
or a security interest in real property or other tangible assets.
"SUBSIDIARY" means (i) any corporation, partnership, joint venture, limited
liability company or other entity the majority of the shares, if any, of the
non-voting capital stock or other equivalent ownership interests of which
(except directors' qualifying shares) are at the time directly or indirectly
owned by the Company, and the majority of the shares of the voting capital stock
or other equivalent ownership interests of which (except for directors'
qualifying shares) are at the time directly or indirectly owned by the Company,
any other Subsidiary or Subsidiaries, and/or one or more individuals of the
Executive Group (or, in the event of death or disability of any of such
individuals, his/her respective legal representative(s), or such individuals'
successors in office as an officer of the Company), and (ii) any other entity
the accounts of which are consolidated with the accounts of the Company.
"TOTAL ASSETS" as of any date means the sum of (i) Undepreciated Real Estate
Assets and (ii) all other assets of the Company and its Subsidiaries determined
on a consolidated basis in accordance with GAAP (but excluding accounts
receivable and intangibles).
"TOTAL UNENCUMBERED ASSETS" as of any date means Total Assets minus the
value of any properties of the Company and its Subsidiaries that are encumbered
by any mortgage, charge, pledge, lien, security interest, trust deed, deed of
trust, deed to secure debt, security agreement, security interest or other
encumbrance of any kind (other than those relating to Intercompany Debt),
including the value of any stock of any Subsidiary that is so encumbered
determined on a consolidated basis in accordance with GAAP. For purposes of this
definition, the value of each property shall be equal to the purchase price or
cost of each such property and the value of any stock subject to any encumbrance
shall be determined by reference to the value of the properties owned by the
issuer of such stock as aforesaid.
"UNDEPRECIATED REAL ESTATE ASSETS" as of any date means the amount of real
estate assets of the Company and its Subsidiaries on such date, before
depreciation and amortization, determined on a consolidated basis in accordance
with GAAP.
"UNSECURED DEBT" means Debt of the Company or any Subsidiary that is not
Secured Debt.
OPTIONAL REDEMPTION
The Notes may be redeemed at any time at the option of the Company, in whole
or from time to time in part, at a redemption price equal to the sum of (i) the
principal amount of the Notes being redeemed plus accrued interest thereon to
the redemption date and (ii) the Make-Whole Amount (as defined below), if any,
with respect to such Notes (the "Redemption Price"); provided that installments
of interest on Notes which are payable on Interest Payment Dates falling on or
prior to the relevant redemption dates shall be payable to the Holders of such
Notes (or one or more predecessor Notes) registered as such at the close of
business on the relevant Regular Record Dates.
If notice has been given as provided in the Indenture and funds for the
redemption of any Notes called for redemption shall have been made available on
the redemption date referred to in such notice, such Notes will cease to bear
interest on the date fixed for such redemption specified in such notice and the
only right of the Holders of the Notes will be to receive payment of the
Redemption Price.
Notice of any optional redemption of any Notes will be given to Holders at
their addresses, as shown in the security register for the Notes, not more than
60 nor less than 30 days prior to the date fixed for
S-37
<PAGE>
redemption. The notice of redemption will specify, among other items, the
Redemption Price and the principal amount of the Notes held by such Holder to be
redeemed.
If less than all the Notes are to be redeemed at the option of the Company,
the Company will notify the Trustee at least 45 days prior to giving notice of
redemption (or such shorter notice period as is satisfactory to the Trustee) of
the aggregate principal amount of Notes to be redeemed and their redemption
date. The Trustee shall select, in such manner as it shall deem fair and
appropriate, Notes to be redeemed in whole or in part.
As used herein:
"MAKE-WHOLE AMOUNT" means, in connection with any optional redemption of any
Notes, the excess, if any, of (i) the aggregate present value as of the date of
such redemption of each dollar of principal being redeemed and the amount of
interest (exclusive of interest accrued to the date of redemption) that would
have been payable in respect of each such dollar if such redemption had not been
made, determined by discounting, on a semi-annual basis, such principal and
interest at the Reinvestment Rate (determined on the third Business Day
preceding the date such notice of redemption is given) from the respective dates
on which such principal and interest would have been payable if such redemption
had not been made to the date of redemption over (ii) the aggregate principal
amount of the Notes being redeemed. For purposes of the Indenture, all
references to "premium, if any" on the Notes shall be deemed to refer to the
Make-Whole Amount, if any.
"REINVESTMENT RATE" means .25% plus the arithmetic mean of the yields under
the heading "Week Ending" published in the most recent Statistical Release under
the caption "Treasury Constant Maturities" for the maturity (rounded to the
nearest month) corresponding to the remaining life to maturity of the Notes, as
of the payment date of the principal being redeemed. If no maturity exactly
corresponds to such maturity, yields for the two published maturities most
closely corresponding to such maturity shall be calculated pursuant to the
immediately preceding sentence and the Reinvestment Rate shall be interpolated
or extrapolated from such yields on a straight-line basis, rounding in each of
such relevant periods to the nearest month. For the purposes of calculating the
Reinvestment Rate, the most recent Statistical Release published prior to the
date of determination of the Make-Whole Amount shall be used.
"STATISTICAL RELEASE" means the statistical release designated "H.15(519)"
or any successor publication which is published weekly by the Federal Reserve
System and which reports yields on actively traded U.S. government securities
adjusted to constant maturities, or, if such statistical release is not
published at the time of any determination under the Indenture, then such other
reasonably comparable index which shall be designated by the Company.
BOOK-ENTRY SYSTEM
The following are summaries of certain rules and operating procedures of DTC
that affect the payment of principal, premium, if any, and interest and
transfers of interests in the Global Note. Upon issuance, the Notes will only be
issued in the form of a Global Note which will be deposited with, or on behalf
of, DTC and registered in the name of Cede & Co., as nominee of DTC. Unless and
until it is exchanged in whole or in part for Notes in definitive form under the
limited circumstances described below, a Global Note may not be transferred
except as a whole (i) by DTC to a nominee of DTC, (ii) by a nominee of DTC to
DTC or another nominee of DTC or (iii) by DTC or any such nominee to a successor
of DTC or a nominee of such successor.
Ownership of beneficial interests in a Global Note will be limited to
persons that have accounts with DTC for such Global Note ("participants") or
persons that may hold interests through participants. Upon the issuance of a
Global Note, DTC will credit, on its book-entry registration and transfer
system, the participants' accounts with the respective principal amounts of the
Notes represented by such Global Note beneficially owned by such participants.
Ownership of beneficial interests in the Global Note will be shown
S-38
<PAGE>
on, and the transfer of such ownership interests will be effected only through,
records maintained by DTC (with respect to interests of participants) and on the
records of participants (with respect to interests of persons holding through
participants). The laws of some states may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
laws may limit or impair the ability to own, transfer or pledge beneficial
interests in the Global Note.
So long as DTC or its nominee is the registered owner of a Global Note, DTC
or its nominee, as the case may be, will be considered the sole owner or Holder
of the Notes represented by such Global Note for all purposes under the
Indenture. Except as set forth below, owners of beneficial interests in a Global
Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of such Notes in certificated form and will not be considered the
registered owners or Holders thereof under the Indenture. Accordingly, each
person owning a beneficial interest in a Global Note must rely on the procedures
of DTC and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a Holder under the Indenture. The Company understands that under existing
industry practices, if the Company requests any action of Holders or if an owner
of a beneficial interest in a Global Note desires to give or take any action
that a Holder is entitled to give or take under the Indenture, DTC would
authorize the participants holding the relevant beneficial interests to give or
take such action, and such participants would authorize beneficial owners owning
through such participants to give or take such action or would otherwise act
upon the instructions of beneficial owners holding through them.
Principal, premium, if any, and interest payments on interests represented
by a Global Note will be made to DTC or its nominee, as the case may be, as the
registered owner of such Global Note. None of the Company, the Trustee or any
other agent of the Company or agent of the Trustee will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership of interests in the Global Notes or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests. The Company expects that DTC, upon receipt of any payment
of principal, premium, if any, or interest in respect of a Global Note, will
immediately credit participants' accounts with payments in amounts proportionate
to their respective beneficial interests in such Global Note as shown on the
records of DTC. The Company also expects that payments by participants to owners
of beneficial interests in the Global Note held through such participants will
be governed by standing customer instructions and customary practice, as is now
the case with securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of such
participants.
The Indenture will provide that if (i) DTC notifies the Company that it is
unwilling or unable to continue as depositary or if DTC ceases to be a clearing
agency registered as such under the Exchange Act at any time when the depositary
is required to be so registered in order to act as depositary for the Notes and
a successor depositary is not appointed within 90 days after the Company
receives such notice or learns of such ineligibility, (ii) the Company
determines that the Notes shall no longer be represented by a Global Note and
executes and delivers to the Trustee an officers' certificate to such effect or
(iii) an Event of Default with respect to the Notes shall have occurred and be
continuing and beneficial owners representing a majority in aggregate principal
amount of the outstanding Notes advise DTC to cease acting as depositary for the
Notes, the Company will issue the Notes in definitive form in exchange for
interests in the Global Note. Any Notes issued in definitive form in exchange
for interests in the Global Note will be registered in such name or names, and
will be issued in denominations of $1,000 and such integral multiples thereof,
as DTC shall instruct the Trustee. It is expected that such instructions will be
based upon directions received by DTC from participants with respect to
ownership of beneficial interests in the Global Note.
DTC is a limited-purpose trust company organized under the Banking Law of
the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A
S-39
<PAGE>
of the Exchange Act. DTC was created to hold securities of its participants and
to facilitate the clearance and settlement of transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations, some of which (and/or their representatives) own DTC. Access to
the DTC book-entry system is also available to others, such as banks, brokers
and dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. All payments of principal, premium, if any, and interest in
respect of the Notes will be made by the Company by wire transfer of immediately
available funds to an account maintained in the United States; provided that, in
the event that Notes are issued in definitive certificated form, the Holders
thereof shall have given appropriate wire transfer instructions to the Company.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing house or next-day funds. In contrast, the Notes
will trade in DTC's Same-Day Funds Settlement System until maturity or until the
Notes are issued in certificated form, and secondary market trading activity in
the Notes will therefore be required by DTC to settle in immediately available
funds. The Company expects that secondary trading in the certificated
securities, if any, will also be settled in immediately available funds. No
assurance can be given as to the effect, if any, of settlement in immediately
available funds on trading activity in the Notes.
UNDERWRITING
Subject to the terms and conditions contained in the purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), Donaldson, Lufkin & Jenrette
Securities Corporation, J.P. Morgan Securities Inc. and Salomon Brothers Inc
(the "Underwriters"), and the Underwriters have severally agreed to purchase the
respective principal amount of Notes set forth opposite their names below. In
the Purchase Agreement, the several Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Notes offered
hereby if any such Notes are purchased. In the event of a default by an
Underwriter, the Purchase Agreement provides that, in certain circumstances, the
purchase commitments of the non-defaulting Underwriters may be increased or the
Purchase Agreement may be terminated.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER NOTES
- ------------------------------------------------------------------------------ --------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................................ $
Donaldson, Lufkin & Jenrette Securities Corporation...........................
J.P. Morgan Securities Inc....................................................
Salomon Brothers Inc..........................................................
--------------
Total............................................................... $ 110,000,000
--------------
--------------
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the Notes to the public at the public offering price set forth on the
cover page of this Prospectus Supplement, and to certain dealers at such price
less a concession not in excess of % of the principal amount thereof. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of % of the principal
S-40
<PAGE>
amount to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The Notes constitute a new issue of securities with no established trading
market. The Company does not intend to apply for listing of the Notes on a
national securities exchange. The Company has been advised by the Underwriters
that the Underwriters intend to make a market in the Notes, but the Underwriters
are not obligated to do so and may discontinue market-making at any time without
notice. No assurance can be given as to whether or not a trading market for the
Notes will develop or as to the liquidity of any trading market for the Notes
which may develop.
Until the distribution of the Notes is completed, rules of the Securities
and Exchange Commission may limit the ability of the Underwriters to bid for and
purchase the Notes. As an exception to these rules, the Underwriters are
permitted to engage in certain transactions that stabilize the price of the
Notes. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Notes.
If the Underwriters create a short position in the Notes in connection with
this offering, I.E., they sell more Notes than are set forth on the cover page
of this Prospectus Supplement, the Underwriters may reduce that short position
by purchasing Notes in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Notes. In addition, neither the
Company nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act or to contribute to
payments the Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the Notes to be issued in connection with the Offering will
be passed upon for the Company by Latham & Watkins, Costa Mesa, California.
Brown & Wood LLP, San Francisco, California will act as counsel for the
Underwriters.
S-41
<PAGE>
PROSPECTUS
$200,000,000
REALTY INCOME CORPORATION
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
------------------------
Realty Income Corporation (the "Company") may from time to time offer in one
or more series (i) its debt securities (the "Debt Securities"), (ii) shares of
its preferred stock, par value $1.00 per share (the "Preferred Stock"), or (iii)
shares of its Common Stock, par value $1.00 per share (the "Common Stock"), with
an aggregate public offering price of up to $200,000,000 on terms to be
determined at the time of offering. The Debt Securities, the Preferred Stock and
the Common Stock (collectively, the "Securities") may be offered, separately or
together, in separate series, in amounts, at prices and on terms to be set forth
in one or more supplements to this Prospectus (each, a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Debt Securities, the specific
title, aggregate principal amount, currency, form (which may be registered or
bearer, or certificated or global), authorized denominations, maturity, rate (or
manner of calculation thereof) and time of payment of interest, terms for
redemption at the Company's option or repayment at the holder's option, terms
for sinking fund payments, terms for conversion into Preferred Stock or Common
Stock, covenants and any initial public offering price; (ii) in the case of
Preferred Stock, the specific designation and stated value, any dividend,
liquidation, redemption, conversion, voting and other rights, and any initial
public offering price; and (iii) in the case of Common Stock, any initial public
offering price. In addition, such specific terms may include limitations on
actual, beneficial or constructive ownership and restrictions on transfer of the
Securities, in each case as may be appropriate to preserve the status of the
Company as a real estate investment trust ("REIT") for federal income tax
purposes. See "Restrictions on Ownership and Transfers of Capital Stock."
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities covered
by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement
between or among them, will be set forth, or will be calculable from the
information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of such
Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is April 18, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The registration
statement on Form S-3 (of which this Prospectus is a part) (the "Registration
Statement"), the exhibits and schedules forming a part thereof and the reports,
proxy statements and other information filed by the Company with the Commission
in accordance with the Exchange Act can be inspected and copied at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Common Stock is currently listed on the New York Stock Exchange ("NYSE") and
similar information concerning the Company can be inspected and copied at the
offices of the NYSE, 20 Broad Street, New York, New York 10005. Electronic
filings made through the Commission's EDGAR filing system are publicly available
through the Commission's web site (http://www.sec.gov).
The Company has filed with the Commission the Registration Statement under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities. This Prospectus does not contain all the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the Commission's rules and regulations. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed or incorporated by reference as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference and the exhibits and schedules thereto. For further
information regarding the Company and the Securities, reference is hereby made
to the Registration Statement and such exhibits and schedules, which may be
obtained from the Commission at its principal office in Washington, D.C. upon
payment of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The document listed below has been filed by the Company under the Exchange
Act with the Commission and is incorporated herein by reference:
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the applicable Prospectus Supplement) or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Copies of all documents that are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this Prospectus
incorporates) will be provided without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request. Requests should be directed to the Corporate Secretary of the Company,
220 West Crest Street, Escondido, California 92025 (telephone number: (760)
741-2111).
2
<PAGE>
THE COMPANY
Realty Income Corporation (the "Company") is a fully integrated,
self-administered and self-managed real estate investment trust ("REIT") that
focuses on the acquisition of long-term net lease properties. The Company's
philosophy is to employ a strategy of acquiring, owning and managing additional
properties that are preleased on a long-term net lease basis to national and
regional chain operators in a variety of consumer service and retail industries
throughout the United States. As of April 1, 1997, the Company directly owned
controlling interests in 747 properties located throughout the United States.
The Company commenced operations as a REIT on August 15, 1994 through a
merger of 25 discrete publicly and privately held limited partnerships with and
into the Company (the "Consolidation"). On August 17, 1995, R.I.C. Advisor,
Inc., a California corporation ("R.I.C. Advisor"), merged with and into the
Company (the "Merger") pursuant to an Agreement and Plan of Merger dated as of
April 28, 1995, by and among the Company, R.I.C. Advisor and the shareholders of
R.I.C. Advisor. Prior to the Merger, the Company's day to day operations were
administered by R.I.C. Advisor. Through the Merger, the Company internalized the
expertise and experience of R.I.C. Advisor's personnel and became
self-administered and self-managed.
The Company is a Delaware corporation incorporated on September 9, 1993. The
Company's executive offices are located at 220 West Crest Street, Escondido,
California 92025, and the telephone number is (760) 741-2111.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, which may include the development and acquisition of
additional properties and other acquisition transactions, the expansion and
improvement of certain properties in the Company's portfolio, and the repayment
of indebtedness.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth ratios of earnings to fixed charges for the
periods shown. The years ended December 31, 1996 and 1995 are for the Company.
The results of operations used to compute the ratio for the year ended December
31, 1994 are comprised of those of the combined 10 private and 15 publicly held
real estate limited partnerships that were included in the Consolidation
("Predecessor") from January 1, 1994 through August 15, 1994 and those of the
Company from August 16, 1994 through December 31, 1994. The ratio shown for the
year ended December 31, 1993 is derived from the combined historical financial
information of the Predecessor. Ratios are not shown for the year ended December
31, 1992 because the Predecessor did not have any fixed charges for such
periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ------------------------------------------------
<S> <C> <C> <C>
1996 1995 1994 1993
----- ----- ----- ---------
14x 10x 39x 5,865x
</TABLE>
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of net income before
extraordinary items plus fixed charges (excluding interest costs capitalized).
Fixed charges consist of interest expense (including interest costs capitalized)
and the amortization of debt issuance costs. To date, the Company has not issued
any Preferred Stock; therefore, the ratios of earnings to fixed charges and
preferred share dividends are the same as the ratios presented above.
3
<PAGE>
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct obligations of the Company, which may be
secured or unsecured, and which may be senior or subordinated indebtedness of
the Company. The Debt Securities may be issued under one or more indentures,
each dated as of a date on or before the issuance of the Debt Securities to
which it relates and in the form that has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part or incorporated by
reference herein by means of a post-effective amendment to the Registration
Statement or a Form 8-K, subject to such amendments or supplements as may be
adopted from time to time. Each such indenture (collectively, the "Indenture")
will be entered into between the Company and a trustee (the "Trustee"), which
may be the same Trustee. The Indenture will be subject to, and governed by, the
Trust Indenture Act of 1939, as amended. The statements made hereunder relating
to the Indenture and the Debt Securities are summaries of certain anticipated
provisions thereof, do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all provisions of the Indenture and
such Debt Securities. Capitalized terms used but not defined herein shall have
the respective meanings set forth in the Indenture.
TERMS
The particular terms of the Debt Securities offered by a Prospectus
Supplement will be described in the particular Prospectus Supplement, along with
any applicable modifications of or additions to the general terms of the Debt
Securities as described herein and in the applicable Indenture. Accordingly, for
a description of the terms of any series of Debt Securities, reference must be
made to both the Prospectus Supplement relating thereto and the description of
the Debt Securities set forth in this Prospectus. To the extent that any
particular terms of the Debt Securities described in a Prospectus Supplement
differ from any of the terms described herein, then such terms described herein
shall be deemed to have been superseded by such Prospectus Supplement.
Except as set forth in any Prospectus Supplement, the Debt Securities may be
issued without limit as to aggregate principal amount, in one or more series, in
each case as established from time to time by the Company's Board of Directors
or as set forth in the applicable Indenture or one or more indentures
supplemental to the Indenture. All Debt Securities of one series need not be
issued at the same time and, unless otherwise provided, a series may be
reopened, without the consent of the holders of the Debt Securities of such
series, for issuances of additional Debt Securities of such series.
Each Indenture will provide that the Company may, but need not, designate
more than one Trustee thereunder, each with respect to one or more series of
Debt Securities. Any Trustee under an Indenture may resign or be removed with
respect to one or more series of Debt Securities, and a successor Trustee may be
appointed to act with respect to such series. If two or more persons are acting
as Trustee with respect to different series of Debt Securities, each such
Trustee shall be a Trustee of a trust under the applicable Indenture separate
and apart from the trust administered by any other Trustee and, except as
otherwise indicated herein, any action described herein to be taken by a Trustee
may be taken by each such Trustee with respect to, and only with respect to, the
one or more series of Debt Securities for which it is Trustee under the
applicable Indenture.
The following summaries set forth certain general terms and provisions of
the Indenture and the Debt Securities. The Prospectus Supplement relating to the
series of Debt Securities being offered will contain further terms of such Debt
Securities, including the following specific terms:
(1) the title of such Debt Securities;
(2) the aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
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(3) the price (expressed as a percentage of the principal amount
thereof) at which such Debt Securities will be issued and, if other than the
principal amount thereof, the portion of the principal amount thereof
payable upon declaration of acceleration of the maturity thereof, or (if
applicable) the portion of the principal amount of such Debt Securities that
is convertible into Common Stock or Preferred Stock, or the method by which
any such portion shall be determined;
(4) if convertible, the terms on which such Debt Securities are
convertible, including the initial conversion price or rate and conversion
period and, in connection with the preservation of the Company's status as a
REIT, any applicable limitations on the ownership or transferability of the
Common Stock or the Preferred Stock into which such Debt Securities are
convertible;
(5) the date or dates, or the method for determining such date or dates,
on which the principal of such Debt Securities will be payable;
(6) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt Securities
will bear interest, if any;
(7) the date or dates, or the method for determining such date or dates,
from which any interest will accrue, the dates upon which any such interest
will be payable, the record dates for payment of such interest, or the
method by which any such dates shall be determined, the persons to whom such
interest shall be payable, and the basis upon which interest shall be
calculated if other than that of a 360-day year of twelve 30-day months;
(8) the place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, where such Debt
Securities may be surrendered for conversion or registration of transfer or
exchange and where notices or demands to or upon the Company in respect of
such Debt Securities and the Indenture may be served;
(9) the period or periods, if any, within which, the price or prices at
which and the terms and conditions upon which such Debt Securities may be
redeemed, as a whole or in part, at the Company's option;
(10) the obligation, if any, of the Company to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous provision or
at the option of a holder thereof, and the period or periods within which,
the price or prices at which and the terms and conditions upon which such
Debt Securities will be redeemed, repaid or purchased, as a whole or in
part, pursuant to such obligation;
(11) if other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(12) whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not, be based on a currency, currencies, currency unit
or units or composite currency or currencies) and the manner in which such
amounts shall be determined;
(13) whether such Debt Securities will be issued in certificated and/or
book-entry form, and, if so, the identity of the depositary for such Debt
Securities;
(14) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto;
(15) the applicability, if any, of the defeasance and covenant
defeasance provisions described herein or set forth in the applicable
Indenture, or any modification thereof;
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(16) any deletions from, modifications of or additions to the events of
default or covenants of the Company with respect to such Debt Securities;
(17) whether and under what circumstances the Company will pay any
Additional Amounts on such Debt Securities in respect of any tax, assessment
or governmental charge and, if so, whether the Company will have the option
to redeem such Debt Securities in lieu of making such payment;
(18) the subordination provisions, if any, relating to such Debt
Securities;
(19) the provisions, if any, relating to any security provided for such
Debt Securities; and
(20) any other terms of such Debt Securities.
If so provided in the applicable Prospectus Supplement, the Debt Securities
may be issued at a discount below their principal amount and provide for less
than the entire principal amount thereof to be payable upon declaration of
acceleration of the maturity thereof ("Original Issue Discount Securities"). In
such cases, any material U.S. federal income tax, accounting and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise described in the applicable Prospectus Supplement, the
principal of (and premium, if any) and interest on any series of Debt Securities
will be payable at the applicable Trustee's corporate trust office, the address
of which will be set forth in the applicable Prospectus Supplement; PROVIDED,
HOWEVER, that, unless otherwise provided in the applicable Prospectus
Supplement, at the Company's option, payment of interest may be made by check
mailed to the address of the person entitled thereto as it appears in the
applicable register for such Debt Securities or by wire transfer of funds to
such person at an account maintained within the United States.
Subject to certain limitations imposed on Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the same series and of a
like aggregate principal amount and tenor upon surrender of such Debt Securities
at the office of any transfer agent designated by the Company for such purpose.
In addition, subject to certain limitations imposed on Debt Securities issued in
book-entry form, the Debt Securities of any series may be surrendered for
conversion or registration of transfer thereof at the office of any transfer
agent designated by the Company for such purpose. Every Debt Security
surrendered for conversion, registration of transfer or exchange shall be duly
endorsed or accompanied by a written instrument of transfer and the person
requesting such transfer must provide evidence of title and identity
satisfactory to the applicable Trustee or transfer agent. No service charge will
be made for any registration of transfer or exchange of any Debt Securities, but
the Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. The Company may at any time
rescind the designation of any transfer agent appointed with respect to the Debt
Securities of any series or approve a change in the location through which any
such transfer agent acts, except that the Company will be required to maintain a
transfer agent in each place of payment for such series. The Company may at any
time designate additional transfer agents with respect to any series of Debt
Securities.
Neither the Company nor any Trustee shall be required to (a) issue, register
the transfer of or exchange Debt Securities of any series if such Debt Security
may be among those selected for redemption during a period beginning at the
opening of business 15 days before the mailing or first publication, as the case
may be, of notice of redemption of such Debt Securities and ending at the close
of business on (i) if the Debt Securities of such series are issuable only in
registered form, the day of mailing of the relevant notice of redemption or (ii)
if the Debt Securities of such series are issuable in bearer form, the day of
the
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first publication of the relevant notice of redemption or, if such Debt
Securities are also issuable in registered form and there is no such
publication, the day of mailing of the relevant notice of redemption; (b)
register the transfer of or exchange any Debt Security, or portion thereof, so
selected for redemption, in whole or in part, except the unredeemed portion of
any Debt Security being redeemed in part; or (c) exchange any Debt Security in
bearer form so selected for redemption, except in exchange for a Debt Security
of such series in registered form that is simultaneously surrendered for
redemption; or (d) issue, register the transfer of or exchange any Debt Security
that has been surrendered for repayment at the holder's option, except the
portion, if any, of such Debt Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Each Indenture will provide that the Company will not consolidate with, or
sell, lease or convey all or substantially all of its assets to, or merge with
or into, any person unless (a) either the Company shall be the continuing
entity, or the successor person (if other than the Company) formed by or
resulting from any such consolidation or merger or which shall have received the
transfer of such assets shall be a corporation organized and existing under the
laws of the United States or any State thereof and shall expressly assume the
Company's obligation to pay the principal of (and premium, if any) and interest
on all the Debt Securities issued under such Indenture and the due and punctual
performance and observance of all the covenants and conditions contained in such
Indenture and in such Debt Securities; (b) immediately after giving effect to
such transaction and treating any indebtedness that becomes an obligation of the
Company or any Subsidiary as a result thereof as having been incurred, and any
liens on any property or assets of the Company or any Subsidiary that are
incurred, created or assumed as a result thereof as having been created,
incurred or assumed, by the Company or such Subsidiary at the time of such
transaction, no event of default under the Indenture, and no event that, after
notice or the lapse of time, or both, would become such an event of default,
shall have occurred and be continuing; and (c) an officers' certificate and
legal opinion covering such conditions shall be delivered to the Trustee.
CERTAIN COVENANTS
EXISTENCE. Except as permitted under "--Merger, Consolidation or Sale of
Assets," each Indenture will require the Company to do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, all material rights (by certificate of incorporation, by-laws and
statute) and all material franchises; PROVIDED, HOWEVER, that the Company shall
not be required to preserve any right or franchise if its Board of Directors
determines that the preservation thereof is no longer desirable in the conduct
of its business.
MAINTENANCE OF PROPERTIES. Each Indenture will require the Company to cause
all of its material properties used or useful in the conduct of its business or
the business of any Subsidiary to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and to cause
to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the Company's judgment may be necessary so that
the business carried on in connection therewith may be properly and
advantageously conducted at all times; PROVIDED, HOWEVER, that the Company and
its Subsidiaries shall not be prevented from selling or otherwise disposing of
their properties for value in the ordinary course of business.
INSURANCE. Each Indenture will require the Company to, and to cause each of
its Subsidiaries to, keep in force upon all of its properties and operations
policies of insurance carried with responsible companies in such amounts and
covering all such risks as shall be customary in the industry in accordance with
prevailing market conditions and availability.
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PAYMENT OF TAXES AND OTHER CLAIMS. Each Indenture will require the Company
to pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (a) all taxes, assessments and governmental charges levied or
imposed on it or any Subsidiary or on the income, profits or property of the
Company or any Subsidiary and (b) all lawful claims for labor, materials and
supplies that, if unpaid, might by law become a lien upon the property of the
Company or any Subsidiary; PROVIDED, HOWEVER, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim the amount, applicability or validity of which is
being contested in good faith by appropriate proceedings.
PROVISION OF FINANCIAL INFORMATION. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, each Indenture will require the
Company, within 15 days after each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
documents with the Commission if the Company were so subject, (a) to transmit by
mail to all holders of Debt Securities issued under such Indenture, as their
names and addresses appear in the applicable register for such Debt Securities,
without cost to such holders, copies of the annual reports, quarterly reports
and other documents that the Company would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company
were subject to such Sections, (b) to file with the applicable Trustee copies of
the annual reports, quarterly reports and other documents that the Company would
have been required to file with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act if the Company were subject to such Sections, and (c) to
supply, promptly upon written request and payment of the reasonable cost of
duplication and delivery, copies of such documents to any prospective holder of
such Debt Securities.
ADDITIONAL COVENANTS. Any additional covenants of the Company with respect
to any of the series of Debt Securities will be set forth in the Prospectus
Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the applicable Indenture, each Indenture will
provide that the following events are "events of default" with respect to any
series of Debt Securities issued thereunder: (a) default for 30 days in the
payment of any installment of interest on any Debt Security of such series; (b)
default in the payment of the principal of (or premium, if any, on) any Debt
Security of such series when due, whether at stated maturity or by declaration
of acceleration, notice of redemption, notice of option to elect repayment or
otherwise; (c) default in making any sinking fund payment as required for any
Debt Security of such series; (d) default in the performance of any other
covenant of the Company contained in the Indenture (other than a covenant added
to the Indenture solely for the benefit of a series of Debt Securities issued
thereunder other than such series), continued for 60 days after written notice
to the Company by the Trustee or the Holders of at least 25% in principal amount
of the outstanding Debt Securities of such series; (e) a default under any bond,
debenture, note or other evidence of indebtedness for money borrowed by the
Company or any of its Subsidiaries (including obligations under leases required
to be capitalized on the balance sheet of the lessee under generally accepted
accounting principles, but not including any indebtedness or obligations for
which recourse is limited to property purchased) in an aggregate principal
amount in excess of $25,000,000 or under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any indebtedness for money borrowed by the Company or any of its Subsidiaries
(including such leases, but not including such indebtedness or obligations for
which recourse is limited to property purchased) in an aggregate principal
amount in excess of $25,000,000, whether such indebtedness exists at the date of
the relevant Indenture or shall thereafter be created, which default shall have
resulted in such indebtedness becoming or being declared due and payable prior
to the date on which it would otherwise have become due and payable or such
obligations being accelerated, without such acceleration having been rescinded
or annulled; (f) certain events of bankruptcy, insolvency or reorganization, or
court appointment of a receiver, liquidator or trustee of the Company or any
Significant Subsidiary of the Company; and (g) any other
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Event of Default provided with respect to a particular series of Debt
Securities. The term "Significant Subsidiary" has the meaning ascribed to such
term in Regulation S-X promulgated under the Securities Act, as such Regulation
was in effect on January 1, 1996.
If an event of default under any Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the outstanding Debt Securities of that series may declare
the principal amount (or, if the Debt Securities of that series are Original
Issue Discount Securities or Indexed Securities, such portion of the principal
amount as may be specified in the terms thereof) of all the Debt Securities of
that series to be due and payable immediately by written notice thereof to the
Company (and to the applicable Trustee if given by the holders). However, at any
time after such a declaration of acceleration with respect to Debt Securities of
such series has been made, but before a judgment or decree for payment of the
money due has been obtained by the applicable Trustee, the holders of not less
than a majority of the principal amount of the outstanding Debt Securities of
such series may rescind and annul such declaration and its consequences if (a)
the Company shall have deposited with the applicable Trustee all required
payments of the principal of (and premium, if any) and interest on the Debt
Securities of such series (other than principal and premium, if any, and
interest which have become due solely as a result of such acceleration), plus
certain fees, expenses, disbursements and advances of the applicable Trustee and
(b) all events of default, other than the nonpayment of accelerated principal
(or specified portion thereof), premium, if any, and interest with respect to
Debt Securities of such series have been cured or waived as provided in the
Indenture. Each Indenture will also provide that the holders of not less than a
majority in principal amount of the outstanding Debt Securities of any series
may waive any past default with respect to such series and its consequences,
except a default (y) in the payment of the principal of (or premium, if any) or
interest on any Debt Security of such series or (z) in respect of a covenant or
provision contained in such Indenture that cannot be modified or amended without
the consent of the holder of each outstanding Debt Security of such series
affected thereby.
Each Indenture will require each Trustee to give notice to the holders of
Debt Securities within 90 days of a default under the Indenture unless such
default shall have been cured or waived, subject to certain exceptions;
PROVIDED, HOWEVER, that such Trustee may withhold notice to the holders of any
series of Debt Securities of any default with respect to such series (except a
default in the payment of the principal of (or premium, if any) or interest on
any Debt Security of such series or in the payment of any sinking fund
installment in respect of any Debt Security of such series) if specified
Responsible Officers of the Trustee consider such withholding to be in such
holders' interest.
Each Indenture will provide that no holders of Debt Securities of any series
may institute any proceedings, judicial or otherwise, with respect to the
Indenture or for any remedy thereunder, except in the case of failure of the
Trustee, for 60 days, to act after it has received a written request to
institute proceedings in respect of an event of default from the holders of not
less than 25% in principal amount of the outstanding Debt Securities of such
series, as well as an offer of indemnity reasonably satisfactory to it, and no
direction inconsistent with such written request has been given to the Trustee
during such 60-day period by holders of a majority in principal amount of the
outstanding Debt Securities of such series. This provision will not prevent,
however, any holder of Debt Securities from instituting suit for the enforcement
of payment of the principal of (and premium, if any) and interest on such Debt
Securities at the respective due dates thereof.
Each Indenture will provide that, subject to provisions in the Trust
Indenture Act of 1939 relating to its duties in case of default, the Trustee is
under no obligation to exercise any of its rights or powers under the Indenture
at the request or direction of any holders of any series of Debt Securities then
outstanding under the Indenture, unless such holders shall have offered to the
Trustee reasonable security or indemnity. The holders of not less than a
majority in principal amount of the outstanding Debt Securities of any series
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or of exercising any trust
or power conferred upon the Trustee; provided
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that such direction shall not conflict with any rule of law or the Indenture and
the Trustee may refuse to follow any direction that may involve the Trustee in
personal liability or that may be unduly prejudicial to the holders of Debt
Securities of such series not joining therein.
Within 120 days after the close of each fiscal year, the Company will be
required to deliver to the Trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under the Indenture and, if so, specifying each such default and the
nature and status thereof.
MODIFICATION OF THE INDENTURE
Modifications and amendments of any Indenture will be permitted with the
consent of the holders of not less than a majority in principal amount of all
outstanding Debt Securities of each series issued under such Indenture affected
by such modification or amendment; PROVIDED, HOWEVER, that no such modification
or amendment may, without the consent of the holder of each Debt Security
affected thereby, (a) change the stated maturity of the principal of, or any
installment of principal, interest (or premium, if any) on, any such Debt
Security; (b) reduce the principal amount of, or the rate or amount of interest
on, or any premium payable on redemption of, any such Debt Security, or reduce
the amount of principal of an Original Issue Discount Security that would be due
and payable upon declaration of acceleration of the maturity thereof or would be
provable in bankruptcy, or adversely affect any right of repayment at the option
of the holder of any Debt Security (or reduce the amount of premium payable upon
any such repayment); (c) change the place of payment, or the coin or currency,
for payment of principal of (or premium, if any) or interest on any such Debt
Security; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Security when due; (e) reduce the
above-stated percentage of outstanding Debt Securities of any series necessary
to modify or amend the Indenture, to waive compliance with certain provisions
thereof or certain defaults and consequences thereunder or to reduce the quorum
or voting requirements set forth in the Indenture; or (f) modify any of the
foregoing provisions or any of the provisions relating to the waiver of certain
past defaults or certain covenants, except to increase the required percentage
to effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the holder of each outstanding Debt
Security affected thereby.
The holders of a majority in aggregate principal amount of outstanding Debt
Securities of each series may, on behalf of all holders of Debt Securities of
that series waive, insofar as that series is concerned, compliance by the
Company with certain restrictive covenants in the applicable Indenture.
Modifications and amendments of an Indenture will be permitted to be made by
the Company and the Trustee without the consent of any holder of Debt Securities
for any of the following purposes: (a) to evidence the succession of another
person to the Company as obligor under the Indenture; (b) to add to the
covenants of the Company for the benefit of the holders of all or any series of
Debt Securities or to surrender any right or power conferred upon the Company in
the Indenture; (c) to add events of default for the benefit of the holders of
all or any series of Debt Securities; (d) to add or change any provisions of the
Indenture to facilitate the issuance of, or to liberalize certain terms of, Debt
Securities in bearer form, or to permit or facilitate the issuance of Debt
Securities in uncertificated form, PROVIDED that such action shall not adversely
affect the interests of the holders of the Debt Securities of any series in any
material respect; (e) to change or eliminate any provisions of the Indenture,
PROVIDED that any such change or elimination does not apply to any outstanding
Debt Securities issued prior to the date of such amendment or supplement that
are entitled to the benefit of such provision; (f) to secure the Debt
Securities; (g) to establish the form or terms of Debt Securities of any series,
including the provisions and procedures, if applicable, for the conversion of
such Debt Securities into Common Stock or Preferred Stock; (h) to provide for
the acceptance of appointment by a successor Trustee or facilitate the
administration of the trusts under the Indenture by more than one Trustee; (i)
to cure any ambiguity, defect or inconsistency in the Indenture or to make any
other provisions with respect to matters or questions arising under the
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Indenture PROVIDED, HOWEVER, that such action shall not adversely affect the
interests of holders of Debt Securities of any series in any material respect;
or (j) to supplement any of the provisions of the Indenture to the extent
necessary to permit or facilitate defeasance, covenant defeasance and discharge
of any series of such Debt Securities, PROVIDED, HOWEVER, that such action shall
not adversely affect the interests of the holders of the Debt Securities of any
series in any material respect.
Each Indenture will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (a) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (b) the principal amount of
any Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (a) above), (c) the
principal amount of an Indexed Security that shall be deemed outstanding shall
be the principal face amount of such Indexed Security at original issuance,
unless otherwise provided with respect to such Indexed Security in the
applicable Indenture, and (d) Debt Securities owned by the Company or any other
obligor upon the Debt Securities or any affiliate of the Company or of such
other obligor shall be disregarded.
Each Indenture will contain provisions for convening meetings of the holders
of Debt Securities of a series. A meeting may be permitted to be called at any
time by the Trustee, and also, upon request, by the Company or the holders of at
least 10% in principal amount of the outstanding Debt Securities of such series,
in any such case upon notice given as provided in the Indenture. Except for any
consent or waiver that must be given by the holder of each Debt Security
affected thereby, any resolution presented at a meeting or adjourned meeting
duly reconvened at which a quorum is present may be adopted by the affirmative
vote of the holders of a majority in principal amount of the outstanding Debt
Securities of that series; PROVIDED, HOWEVER, that, except as referred to above,
any resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by the
holders of a specified percentage, which is less than a majority, in principal
amount of the outstanding Debt Securities of a series may be adopted at a
meeting or adjourned meeting duly reconvened at which a quorum is present by the
affirmative vote of the holders of such specified percentage in principal amount
of the outstanding Debt Securities of that series. Any resolution passed or
decision taken at any meeting of holders of Debt Securities of any series duly
held in accordance with the Indenture will be binding on all holders of Debt
Securities of that series. The persons holding or representing a majority in
principal amount of the outstanding Debt Securities of a series shall constitute
a quorum for a meeting of holders of such series; PROVIDED, HOWEVER, that if any
action is to be taken at such meeting with respect to a consent or waiver that
may be given by the holders of not less than a specified percentage in principal
amount of the outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the outstanding
Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, each Indenture will provide that
if any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver or other action that the Indenture expressly provides may be
made, given or taken by the holders of such series and one or more additional
series: (a) there shall be no minimum quorum requirement for such meeting and
(b) the principal amount of the outstanding Debt Securities of all such series
that are entitled to vote in favor of such request, demand, authorization,
direction, notice, consent, waiver or other action shall be taken into account
in determining whether such request, demand, authorization, direction, notice,
consent, waiver or other action has been made, given or taken under the
Indenture.
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DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, upon
request of the Company any Indenture shall cease to be of further effect with
respect to any series of Debt Securities issued thereunder specified in such
Company request (except as to certain limited provisions of such Indenture which
shall survive) when either (i) all Debt Securities of such series have been
delivered to the Trustee for cancellation or (ii) all Debt Securities of such
series have become due and payable or will become due and payable within one
year (or are scheduled for redemption within one year) and the Company has
irrevocably deposited with the applicable Trustee, in trust, funds in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities in respect of principal (and
premium, if any) and interest to the date of such deposit (if such Debt
Securities have become due and payable) or to the stated maturity or redemption
date, as the case may be.
Each Indenture will provide that, unless otherwise indicated in the
applicable Prospectus Supplement, the Company may elect either to (a) defease
and be discharged from any and all obligations with respect to any series of
Debt Securities (except for the obligation to pay Additional Amounts, if any,
upon the occurrence of certain events of tax with respect to payments on such
Debt Securities and the obligations to register the transfer or exchange of such
Debt Securities, to replace temporary or mutilated, destroyed, lost or stolen
Debt Securities, to maintain an office or agency in respect of such Debt
Securities and to hold money for payment in trust) ("defeasance") or (b) be
released from its obligations with respect to certain covenants (which will be
described in the relevant Prospectus Supplement) applicable to such Debt
Securities under the applicable Indenture (which may include, subject to a
limited exception, the covenants described under "--Certain Covenants"), and any
omission to comply with such obligations shall not constitute a default or an
event of default with respect to such Debt Securities ("covenant defeasance"),
in either case upon the irrevocable deposit by the Company with the applicable
Trustee, in trust, of an amount, in such currency or currencies, currency unit
or units or composite currency or currencies in which such Debt Securities are
payable at stated maturity, or Government Obligations (as defined below), or
both, applicable to such Debt Securities that through the scheduled payment of
principal and interest in accordance with their terms will provide money in an
amount sufficient to pay the principal of (and premium, if any) and interest on
such Debt Securities, and any mandatory sinking fund or analogous payments
thereon, on the scheduled due dates therefor.
Such a trust may only be established if, among other things, the Company has
delivered to the applicable Trustee an opinion of counsel (as specified in the
applicable Indenture) to the effect that the holders of such Debt Securities
will not recognize income, gain or loss for U.S. federal income tax purposes as
a result of such defeasance or covenant defeasance and will be subject to U.S.
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such defeasance or covenant defeasance had not
occurred, and such opinion of counsel, in the case of defeasance, must refer to
and be based on a ruling of the Internal Revenue Service (the "IRS") or a change
in applicable U.S. federal income tax law occurring after the date of the
applicable Indenture. In the event of such defeasance, the holders of such Debt
Securities would thereafter be able to look only to such trust fund for payment
of principal (and premium, if any) and interest.
"Government Obligations" means securities that are (a) direct obligations of
the United States of America or the government which issued the foreign currency
in which the Debt Securities of a particular series are payable, for the payment
of which its full faith and credit is pledged, or (b) obligations of a person
controlled or supervised by and acting as an agency or instrumentality of the
United States of America or such government which issued the foreign currency in
which the Debt Securities of such series are payable, the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America or such other government, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
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or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt; PROVIDED, HOWEVER, that (except
as required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the Government Obligation or the
specific payment of interest on or principal of the Government Obligation
evidenced by such depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the holder of a Debt Security of such series is entitled to, and does, elect
pursuant to the applicable Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security or (b)
a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security will be deemed to have been, and
will be, fully discharged and satisfied through the payment of the principal of
(and premium, if any) and interest on such Debt Security as they become due out
of the proceeds yielded by converting the amount so deposited in respect of such
Debt Security into the currency, currency unit or composite currency in which
such Debt Security becomes payable as a result of such election or Conversion
Event based on the applicable market exchange rate. "Conversion Event" means the
cessation of use of (i) a currency, currency unit or composite currency both by
the government of the country which issued such currency and for the settlement
of transactions by a central bank or other public institution of or within the
international banking community, (ii) the ECU both within the European Monetary
System and for the settlement of transactions by public institutions of or
within the European Communities, or (iii) any currency unit or composite
currency other than the ECU for the purposes for which it was established.
Unless otherwise provided in the applicable Prospectus Supplement, all payments
of principal of (and premium, if any) and interest on any Debt Security that is
payable in a foreign currency that ceases to be used by its government of
issuance shall be made in U.S. dollars.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any event of default, other than the event of default
described in clause (d) under "--Events of Default, Notice and Waiver" with
respect to the specified sections of the applicable Indenture (which sections
would no longer be applicable to such Debt Securities) or clause (g) thereunder
with respect to any other covenant as to which there has been covenant
defeasance, the amount in such currency, currency unit or composite currency in
which such Debt Securities are payable, and Government Obligations on deposit
with the applicable Trustee, may not be sufficient to pay amounts due on such
Debt Securities at the time of the acceleration resulting from such event of
default. The Company would, however, remain liable to make payment of such
amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
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CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock or Preferred Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Common Stock or Preferred
Stock, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the holders
or the Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Debt
Securities and any restrictions on conversion, including restrictions directed
at maintaining the Company's REIT status.
UNCLAIMED PAYMENTS
All amounts paid by the Company to a paying agent or a Trustee for the
payment of the principal of or any premium or interest on any Debt Security that
remain unclaimed at the end of two years after such principal, premium or
interest has become due and payable will be repaid to the Company, and the
holder of such Debt Security thereafter may look only to the Company for payment
thereof.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
DESCRIPTION OF COMMON STOCK
The Company has authority to issue 40,000,000 shares of Common Stock, par
value $1.00 per share. As of April 1, 1997, the Company had outstanding
22,988,237 shares of Common Stock.
GENERAL
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that the Common Stock will
be issuable upon conversion of Debt Securities or Preferred Stock. The
statements below describing the Common Stock are in all respects subject to and
qualified in their entirety by reference to the applicable provisions of the
Company's Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and Amended and Restated Bylaws (the "Bylaws").
TERMS
Subject to the preferential rights of any other shares or series of stock,
holders of Common Stock are entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefor. Payment and declaration of dividends on the Common Stock and purchases
of shares thereof by the Company may be subject to certain restrictions if the
Company fails to pay dividends on the Preferred Stock. See "Description of
Preferred Stock." Upon any liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share equally and ratably in
any assets available for distribution to them, after payment or provision for
payment of the debts and other liabilities of the Company and the preferential
amounts owing with respect to any outstanding Preferred Stock. The Common Stock
possesses ordinary voting rights for the election of directors and in respect of
other corporate matters, each share entitling the holder thereof to one vote.
Holders of Common Stock do not have cumulative voting rights in the election of
directors, which means that holders of more than 50% of
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all the shares of the Company's Common Stock voting for the election of
directors can elect all the directors if they choose to do so and the holders of
the remaining shares cannot elect any directors. Holders of shares of Common
Stock do not have preemptive rights, which means they have no right to acquire
any additional shares of Common Stock that may be issued by the Company at a
subsequent date. All shares of Common Stock now outstanding are, and additional
shares of Common Stock offered will be when issued, fully paid and
nonassessable, and no shares of Common Stock are or will be subject to
preemptive or similar rights.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
capital stock may be owned, actually or constructively, by five or fewer
individuals (defined in the Code to include certain entities) during the last
half of a taxable year. To assist the Company in meeting this requirement and
certain other requirements relating to its tax status as a REIT, the Company may
take certain actions to limit the actual, beneficial or constructive ownership
by a single person or entity of the Company's outstanding equity securities. See
"Restrictions on Ownership and Transfers of Capital Stock."
TRANSFER AGENT
The registrar and transfer agent for the Common Stock is The Bank of New
York.
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock, par
value $1.00 per share, of which no shares were outstanding as of April 1, 1997.
GENERAL
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Certificate of Incorporation (including the
applicable Certificate of Designations) and Bylaws.
Shares of Preferred Stock may be issued from time to time in one or more
series or classes as authorized by the Company's Board of Directors. Subject to
limitations prescribed by the Delaware General Corporation Law and the
Certificate of Incorporation, the Company's Board of Directors is authorized to
fix the number of shares constituting each series or class of Preferred Stock
and the designations and powers, preferences and relative, participating,
optional or other special rights and qualifications, limitations or restrictions
thereof, including such provisions as may be desired concerning voting,
redemption, dividends, dissolution or the distribution of assets, conversion or
exchange, and such other subjects or matters as may be fixed by resolution by
the Board of Directors or a duly authorized committee thereof. The Preferred
Stock will, when issued, be fully paid and nonassessable and will have no
preemptive rights.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including:
(1) the title and stated value of such Preferred Stock;
(2) the number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such Preferred
Stock;
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(3) the dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(4) whether such Preferred Stock is cumulative or not and, if
cumulative, the date from which dividends on such Preferred Stock shall
accumulate;
(5) the procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) the provision for a sinking fund, if any, for such Preferred Stock;
(7) any voting rights of such Preferred Stock;
(8) the provision for redemption, if applicable, of such Preferred
Stock;
(9) any listing of such Preferred Stock on any securities exchange;
(10) the terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock, including the conversion price
(or manner of calculation thereof);
(11) a discussion of federal income tax considerations applicable to
such Preferred Stock;
(12) any limitations on actual, beneficial or constructive ownership and
restrictions on transfer, in each case as may be appropriate to preserve the
Company's REIT status;
(13) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(14) any limitations on issuance of any series or class of Preferred
Stock ranking senior to or on a parity with such series or class of
Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company; and
(15) any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company, rank (a)
senior to all classes or series of Common Stock and to all equity securities
ranking junior to such Preferred Stock with respect to dividend rights or rights
upon liquidation, dissolution or winding up of the Company; (b) on a parity with
all equity securities issued by the Company the terms of which specifically
provide that such equity securities rank on a parity with the Preferred Stock
with respect to dividend rights or rights upon liquidation, dissolution or
winding up of the affairs of the Company; and (c) junior to all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank senior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
affairs of the Company. As used in the Certificate of Incorporation for these
purposes, the term "equity securities" does not include convertible debt
securities.
DIVIDENDS
Holders of shares of the Preferred Stock of each series or class shall be
entitled to receive, when, as and if declared by the Company's Board of
Directors, out of the Company's assets legally available for payment, cash
dividends at such rates and on such dates as will be set forth in the applicable
Prospectus Supplement. Each such dividend shall be payable to holders of record
as they appear on the Company's stock transfer books on such record dates as
shall be fixed by the Company's Board of Directors.
Dividends on any series or class of Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the
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date set forth in the applicable Prospectus Supplement. If the Company's Board
of Directors fails to declare a dividend payable on a dividend payment date on
any series or class of Preferred Stock for which dividends are noncumulative,
then the holders of such series or class of Preferred Stock will have no right
to receive a dividend in respect of the dividend period ending on such dividend
payment date, and the Company will have no obligation to pay the dividend
accrued for such period, whether or not dividends on such series or class are
declared payable on any future dividend payment date.
If any shares of Preferred Stock of any series or class are outstanding, no
full dividends shall be declared or paid or set apart for payment on the
Preferred Stock of any other series or class ranking, as to dividends, on a
parity with or junior to the Preferred Stock of such series or class for any
period unless (a) if such series or class of Preferred Stock has a cumulative
dividend, full cumulative dividends have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof is set apart
for such payment on the Preferred Stock of such series or class for all past
dividend periods and the then current dividend period or (b) if such series or
class of Preferred Stock does not have a cumulative dividend, full dividends for
the then current dividend period have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof is set apart for
such payment on the Preferred Stock of such series or class. When dividends are
not paid in full (or a sum sufficient for such full payment is not so set apart)
upon the shares of Preferred Stock of any series or class and the shares of any
other series or class of Preferred Stock ranking on a parity as to dividends
with the Preferred Stock of such series or class, all dividends declared on
shares of Preferred Stock of such series or class and any other series or class
of Preferred Stock ranking on a parity as to dividends with such Preferred Stock
shall be declared pro rata so that the amount of dividends declared per share on
the Preferred Stock of such series or class and such other series or class of
Preferred Stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the shares of Preferred Stock of such series or
class (which shall not include any accumulation in respect of unpaid dividends
for prior dividend periods if such Preferred Stock does not have a cumulative
dividend) and such other series or class of Preferred Stock bear to each other.
No interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on Preferred Stock of such series or class that
may be in arrears.
Except as provided in the immediately preceding paragraph, unless (a) if
such series or class of Preferred Stock has a cumulative dividend, full
cumulative dividends on the Preferred Stock of such series or class have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for all past dividend periods and the
then current dividend period and (b) if such series or class of Preferred Stock
does not have a cumulative dividend, full dividends on the Preferred Stock of
such series or class have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof is set apart for payment
for the then current dividend period, no dividends (other than in the Common
Stock or other capital stock of the Company ranking junior to the Preferred
Stock of such series or class as to dividends and upon liquidation) shall be
declared or paid or set aside for payment nor shall any other distribution be
declared or made on the Common Stock or any other capital stock of the Company
ranking junior to or on a parity with the Preferred Stock of such series or
class as to dividends or upon liquidation, nor shall the Common Stock or any
other capital stock of the Company ranking junior to or on a parity with the
Preferred Stock of such series or class as to dividends or upon liquidation be
redeemed, purchased or otherwise acquired for any consideration (or any amounts
be paid to or made available for a sinking fund for the redemption of any shares
of any such stock) by the Company (except by conversion into or exchange for
other capital stock of the Company ranking junior to the Preferred Stock of such
series or class as to dividends and upon liquidation).
Any dividend payment made on shares of a series or class of Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to shares of such series or class that remains payable.
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REDEMPTION
If so provided in the applicable Prospectus Supplement, the shares of
Preferred Stock will be subject to mandatory redemption or redemption at the
Company's option, as a whole or in part, in each case on the terms, at the times
and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series or class of Preferred Stock
that is subject to mandatory redemption will specify the number of shares of
such Preferred Stock that shall be redeemed by the Company in each year
commencing after a date to be specified, at a redemption price per share to be
specified, together with an amount equal to all accumulated and unpaid dividends
thereon (which shall not, if such Preferred Stock does not have a cumulative
dividend, include any accumulation in respect of unpaid dividends for prior
dividend periods) to the date of redemption. The redemption price may be payable
in cash or other property, as specified in the applicable Prospectus Supplement.
If the redemption price for Preferred Stock of any series or class is payable
only from the net proceeds of the issuance of capital stock of the Company, the
terms of such Preferred Stock may provide that, if no such capital stock shall
have been issued or to the extent the net proceeds from any issuance are
insufficient to pay in full the aggregate redemption price then due, such
Preferred Stock shall automatically and mandatorily be converted into shares of
the applicable capital stock of the Company pursuant to conversion provisions
specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (a) if such series or class of
Preferred Stock has a cumulative dividend, full cumulative dividends on all
shares of such series or class of Preferred Stock have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
is set apart for payment for all past dividend periods and the then current
dividend period and (b) if such series or class of Preferred Stock does not have
a cumulative dividend, full dividends on the Preferred Stock of such series or
class have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof is set apart for payment for the then current
dividend period, no shares of such series or class of Preferred Stock shall be
redeemed unless all outstanding shares of Preferred Stock of such series or
class are simultaneously redeemed; PROVIDED, HOWEVER, that the foregoing shall
not prevent the purchase or acquisition of shares of Preferred Stock of such
series or class to preserve the Company's REIT status or pursuant to a purchase
or exchange offer made on the same terms to holders of all outstanding shares of
Preferred Stock of such series or class. In addition, unless (i) if such series
or class of Preferred Stock has a cumulative dividend, full cumulative dividends
on all outstanding shares of such series or class of Preferred Stock have been
or contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof is set apart for payment for all past dividend periods and
the then current dividend period and (ii) if such series or class of Preferred
Stock does not have a cumulative dividend, full dividends on the Preferred Stock
of such series or class have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof is set apart for payment
for the then current dividend period, the Company shall not purchase or
otherwise acquire directly or indirectly any shares of Preferred Stock of such
series or class (except by conversion into or exchange for capital stock of the
Company ranking junior to the Preferred Stock of such series or class as to
dividends and upon liquidation); PROVIDED, HOWEVER, that the foregoing shall not
prevent the purchase or acquisition of shares of Preferred Stock of such series
or class to preserve the Company's REIT status or pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding shares of
Preferred Stock of such series or class.
If fewer than all the outstanding shares of Preferred Stock of any series or
class are to be redeemed, the number of shares to be redeemed will be determined
by the Company and such shares may be redeemed pro rata from the holders of
record of such shares in proportion to the number of such shares held by such
holders (with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by the Company.
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Notice of redemption will be mailed at least 30, but not more than 60, days
before the redemption date to each holder of record of a share of Preferred
Stock of any series or class to be redeemed at the address shown on the
Company's stock transfer books. Each notice shall state: (a) the redemption
date; (b) the number of shares and series or class of the Preferred Stock to be
redeemed; (c) the redemption price; (d) the place or places where certificates
for such Preferred Stock are to be surrendered for payment of the redemption
price; (e) that dividends on the shares to be redeemed will cease to accumulate
on such redemption date; and (f) the date on which the holder's conversion
rights, if any, as to such shares shall terminate. If fewer than all the shares
of Preferred Stock of any series or class are to be redeemed, the notice mailed
to each such holder thereof shall also specify the number of shares of Preferred
Stock to be redeemed from each such holder and, upon redemption, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof. If notice of redemption of any shares of Preferred Stock has
been given and if the funds necessary for such redemption have been set aside by
the Company in trust for the benefit of the holders of any shares of Preferred
Stock so called for redemption, then from and after the redemption date
dividends will cease to accrue on such shares of Preferred Stock, such shares of
Preferred Stock shall no longer be deemed outstanding and all rights of the
holders of such shares will terminate, except the right to receive the
redemption price. In order to facilitate the redemption of shares of Preferred
Stock of any series or class, the Board of Directors may fix a record date for
the determination of shares of such series or class of Preferred Stock to be
redeemed.
Subject to applicable law and the limitation on purchases when dividends on
a series or class of Preferred Stock are in arrears, the Company may, at any
time and from time to time, purchase any shares of such series or class of
Preferred Stock in the open market, by tender or by private agreement.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of the Common Stock or any other series or class of capital
stock of the Company ranking junior to any series or class of the Preferred
Stock in the distribution of assets upon any liquidation, dissolution or winding
up of the affairs of the Company, the holders of such series or class of
Preferred Stock shall be entitled to receive out of assets of the Company
legally available for distribution to shareholders liquidating distributions in
the amount of the liquidation preference per share (set forth in the applicable
Prospectus Supplement), plus an amount equal to all dividends accrued and unpaid
thereon (which shall not include any accumulation in respect of unpaid dividends
for prior dividend periods if such Preferred Stock does not have a cumulative
dividend). After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Preferred Stock will have no right or
claim to any of the remaining assets of the Company. If, upon any such voluntary
or involuntary liquidation, dissolution or winding up, the legally available
assets of the Company are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of any series or class of Preferred
Stock and the corresponding amounts payable on all shares of other classes or
series of capital stock of the Company ranking on a parity with such series or
class of Preferred Stock in the distribution of assets upon liquidation,
dissolution or winding up, then the holders of such series or class of Preferred
Stock and all other such classes or series of capital stock shall share ratably
in any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
any series or class of Preferred Stock, the remaining assets of the Company
shall be distributed among the holders of any other classes or series of capital
stock ranking junior to such series or class of Preferred Stock upon
liquidation, dissolution or winding up, according to their respective rights and
preferences and in each case according to their respective number of shares. For
such purposes, the consolidation or merger of the Company with or into any other
entity, or the sale, lease, transfer or conveyance of all or substantially all
of the Company's
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property or business, shall not be deemed to constitute a liquidation,
dissolution or winding up of the affairs of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series or class of Preferred Stock, so
long as any shares of Preferred Stock of a series or class remain outstanding,
the Company shall not, without the affirmative vote or consent of the holders of
at least a majority of the shares of such series or class of Preferred Stock
outstanding at the time, given in person or by proxy, either in writing or at a
meeting (such series or class voting separately as a class), (a) authorize or
create, or increase the authorized or issued amount of, any class or series of
capital stock ranking prior to such series or class of Preferred Stock with
respect to payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up or reclassify any authorized capital stock of the
Company into any such shares, or create, authorize or issue any obligation or
security convertible into or evidencing the right to purchase any such shares;
or (b) amend, alter or repeal the provisions of the Certificate of Incorporation
or the Certificate of Designations for such series or class of Preferred Stock,
whether by merger, consolidation or otherwise, so as to materially and adversely
affect any right, preference, privilege or voting power of such series or class
of Preferred Stock or the holders thereof; PROVIDED, HOWEVER, that any increase
in the amount of the authorized Preferred Stock or the creation or issuance of
any other series or class of Preferred Stock, or any increase in the amount of
authorized shares of such series or class or any other series or class of
Preferred Stock, in each case ranking on a parity with or junior to the
Preferred Stock of such series or class with respect to payment of dividends or
the distribution of assets upon liquidation, dissolution or winding up, shall
not be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series or class of Preferred Stock
shall have been redeemed or called for redemption upon proper notice and
sufficient funds shall have been deposited in trust to effect such redemption.
Under Delaware law, notwithstanding anything to the contrary set forth
above, holders of each series or class of Preferred Stock will be entitled to
vote as a class upon a proposed amendment to the Certificate of Incorporation,
whether or not entitled to vote thereon by the Certificate of Incorporation, if
the amendment would increase or decrease the aggregate number of authorized
shares of such series or class, increase or decrease the par value of the shares
of such series or class, or alter or change the powers, preferences or special
rights of the shares of such series or class so as to affect them adversely.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series or class
of Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the Preferred Stock is convertible,
the conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of the
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such Preferred Stock.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, actually or constructively,
by five or fewer individuals (defined in the Code to include certain entities)
during the last half of a taxable year. To assist the Company in meeting this
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requirement and certain other requirements relating to its tax status as a REIT,
the Company may take certain actions to limit the actual, beneficial or
constructive ownership by a single person or entity of the Company's outstanding
equity securities. See "Restrictions on Ownership and Transfers of Capital
Stock."
TRANSFER AGENT
The transfer agent and registrar for any series or class of Preferred Stock
will be set forth in the applicable Prospectus Supplement.
RESTRICTIONS ON OWNERSHIP AND TRANSFERS OF CAPITAL STOCK
For the Company to qualify as a REIT under the Code, among other things, not
more than 50% in value of its outstanding capital stock may be owned, actually
or constructively, by five or fewer individuals (defined in the Code to include
certain entities) during the last half of a taxable year, and such capital stock
must be beneficially owned by 100 or more persons during at least 355 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year. In addition, rent from a Related Party Tenant (i.e., a tenant in which the
REIT or an owner of 10% or more of the REIT actually or constructively owns 10%
or more of such tenant) is not qualifying income for purposes of the gross
income tests under the Code.
To ensure that the Company remains qualified as a REIT, provisions in the
Certificate of Incorporation restrict the ownership and transfer of shares of
stock of the Company. The statements below describing the restrictions on the
ownership and transfer of shares of stock of the Company are in all respects
subject to and qualified in their entirety by reference to the applicable
provisions of the Certificate of Incorporation.
The Certificate of Incorporation provides, subject to certain exemptions
specified therein, that no stockholder may actually own, or be deemed to own by
virtue of the beneficial or constructive ownership provisions of the Code,
shares of Common Stock or Preferred Stock in excess of the "Ownership Limit,"
which is equal to 9.8% of the outstanding shares of Common Stock and 9.8% of
each series or class of the outstanding Preferred Stock, respectively. The
beneficial and constructive ownership rules are complex and may cause shares of
Common Stock or Preferred Stock actually owned, beneficially owned or
constructively owned by a group of related individuals and/or entities to be
deemed to be beneficially owned or constructively owned by one individual or
entity. As a result, the transfer of less than 9.8% of the outstanding shares of
Common Stock or outstanding Preferred Stock to (or the acquisition of an
interest in an entity which owns shares of Common Stock or Preferred Stock by)
an individual or entity could cause that individual or entity (or another
individual or entity) to beneficially own or constructively own in excess of
9.8% of the outstanding shares of Common Stock or Preferred Stock, and thus
subject such shares of Common Stock or Preferred Stock to the Ownership Limit.
The Board of Directors, in its sole and absolute discretion, may exempt a
particular stockholder from the limitation on a stockholder actually or
beneficially owning shares of Common Stock or Preferred Stock in excess of the
Ownership Limit if such stockholder is not an "individual" (defined in the Code
to include certain entities) and the Board of Directors obtains such
representations and undertakings from such stockholder as are reasonably
necessary to ascertain that no individual's beneficial ownership of such Common
Stock or Preferred Stock will violate the Ownership Limit. The Board of
Directors, in its sole and absolute discretion, may exempt a particular
stockholder from the limitation on a stockholder constructively owning shares of
Common Stock or Preferred Stock in excess of the Ownership Limit if such
stockholder does not and represents that it will not actually own or
constructively own more than a 9.8% interest (as set forth in Section
856(d)(2)(B) of the Code) in a tenant of the Company (or of any partnership in
which the Company is a direct or indirect partner), and the Board of Directors
obtains such representations and undertakings from such stockholder as are
reasonably necessary to ascertain this fact. As a condition of such exemptions,
the Board of Directors may require a ruling from the Internal Revenue
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Service, or an opinion of counsel of the applicant, as the Board may deem
necessary or advisable in order to determine or ensure the Company's status as a
REIT.
In the event of an issuance or transfer of shares, or the ownership of
shares, of Common Stock or Preferred Stock in excess of the Ownership Limit, the
Board of Directors may take such action as it deems advisable to refuse to give
effect to or to prevent such issuance or transfer, including without limitation,
causing the Company to deem such person to have granted an option to the Company
to purchase, at a price equal to the fair market value on the date of the
exercise of such option and upon such other terms and conditions, in each case
as determined by the Board of Directors in its sole discretion, the number of
shares of Common Stock or Preferred Stock necessary or desirable, as determined
by the Board of Directors in its sole discretion, to refuse to give effect to
such issuance or transfer on the books of the Company or to institute
proceedings to enjoin such issuance or transfer. In addition, if shares of
Common Stock or Preferred Stock in excess of the Ownership Limit, or shares of
Common Stock or Preferred Stock which would cause the REIT to be owned by less
than 100 persons, are issued or transferred to any person, such issuance or
transfer will be null and void, and the intended transferee will acquire no
rights to such shares of Common Stock or Preferred Stock.
All certificates representing shares of Common Stock and Preferred Stock
will bear a legend referring to the restrictions described above.
All persons who own a specified percentage (or more) of the outstanding
shares of Common Stock or Preferred Stock must file an affidavit with the
Company containing information regarding their ownership of shares of Common
Stock or Preferred Stock as set forth in the Treasury Regulations. Under current
Treasury Regulations the percentage is set between .5% and 5%, depending on the
number of record holders of shares of Common Stock and Preferred Stock. In
addition, each stockholder will upon demand be required to disclose to the
Company in writing such information with respect to the actual ownership,
beneficial ownership and constructive ownership of shares as the Board of
Directors deems necessary to comply with the provisions of the Code applicable
to a REIT or to comply with the requirements of any taxing authority or
governmental agency. Any person who acquires or attempts to acquire actual
ownership, beneficial ownership or constructive ownership of shares of Common
Stock or Preferred Stock in violation of the Ownership Limit must immediately
provide written notice or, in the case of an attempted transfer, give at least
15 days prior written notice, to the Company of such transfer or attempted
transfer and provide such other information as the Company may request in order
to determine the effect, if any, of such transfer or attempted transfer on the
Company's status as a REIT.
In addition to preserving the Company's status as a REIT, the Ownership
Limit may have the effect of precluding acquisition of control of the Company by
a third party unless the Board of Directors determines that maintenance of REIT
status is no longer in the best interests of the Company.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations to the
Company is based on current law, is for general information only, and is not tax
advice. The tax treatment of a holder of any of the Securities will vary
depending upon the terms of the specific Securities acquired by such holder, as
well as his particular situation, and this discussion does not attempt to
address any aspects of federal income taxation relating to holders of
Securities. Certain federal income tax considerations relevant to holders of the
Securities will be provided in the applicable Prospectus Supplement relating
thereto.
EACH INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT, AS
WELL AS HIS OWN TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO HIM OF THE
ACQUISITION, OWNERSHIP AND SALE OF THE SECURITIES, INCLUDING THE FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND
SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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TAXATION OF THE COMPANY AS A REIT
GENERAL. The Company has elected to be taxed as a real estate investment
trust under Sections 856 through 860 of the Code, commencing with its taxable
year ended December 31, 1994. The Company believes that, commencing with its
taxable year ended December 31, 1994, it has been organized and has operated in
such a manner as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to operate in such a manner, but no assurance can be
given that it has operated or will operate in a manner so as to qualify or
remain qualified.
These sections of the Code are highly technical and complex. The following
sets forth the material aspects of the sections that govern the federal income
tax treatment of a REIT. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof. Latham & Watkins has acted
as tax counsel to the Company in connection with this Prospectus and the
Company's election to be taxed as a REIT.
Latham & Watkins has rendered an opinion to the Company as of September 8,
1995 to the effect that commencing with the Company's taxable year ended
December 31, 1994, the Company has been organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
has enabled and will continue to enable it to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters, and that Latham &
Watkins undertakes no obligation to update this opinion subsequent to such date.
In addition, this opinion is based upon certain factual representations of the
Company. Moreover, such qualification and taxation as a REIT depends upon the
Company's ability to meet (through actual annual operating results, distribution
levels and diversity of stock ownership) the various qualification tests imposed
under the Code discussed below, the results of which have not been and will not
be reviewed by Latham & Watkins. Accordingly, no assurance can be given that the
actual results of the Company's operation in any particular taxable year will
satisfy such requirements. See "--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
federal income tax as follows: First, the Company will be taxed at regular
corporate rates on any undistributed real estate investment trust taxable
income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its items of tax preference. Third, if Company has (i) net income from the sale
or other disposition of "foreclosure property" which is held primarily for sale
to customers in the ordinary course of business or (ii) other non-qualifying
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income. Fourth, if the Company has net income from
prohibited transactions (which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in the ordinary
course of business other than foreclosure property), such income will be subject
to a 100% tax. Fifth, if the Company should fail to satisfy the 75% gross income
test or the 95% gross income test (as discussed below), but has nonetheless
maintained its qualification as a real estate investment trust because certain
other requirements have been met, it will be subject to a 100% tax on an amount
equal to (a) the gross income attributable to the greater of the amount by which
the Company fails the 75% or 95% test, multiplied by (b) a fraction intended to
reflect the Company's profitability. Sixth, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its real
estate investment trust ordinary income for such year, (ii) 95% of its real
estate investment trust capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, with respect to any asset (a "Built-in Gain
Asset") acquired by the Company from a corporation which is or has been a C
corporation (i.e., generally a corporation subject to full corporate-level tax)
in a transaction in which the basis of the Built-in
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Gain Asset in the hands of the Company is determined by reference to the basis
of the asset in the hands of the C corporation, if the Company recognizes gain
on the disposition of such asset during the 10-year period (the "Recognition
Period") beginning on the date on which such asset was acquired by the Company,
then, to the extent of the Built-in Gain (i.e., the excess of (a) the fair
market value of such asset over (b) the Company's adjusted basis in such asset,
determined as of the beginning of the Recognition Period), such gain will be
subject to tax at the highest regular corporate rate pursuant to Treasury
Regulations that have not yet been promulgated. The results described above with
respect to the recognition of Built-in Gain assume that the Company has made an
election pursuant to IRS Notice 88-19.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors,
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (3) which would be taxable as
a domestic corporation, but for Sections 856 through 859 of the Code, (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code, (5) the beneficial ownership of which is held by 100 or
more persons, (6) during the last half of each taxable year, not more than 50%
in value of the outstanding stock of which is owned, actually or constructively,
by five or fewer individuals (as defined in the Code to include certain
entities) and (7) which meets certain other tests, described below, regarding
the nature of its income and assets. The Code provides that conditions (1) to
(4) must be met during the entire taxable year and that condition (5) must be
met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (5) and
(6) will not apply until after the first taxable year for which an election is
made to be taxed as a real estate investment trust.
The Company has satisfied condition (5) and believes that it has issued
sufficient shares to allow it to satisfy condition (6). In addition, the
Company's Certificate of Incorporation provides for restrictions regarding
ownership and transfer of the Company's capital stock, which restrictions are
intended to assist the Company in continuing to satisfy the share ownership
requirements described in (5) and (6) above. Such ownership and transfer
restrictions are described in "Restrictions on Ownership and Transfers of
Capital Stock." There can be no assurance, however, that such transfer and
ownership restrictions will, in all cases, prevent a violation of the stock
ownership provisions described in (5) and (6) above. The ownership and transfer
restrictions pertaining to a particular class or series of capital stock will be
described in the applicable Prospectus Supplement pertaining to such class or
series.
The Company owns, and has owned, interests in various partnerships. In the
case of a REIT that is a partner in a partnership, Treasury Regulations provide
that the REIT will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership will retain the same character in the hands of the
real estate investment trust for purposes of Section 856 of the Code, including
satisfying the gross income tests and the asset tests. Thus, the Company's
proportionate share of the assets, liabilities and items of income of the
partnerships in which the Company is a partner will be treated as assets,
liabilities and items of income of the Company for purposes of applying the
requirements described herein. See "--Tax Risks Associated with the
Partnerships."
The Company owns 100% of the stock of a subsidiary that is a qualified REIT
subsidiary (a "QRS") and may acquire stock of one or more new subsidiaries. A
corporation will qualify as a QRS if 100% of its stock is held by the Company at
all times during the period such QRS was in existence. A QRS will not be treated
as a separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a QRS will be treated as assets, liabilities and such
items (as the case may be) of the Company for all purposes of the Code including
the REIT qualification tests. For this reason, references under "Certain Federal
Income Tax Considerations" to the income and assets of the Company shall include
the income and assets of any QRS. A QRS will not be subject to federal income
tax and the Company's ownership of the voting stock of a QRS will not violate
the restrictions against ownership of securities of any one issuer
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which constitute more than 10% of such issuer's voting securities or more than
5% of the value of the Company's total assets, described below under "--Asset
Tests."
INCOME TESTS. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions and gain on the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a real estate investment trust
described above only if several conditions are met. First, the amount of rent
must not be based in whole or in part on the income or profits of any person.
However, an amount received or accrued generally will not be excluded from the
term "rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, the Code provides that
rents received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the real estate investment trust, or an
owner of 10% or more of the real estate investment trust, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, for rents received to qualify as
"rents from real property," the real estate investment trust generally must not
operate or manage the property or furnish or render services to the tenants of
such property, other than through an independent contractor from whom the real
estate investment trust derives no revenue; PROVIDED, HOWEVER, the Company may
directly perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property. The Company does not and
will not (i) charge rent for any property that is based in whole or in part on
the income or profits of any person (except by reason of being based on a
percentage of receipts or sales, as described above), (ii) rent any property to
a Related Party Tenant, (iii) derive rental income attributable to personal
property (other than personal property leased in connection with the lease of
real property, the amount of which is less than 15% of the total rent received
under the lease), or (iv) perform services considered to be rendered to the
occupant of the property, other than through an independent contractor from whom
the Company derives no revenue.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a real estate
investment trust for such year if it is entitled to relief under certain
provisions of the Code. These relief provisions will generally be available if
the Company's failure to meet such tests was due to reasonable cause and not due
to willful neglect, the Company attaches a schedule of the sources of its income
to its federal income tax return, and any incorrect information on the schedule
was not due to fraud with intent to evade tax. It is not possible, however, to
state whether in all circumstances the Company would be entitled to the benefit
of these relief provisions. As discussed above
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under "--General," even if these relief provisions apply, a tax would be imposed
with respect to the excess net income.
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including stock or debt instruments held for not more than one
year purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company), cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, 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% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the net income
(after tax), if any, from foreclosure property, minus (B) the sum of certain
items of non-cash income. In addition, if the Company disposes of any asset
during its Recognition Period, the Company will be required, pursuant to IRS
regulations which have not yet been promulgated, to distribute at least 95% 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 distributes at least 95%, but less
than 100%, of its REIT taxable income, as adjusted, it will be subject to tax
thereon at regular ordinary and capital gain corporate tax rates.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (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 95% distribution
requirement, 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.
Under certain circumstances, the Company may be able to rectify a failure to
meet the above distribution requirements for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its real estate investment trust ordinary
income for such year, (ii) 95% of its real estate investment trust capital gain
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. The Company intends
to make timely distributions sufficient to satisfy the annual distribution
requirements set forth above.
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DISTRIBUTION OF ACQUIRED EARNINGS. In addition to the above annual
distribution requirements, a REIT is not allowed to have accumulated earnings
and profits attributable to non-REIT years. A REIT has until the close of its
first taxable year in which it has non-REIT earnings and profits to distribute
any such earnings and profits. In a corporate reorganization qualifying as a
tax-free statutory merger, the acquired corporation's earnings and profits are
carried over to the surviving corporation. Any earnings and profits treated as
having been acquired by a REIT through such a merger will be treated as
accumulated earnings and profits of the REIT attributable to non-REIT years.
Accordingly, as a result of the Merger in August 1995, the Company was treated
as having acquired the earnings and profits (the "Acquired Earnings") of R.I.C.
Advisor. The Company was required to distribute (or be deemed to distribute) the
Acquired Earnings prior to the close of 1995. Failure to do so would result in
the loss of the Company's REIT status, which would have a material adverse
effect on the financial position and results of operations of the Company and
its ability to make distributions to stockholders and debt service payments. See
"--Failure to Qualify."
The amount of the Acquired Earnings was based on the earnings and profits of
R.I.C. Advisor immediately prior to the Merger. The Acquired Earnings were
determined through an earnings and profits study based on the corporate tax
returns of R.I.C. Advisor for the tax years beginning with R.I.C. Advisor's date
of incorporation through the date of the Merger. The Company requested that KPMG
Peat Marwick LLP perform certain procedures relating to the amount of the
earnings and profits of R.I.C. Advisor for purposes of the earnings and profits
distribution requirement. Based on KPMG Peat Marwick LLP's conclusions (which
were based on R.I.C. Advisor's tax returns as filed with the Internal Revenue
Service (the "IRS"), certain other information provided by R.I.C. Advisor and
other assumptions and qualifications set forth in KPMG Peat Marwick LLP's
report) and other relevant factors, the Company believes that it made (or was
deemed to make) distributions to its shareholders which were sufficient to
distribute the Acquired Earnings prior to the close of 1995.
The calculation of the amount of Acquired Earnings is subject to challenge
by the IRS. The IRS may examine R.I.C. Advisor's prior tax returns and propose
adjustments to increase its taxable income. Because the earnings and profits
study used to calculate the amount of Acquired Earnings was based on these
returns, such adjustments may increase the amount of the Acquired Earnings. If
the IRS determines that the Company did not distribute all of the Acquired
Earnings prior to the end of 1995, the Company would fail to qualify as a REIT
for 1995 and perhaps for subsequent years, which would have a material adverse
effect on the financial position and results of operations of the Company and
its ability to make distributions to stockholders and debt service payments. See
"--Failure to Qualify." However, the Company may make an additional distribution
within 90 days of such a determination by the IRS to distribute the Acquired
Earnings and would be required to pay to the IRS an interest charge based on 50%
of the amount not previously distributed. If such additional distribution is
made, the Company's failure to distribute the Acquired Earnings would not
prevent it from qualifying as a REIT for years subsequent to 1995.
TAX RISKS ASSOCIATED WITH THE PARTNERSHIPS
The Company presently owns an interest in one partnership and previously
owned an interest in other partnerships. The ownership of an interest in a
partnership may involve special tax risks, including the possible challenge by
the IRS of (i) allocations of income and expense items, which could affect the
computation of taxable income of the Company, and (ii) the status of a
partnership as a partnership (as opposed to an association taxable as a
corporation) for federal income tax purposes. If the partnership was treated as
an association taxable as a corporation for federal income tax purposes, the
partnership would be treated as a taxable entity. In addition, in such a
situation, (i) if the Company owned more than 10% of the outstanding voting
securities of such partnership, or the value of such securities exceeded 5% of
the value of the Company's assets, the Company would fail to satisfy the asset
tests described above and would therefore fail to qualify as a REIT, (ii)
distributions from the partnership to the Company would be treated
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as dividends, which are not taken into account in satisfying the 75% gross
income test described above and could, therefore, make it more difficult for the
Company to satisfy such test, (iii) the interest in the partnership held by the
Company would not qualify as a "real estate asset," which could make it more
difficult for the Company to meet the 75% asset test described above, and (iv)
the Company would not be able to deduct its share of any losses generated by the
partnerships in computing its taxable income. See "--Failure to Qualify" for a
discussion of the effect of the Company's failure to meet such tests for a
taxable year. The Company believes that each of the partnerships in which the
Company owns or has owned an interest have been and will be treated for tax
purposes as a partnership (rather than an association taxable as a corporation).
The Company's position will not be binding on the IRS and no assurance can be
given that the IRS will not successfully challenge the status of any partnership
as a partnership for federal income tax purposes.
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 alternative minimum tax) on its taxable income at
regular corporate rates. Such a failure to qualify for taxation as a REIT would
reduce the cash available for distribution by the Company to stockholders and to
pay debt service and could have an adverse effect on the market value and
marketability of the Securities. 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 as 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 will
also be disqualified from taxation 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.
STATE AND LOCAL TAXES
The Company may be subject to state or local taxes in other jurisdictions
such as those in which the Company may be deemed to be engaged in activities or
own property or other interests. Such tax treatment of the Company in states
having taxing jurisdiction over it may differ from the federal income tax
treatment described in this summary.
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at prices relating to the prevailing market prices at the
time of sale or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell the
Securities upon the terms and conditions as are set forth in the applicable
Prospectus Supplement. In connection with the sale of Securities, underwriters
may be deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Securities for whom they may act as agent. Underwriters may sell
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent. Any underwriting
compensation paid by the Company to underwriters or agents in connection with
the offering of Securities, and any discounts, concessions or commissions
allowed by underwriters to participating dealers, will be set forth in the
applicable Prospectus Supplement. Underwriters, dealers and agents participating
in the distribution of the Securities may be deemed to be underwriters, and any
28
<PAGE>
discounts and commissions received by them and any profit realized by them on
resale of the Securities may be deemed to be underwriting discounts and
commissions, under the Securities Act. Any such underwriter or agent will be
identified, and such compensation received from the Company will be described,
in the applicable Prospectus Supplement.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Company, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Securities Act.
Certain of the underwriters, dealers and agents and their affiliates may be
customers of, engage in transactions with and perform services for the Company
and its subsidiaries in the ordinary course of business.
Unless otherwise specified in the related Prospectus Supplement, each series
of Securities will be a new issue with no established trading market, other than
the Common Stock. The Common Stock is currently listed on the NYSE. Unless
otherwise specified in the related Prospectus Supplement, any shares of Common
Stock sold pursuant to a Prospectus Supplement will be listed on the NYSE,
subject to official notice of issuance. The Company may elect to list any series
of Debt Securities or Preferred Stock on an exchange or Nasdaq, but is not
obligated to do so. It is possible that one or more underwriters may make a
market in a series of Securities, but will not be obligated to do so and may
discontinue any market making at any time without notice. Therefore, there can
be no assurance as to the liquidity of, or the trading market for, the
Securities.
EXPERTS
The consolidated financial statements and financial statement schedule of
Realty Income Corporation as of December 31, 1996 and 1995 and for each of the
years in the three-year period ended December 31, 1996 included in Realty Income
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 and incorporated by reference herein have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, and have been incorporated herein
by reference in reliance upon the reports of KPMG Peat Marwick LLP, incorporated
herein by reference, and upon the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by Latham
& Watkins, Costa Mesa, California. The legal opinion regarding the validity of
any of the Securities to be offered will be included in the Registration
Statement or incorporated by reference herein by means of a post-effective
amendment to the Registration Statement or a Form 8-K prior to any sales of such
Securities under the Registration Statement.
29
<PAGE>
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Incorporation of Certain Documents By
Reference.................................... S-2
Prospectus Supplement Summary.................. S-3
Recent Developments............................ S-6
Use of Proceeds................................ S-7
Capitalization................................. S-7
Business and Properties........................ S-8
Selected Financial Information................. S-19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... S-21
Management of the Company...................... S-31
Description of the Notes....................... S-33
Underwriting................................... S-40
Legal Matters.................................. S-41
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
The Company.................................... 3
Use of Proceeds................................ 3
Ratios of Earnings to Fixed Charges............ 3
Description of Debt Securities................. 4
Description of Common Stock.................... 14
Description of Preferred Stock................. 15
Restrictions on Ownership and Transfers of
Capital Stock................................ 21
Certain Federal Income Tax Considerations...... 22
Plan of Distribution........................... 28
Experts........................................ 29
Legal Matters.................................. 29
</TABLE>
$110,000,000
abcd
% NOTES DUE 2007
---------------------
PROSPECTUS SUPPLEMENT
---------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
J.P. MORGAN & CO.
SALOMON BROTHERS INC
MAY , 1997
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