<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 1, 1997)
2,700,000 SHARES
[LOGO]
COMMON STOCK
------------------
Realty Income Corporation, a Maryland corporation (the "Company" or "Realty
Income"), is a fully integrated, self-administered and self-managed real estate
investment trust ("REIT") that acquires, owns and manages net leased, retail
properties. The Company 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 and, through its predecessors,
has been in the real estate investment business since 1969. As of August 31,
1997, the Company owned a diversified portfolio of 774 properties located in 42
states with over 5.7 million square feet of leasable space. Over 99 percent of
the Company's single-tenant properties were leased as of August 31, 1997
pursuant to leases with an average remaining term (excluding extension options)
of approximately 8.4 years.
The Company currently pays regular monthly distributions to holders of its
outstanding shares of common stock, par value $1.00 per share ("Common Stock").
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under the
symbol "O." On October 8, 1997, the last reported sale price of the Common Stock
on the NYSE was $27 1/16 per share.
All of the 2,700,000 shares of Common Stock being offered hereby are being
sold by Realty Income. Of the 2,700,000 shares of Common Stock offered hereby,
2,160,000 shares are being offered in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and 540,000 shares are being offered in a
concurrent offering outside of the United States and Canada by the International
Managers (the "International Offering" and, together with the U.S. Offering, the
"Offering"). The price to public and underwriting discount per share are
identical for the U.S. Offering and the International Offering. See
"Underwriting."
The shares of Common Stock are subject to certain restrictions on ownership
and transfer designed to preserve the Company's status as a REIT for federal
income tax purposes. See "Restrictions on Ownership and Transfers of Capital
Stock" in the accompanying Prospectus.
SEE "RISK FACTORS" BEGINNING ON PAGE S-13 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
------------------------
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 DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share............................................ $27.00 $1.415 $25.585
Total(3)............................................. $72,900,000 $3,820,500 $69,079,500
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $400,000.
(3) The Company has granted the U.S. Underwriters and International Managers
(the "Underwriters") options, exercisable within 30 days after the date
hereof, to purchase up to 324,000 and 81,000 additional shares of Common
Stock, respectively, in each case to cover over-allotments, if any. If all
such shares are purchased, the total Price to Public, Underwriting Discount
and Proceeds to Company will be $83,835,000, $4,393,575 and $79,441,425,
respectively. See "Underwriting."
------------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued by the Company and delivered to and
accepted by the Underwriters, 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 Common
Stock will be made in New York, New York on or about October 15, 1997.
--------------------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
SUTRO & CO. INCORPORATED
WHEAT FIRST BUTCHER SINGER
----------------
The date of this Prospectus Supplement is October 8, 1997.
<PAGE>
Narrative Description of Colorwork
Front Inside Cover:
Map of the continental United States depicting the number of Company
properties located in each state.
Photographs of several of the Company's properties including a Jiffy Lube,
Staples, Linens 'N Things and La Petite Academy.
As of August 31, 1997, Realty Income owned and actively managed a portfolio
of 774 properties located in 42 states, consisting primarily of freestanding,
single-tenant, net leased retail locations. The Company provides expansion
capital to regional and national retail chain store operators in a variety of
industries by acquiring, then leasing back, the location to the retailer. Realty
Income 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.
Back Inside Cover:
Photographs of several of the Company's properties, including a Dairy Mart,
Barnes & Noble Bookstore, OfficeMax, Taco Bell and Petco.
Realty Income's acquisition and investment activities are concentrated in
specific target markets as the Company focuses on middle and upper market
retailers providing goods and services used by consumers every day.
<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 OTHERWISE INDICATED, THE INFORMATION IN THIS
PROSPECTUS SUPPLEMENT ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS
NOT EXERCISED. 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 IN NOTE (1) UNDER "--SUMMARY
FINANCIAL INFORMATION" BELOW) 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 AUGUST 31, 1997. ALL REFERENCES TO
"$" OR "DOLLARS" MEAN UNITED STATES DOLLARS.
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY
ANY UNDERWRITER THAT WOULD PERMIT THE PUBLIC OFFERING OF THE COMMON STOCK OR THE
POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED, OTHER
THAN IN THE UNITED STATES. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS
SUPPLEMENT COMES ARE REQUIRED BY THE COMPANY AND THE UNDERWRITERS TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THE OFFERING OF THE
COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS.
THE COMPANY
Realty Income Corporation, a Maryland corporation ("Realty Income" or the
"Company"), is a fully integrated, self-administered and self-managed real
estate investment trust ("REIT") that acquires, owns and manages net leased,
retail properties. The Company 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 August 31, 1997, the
Company owned a diversified portfolio of 774 properties located in 42 states
with over 5.7 million square feet of leasable space. Over 99% of the Company's
single-tenant properties were leased as of August 31, 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 August 31, 1997, Realty Income has acquired and
leased back to national and regional retail chains 744 properties (including 31
properties that have been sold) and has collected approximately 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 further 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 August 31, 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.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF SHARES OF COMMON STOCK
TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
S-3
<PAGE>
The Company is a fully integrated real estate company with in-house
acquisition, leasing, legal, research, financial underwriting, portfolio
management and capital markets expertise. The five senior officers of the
Company, who have each managed the Company's properties and operations for
between six and 12 years, owned approximately 1.0% of the Company's outstanding
Common Stock as of September 15, 1997. The directors and officers of the
Company, as a group, owned approximately 3.5% of the Company's outstanding
Common Stock as of September 15, 1997. Realty Income had 44 employees as of
September 15, 1997.
RECENT DEVELOPMENTS
ACQUISITION OF 43 PROPERTIES THROUGH AUGUST 31, 1997.
During the 1997 calendar year, the Company has continued to increase the
size of its portfolio through a strategic program of acquisitions. The Company
acquired 43 additional properties (the "New Properties"), and selectively sold 9
properties, increasing the number of properties in its portfolio by 4.6% from
740 properties at December 31, 1996 to 774 properties at August 31, 1997. Of the
New Properties, 36 were occupied as of September 15, 1997 and the remaining
properties 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 $58.1 million (excluding the estimated unfunded development costs
totaling $2.4 million on properties under construction) at August 31, 1997. The
New Properties are located in 20 states, will contain approximately 610,100
leasable square feet and are 100% leased under net leases, with an average
initial lease term of 14.4 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 10.3%, 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 eight
months of 1997, the Company also invested $3.1 million in 12 development
properties acquired during 1996.
ACQUISITION OF 21 PROPERTIES IN SEPTEMBER 1997.
During the month of September 1997, the Company acquired 21 properties (the
"September Properties"), all of which were completed and occupied. The September
Properties were acquired for an aggregate cost of approximately $54.4 million.
These properties are located in 10 states, contain approximately 344,900
leasable square feet and are 100% leased under net leases with an average
initial lease term of 15 years. The September Properties added two new
industries to the portfolio, footwear and apparel, and are leased to Bob's
Stores, Hollywood Video, Jiffy Lube, Just For Feet, Linens 'N Things, OfficeMax,
and Speedy Brake & Muffler. The weighted average annual unleveraged return on
the cost of the September Properties is estimated to be 10.4%, computed as
estimated contractual net operating income, which in the case of a net leased
property is equal to the base rent for the first year of each lease, divided by
total acquisition costs. As noted above, no assurance can be given that the
actual return on the cost of the September Properties will not differ from the
foregoing percentage.
NOTES OFFERING.
On May 6, 1997 Realty Income issued $110 million of 7 3/4% Notes due 2007
(the "Notes"). The Notes were sold at 99.929% of par for a yield to the
investors of 7.76%. After taking into effect the $1.1 million gain realized on a
treasury interest rate lock agreement entered into by the Company, the effective
interest rate to the Company on the Notes is 7.62%. The net proceeds from the
sale of the Notes were used to repay $93.7 million of outstanding borrowings
under the Company's credit facility and to acquire properties. Currently, there
is no formal trading market for the Notes and the Company has not listed and
does not intend to list the Notes on any security exchange.
S-4
<PAGE>
The Company received investment grade credit ratings 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- to
the Company's senior debt. These ratings are subject to change based upon, among
other things, the Company's results of operations and financial condition.
NEW PROPERTIES
The following table sets forth information concerning the New Properties as
of August 31, 1997.
<TABLE>
<CAPTION>
APPROX.
INITIAL LEASE LEASABLE
PERIOD ACQUIRED TENANT INDUSTRY LOCATION TERM (YEARS) SQUARE FEET
- -------------------- -------------------- -------------------- -------------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
1st Qtr 1997 Aaron Rents Home Furnishings Arlington, TX 10.0 68,100
1st Qtr 1997 Aaron Rents Home Furnishings Cedar Park, TX 10.0 23,300
1st Qtr 1997 Aaron Rents Home Furnishings Houston, TX 10.0 70,300
1st Qtr 1997 Barnes & Noble Book Store Tampa, FL 14.2 30,000
1st Qtr 1997 Econo Lube Auto Service Greensboro, NC 15.0 2,300
1st Qtr 1997 Econo Lube Auto Service Columbia, SC 15.0 2,800
1st Qtr 1997 Econo Lube Auto Service Durham, NC 15.0 2,800
1st Qtr 1997 Econo Lube Auto Service Charleston, SC 15.0 2,800
1st Qtr 1997 Econo Lube Auto Service Greenville, SC 15.0 2,800
1st Qtr 1997 Jiffy Lube Auto Service Springboro, OH 20.0 2,400
1st Qtr 1997 OfficeMax Office Supplies Lakewood, CA 14.6 28,700
2nd Qtr 1997 Aaron Rents Home Furnishings Ridgeland, MS 10.0 22,300
2nd Qtr 1997 Aaron Rents Home Furnishings Memphis, TN 10.0 51,500
2nd Qtr 1997 Aaron Rents Home Furnishings Webster, TX 10.0 22,500
2nd Qtr 1997 Best Buy Consumer Electronics Smyrna, GA 20.0 46,100
2nd Qtr 1997 Econo Lube (1) Auto Service Denver, CO 15.0 2,800
2nd Qtr 1997 Econo Lube (1) Auto Service Duluth, GA 15.0 2,800
2nd Qtr 1997 Econo Lube (1) Auto Service Garner, NC 15.0 2,800
2nd Qtr 1997 Econo Lube Auto Service Pineville, NC 15.0 2,800
2nd Qtr 1997 Jiffy Lube (1) Auto Service Brentwood, TN 20.0 2,000
2nd Qtr 1997 Linens 'N Things Home Accessories Omaha, NE 15.8 46,600
2nd Qtr 1997 OfficeMax Office Supplies Hutchinson, KS 15.0 23,500
2nd Qtr 1997 OfficeMax Office Supplies Salina, KS 15.0 23,500
2nd Qtr 1997 Petco Pet Supplies Dickson City, PA 14.7 16,000
2nd Qtr 1997 Quik Trip Convenience Store Dunwoody, GA 11.3 3,200
2nd Qtr 1997 Quik Trip Convenience Store Lithonia, GA 18.3 3,200
2nd Qtr 1997 Quik Trip Convenience Store Mableton, GA 17.4 3,200
2nd Qtr 1997 Quik Trip Convenience Store Norcross, GA 17.4 3,200
2nd Qtr 1997 Quik Trip Convenience Store Stone Mountain, GA 11.3 3,200
2nd Qtr 1997 Quik Trip Convenience Store Godfrey, IL 13.3 3,200
2nd Qtr 1997 Quik Trip Convenience Store Granite City, IL 13.3 3,200
2nd Qtr 1997 Quik Trip Convenience Store Madison, IL 13.3 3,200
2nd Qtr 1997 Quik Trip Convenience Store Tulsa, OK 11.3 3,200
2nd Qtr 1997 Speedy Brake Auto Service Southington, CT 15.1 5,300
2nd Qtr 1997 Speedy Brake Auto Service Billerica, MA 15.0 5,000
2nd Qtr 1997 Staples Office Supplies Helena, MT 14.7 24,600
2nd Qtr 1997 Staples Office Supplies New Philadelphia, OH 14.9 24,000
3rd Qtr 1997 East Coast Oil Convenience Store Midlothian, VA 15.0 2,400
3rd Qtr 1997 Econo Lube(1) Auto Service Flagstaff, AZ 15.0 2,800
3rd Qtr 1997 Econo Lube(1) Auto Service Midwest City, OK 15.0 2,800
3rd Qtr 1997 Econo Lube(1) Auto Service The Village, OK 15.0 2,800
3rd Qtr 1997 Econo Lube Auto Service Houston, TX 15.0 2,600
3rd Qtr 1997 Hollywood Video Video Rental Lubbock, TX 15.0 7,500
--- -----------
Average/Total 14.4 610,100
--- -----------
--- -----------
</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.
S-5
<PAGE>
PROPERTIES
As of August 31, 1997, the Company owned 774 properties in 42 states
consisting of 98 automotive parts and accessories stores, 72 automotive service
locations, one book store, 317 child care centers, 37 consumer electronics
stores, 52 convenience stores, 11 home furnishings stores, five office supplies
stores, one pet supplies store, 167 restaurant facilities, one video rental
store and 12 other properties. Of the 774 properties, 710 or 92% were leased to
national or regional middle market retail chain operators; 41 or 5% were leased
to franchisees of retail chain operators; 16 or 2% were leased to other tenant
types; and seven or less than 1% were available for lease. Of the 774
properties, over 98% were under net lease agreements as of August 31, 1997. Net
leases typically require the tenants to be responsible for property operating
costs, including property taxes, insurance and maintenance.
The following table sets forth certain state-by-state information regarding
the properties owned by the Company as of August 31, 1997.
<TABLE>
<CAPTION>
NUMBER APPROX. PERCENT OF TOTAL
OF LEASABLE ANNUALIZED ANNUALIZED
STATE PROPERTIES PERCENT LEASED SQUARE FEET BASE RENT(1) BASE RENT
- -------------------- ------------- ----------------- ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Alabama 6 100% 42,300 $ 319,000 0.5%
Arizona 27 99 181,200 2,407,000 3.6
California 53 92 1,001,900 10,392,000 15.7
Colorado 43 98 236,400 3,067,000 4.6
Connecticut 5 100 22,500 337,000 0.5
Florida 48 100 457,300 4,227,000 6.4
Georgia 44 100 252,500 3,480,000 5.3
Idaho 11 100 52,000 656,000 1.0
Illinois 28 100 192,200 2,389,000 3.6
Indiana 22 100 117,600 1,408,000 2.1
Iowa 8 100 51,700 456,000 0.7
Kansas 17 100 176,000 1,862,000 2.8
Kentucky 11 100 33,300 847,000 1.3
Louisiana 2 100 10,700 126,000 0.2
Maryland 6 100 34,900 505,000 0.8
Massachusetts 5 100 25,900 534,000 0.8
Michigan 5 100 26,900 355,000 0.5
Minnesota 17 100 118,400 1,713,000 2.6
Mississippi 12 100 128,900 901,000 1.4
Missouri 27 100 163,600 1,908,000 2.9
Montana 2 100 30,000 276,000 0.4
Nebraska 9 100 93,700 1,071,000 1.6
Nevada 5 100 29,100 353,000 0.5
New Hampshire 1 100 6,400 122,000 0.2
New Jersey 2 100 22,700 346,000 0.5
New Mexico 3 100 12,000 103,000 0.2
New York 5 100 38,300 539,000 0.8
North Carolina 22 100 87,800 1,466,000 2.3
Ohio 49 100 234,000 3,668,000 5.6
Oklahoma 12 100 69,000 707,000 1.1
Oregon 17 100 92,400 1,062,000 1.6
Pennsylvania 5 100 44,300 676,000 1.0
South Carolina 19 100 75,000 1,152,000 1.7
South Dakota 1 100 6,100 79,000 0.1
Tennessee 12 100 132,400 1,281,000 1.9
Texas 130 99 1,015,300 9,317,000 14.1
</TABLE>
S-6
<PAGE>
<TABLE>
<CAPTION>
NUMBER APPROX. PERCENT OF TOTAL
OF LEASABLE ANNUALIZED ANNUALIZED
STATE PROPERTIES PERCENT LEASED SQUARE FEET BASE RENT(1) BASE RENT
- -------------------- ------------- ----------------- ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Utah 7 100% 45,400 $ 591,000 0.9%
Virginia 17 100 81,500 1,323,000 2.0
Washington 42 98 249,700 2,959,000 4.5
West Virginia 2 100 16,800 147,000 0.2
Wisconsin 11 100 60,500 738,000 1.1
Wyoming 4 100 20,100 264,000 0.4
--- --- ----------- ------------- -----
Total/Average 774 99% 5,788,700 $ 66,129,000 100.0%
--- --- ----------- ------------- -----
--- --- ----------- ------------- -----
</TABLE>
- ------------------------
(1) Annualized base rent is calculated by multiplying the monthly contractual
base rent as of August 31, 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 August 31, 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.
The following table sets forth certain information regarding the Company's
properties as of August 31, 1997, classified according to the business of the
respective tenants.
<TABLE>
<CAPTION>
REALTY
APPROXIMATE INCOME APPROXIMATE ANNUALIZED
INDUSTRY TOTAL OWNED LEASABLE BASE
TENANT(1) SEGMENT(1) LOCATIONS(2) LOCATIONS SQUARE FOOTAGE RENT(3)
- ------------------------------------- ------------------------ ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
AUTOMOTIVE PARTS & ACCESSORIES
CSK Auto Parts & Accessories 580 79 409,200 $ 4,192,000
Discount Tire Parts & Accessories 310 18 104,900 1,178,000
Other Parts & Accessories - 1 3,400 49,000
--- -------------- -------------
TOTAL AUTOMOTIVE PARTS & ACCESSORIES 98 517,500 5,419,000
AUTOMOTIVE SERVICE
Econo Lube 'N Tune Service 210 26 71,800 1,763,000
Jiffy Lube Service 1,400 30 70,200 1,935,000
Q-Lube Service 490 4 7,600 183,000
R&S Strauss Service 110 2 31,200 431,000
Speedy Brake Service 1,080 9 51,200 722,000
Other Service - 1 3,100 41,000
--- -------------- -------------
TOTAL AUTOMOTIVE SERVICE 72 235,100 5,075,000
BOOK STORES
Barnes & Noble Bookstores 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
KinderCare Learning Centers Child Care 1,150 13 79,800 1,087,000
La Petite Academy Child Care 790 167 959,000 8,738,000
Other Child Care - 3 13,300 70,000
--- -------------- -------------
TOTAL CHILD CARE 317 2,016,100 23,507,000
</TABLE>
S-7
<PAGE>
<TABLE>
<CAPTION>
REALTY
APPROXIMATE INCOME APPROXIMATE ANNUALIZED
INDUSTRY TOTAL OWNED LEASABLE BASE
TENANT(1) SEGMENT(1) LOCATIONS(2) LOCATIONS SQUARE FOOTAGE RENT(3)
- ------------------------------------- ------------------------ ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
CONSUMER ELECTRONICS
Best Buy Consumer Electronics 270 3 150,900 $ 1,738,000
Rex Stores Consumer Electronics 230 34 408,300 2,694,000
--- -------------- -------------
TOTAL CONSUMER ELECTRONICS 37 559,200 4,432,000
CONVENIENCE STORES
7-ELEVEN Convenience Stores 20,240 3 9,700 235,000
Dairy Mart Convenience Stores 1,020 22 66,500 1,522,000
East Coast Oil Convenience Stores 40 3 8,800 286,000
Quick Trip Convenience Stores 330 9 28,800 924,000
The Pantry Convenience Stores 400 14 34,400 1,333,000
Other Convenience Stores - 1 2,100 0
--- -------------- -------------
TOTAL CONVENIENCE STORES 52 150,300 4,300,000
HOME FURNISHINGS & ACCESSORIES
Aaron Rents Home Furnishings 290 6 258,000 888,000
Levitz Furniture Home Furnishings 130 4 376,400 2,502,000
Linens 'N Things Home Accessories 170 1 46,600 561,000
--- -------------- -------------
TOTAL HOME FURNISHINGS & ACCESSORIES 11 681,000 3,951,000
OFFICE SUPPLIES
OfficeMax Office Supplies 560 3 75,700 854,000
Staples Office Supplies 560 2 48,600 456,000
--- -------------- -------------
TOTAL OFFICE SUPPLIES 5 124,300 1,310,000
PET SUPPLIES
Petco Pet Supplies 340 1 16,000 253,000
--- -------------- -------------
TOTAL PET SUPPLIES 1 16,000 253,000
RESTAURANTS
Carver's Dinner House 90 3 26,600 495,000
Don Pablo's Dinner House 70 7 60,700 607,000
Other Dinner House - 12 93,100 887,000
Golden Corral Family 460 85 501,200 6,616,000
Sizzler Family 630 7 37,600 848,000
Other Family - 2 11,600 108,000
Hardee's 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 - 15 50,000 897,000
--- -------------- -------------
TOTAL RESTAURANTS 167 868,200 12,720,000
</TABLE>
S-8
<PAGE>
<TABLE>
<CAPTION>
REALTY
APPROXIMATE INCOME APPROXIMATE ANNUALIZED
INDUSTRY TOTAL OWNED LEASABLE BASE
TENANT(1) SEGMENT(1) LOCATIONS(2) LOCATIONS SQUARE FOOTAGE RENT(3)
- ------------------------------------- ------------------------ ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
VIDEO RENTAL
Hollywood Video Video Rental 660 1 7,500 $ 118,000
--- -------------- -------------
TOTAL VIDEO RENTAL 1 7,500 118,000
TOTAL OTHER Miscellaneous 12 583,500 4,594,000
--- -------------- -------------
TOTAL 774 5,788,700 $ 66,129,000
--- -------------- -------------
--- -------------- -------------
</TABLE>
- ------------------------
(1) See "Business and Properties--Matters Pertaining to Certain Properties and
Tenants."
(2) Approximate total number of retail locations in operation by each tenant
(including both owned and franchised locations), based on information
provided to Realty Income by the respective tenants.
(3) Annualized base rent is calculated by multiplying the monthly contractual
base rent as of August 31, 1997 for each of the properties owned as of that
date 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 August 31, 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, if any, that may be payable under leases covering certain
of the properties.
THE OFFERING
All the shares of Common Stock offered hereby are being sold by the Company.
None of the Company's stockholders is selling any shares of Common Stock. For a
more complete description of the Common Stock, see "Description of Common Stock"
in the accompanying Prospectus.
<TABLE>
<CAPTION>
Shares of Common Stock Offered............... 2,700,000
<S> <C>
Common Stock Offered for Sale in the:
U.S. Offering.............................. 2,160,000
International Offering..................... 540,000
Total Common Stock Offered............... 2,700,000
Shares of Common Stock Outstanding After this
Offering................................... 25,698,664
Use of Proceeds.............................. To pay down amounts drawn under the Company's
$130 million revolving, unsecured acquisition
credit facility (the "Credit Facility") and
for other general corporate purposes. The
Credit Facility had an outstanding balance at
September 29, 1997 of $67.6 million and is
expected to be approximately $65 million on
the closing date of the Offering. See "Use of
Proceeds."
NYSE Symbol.................................. "O"
</TABLE>
S-9
<PAGE>
DISTRIBUTION POLICY
Distributions are paid to the Company's stockholders on a monthly basis if,
as and when declared by the Company's Board of Directors. The monthly
distribution of $0.1575 per share represents a current annualized distribution
of $1.89 per share, and an annualized distribution yield of approximately 7.0%
based on the last reported sale price of the Company's Common Stock on the NYSE
on October 8, 1997. The Company's Board of Directors has declared a distribution
of $0.1575 per share of Common Stock payable October 15, 1997 to stockholders of
record on October 1, 1997. PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED
HEREBY WILL NOT RECEIVE THE OCTOBER 15, 1997 DISTRIBUTION IN RESPECT OF THE
SHARES OF COMMON STOCK BEING OFFERED HEREBY. The distributions paid by the
Company for the six months ended June 30, 1997 represented approximately 87.5%
of the Company's funds from operations (" FFO") for such period. Although the
Company expects to continue its policy of paying monthly distributions, there
can be no assurance that the current level of distributions will be maintained
by the Company or as to the actual distribution yield for any future period. See
"Distribution Policy" herein.
RISK FACTORS
For certain factors which investors should carefully consider in evaluating
an investment in the Company's Common Stock, see "Risk Factors" herein.
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 SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (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 "RISK FACTORS" AND "BUSINESS AND PROPERTIES-- MATTERS
PERTAINING TO CERTAIN PROPERTIES AND TENANTS" IN THIS PROSPECTUS SUPPLEMENT AND
IN THE SECTIONS ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND IN THE COMPANY'S QUARTERLY
REPORTS ON FORM 10-Q FOR THE QUARTERS ENDED MARCH 31, 1997 AND JUNE 30, 1997
INCORPORATED BY REFERENCE IN THE ACCOMPANYING PROSPECTUS.
S-10
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary financial information for the Company
and the Predecessor (as defined below), as the case may be, for the six-month
periods ended June 30, 1997 and 1996 and each of the five years in the period
ended December 31, 1996. Data for the five years ended December 31, 1996 has
been derived from financial statements which have been audited by the Company's
independent auditors, KPMG Peat Marwick LLP. Data for the six month periods
ended June 30, 1997 and 1996 is unaudited but, in the opinion of management of
the Company, includes all adjustments (consisting of only normal recurring
accruals) necessary to fairly present such information. Data as of and for the
six months ended June 30, 1997 does not purport to be indicative of results for
the fiscal year ending December 31, 1997. The following financial information
should be read in conjunction with the consolidated financial statements and
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" incorporated by reference in the accompanying
Prospectus from the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997. The following table also includes certain
property data.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR(2)
-------------------------------------------------------------------- ------------------------
AS OF OR FOR THE AS OF OR FOR THE AS OF OR FOR THE
SIX MONTHS ENDED YEARS ENDED YEARS ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
-------------------------- ---------------------------------------- ------------------------
1997 1996 1996 1995 1994(1) 1993 1992
------------ ------------ ------------ ------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue:
Rental revenue............ $ 31,455 $ 27,330 $ 56,777 $ 51,185 $ 47,905 $ 48,584 $ 48,694
Interest and other
income.................. 148 85 180 370 958 434 340
------------ ------------ ------------ ------------ ------------ ----------- -----------
Total revenue........... 31,603 27,415 56,957 51,555 48,863 49,018 49,034
------------ ------------ ------------ ------------ ------------ ----------- -----------
Expenses:
Depreciation and
amortization............ 8,948 8,123 16,422 14,849 13,790 14,689 14,811
General and administrative
expenses and advisor
fees.................... 2,585 2,598 5,181 6,875 7,187 5,886 5,416
Property.................. 853 859 1,640 1,607 2,095 1,768 1,867
Interest.................. 3,321 1,005 2,367 2,642 396 5 --
Provision for impairment
losses.................. 70 323 579 -- 135 935 --
Consolidation costs....... -- -- -- -- 11,201 -- --
------------ ------------ ------------ ------------ ------------ ----------- -----------
Total expenses.......... 15,777 12,908 26,189 25,973 34,804 23,283 22,094
------------ ------------ ------------ ------------ ------------ ----------- -----------
Income from operations...... 15,826 14,507 30,768 25,582 14,059 25,735 26,940
Net gain on sales of
properties................ 427 958 1,455 18 1,165 3,583 1,113
------------ ------------ ------------ ------------ ------------ ----------- -----------
Net income.................. $ 16,253 $ 15,465 $ 32,223 $ 25,600 $ 15,224 $ 29,318 $ 28,053
------------ ------------ ------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ------------ ------------ ----------- -----------
Net income per share(3)..... $ 0.71 $ 0.67 $ 1.40 $ 1.27 $ 0.78 $ -- $ --
------------ ------------ ------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ------------ ------------ ----------- -----------
Weighted average common
shares outstanding(3)..... 22,990,163 22,976,756 22,977,837 20,230,963 19,502,091 -- --
------------ ------------ ------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ------------ ------------ ----------- -----------
</TABLE>
S-11
<PAGE>
<TABLE>
<CAPTION>
COMPANY PREDECESSOR(2)
-------------------------------------------------------------------- ------------------------
AS OF OR FOR THE AS OF OR FOR THE AS OF OR FOR THE
SIX MONTHS ENDED YEARS ENDED YEARS ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
-------------------------- ---------------------------------------- ------------------------
1997 1996 1996 1995 1994(1) 1993 1992
------------ ------------ ------------ ------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF
PERIOD)
Real estate, at cost,
before accumulated
depreciation.............. $ 616,432 $ 517,707 $ 564,540 $ 515,426 $ 450,703 $ 451,738 $ 476,822
Total assets (book value)... 500,321 411,842 454,097 417,639 352,768 384,474 395,671
Total liabilities........... 131,344 32,951 79,856 36,218 17,352 2,570 2,150
Stockholders' equity........ 368,977 378,891 374,241 381,421 335,416 381,904 393,418
OTHER DATA
FFO(4)...................... $ 24,820 $ 22,927 $ 47,718 $ 40,414 $ 39,185 $ 41,359 $ 41,751
Capital expenditures........ 7 9 37 296 222 94 13
PORTFOLIO DATA (AT END OF
PERIOD)
Number of properties........ 770 692 740 685 630 631 634
Net leasable square feet.... 5,777,500 4,688,100 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 25 public and private real estate limited partnerships (the
"Partnerships") with and into the Company (the "Consolidation"). The
Consolidation was accounted for as a reorganization of 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 period 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) Funds from operations ("FFO") is calculated by adding (i) net income before
net gain on sales 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.
S-12
<PAGE>
RISK FACTORS
In evaluating an investment in the Common Stock, investors should carefully
consider the following factors, in addition to other matters set forth or
incorporated in this Prospectus Supplement or the accompanying Prospectus.
REAL ESTATE INVESTMENT RISKS
RISK OF DEFAULT BY MAJOR TENANTS. The Company's three largest tenants
currently are Children's World Learning Center, La Petite Academy and Golden
Corral Restaurants which accounted for approximately 21.6%, 14.1% and 11.2%,
respectively, of the Company's rental revenue for the six months ended June 30,
1997. 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 six months ended June 30, 1997, approximately 37.4% and 21.4% of the
Company's rental revenues were attributable to tenants in the child care and
restaurant 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 business or in the national or regional economy generally.
On September 5, 1997, Levitz Furniture filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code. Levitz Furniture
occupies four of the Company's properties: two in California, one in Texas and
one in Florida. As of August 31, 1997, the annualized base rent (computed as
described in note (1) to the table under "--Prospectus Supplement
Summary--Properties") from the four stores leased to Levitz Furniture was
approximately $2.5 million, or approximately 3.8% of the Company's total
annualized base rent at that date. While Levitz Furniture has paid its most
recent rental payments and has not informed the Company that it will be unable
to continue to fulfill its obligations under its lease agreements with the
Company, there can be no assurance that Levitz Furniture will continue to pay
rent for the remainder of the lease terms for the four Levitz properties.
Likewise, there can be no assurance that Levitz Furniture will not be released
from its obligations under its leases with the Company pursuant to these
bankruptcy proceedings. This may result in an adverse impact on the Company's
financial condition, results of operations and ability to make distributions to
stockholders and debt service payments.
Certain of the Company's properties have been subleased to tenants in other
industries and certain of its properties are available for lease. See "Business
and Properties--Matters Pertaining to Certain Properties and Tenants."
COMPETITION FOR ACQUISITION OF REAL ESTATE. The Company faces competition
in the acquisition, operation and sale of its properties. Such competition can
be expected from other businesses, individuals, fiduciary accounts and plans and
other entities engaged in real estate investment. Some of the Company's
competitors are larger and have greater financial resources than the Company.
This competition may result in a higher cost for properties the Company wishes
to purchase. The tenants leasing the Company's properties generally face
significant competition from other operators. This may result in an adverse
impact on that portion, if any, of the rental stream to be paid to the Company
based on a tenant's revenues and may also adversely impact the tenants' results
of operations or financial condition.
REAL ESTATE OWNERSHIP RISKS. The Company is subject to all of the general
risks associated with the ownership of real estate, in particular the risk that
rental revenue from the properties will not be sufficient to cover all corporate
operating expenses and debt service payments on indebtedness incurred by the
S-13
<PAGE>
Company. These risks include adverse changes in general or local economic
conditions, changes in supply of or demand for similar or competing properties,
changes in interest rates and operating expenses, competition for tenants,
changes in market rental rates, inability to lease properties upon termination
of existing leases, renewal of leases at lower rental rates and inability to
collect rents from tenants due to financial hardship, including bankruptcy.
Other risks include changes in tax, real estate, zoning and environmental laws
which may have an adverse impact upon the value of real estate, uninsured
property liability, property damage or casualty losses and unexpected
expenditures for capital improvements or to bring properties into compliance
with applicable federal, state and local laws. Acts of God and other factors
beyond the control of the Company's management might also adversely affect the
Company.
RISKS RELATED TO OWNERSHIP AND FINANCING OF COMMERCIAL
PROPERTIES. Investment in commercial properties may be affected by adverse
changes in national, regional or local economic or market conditions, poor
management, increases in the number and density of competing commercial
properties of the same type and other competitive factors. Other factors
affecting ownership and financing of commercial properties include the limited
alternative uses for the buildings and any equipment utilized for the business,
changing consumer habits, condemnation or uninsured losses, changing
demographics, changes in labor and insurance costs, government regulations,
changing traffic patterns and the credit, financial stability and management
skills of the operator. In the event of a default under a lease, the Company may
experience delays in regaining possession of the property and thereafter may not
be able to enter into a new lease with respect to the property on the same terms
or sell the property on favorable terms. In addition, in the event of the
financial failure of a commercial property operator, there can be no assurance
that the Company could promptly recover the property from a trustee or
debtor-in-possession in any bankruptcy proceedings filed by such person, or that
the Company would receive rent in such proceedings sufficient to cover its
expenses with respect to such property. In the event of foreclosure of the
Company's interest in real estate in connection with the bankruptcy of a
commercial property operator, the Company may be subject to the substantive and
procedural matters affecting creditors' remedies in bankruptcy.
ENVIRONMENTAL LIABILITIES. Investments in real property create a potential
for environmental liability on the part of the owner of such property for
contamination resulting from the presence or discharge of hazardous substances
on the property. Such liability may be imposed without regard to knowledge of,
or the timing, cause or person responsible for the release of such substances
onto the property. There may be environmental problems associated with the
Company's properties which are not known to the Company. In that regard, a
number of the Company's properties are leased to operators of oil change and
tune-up facilities and to convenience stores which sell petroleum-based fuels.
These facilities or other of the Company's properties utilize, or may have
utilized in the past, underground tanks for the storage of petroleum-based or
waste products which could create a potential for release of hazardous
substances. The presence of hazardous substances on a property may adversely
affect the Company's ability to sell such property or to borrow using such
property as collateral, and it may cause the Company to incur substantial
remediation costs. In addition to claims for cleanup costs, the presence of
hazardous substances on a property could result in the Company incurring
substantial liabilities as a result of a claim by a private party for personal
injury or a claim by an adjacent property owner for property damage. Although
tenants of the Company's properties generally are required by their leases to
operate in compliance with all applicable federal, state and local laws and
regulations and to indemnify the Company against any environmental liabilities
arising from the tenants' activities on the properties, the Company could
nevertheless be subject to strict liability by virtue of its ownership interest
and there can be no assurance that the tenants would satisfy their
indemnification obligations under the leases. There can be no assurance that any
environmental assessments undertaken by the Company with respect to the
properties that it owns have revealed all potential environmental liabilities,
that any prior owner or prior or current operator of the properties did not
create any material environmental condition not known to the Company, or that an
environmental condition does not otherwise exist as to any one or more of the
properties that could have material adverse effect on the Company's financial
condition or results of operations and on its ability to make distributions to
stockholders and debt service payments. In addition, there can be no assurance
that (i) future laws, ordinances or regulations will not impose material
environmental liability, (ii) the current environmental conditions of the
properties will not be affected by the condition of properties in the vicinity
S-14
<PAGE>
of such properties (such as the presence of leaking underground storage tanks)
or by third parties unrelated to the Company, or (iii) tenants will not violate
their leases by introducing hazardous or toxic substances into the properties in
a manner that could expose the Company to liability under federal or state
environmental laws. The Company believes that its properties are in compliance
in all material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products. The
Company has not been notified by any governmental authority, and is not
otherwise aware, of any material noncompliance, liability or claim relating to
hazardous or toxic substances or petroleum products in connection with any of
its present properties. Nevertheless, if environmental contamination should
exist, the Company could be subject to strict liability by virtue of its
ownership interest.
In December 1996, the Company obtained a five year environmental insurance
policy on the property portfolio. Based upon the 774 properties in the portfolio
at August 31, 1997, the cost of the insurance will be approximately $84,000 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.
UNINSURED LOSS. Under the terms and conditions of the leases currently in
force on the Company's properties, tenants generally are required to indemnify
and hold the Company harmless from any and all liabilities resulting from injury
to persons, air, water, land, or property, on or off the premises, due to
activities conducted on the properties, except for claims arising from the
negligence or intentional misconduct of the Company or the Company's agents.
Additionally, tenants are generally required, at tenant's expense, to obtain and
keep in full force during the term of the lease, liability and property damage
insurance policies issued by companies holding general policy holder ratings of
at least "A" as set forth in the most current issue of BEST'S INSURANCE GUIDE.
Insurance policies for property damage are generally in amounts not less than
the full replacement cost of the improvements less slab, foundations, supports
and other customarily excluded improvements, insured against all perils of fire,
extended coverage, vandalism, malicious mischief and special extended perils
("all risk," as such term is used in the insurance industry). Insurance policies
are generally obtained by the tenant providing general liability coverage
varying between $1,000,000 and $10,000,000 depending on the facts and
circumstances surrounding the tenant and the industry in which it operates and
include liability coverage for bodily injury and property damage arising out of
the ownership, use, occupancy or maintenance of the properties and all of its
appurtenant areas.
In addition to the indemnities and required insurance policies identified
above, most of the Company's properties are also covered by flood and earthquake
insurance policies (subject to substantial deductibles) obtained by and paid for
by the tenants as part of their risk management programs. Additionally, the
Company has obtained blanket liability, flood and earthquake (subject to
substantial deductibles) and property damage insurance policies to protect the
Company and its properties against loss should the indemnities and insurance
policies provided by the tenants fail to restore the properties to their
condition prior to a loss. Should a loss occur that is uninsured or in an amount
exceeding the combined aggregate limits for the policies noted above, or in the
event of a loss which is subject to a substantial deductible under an insurance
policy, the Company could lose all or part of its capital invested in, and
anticipated revenue from one or more of the properties, which could have a
material adverse effect on the Company's financial condition and results of
operations and on its ability to make distributions to stockholders and debt
service payments.
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT (THE "ADA") AND FIRE AND
SAFETY REGULATIONS. All of the Company's properties are required to comply with
the ADA. The ADA has separate compliance requirements for "public
accommodations" and "commercial facilities," but generally requires that
buildings be made accessible to people with disabilities. Compliance with the
ADA requirements could require removal of access barriers and non-compliance
could result in imposition of fines by the U.S. government or an award of
damages to private litigants. The tenants are obligated by law to comply with
the ADA provisions, and management believes that such tenants may be obligated
to cover costs associated with such compliance. If required changes involve
greater expenditures than anticipated, or if
S-15
<PAGE>
the changes must be made on a more accelerated basis than anticipated, the
ability of tenants to cover such costs could be adversely affected and the
Company could be required to expend its own funds to comply with the provisions
of the ADA, which could adversely affect the Company's financial condition and
results of operations and its ability to make distributions to stockholders and
debt service payments. In addition, the Company is required to operate its
properties in compliance with fire and safety regulations, building codes and
other land use regulations, as they may be adopted by governmental agencies and
bodies and become applicable to the Company's properties. Compliance with such
requirements may require the Company to make substantial capital expenditures
and these expenditures could adversely affect its financial condition and
results of operations and its ability to make distributions to stockholders and
debt service payments.
PROPERTY TAXES. Each of the Company's properties is subject to real
property taxes. The real property taxes on the Company's properties and any
other properties that the Company develops or acquires in the future may
increase as property tax rates change and as such properties are assessed or
reassessed by tax authorities.
RISKS RELATING TO QUALIFICATION AND OPERATIONS AS A REIT
FAILURE TO QUALIFY AS A REIT. The Company has elected to be taxed as a REIT
under the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with its taxable year ended December 31, 1994. As long as the Company meets the
requirements under the Code for qualification as a REIT each year, the Company
will be entitled to a deduction when calculating its taxable income for
dividends paid to its stockholders. For the Company to qualify as a REIT,
however, certain detailed technical requirements must be met (including certain
income, asset, distribution and stock ownership tests) under Code provisions for
which, in many cases, there are only limited judicial or administrative
interpretations. Although the Company intends to operate so that it will
continue to qualify as a REIT, the highly complex nature of the rules governing
REITs, the ongoing importance of factual determinations and the possibility of
future changes in the Company's circumstances preclude any assurance that the
Company will so qualify in any year. For any taxable year that the Company fails
to qualify as a REIT, it would not be entitled to a deduction for dividends paid
to its stockholders in calculating its taxable income. Consequently,
distributions to stockholders would be substantially reduced and could be
eliminated because of the Company's increased tax liability. In addition, if the
Company fails to qualify as a REIT, all distributions to stockholders will be
taxable as ordinary income to the extent of current and accumulated earnings and
profits, but, subject to certain limitations of the Code, corporate distributees
may be eligible for the dividends received deduction. Should the Company's
qualification as a REIT terminate, the Company may not be able to elect to be
treated as a REIT for the subsequent five-year period, which would substantially
reduce and could eliminate distributions to stockholders for the years involved.
See "Certain Federal Income Tax Considerations--Failure to Qualify" in the
accompanying Prospectus.
EFFECT OF DISTRIBUTION REQUIREMENTS. To maintain its status as a REIT for
federal income tax purposes, the Company generally is required each year to
distribute dividends (other than capital gain dividends) to its stockholders in
an amount equal to at least 95% of its taxable income. In addition, the Company
is subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less than
the sum of 85% of its ordinary income for such calendar year, 95% of its capital
gain net income for the calendar year and any amount of such income that was not
distributed in prior years. The Company may be required, under certain
circumstances, to accrue as income for tax purposes interests, rent and other
items treated as earned for tax purposes but not yet received. In addition, the
Company may be required not to accrue as expenses for tax purposes certain items
that actually have been paid. In any such event, the Company could have taxable
income in excess of cash available for distribution. In such circumstances, the
Company could be required to borrow money or liquidate investments in order to
satisfy its federal income tax obligations, to fully distribute its income, or
to meet the distribution requirements applicable to a REIT, and there can be no
assurance that the Company would be able to do so.
S-16
<PAGE>
In calculating the Company's taxable income for purposes of the foregoing
distribution requirements, the Code does not permit taxable income to be reduced
by required principal payments on indebtedness. To the extent that the Company
is obligated to make substantial principal payments in any year, such payments
might make it difficult or impossible for the Company to satisfy its obligation
to distribute 95% of its taxable income. If the Company borrows a substantial
amount under the Credit Facility, the requirement that such borrowings be repaid
when the Credit Facility matures in November 1999 could make it difficult for
the Company to satisfy its obligations to distribute 95% of its taxable income
in that year. Refinancing of the Credit Facility may be the only way in which
the Company could satisfy its obligations to make distributions under the Code
and there can be no assurance that the Company would be able to effect any such
refinancing or regarding the terms on which such refinancing could be
accomplished. See "Certain Federal Income Tax Considerations--Taxation of the
Company as a REIT--Annual Distribution Requirements" and "--Distributions of
Acquired Earnings" in the accompanying Prospectus.
On August 17, 1995, the Company acquired R.I.C. Advisor, Inc. ("R.I.C.
Advisor") pursuant to a merger (the "Merger"). As a result of the Merger, the
Company was treated as having acquired the earnings and profits (the "Acquired
Earnings") of R.I.C. Advisor for U.S. federal income tax purposes and, pursuant
to the REIT requirements under the Code, was required to distribute (or be
deemed to have distributed) the Acquired Earnings prior to the close of 1995.
Based upon an earnings and profits study and certain other procedures, the
Company believes that it distributed (or was deemed to distribute) the Acquired
Earnings prior to the close of 1995. However, the calculation of the amount of
Acquired Earnings is not binding on, and therefore could be challenged by, the
Internal Revenue Service (the "IRS") and, if it is determined 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 Company's financial
position and results of operations and ability to make distributions to
stockholders and debt service payments. See "Certain Federal Income Tax
Considerations--Taxation of the Company as a REIT--Distribution of Acquired
Earnings" in the accompanying Prospectus.
RESTRICTIONS ON OWNERSHIP AND TRANSFERS OF CAPITAL STOCK. For the Company
to qualify as a REIT, among other things, not more than 50% in value of the
Company's 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 335 days of a taxable
year of 12 months or during a proportionate part of a shorter taxable year. To
ensure that the Company remains qualified as a REIT, the Company's Charter
provides, subject to certain exceptions specified therein, that no stockholder
may actually own, or be deemed to own by virtue of the constructive ownership
provisions of the Code, in excess of 9.8% of the outstanding shares of Common
Stock (the "Ownership Limit"). 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 an exception to such limit would not impair the Company's status as a REIT
or that maintenance of REIT status is no longer in the best interest of the
Company. See "Restrictions on Ownership and Transfers of Capital Stock" in the
Prospectus.
OTHER GENERAL RISKS
DILUTION OF COMMON STOCK. The Company's future growth will depend in large
part upon its ability to raise additional capital. If the Company were to raise
additional capital through the issuance of equity securities, the interests of
holders of Common Stock, including the shares of Common Stock offered hereby,
could be diluted. Likewise, the Company's Board of Directors is authorized to
cause the Company to issue preferred stock in one or more series and entitled to
such dividends and voting and other rights as the Board of Directors may
determine. Accordingly, the Board of Directors may authorize the issuance of
preferred stock with voting, dividend and other similar rights which could be
dilutive to or otherwise adversely affect the interests of holders of Common
Stock.
RISKS OF DEBT FINANCING. Although the Company intends to apply the net
proceeds from the sale of the Common Stock offered hereby to repay borrowings
outstanding under the Credit Facility, the Company intends to incur additional
indebtedness in the future, including through additional borrowings
S-17
<PAGE>
under the Credit Facility. In addition, at September 15, 1997, $110 million
aggregate principal amount of the Company's 7 3/4% Notes due 2007 was
outstanding. As a result, the Company will be subject to risks associated with
debt financing, including the risk that the Company's cash flow will be
insufficient to meet required payments on such debt, particularly in light of
the fact that the interest rate on the Credit Facility is variable and could
increase over time, and the risk that the Company may be unable to refinance or
repay its debt as it comes due. In addition, the Credit Facility provides that,
in the event of a failure to pay principal or interest on borrowings thereunder
when due (subject to any applicable grace period), the Company and its
subsidiaries may not pay any dividends on the Common Stock.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of its
executive officers and key employees. See "Management." The loss of the services
of its executive officers and key employees could have a material adverse effect
on the Company. There can be no assurance that the Company would be able to
recruit additional personnel with equivalent experience in the retail, net
leasing industry.
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK. One of the
factors that influences the price of the Company's Common Stock in public
trading markets is the annual yield from distributions by the Company as
compared to yields on other financial instruments. Thus, an increase in market
interest rates will result in higher yields on other financial instruments,
which could adversely affect the market price of the Company's Common Stock.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be approximately $68.7 million (approximately $79.0
million if the Underwriters' over-allotment option is exercised in full). The
Company intends to use the net proceeds to pay down outstanding indebtedness
under the Credit Facility and for other general corporate purposes. Pending
application for such purposes, such net proceeds may be invested in short-term
investments.
The Credit Facility had an outstanding balance at September 29, 1997 of
$67.6 million and is expected to be approximately $65 million on the closing
date of the Offering. 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 on outstanding borrowings was 6.9% at September 29, 1997.
DISTRIBUTION POLICY
Distributions are paid to the Company's stockholders on a monthly basis if,
as and when declared by the Company's Board of Directors. In order to maintain
its tax status as a REIT, the Company is generally required to distribute
annually to its stockholders at least 95% of its taxable income (determined
without regard to the deduction for dividends paid and by excluding any net
capital gain). The Company intends to make distributions to its stockholders
which are sufficient to meet this requirement. See "Risk Factors-- Risks
Relating to Qualification and Operations as a REIT--Effect of Distribution
Requirements."
The current monthly distribution of $0.1575 per share represents a current
annualized distribution of $1.89 per share, and an annualized distribution yield
of approximately 7.0% based on the last reported sale price of the Company's
Common Stock on the NYSE on October 8, 1997. The Company's Board of Directors
has declared a distribution of $0.1575 per share of Common Stock payable October
15, 1997 to stockholders of record on October 1, 1997. PURCHASERS OF THE SHARES
OF COMMON STOCK OFFERED HEREBY WILL NOT RECEIVE THE OCTOBER 15, 1997
DISTRIBUTION IN RESPECT OF THE SHARES OF COMMON STOCK BEING OFFERED HEREBY. The
distributions paid by the Company for the six months ended June 30, 1997
represented approximately 87.5% of the Company's FFO for such period. Although
the Company expects to continue its policy of paying monthly distributions,
there can be no assurance that the current level of distributions will be
maintained by the Company or as to the actual distribution yield for any future
period.
S-18
<PAGE>
Future distributions by the Company will be at the discretion of its Board
of Directors and will depend on, among other things, its results of operations,
financial condition and capital requirements, the annual distribution
requirements under the REIT provisions of the Code, its debt service
requirements and such other factors as the Board of Directors may deem relevant.
In addition, the Credit Facility contains financial covenants which could limit
the amount of distributions payable by the Company in the event of a
deterioration in the results of operations or financial condition of the
Company, and which prohibit the payment of distributions on the Common Stock in
the event that the Company fails to pay when due (subject to any applicable
grace period) any principal of or interest on borrowings under the Credit
Facility.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to stockholders as ordinary income. Distributions in excess of such earnings and
profits generally will be treated as a non-taxable reduction in the
stockholders' basis in its stock to the extent of such basis, and thereafter as
a gain from the sale of such stock. Approximately 13.2% of the distributions
made or deemed to have been made in 1996 were classified as a return of capital
for federal income tax purposes. Although the Company believes that a portion of
its distributions for 1997 will be classified as a return of capital for federal
income tax purposes, the Company is unable to predict the portion of 1997 or
future distributions which may be classified as a return of capital since such
amount depends on the Company's taxable income for the entire year.
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of June 30, 1997 and as adjusted to give effect to the issuance and sale of
the Common Stock offered hereby and the use of the estimated net proceeds
therefrom to repay borrowings under the Credit Facility as described in "Use of
Proceeds." This information should be read in conjunction with the summary
financial information presented elsewhere in this Prospectus Supplement, and the
consolidated financial statements and notes thereto incorporated by reference in
the accompanying Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------
HISTORICAL AS ADJUSTED
----------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Credit Facility(1)...................................................................... $ 12,000 $ 0
Notes due 2007.......................................................................... 110,000 110,000
----------- -----------
Total debt.......................................................................... 122,000 110,000
----------- -----------
Preferred stock, $1.00 par value per share, 20,000,000 shares authorized, no shares
issued or outstanding................................................................. -- --
Common Stock, $1.00 par value per share, 100,000,000 shares authorized, 22,988,186 and
25,688,186 issued and outstanding at the June 30, 1997 historical and as adjusted,
respectively.......................................................................... 22,988 25,688
Capital in excess of par value.......................................................... 516,202 582,182
Accumulated distributions in excess of net income....................................... (170,213) (170,213)
----------- -----------
Total stockholders' equity.......................................................... 368,977 437,657
----------- -----------
Total capitalization................................................................ $ 490,977 $ 547,657
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) The amount drawn on the Credit Facility was $12.0 million at June 30, 1997
and is expected to be approximately $65 million on the closing date of the
Offering.
S-19
<PAGE>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
On October 18, 1994, the Company's Common Stock began trading on the NYSE
under the symbol "O." Prior to October 18, 1994, the Common Stock was not
publicly traded. On October 8, 1997, the last reported sales price per share of
Common Stock on the NYSE was $27.0625. The table below sets forth for the
periods indicated the high and low sales prices per share of the Company's
Common Stock, as reported on the NYSE composite tape, and distributions declared
per share of Common Stock.
<TABLE>
<CAPTION>
PRICE PER SHARE OF
COMMON STOCK
-------------------- DISTRIBUTIONS
HIGH LOW DECLARED(1)
--------- --------- ------------
<S> <C> <C> <C>
1995
First Quarter............................................................... $ 19.250 $ 16.375 $ 0.4500
Second Quarter.............................................................. 21.500 17.875 0.4500
Third Quarter............................................................... 22.125 20.250 0.4650
Fourth Quarter.............................................................. 22.500 19.125 0.8500(2)
------------
$ 2.2150
------------
------------
1996
First Quarter............................................................... 23.250 20.250 $ 0.3100(3)
Second Quarter.............................................................. 21.375 19.500 0.4650
Third Quarter............................................................... 23.750 20.375 0.4650
Fourth Quarter.............................................................. 24.500 22.250 0.4700
------------
$ 1.7100
------------
------------
1997
First Quarter............................................................... 26.625 23.000 $ 0.4725
Second Quarter.............................................................. 26.500 22.625 0.4725
Third Quarter............................................................... 27.813 25.438 0.4725
Fourth Quarter (through October 8, 1997).................................... 27.125 26.938 0.1575
------------
$ 1.5750
------------
------------
</TABLE>
- ------------------------
(1) Distributions are currently declared monthly by the Company based on
financial results for the prior month. The Company's Board of Directors has
declared a monthly distribution of $0.1575 per share of Common Stock
payable October 15, 1997 to stockholders of record on October 1, 1997.
PURCHASERS OF THE SHARES OF COMMON STOCK BEING OFFERED HEREBY WILL NOT
RECEIVE THE OCTOBER 15, 1997 DISTRIBUTION IN RESPECT OF THE SHARES OF
COMMON STOCK BEING OFFERED HEREBY. Although the Company expects to continue
its policy of paying monthly distributions, there can be no assurance that
the current level of distributions will be maintained by the Company. See
"Distribution Policy."
(2) In the fourth quarter of 1995, four monthly distributions of $0.155 per
share and a special distribution of $0.23 per share were declared.
(3) In the first quarter of 1996, two monthly distributions of $0.155 per share
were declared.
S-20
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
The Company is a fully integrated, self-administered and self-managed REIT
that acquires, owns and manages net leased retail properties. The Company 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 August 31, 1997, the Company owned a diversified
portfolio of 774 properties located in 42 states with over 5.7 million square
feet of leasable space. Over 99% of the Company's single-tenant properties were
leased as of August 31, 1997. Unless otherwise indicated, information regarding
the Company's properties is as of August 31, 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 August 31, 1997, Realty Income has acquired and
leased back to national and regional retail chains 744 properties (including 31
properties that have been sold) and has collected approximately 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 further 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 August 31, 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. On May
28, 1997 the Company was reincorporated in the State of Maryland. 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.
RECENT DEVELOPMENTS
ACQUISITION OF 43 PROPERTIES THROUGH AUGUST 31, 1997. During the 1997
calendar year, the Company has continued to increase the size of its portfolio
through a strategic program of acquisitions. The Company acquired the 43 New
Properties, and selectively sold 9 properties, increasing the number of
properties in its portfolio by 4.6% from 740 properties at December 31, 1996 to
774 properties at August 31, 1997. Of the New Properties, 36 were occupied as of
September 15, 1997 and the remaining properties 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 $58.1 million (excluding the
estimated unfunded development costs totaling $2.4 million on properties under
construction) at August 31, 1997. The New Properties are located in 20 states,
will contain approximately 610,100 leasable square feet and are 100% leased
under net leases, with an average initial lease term of 14.4 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 10.3%, 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
S-21
<PAGE>
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 eight months of 1997, the Company also invested $3.1 million in
12 development properties acquired in 1996.
ACQUISITION OF 21 PROPERTIES IN SEPTEMBER 1997. During the month of
September 1997, the Company acquired 21 properties (the "September Properties"),
all of which were completed and occupied. The September Properties were acquired
for an aggregate cost of approximately $54.4 million. These properties are
located in 10 states, contain approximately 344,900 leasable square feet and are
100% leased under net leases with an average initial lease term of 15 years. The
September Properties added two new industries to the portfolio, footwear and
apparel, and are leased to Bob's Stores, Hollywood Video, Jiffy Lube, Just For
Feet, Linens 'N Things, OfficeMax, and Speedy Brake & Muffler. The weighted
average annual unleveraged return on the cost of the September Properties is
estimated to be 10.4%, computed as estimated contractual net operating income,
which in the case of a net leased property is equal to the base rent for the
first year of each lease, divided by total acquisition costs. As noted above, no
assurance can be given that the actual return on the cost of the September
Properties will not differ from the foregoing percentage.
NOTES OFFERING. On May 6, 1997 Realty Income issued $110 million of 7 3/4%
Notes due 2007. The Notes were sold at 99.929% of par for a yield to the
investors of 7.76%. After taking into effect the $1.1 million gain realized on a
treasury interest rate lock agreement entered into by the Company, the effective
interest rate to the Company on the Notes is 7.62%. The net proceeds from the
sale of the Notes were used to repay $93.7 million of outstanding borrowings
under the Company's Credit Facility and to acquire properties. Currently, there
is no formal trading market for the Notes and the Company has not listed and
does not intend to list the Notes on any security exchange.
The Company received investment grade credit ratings 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- to
the Company's senior debt. These ratings are subject to change based upon, among
other things, the Company's results of operations and financial condition.
S-22
<PAGE>
NEW PROPERTIES
The following table sets forth information concerning the New Properties as
of August 31, 1997.
<TABLE>
<CAPTION>
APPROX.
INITIAL LEASE LEASABLE
PERIOD ACQUIRED TENANT INDUSTRY LOCATION TERM (YEARS) SQUARE FEET
- --------------- -------------------- ------------------------ ------------------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
1st Qtr 1997 Aaron Rents Home Furnishings Arlington, TX 10.0 68,100
1st Qtr 1997 Aaron Rents Home Furnishings Cedar Park, TX 10.0 23,300
1st Qtr 1997 Aaron Rents Home Furnishings Houston, TX 10.0 70,300
1st Qtr 1997 Barnes & Noble Book Store Tampa, FL 14.2 30,000
1st Qtr 1997 Econo Lube Auto Service Greensboro, NC 15.0 2,300
1st Qtr 1997 Econo Lube Auto Service Columbia, SC 15.0 2,800
1st Qtr 1997 Econo Lube Auto Service Durham, NC 15.0 2,800
1st Qtr 1997 Econo Lube Auto Service Charleston, SC 15.0 2,800
1st Qtr 1997 Econo Lube Auto Service Greenville, SC 15.0 2,800
1st Qtr 1997 Jiffy Lube Auto Service Springboro, OH 20.0 2,400
1st Qtr 1997 OfficeMax Office Supplies Lakewood, CA 14.6 28,700
2nd Qtr 1997 Aaron Rents Home Furnishings Ridgeland, MS 10.0 22,300
2nd Qtr 1997 Aaron Rents Home Furnishings Memphis, TN 10.0 51,500
2nd Qtr 1997 Aaron Rents Home Furnishings Webster, TX 10.0 22,500
2nd Qtr 1997 Best Buy Consumer Electronics Smyrna, GA 20.0 46,100
2nd Qtr 1997 Econo Lube(1) Auto Service Denver, CO 15.0 2,800
2nd Qtr 1997 Econo Lube(1) Auto Service Duluth, GA 15.0 2,800
2nd Qtr 1997 Econo Lube(1) Auto Service Garner, NC 15.0 2,800
2nd Qtr 1997 Econo Lube Auto Service Pineville, NC 15.0 2,800
2nd Qtr 1997 Jiffy Lube(1) Auto Service Brentwood, TN 20.0 2,000
2nd Qtr 1997 Linens 'N Things Home Accessories Omaha, NE 15.8 46,600
2nd Qtr 1997 OfficeMax Office Supplies Hutchinson, KS 15.0 23,500
2nd Qtr 1997 OfficeMax Office Supplies Salina, KS 15.0 23,500
2nd Qtr 1997 Petco Pet Supplies Dickson City, PA 14.7 16,000
2nd Qtr 1997 Quik Trip Convenience Store Dunwoody, GA 11.3 3,200
2nd Qtr 1997 Quik Trip Convenience Store Lithonia, GA 18.3 3,200
2nd Qtr 1997 Quik Trip Convenience Store Mableton, GA 17.4 3,200
2nd Qtr 1997 Quik Trip Convenience Store Norcross, GA 17.4 3,200
2nd Qtr 1997 Quik Trip Convenience Store Stone Mountain, GA 11.3 3,200
2nd Qtr 1997 Quik Trip Convenience Store Godfrey, IL 13.3 3,200
2nd Qtr 1997 Quik Trip Convenience Store Granite City, IL 13.3 3,200
2nd Qtr 1997 Quik Trip Convenience Store Madison, IL 13.3 3,200
2nd Qtr 1997 Quik Trip Convenience Store Tulsa, OK 11.3 3,200
2nd Qtr 1997 Speedy Brake Auto Service Southington, CT 15.1 5,300
2nd Qtr 1997 Speedy Brake Auto Service Billerica, MA 15.0 5,000
2nd Qtr 1997 Staples Office Supplies Helena, MT 14.7 24,600
2nd Qtr 1997 Staples Office Supplies New Philadelphia, OH 14.9 24,000
3rd Qtr 1997 East Coast Oil Convenience Store Midlothian, VA 15.0 2,400
3rd Qtr 1997 Econo Lube(1) Auto Service Flagstaff, AZ 15.0 2,800
3rd Qtr 1997 Econo Lube(1) Auto Service Midwest City, OK 15.0 2,800
3rd Qtr 1997 Econo Lube(1) Auto Service The Village, OK 15.0 2,800
3rd Qtr 1997 Econo Lube Auto Service Houston, TX 15.0 2,600
3rd Qtr 1997 Hollywood Video Video Rental Lubbock, TX 15.0 7,500
--- -----------
Average/Total 14.4 610,100
--- -----------
--- -----------
</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.
S-23
<PAGE>
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 should produce consistent, predictable income
and the potential for long-term capital appreciation. Under a net lease
agreement, the 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, in some cases, 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, 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 August 31,
1997, Realty Income has acquired and leased back to national and regional retail
chains 744 properties (including 31 properties that have been sold) and has
collected approximately 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.
S-24
<PAGE>
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
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 investment committee meets weekly to review industry and tenant
research and property due diligence, and the executive committee meets at least
monthly to discuss 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
S-25
<PAGE>
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 leased properties for
long-term investment, the Company actively manages its portfolio of net leased
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's $130 million revolving, unsecured acquisition Credit Facility
expires in November 1999. As of September 29, 1997, the outstanding balance on
the Credit Facility was $67.6 million with an effective interest rate of
approximately 6.9%. A commitment fee of 0.15% per annum accrues on the average
amount of the unused available credit commitment. The Company is and has been in
compliance with the various leverage and interest coverage ratio limitations
required by the Credit Facility. The Credit Facility has been and is expected to
be used to acquire additional retail properties leased to national and regional
retail chains under long term net lease agreements.
The Company utilizes its 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 $60
to $100 million), the Company intends to refinance those borrowings with the net
proceeds of long-term or permanent financing, which 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 Common Stock offered
hereby and application of the estimated net proceeds therefrom to repay
borrowings under the Credit Facility occurring on October 8, 1997, the Company's
total indebtedness would have been approximately 13.7% 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 the NYSE set
forth on the cover page of the Prospectus Supplement plus total indebtedness).
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 the Company will require additional sources of capital to
fund property acquisitions.
The Company received investment grade credit ratings 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- to
the Company's senior debt. These ratings are subject to change based upon, among
other things, the Company's results of operations and financial condition.
COMPETITIVE ADVANTAGES
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
S-26
<PAGE>
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-eight 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 5.7
million square feet of leasable space.
The tenants of Realty Income's freestanding retail properties provide
goods and services which satisfy basic consumer 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 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
1997, 1996 and 1995, the Company added the book store, consumer electronics,
convenience store, home furnishings and accessories, office supply, pet
supply and video rental industries to the portfolio.
(iv) MANAGEMENT SPECIALIZATION: The Company believes that its
management's specialization in single-tenant retail 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 August 31, 1997, the Company owned a diversified portfolio of 774
properties in 42 states containing over 5.7 million square feet of leasable
space. The portfolio consisted of 98 automotive parts and accessories stores, 72
automotive service locations, one book store, 317 child care centers, 37
consumer electronics stores, 52 convenience stores, 11 home furnishings stores,
five office supplies stores, one pet supplies store, 167 restaurant facilities,
one video rental store and 12 other properties. Of the 774 properties, 710 or
92% were leased to national or regional retail chain operators; 41 or 5% were
leased to franchisees of retail chain operators; 16 or 2% were leased to other
tenant types; and seven or less than 1% were available for lease. At August 31,
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 maintenance.
S-27
<PAGE>
The Company's net leased retail properties are retail locations primarily
leased to national and regional retail chain store operators. At August 31,
1997, the properties averaged approximately 7,500 square feet of leasable retail
space on approximately 44,500 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 state-by-state information regarding
the properties owned by the Company as of August 31, 1997.
<TABLE>
<CAPTION>
NUMBER APPROX. PERCENT OF TOTAL
OF LEASABLE ANNUALIZED ANNUALIZED
STATE PROPERTIES PERCENT LEASED SQUARE FEET BASE RENT(1) BASE RENT
- -------------------- ------------- ----------------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Alabama 6 100% 42,300 $ 319,000 0.5%
Arizona 27 99 181,200 2,407,000 3.6
California 53 92 1,001,900 10,392,000 15.7
Colorado 43 98 236,400 3,067,000 4.6
Connecticut 5 100 22,500 337,000 0.5
Florida 48 100 457,300 4,227,000 6.4
Georgia 44 100 252,500 3,480,000 5.3
Idaho 11 100 52,000 656,000 1.0
Illinois 28 100 192,200 2,389,000 3.6
Indiana 22 100 117,600 1,408,000 2.1
Iowa 8 100 51,700 456,000 0.7
Kansas 17 100 176,000 1,862,000 2.8
Kentucky 11 100 33,300 847,000 1.3
Louisiana 2 100 10,700 126,000 0.2
Maryland 6 100 34,900 505,000 0.8
Massachusetts 5 100 25,900 534,000 0.8
Michigan 5 100 26,900 355,000 0.5
Minnesota 17 100 118,400 1,713,000 2.6
Mississippi 12 100 128,900 901,000 1.4
Missouri 27 100 163,600 1,908,000 2.9
Montana 2 100 30,000 276,000 0.4
Nebraska 9 100 93,700 1,071,000 1.6
Nevada 5 100 29,100 353,000 0.5
New Hampshire 1 100 6,400 122,000 0.2
New Jersey 2 100 22,700 346,000 0.5
New Mexico 3 100 12,000 103,000 0.2
New York 5 100 38,300 539,000 0.8
North Carolina 22 100 87,800 1,466,000 2.3
Ohio 49 100 234,000 3,668,000 5.6
Oklahoma 12 100 69,000 707,000 1.1
Oregon 17 100 92,400 1,062,000 1.6
Pennsylvania 5 100 44,300 676,000 1.0
South Carolina 19 100 75,000 1,152,000 1.7
South Dakota 1 100 6,100 79,000 0.1
Tennessee 12 100 132,400 1,281,000 1.9
Texas 130 99 1,015,300 9,317,000 14.1
Utah 7 100 45,400 591,000 0.9
Virginia 17 100 81,500 1,323,000 2.0
Washington 42 98 249,700 2,959,000 4.5
West Virginia 2 100 16,800 147,000 0.2
</TABLE>
S-28
<PAGE>
<TABLE>
<CAPTION>
NUMBER APPROX. PERCENT OF TOTAL
OF LEASABLE ANNUALIZED ANNUALIZED
STATE PROPERTIES PERCENT LEASED SQUARE FEET BASE RENT(1) BASE RENT
- -------------------- ------------- ----------------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Wisconsin 11 100% 60,500 $ 738,000 1.1%
Wyoming 4 100 20,100 264,000 0.4
--- --- ----------- ------------- -----
Total/Average 774 99% 5,788,700 $ 66,129,000 100.0%
--- --- ----------- ------------- -----
--- --- ----------- ------------- -----
</TABLE>
- ------------------------------
(1) Annualized base rent is calculated by multiplying the monthly contractual
base rent as of August 31, 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 August 31, 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.
The following table sets forth certain information regarding the Company's
properties as of August 31, 1997, classified according to the business of the
respective tenants.
<TABLE>
<CAPTION>
REALTY
APPROXIMATE INCOME APPROXIMATE ANNUALIZED
INDUSTRY TOTAL OWNED LEASABLE BASE
TENANT(1) SEGMENT(1) LOCATIONS(2) LOCATIONS SQUARE FOOTAGE RENT(3)
- --------------------------- --------------------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
AUTOMOTIVE PARTS & ACCESSORIES
CSK Auto Parts & Accessories 580 79 409,200 $ 4,192,000
Discount Tire Parts & Accessories 310 18 104,900 1,178,000
Other Parts & Accessories -- 1 3,400 49,000
--- -------------- -------------
TOTAL AUTOMOTIVE PARTS & ACCESSORIES 98 517,500 5,419,000
AUTOMOTIVE SERVICE
Econo Lube 'N Tune Service 210 26 71,800 1,763,000
Jiffy Lube Service 1,400 30 70,200 1,935,000
Q-Lube Service 490 4 7,600 183,000
R&S Strauss Service 110 2 31,200 431,000
Speedy Brake Service 1,080 9 51,200 722,000
Other Service -- 1 3,100 41,000
--- -------------- -------------
TOTAL AUTOMOTIVE SERVICE 72 235,100 5,075,000
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
KinderCare Learning Centers Child Care 1,150 13 79,800 1,087,000
La Petite Academy Child Care 790 167 959,000 8,738,000
Other Child Care -- 3 13,300 70,000
--- -------------- -------------
TOTAL CHILD CARE 317 2,016,100 23,507,000
CONSUMER ELECTRONICS
Best Buy Consumer Electronics 270 3 150,900 1,738,000
Rex Stores Consumer Electronics 230 34 408,300 2,694,000
--- -------------- -------------
TOTAL CONSUMER ELECTRONICS 37 559,200 4,432,000
</TABLE>
S-29
<PAGE>
<TABLE>
<CAPTION>
REALTY
APPROXIMATE INCOME APPROXIMATE ANNUALIZED
INDUSTRY TOTAL OWNED LEASABLE BASE
TENANT(1) SEGMENT(1) LOCATIONS(2) LOCATIONS SQUARE FOOTAGE RENT(3)
- --------------------------- --------------------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
CONVENIENCE STORES
7-ELEVEN Convenience Stores 20,240 3 9,700 $ 235,000
Dairy Mart Convenience Stores 1,020 22 66,500 1,522,000
East Coast Oil Convenience Stores 40 3 8,800 286,000
Quick Trip Convenience Stores 330 9 28,800 924,000
The Pantry Convenience Stores 400 14 34,400 1,333,000
Other Convenience Stores -- 1 2,100 0
--- -------------- -------------
TOTAL CONVENIENCE STORES 52 150,300 4,300,000
HOME FURNISHINGS & ACCESSORIES
Aaron Rents Home Furnishings 290 6 258,000 888,000
Levitz Furniture Home Furnishings 130 4 376,400 2,502,000
Linens 'N Things Home Accessories 170 1 46,600 561,000
--- -------------- -------------
TOTAL HOME FURNISHINGS & ACCESSORIES 11 681,000 3,951,000
OFFICE SUPPLIES
OfficeMax Office Supplies 560 3 75,700 854,000
Staples Office Supplies 560 2 48,600 456,000
--- -------------- -------------
TOTAL OFFICE SUPPLIES 5 124,300 1,310,000
PET SUPPLIES
Petco Pet Supplies 340 1 16,000 253,000
--- -------------- -------------
TOTAL PET SUPPLIES 1 16,000 253,000
RESTAURANTS
Carver's Dinner House 90 3 26,600 495,000
Don Pablo's Dinner House 70 7 60,700 607,000
Other Dinner House -- 12 93,100 887,000
Golden Corral Family 460 85 501,200 6,616,000
Sizzler Family 630 7 37,600 848,000
Other Family -- 2 11,600 108,000
Hardee's 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 -- 15 50,000 897,000
--- -------------- -------------
TOTAL RESTAURANTS 167 868,200 12,720,000
VIDEO RENTAL
Hollywood Video Video Rental 660 1 7,500 118,000
--- -------------- -------------
TOTAL VIDEO RENTAL 1 7,500 118,000
TOTAL OTHER Miscellaneous 12 583,500 4,594,000
--- -------------- -------------
TOTAL 774 5,788,700 $ 66,129,000
--- -------------- -------------
--- -------------- -------------
</TABLE>
- ------------------------------
(1) See "Business and Properties--Matters Pertaining to Certain Properties and
Tenants."
(2) Approximate total number of retail locations in operation by each tenant
(including both owned and franchised locations), based on information
provided to Realty Income by the respective tenants.
(3) Annualized base rent is calculated by multiplying the monthly contractual
base rent as of August 31, 1997 for each of the properties owned as of that
date 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 August 31, 1997. The estimated contractual base
rent for the
S-30
<PAGE>
properties under construction is based upon the estimated acquisition costs
of the properties. Annualized base rent does not include percentage rents,
if any, that may be payable under leases covering certain of the properties.
Of the 774 properties in the portfolio at August 31, 1997, 767 were
single-tenant properties with the remaining being multi-tenant properties. As of
August 31, 1997, 761 or over 99% of the 767 single-tenant properties were net
leased with an average remaining lease term (excluding extension options) of
approximately 8.4 years. The following table sets forth certain information
regarding the timing of the initial lease term expirations (excluding extension
options) on the Company's 761 net leased, single-tenant retail properties as of
August 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
LEASES ANNUALIZED TOTAL ANNUALIZED
YEAR EXPIRING BASE RENT(1) RENT
- --------- ----------- ------------- -----------------
<S> <C> <C> <C>
1997 7 $ 281,000 0.4%
1998 5 204,000 0.3
1999 29 1,283,000 2.0
2000 34 1,985,000 3.2
2001 53 3,967,000 6.4
2002 73 5,874,000 9.4
2003 67 5,132,000 8.2
2004 109 8,836,000 14.1
2005 86 6,049,000 9.7
2006 29 2,449,000 3.9
2007 85 5,373,000 8.6
2008 39 3,174,000 5.1
2009 12 896,000 1.4
2010 37 3,037,000 4.9
2011 31 3,538,000 5.7
2012 24 2,669,000 4.3
2013 2 627,000 1.0
2014 2 265,000 0.4
2015 25 4,795,000 7.7
2016 7 1,357,000 2.2
2017 4 618,000 1.0
2018 1 39,000 0.1
--- ------------- -----
Total 761(2) $ 62,448,000 100.0%
--- ------------- -----
--- ------------- -----
</TABLE>
- ------------------------------
(1) Annualized base rent is calculated by multiplying the monthly contractual
base rent as of August 31, 1997 for each of the properties owned as of that
date 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 August 31, 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, if any, that may be payable under leases covering certain
of the properties.
(2) The table does not include seven multi-tenant properties, one of which is
vacant, and six vacant, unleased single-tenant properties owned by the
Company. The lease expirations for properties under construction are based
on the estimated dates of completion of such properties.
S-31
<PAGE>
PROPERTY PORTFOLIO. Set forth below is a list of all 774 properties owned
by the Company as of August 31, 1997, ordered by state:
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ALABAMA--6 PROPERTIES
La Petite Academy 135 E. Riverchase Pkwy. Birmingham AL 1984 5,100
La Petite Academy 121 Kohler Rd. Huntsville AL 1982 5,000
La Petite Academy 5459 Able Ct. Mobile AL 1982 5,100
La Petite Academy 1512 Shelton Beach Rd. Mobile AL 1985 5,100
Rex Stores 1710 Highway 21 South Oxford AL 1996 10,000
Rex Stores 4730 McFarland Blvd. East Tuscaloosa AL 1996 12,000
------------
42,300
------------
ARIZONA--27 PROPERTIES
Children's World 1114 W. Elliott Rd. Chandler AZ 1986 7,300
Children's World 150 N. Elm St. Chandler AZ 1987 7,600
Children's World 1997 Elliott Rd. Chandler AZ 1987 7,600
Burger King 80 W. 16th St. Douglas AZ 1985 2,700
Econo Lube 'N Tune 1830 East Route 66 Flagstaff AZ 1997 2,800
Carver's 8172 West Bell Road Glendale AZ 1996 8,100
La Petite Academy 17220 N. 43rd Ave. Glendale AZ 1984 5,100
Auto Mall 3944 E. Main St. Mesa AZ 1986 13,900
Children's World 2750 S. Dobson Rd. Mesa AZ 1988 7,300
Children's World 1236 S. Stapley Dr. Mesa AZ 1988 7,300
Children's World 6810 W. Thunderbird Rd. Peoria AZ 1988 7,300
Auto Mall 2630 E. Bell Rd. Phoenix AZ 1986 15,300
Checker Autoworks 1823 E. McDowell Phoenix AZ 1987 3,100
Checker Autoworks 4444 W. Thomas Rd. Phoenix AZ 1987 5,400
Checker Autoworks 52 E. Baseline Rd. Phoenix AZ 1989 5,400
Children's World 16044 N. 29th Ave. Phoenix AZ 1988 7,300
KinderCare 15626 S. 42Nd St. Phoenix AZ 1990 6,100
KinderCare 4856 E. Greenway Rd. Phoenix AZ 1990 6,100
Children's World 16605 N. 56th St. Scottsdale AZ 1987 7,500
Children's World 6311 S. Rural Rd. Tempe AZ 1990 7,100
Children's World 7570 S. Willow Dr. Tempe AZ 1988 7,500
Checker Autoworks 1401 W. Prince Rd. Tucson AZ 1987 5,400
Children's World 7770 Wrightstown Rd. Tucson AZ 1988 7,200
Children's World 8055 E. 22nd St. Tucson AZ 1988 7,200
Discount Tire Store 2106 S. Alvernon Way Tucson AZ 1990 6,600
Taco Bell 7140 N. Thornydale Rd. Tucson AZ 1986 2,200
Discount Tire Store 780 E. 32nd St. Yuma AZ 1990 4,800
------------
181,200
------------
CALIFORNIA--53 PROPERTIES
Children's World 4277 Old Topanga Cyn. Rd. Calabasas CA 1985 5,800
Children's World 5739 El Camino Carmichael CA 1986 6,100
Levitz Furniture 31833 Date Palm Drive Cathedral City CA 1995 40,000
Children's World 6010 Riverside Dr. Chino CA 1983 7,200
E.T. Tacos 12382 Central Ave. Chino CA 1975 1,400
Regency Realtors 12360 Central Ave. Chino CA 1975 2,800
Children's World 612 Paseo Del Rey Chula Vista CA 1987 6,800
Econo Lube 'N Tune 3008 N. Second Street Chula Vista CA 1996 2,800
Levitz Furniture 1695 Willow Pass Road Concord CA 1995 102,900
Children's World 510 W. Second St. Corona CA 1984 7,200
Pizza Hut 233 S. Gentle Springs Ln. Diamond Bar CA 1978 2,300
Children's World 1471 Granite Hills Dr. El Cajon CA 1985 6,800
Children's World 1578 S. El Camino Real Encinitas CA 1987 6,600
Enterprise Rent-A-Car 175 W. Washington Ave. Escondido CA 1992 3,000
</TABLE>
S-32
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CALIFORNIA--53 PROPERTIES
(CONTINUED)
La Petite Academy 1300 N. Escondido Blvd. Escondido CA 1987 6,800
Vacant 130 W. Woodward Ave. Escondido CA 1984 36,500
La Petite Academy 410 Glenn Dr. Folsom CA 1987 6,800
Medical 21 2828 Fresno St. Fresno CA 1982 24,400
Alberto's Mexican Food 1974 N. Placentia Ave. Fullerton CA 1972 2,600
Vacant 1978 N. Palm Ave. Fullerton CA 1972 2,100
Ron's Auto Parts 1964 N. Placentia Ave. Fullerton CA 1972 3,400
Kragen Autoworks 10101 Olympia Park Rd. Grass Valley CA 1988 5,700
Vacant 40844 Florida Ave. Hemet CA 1977 2,100
Kragen Autoworks 501 S. Hwy. 49 Jackson CA 1988 5,000
OfficeMax 4949 Lakewood Blvd. Lakewood CA 1997 28,700
La Petite Academy 23421 Madero St. Mission Viejo CA 1993 7,500
Children's World 23268 Olivewood Plaza Dr. Moreno Valley CA 1987 6,900
Taco Bell 18426 Nordhoff St. Northridge CA 1970 1,700
Children's World 2860 Thunder Dr. Oceanside CA 1985 6,800
La Petite Academy 1709 E. Palmdale Blvd. Palmdale CA 1988 7,700
Pay N Play 15607 Lakewood Blvd. Paramount CA 1983 5,700
La Petite Academy 11378 Coloma Rd. Rancho Cordova CA 1989 7,400
Children's World 10110 Church St. Rancho Cucamonga CA 1987 10,600
Sizzler 9588 Baseline Rd. Rancho Cucamonga CA 1981 5,400
Taco Bell 9383 Foothill Blvd. Rancho Cucamonga CA 1985 1,900
Golden Corral 250 Antelope Red Bluff CA 1986 5,500
Der Wienerschnitzel 1246 University Ave. Riverside CA 1976 1,900
Vacant 3630 Park Sierra Drive Riverside CA 1981 7,600
La Petite Academy 1800 Eureka Rd. Roseville CA 1987 7,500
Children's World 2500 Natomas Park Dr. Sacramento CA 1987 6,000
Kragen Autoworks 3659 Bradshaw Rd. Sacramento CA 1987 4,800
Empire 7905-65 Silverton Ave. San Diego CA 1987 220,100
Silverton 7920-60 Silverton Ave. San Diego CA 1986 111,700
Trade Center 9235-75 Trade Pl. San Diego CA 1986 135,500
Sizzler 101 N. Village Ct. San Dimas CA 1981 5,000
Boston Market 2421 San Ramon Valley Blvd. San Ramon CA 1983 10,200
La Petite Academy 9580 Carlton Hills Blvd. Santee CA 1987 6,600
Children's World 5165 Cochran St. Simi Valley CA 1985 7,600
Best Buy 390 North Moorpark Road Thousand Oaks CA 1996 59,200
Kragen Autoworks 693 N. Goldenstate Blvd. Turlock CA 1987 5,500
Taco Bell 14232 Newport Blvd. Tustin CA 1970 1,100
La Petite Academy 24925 Anza Dr. Valencia CA 1988 8,000
Children's World 20121 E. Alisu Ct. Walnut CA 1986 10,700
------------
1,001,900
------------
COLORADO--43 PROPERTIES
Econo Lube 5425 West 80th Avenue Arvada CO 1996 2,500
Econo Lube 'N Tune Wadsworth & West 54th Arvada CO 1996 2,800
Children's World 14551 E. Tennessee Ave. Aurora CO 1989 8,300
Children's World 3409 W. Fairplay Way Aurora CO 1986 7,400
Children's World 12291 E. Cornell Ave. Aurora CO 1987 7,300
Discount Tire Store 1160 S. Chambers Rd. Aurora CO 1990 5,000
Vacant 2355 30th St. Boulder CO 1984 8,500
Children's World 805 Burbank St. Broomfield CO 1983 5,000
Econo Lube 'N Tune 1020 Highway 287 Broomfield CO 1996 2,800
La Petite Academy 13009 Westlake Dr. Broomfield CO 1988 5,500
Checker Autoworks 2149 Fremont Dr. Canon City CO 1987 3,100
Children's World 1470 Chapel Hills Dr. Colorado Springs CO 1986 6,200
Discount Tire Store 305 N. Academy Blvd. Colorado Springs CO 1990 4,400
Discount Tire Store 1770 Dublin Blvd. Colorado Springs CO 1993 5,000
Hardee's 1414 Harrison Rd. Colorado Springs CO 1986 3,700
</TABLE>
S-33
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
COLORADO--43 PROPERTIES
(CONTINUED)
Hardee's 1508 N. Academy Blvd. Colorado Springs CO 1987 3,300
La Petite Academy 2760 Purgatory Colorado Springs CO 1982 5,100
La Petite Academy 6625 Delmonico Dr. Colorado Springs CO 1983 5,100
Checker Autoworks 2887 N. Colorado Blvd. Denver CO 1987 5,900
Checker Autoworks 7701 E. Colfax Ave. Denver CO 1988 5,600
Checker Autoworks 290 S. Broadway Denver CO 1988 5,600
Econo Lube 'N Tune 700-710 South Broadway Denver CO 1997 2,800
Jiffy Lube 5869 Leetsdale Dr. Denver CO 1985 2,000
Children's World 6625 S. Dayton St. Englewood CO 1986 6,000
Children's World 6960 S. Holly Circle Englewood CO 1986 7,300
Children's World 2140 Valley Forge Fort Collins CO 1986 7,400
Children's World 1990 S. Lemay Fort Collins CO 1986 7,300
La Petite Academy 4525 Boardwalk, Bldg. T Fort Collins CO 1982 5,200
La Petite Academy 3519 W. 12th St. Greeley CO 1984 5,100
Checker Autoworks 6607 S. Broadway Littleton CO 1988 5,700
Children's World 5104 S. Field St. Littleton CO 1988 8,300
Children's World 6588 W. Ottawa Ave. Littleton CO 1988 8,200
La Petite Academy 11550 W. Burgundy Littleton CO 1987 5,500
Children's World 851 Crisman Dr. Longmont CO 1986 7,400
La Petite Academy 1970 Centennial Dr. Louisville CO 1984 5,100
Golden Corral 1825 E. Main St. Montrose CO 1987 6,100
La Petite Academy 11105 S. Pikes Peak Dr. Parker CO 1987 5,400
Discount Tire Store 1010 W. Hwy. 50 Pueblo CO 1990 4,600
Hardee's 240 Main St. Security CO 1986 3,300
Golden Corral 102 Hayes Ave. Sterling CO 1984 5,100
Econo Lube 'N Tune 651 E. 120th Avenue Thornton CO 1996 2,900
Children's World 8851 Field St. Westminster CO 1989 8,300
La Estrellita Enterprises,Inc 7617 W. 88th Ave. Westminster CO 1984 9,300
------------
236,400
------------
CONNECTICUT--5 PROPERTIES
Speedy Brake & Muffler 902-910 Wethersfield Avenue Hartford CT 1996 10,000
Dairy Mart 653 Center Street Manchester CT 1995 2,000
Speedy Brake & Muffler 445 Queen Street Southington CT 1997 5,300
Dairy Mart 506 Talcotville Road Vernon CT 1995 2,400
Dairy Mart 1309 Boston Post Road Westbrook CT 1995 2,800
------------
22,500
------------
FLORIDA--48 PROPERTIES
La Petite Academy 6919 E. State Route 70 Bradenton FL 1988 5,200
Rex Stores 5735 14th Street West Bradenton FL 1996 6,300
Sizzler 3315 So. U.S. Hwy. 17-92 Casselberry FL 1989 5,300
La Petite Academy 1880 McMullen Booth Rd. Clearwater FL 1981 4,600
Golden Corral 505 N. Orange Ave. Green Cove Sprgs FL 1984 5,100
Arby's 9171 Baymeadows Rd. Jacksonville FL 1985 3,500
Arby's 3939 W. University Blvd. Jacksonville FL 1985 3,300
Jiffy Lube 2837 Townsend Blvd. Jacksonville FL 1985 4,000
La Petite Academy 3720 San Jose Pl. Jacksonville FL 1981 4,600
La Petite Academy 50 St. John's Bluff Jacksonville FL 1981 4,600
La Petite Academy 6601 Argyle Forest Jacksonville FL 1989 5,400
La Petite Academy 17265 Central Blvd. Jupiter FL 1985 4,700
Jiffy Lube 1950 N. State Rd. Lauderdale Lakes FL 1986 1,900
La Petite Academy 3228 Holiday Springs Margate FL 1986 5,000
Rex Stores 100 Mary Esther Cutoff MaryEsther FL 1996 8,200
La Petite Academy 8200 Devereux Drive Melbourne FL 1993 6,000
Rex Stores 4080 W. New Haven Avenue Melbourne FL 1996 8,000
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
FLORIDA--48 PROPERTIES
(CONTINUED)
Rex Stores 1625 E. Merritt Island Merritt Island FL 1996 10,000
Causeway
La Petite Academy 4400 Hwy. 20, #710 Niceville FL 1986 5,000
Rex Stores 3055 S.W. College Road Ocala FL 1996 10,000
La Petite Academy 7698 Silver Star Rd. Orlando FL 1985 4,700
La Petite Academy 6573 Old Wintergarden Rd. Orlando FL 1987 5,400
La Petite Academy 3382 Rouse Rd. Orlando FL 1987 6,600
La Petite Academy 12300 Landstar Blvd. Orlando FL 1989 5,400
Sizzler 4525 S. Semoran Blvd. Orlando FL 1985 6,200
Sizzler 912 W. Colonial Dr. Orlando FL 1986 6,300
Taco Bell 9891 International Dr. Orlando FL 1988 3,700
La Petite Academy 205 Alexandria Blvd. Oviedo FL 1987 5,300
Lil Angels 518 S. Tyndall Panama City FL 1982 4,600
La Petite Academy 9601 Pickwood Dr. Pensacola FL 1989 5,400
Rex Stores 6340 N. Pensacola Blvd. Pensacola FL 1996 64,600
La Petite Academy 153 Sparrow Dr. Royal Palm Beach FL 1988 5,400
Jiffy Lube 7025 Seminole Blvd. Seminole FL 1985 2,400
La Petite Academy 1245 Kass Circle Spring Hill FL 1987 5,400
La Petite Academy 135 Nix Boat Yard Rd. St. Augustine FL 1981 4,400
Jiffy Lube 4359 N. University Blvd. Sunrise FL 1986 1,800
La Petite Academy 4360 Springtree Sunrise FL 1982 4,600
La Petite Academy 13785 N.W. Fifth St. Sunrise FL 1989 5,500
La Petite Academy 3472 N. Monroe St. Tallahassee FL 1982 4,600
Rex Stores 2450 Apalachee Pkwy. Tallahassee FL 1996 10,600
Barnes & Noble 11802 North Dale Mabry Hwy. Tampa FL 1997 30,000
Jiffy Lube 8303 N. Dale Mabry Hwy. Tampa FL 1985 2,400
Jiffy Lube 130 S. Dale Mabry Hwy. Tampa FL 1985 2,400
Jiffy Lube 7202 W. Hillsborough Ave. Tampa FL 1986 2,000
La Petite Academy 13502 S. Village Dr. Tampa FL 1981 4,600
Rex Stores 4220 S. Washington Avenue Titusville FL 1996 12,000
Rex Stores 1860 Tamiami Trail Venice FL 1996 8,200
Levitz Furniture 1540 Semoran Blvd. Winter Park FL 1995 122,100
------------
457,300
------------
GEORGIA--44 PROPERTIES
Jiffy Lube 1742 Howell Mill Rd. Atlanta GA 1985 2,000
Jiffy Lube 3194 Norcross-Tucker Rd. Atlanta GA 1985 2,000
Minit Lube 3745 Hwy. 78 Bogart GA 1985 1,900
La Petite Academy 9633-A Hwy. 5 Douglasville GA 1984 5,000
Econo Lube 'N Tune Peachtree Industrial Blvd. Duluth GA 1997 2,800
Children's World 4630 N. Shallowford Dunwoody GA 1988 8,300
Quick Trip 7884 Roswell Road Dunwoody GA 1997 3,200
La Petite Academy 300 Fairview Rd. Ellenwood GA 1988 5,500
La Petite Academy 108 Antioch Rd. Fayetteville GA 1989 5,400
Minit Lube 853 S.W. Jesse Jewell Pkwy. Gainesville GA 1985 1,900
Taco Bell 4624 Augusta Rd. Garden City GA 1989 2,400
Golden Corral 708 E. Oglethorpe Ave. Hinesville GA 1984 5,000
Taco Bell 229 General Screven Way Hinesville GA 1987 2,400
La Petite Academy 1593 S. Hwy. 29 Lawrenceville GA 1988 5,400
Children's World 917 Killian Hill Rd. Lilburn GA 1986 7,300
La Petite Academy 1806 Lee Road Lithia Springs GA 1989 5,500
Golden Corral 2950 Woodrow Dr. Lithonia GA 1985 4,800
La Petite Academy 474 S. Deshon Rd. Lithonia GA 1991 6,600
Quick Trip 7225 Rockbridge Road Lithonia GA 1997 3,200
Quick Trip 7130 Mableton Parkway Mabelton GA 1997 3,200
Children's World 2566 E. Piedmont Rd. Marietta GA 1988 8,300
Children's World 1060 Franklin Rd. Marietta GA 1988 8,400
Children's World 2090 Lower Roswell Rd. Marietta GA 1988 8,400
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
GEORGIA--44 PROPERTIES
(CONTINUED)
Children's World 3829 Roswell Rd. Marietta GA 1988 7,300
Children's World 3899 N.E. Canton Hwy. Marietta GA 1988 7,300
Jiffy Lube 688 Powder Springs Rd. Marietta GA 1985 3,400
Jiffy Lube 3380 Canton Hwy. Marietta GA 1986 4,000
La Petite Academy 1805 Williams Dr. Marietta GA 1988 5,400
La Petite Academy 3511 Old Petersburg Rd. Martinez GA 1987 5,400
Quick Trip 6065 Singleton Road Norcross GA 1997 3,200
Minit Lube 6579 Hwy. 85 Riverdale GA 1986 1,900
Minit Lube 2301 S.W. Shorter Ave. Rome GA 1985 1,900
Rex Stores 2429 Shorter Avenue Rome GA 1996 10,000
Taco Bell 2631 Skidaway Rd. Savannah GA 1987 1,600
Taco Bell 302 Mall Blvd. Savannah GA 1987 1,600
Best Buy 2460 Cobb Parkway Smyrna GA 1997 46,100
Children's World 1635 Cooper Lake Dr. Smyrna GA 1988 8,400
Taco Bell 224 S. Main St. Statesboro GA 1989 2,400
La Petite Academy 925 W. State Hwy. 138 Stockbridge GA 1989 5,400
Children's World 777 Hambrick Rd. Stone Mountain GA 1988 8,300
Golden Corral 1273 S. Hairston Rd. Stone Mountain GA 1986 6,400
La Petite Academy 693 Lauren Pkwy. Stone Mountain GA 1985 5,200
Quick Trip 3830 Rockbridge Road Stone Mountain GA 1997 3,300
La Petite Academy 1703 Gornto Rd. Valdosta GA 1986 5,100
------------
252,500
------------
IDAHO--11 PROPERTIES
Schuck's Autoworks 4750 Overland Rd. Boise ID 1988 4,800
Schuck's Autoworks 1407 W. State St. Boise ID 1988 4,800
Taco Bell 6521 Fairview Boise ID 1988 2,700
Taco Bell 3377 W. State St. Boise ID 1988 2,200
Schuck's Autoworks 223 Appleway Ave. Coeur D'Alene ID 1987 5,700
Schuck's Autoworks 1907 W. 19th Ave. Lewiston ID 1987 5,700
Schuck's Autoworks 1420 Pullman Rd. Moscow ID 1987 5,000
Schuck's Autoworks 156 Caldwell Blvd. Nampa ID 1988 4,800
Sizzler 501 Caldwell Blvd. Nampa ID 1986 5,100
Golden Corral 240 N.E. Second St. Rexburg ID 1985 4,900
Schuck's Autoworks 780 Blue Lakes Blvd. Twin Falls ID 1988 6,300
------------
52,000
------------
ILLINOIS--28 PROPERTIES
Children's World 950 N. Lombard Addison IL 1986 8,400
KinderCare 100 Countryside Dr. Algonquin IL 1990 6,300
Golden Corral 2723 Corner Ct. Alton IL 1988 6,800
La Petite Academy 4105 Healthway Dr. Aurora IL 1988 5,600
Children's World 1050 W. Stearns Rd. Bartlett IL 1986 7,300
Children's World 590 Pinecrest Rd. Bolingbrook IL 1982 6,400
Children's World 140 N. Gary Carol Stream IL 1986 7,300
Golden Corral 844 N. Galena Dixon IL 1987 6,100
Children's World 1050 Bonaventure Dr. Elk Grove Village IL 1986 7,300
La Petite Academy 1030 Nerge Rd. Elk Grove Village IL 1988 7,900
Children's World 2264 Bloomingdale Glendale Heights IL 1988 8,100
Quick Trip 2809 Godfrey Road Godfrey IL 1997 3,200
Quick Trip 3120 Namoeki Road Granite City IL 1997 3,200
Children's World 1275 Jones Rd. Hoffman Estates IL 1989 7,800
La Petite Academy 3805 Huntington Blvd. Hoffman Estates IL 1989 5,500
La Petite Academy 14225 S. Bell Rd. Lockport IL 1987 6,800
Quick Trip 608 McCambridge Avenue Madison IL 1997 3,200
La Petite Academy 940 W. Hwy. 50 O'Fallon IL 1987 5,500
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ILLINOIS--28 PROPERTIES
(CONTINUED)
La Petite Academy 15851 Park Hill Dr. Orland Park IL 1987 5,100
Children's World 1653 N. Baldwin Rd. Palatine IL 1986 8,400
Rex Stores 3016 N. University Street Peoria IL 1996 8,800
Rex Stores 3782 N. Alpine Rockford IL 1996 10,100
Children's World 1080 W. Lake St. Roselle IL 1988 8,400
Golden Corral 1517 W. Main St. Salem IL 1987 6,900
La Petite Academy 651 Windsor Dr. Schaumburg IL 1987 6,700
Rex Stores One Drawbridge Road Springfield IL 1996 10,300
Children's World Five Phillip Rd. Vernon Hills IL 1986 7,400
Children's World 251 W. 63rd St. Westmont IL 1986 7,400
------------
192,200
------------
INDIANA--22 PROPERTIES
Rex Stores 3205 State Road 109 South Anderson IN 1996 15,600
Taco Bell 5310 Scatterfield Rd. Anderson IN 1988 2,300
Golden Corral 16th Hwy. 37 Bypass Bedford IN 1987 6,900
KinderCare 14907 Greyhound Ct. Carmel IN 1990 6,200
Golden Corral 1241 N. 13th St. Decatur IN 1987 5,600
KinderCare 7255 E. 116th St. Fishers IN 1990 6,600
Arby's 1613 Elkhart Rd. Goshen IN 1986 3,200
KinderCare 9735 Prairie Ave. Highland IN 1990 6,200
Car-X Muffler & Brake 5401 E. Thompson Road Indianapolis IN 1996 5,300
KinderCare 6750 Eagleview Dr. Indianapolis IN 1990 6,200
Burger King 418 S. Tillotson Ave. Muncie IN 1986 3,300
Rex Stores 457 E. McGilliard Road Muncie IN 1996 12,500
Taco Bell 2519 S. Madison St. Muncie IN 1988 1,600
Dairy Mart 3601 Grant Line Road New Albany IN 1995 2,500
Dairy Mart 3706 Charlestown Road New Albany IN 1995 2,800
Taco Bell 1486 Memorial Dr. New Castle IN 1987 2,200
La Petite Academy 11540 Fishers Dr. Noblesville IN 1985 5,100
Rex Stores 3014 E. Main Street Richmond IN 1996 6,400
Golden Corral Sw Corner Sr 44 & Amos Shelbyville IN 1986 6,000
Fazoli's Restaurant 52770 U.S. Route 33 South Bend IN 1986 3,300
Taco Bell 17610 No. U.S. Hwy. 31 Westfield IN 1989 2,300
La Petite Academy 50 N. Ford Rd. Zionsville IN 1987 5,500
------------
117,600
------------
IOWA--8 PROPERTIES
Golden Corral 301 E. First St. Ankeny IA 1983 5,100
Golden Corral 1312 S. Story St. Boone IA 1983 5,100
La Petite Academy 1350 Blairs Ferry Rd. Cedar Rapids IA 1992 6,100
Checker Autoworks 2826 W. Broadway Council Bluffs IA 1988 5,600
Rex Stores 2210 W. Broadway Council Bluffs IA 1996 9,000
Rex Stores 2833 Douglas Avenue Des Moines IA 1996 10,000
La Petite Academy 1504 Mall Drive Iowa City IA 1992 5,200
La Petite Academy 5305 Merle Hay Rd. Johnston IA 1991 5,600
------------
51,700
------------
KANSAS--17 PROPERTIES
Golden Corral 1138 Nelson Dr. Derby KS 1985 5,200
Golden Corral 2521 W. Central Ave. El Dorado KS 1986 5,200
Golden Corral 4705 Tenth St. Great Bend KS 1984 4,900
OfficeMax 1403 East 11th Avenue Hutchinson KS 1997 23,500
Checker Autoworks 2520 State Ave. Kansas City KS 1988 5,600
Checker Autoworks 7524 State Ave. Kansas City KS 1988 5,600
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
KANSAS--17 PROPERTIES
(CONTINUED)
Children's World 9740 Rosehill Rd. Lenexa KS 1989 8,100
Children's World 2001 E. Crossroads Ln. Olathe KS 1988 8,100
Econo Lube 'N Tune 13395 South Blackbob Road Olathe KS 1996 2,900
Children's World 11200 Mastin Rd. Overland Park KS 1988 8,100
OfficeMax 2920 Planet Avenue Salina KS 1997 23,500
Children's World 6350 Long Ave. Shawnee KS 1988 8,100
Best Buy 1600 Southwest Wanamaker Road Topeka KS 1996 45,600
La Petite Academy 2211 S.E. 29th St. Topeka KS 1985 4,900
Burger King 2020 E. 21st St. Wichita KS 1986 3,100
KinderCare 11818 W. Central Ave. Wichita KS 1990 6,200
La Petite Academy 331 S. Tyler Wichita KS 1986 7,400
------------
176,000
------------
KENTUCKY--11 PROPERTIES
Dairy Mart 218 Richmond Road Berea KY 1995 2,700
Dairy Mart 1605 N. Dixie Highway Elizabethtown KY 1995 2,700
The Pantry 197 Garden Mile Road Henderson KY 1995 2,400
Dairy Mart Walnut & Depot Streets Lebanon KY 1995 2,700
La Petite Academy 3665 Harrodsburg Rd. Lexington KY 1991 6,700
Taco Bell 2633 Richmond Rd. Lexington KY 1986 2,500
Dairy Mart 7201 Fegenbush Ln. Louisville KY 1995 2,700
Dairy Mart 13401 Dixie Highway Louisville KY 1995 3,700
Jiffy Lube 6508 Preston Hwy. Louisville KY 1985 1,900
Dairy Mart 10180 Highway 44 East Mt. Washington KY 1996 2,800
The Pantry 1816 Triplett Street Owensboro KY 1995 2,500
------------
33,300
------------
LOUISIANA--2 PROPERTIES
El Chico 1730 Metro Dr. Alexandria LA 1986 5,500
Golden Corral 1403 N. Lake Arthur Ave. Jennings LA 1985 5,200
------------
10,700
------------
MARYLAND--6 PROPERTIES
Jiffy Lube 6415 Coventry Way Clinton MD 1985 2,500
La Petite Academy 10101 Frederick Rd. Ellicott City MD 1988 6,700
Golden Corral 112 S. Hwy. 301 La Plata MD 1985 4,700
Children's World 16910 Georgia Ave. Olney MD 1987 6,700
Children's World 3999 St. Marks Dr. Waldorf MD 1984 6,500
La Petite Academy 100 Smallwood Dr. Waldorf MD 1987 7,800
------------
34,900
------------
MASSACHUSETTS--5 PROPERTIES
Children's World 90 Hayward Rd. Acton MA 1988 6,100
Speedy Brake & Muffler 726-728 Boston Road Billerica MA 1997 5,000
Children's World 81 Hosmer St. Marlborough MA 1988 6,100
Dairy Mart 1502 Newman Avenue Seekonk MA 1995 2,700
Children's World 6 Bellows Rd. Westborough MA 1988 6,000
------------
25,900
------------
MICHIGAN--5 PROPERTIES
Ponderosa 1521 N. Eaton St. Albion MI 1986 5,300
Children's World 211 N. Lilley Canton MI 1982 5,000
7-ELEVEN 5015 Richfield Road Flint MI 1995 3,200
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
MICHIGAN--5 PROPERTIES
(CONTINUED)
Don Pablo's 3145 Miller Road Flint MI 1995 7,800
Golden Corral 904 S. Centerville Rd. Sturgis MI 1987 5,600
------------
26,900
------------
MINNESOTA--17 PROPERTIES
Golden Corral 1615 S.E. Marshall St. Albert Lea MN 1987 6,600
Children's World 7561 142nd St. Apple Valley MN 1986 8,300
Children's World 7400 W. 109th St. Bloomington MN 1986 7,300
Children's World 7660 Kentucky Ave. Brooklyn Park MN 1986 8,400
Children's World 1604 N. Brookdale Dr. Brooklyn Park MN 1986 8,400
Children's World 4194 Pilot Knob Eagan MN 1986 7,300
Children's World 8825 Aztec Dr. Eden Prairie MN 1986 7,400
Children's World 6249 Hemlock Ln. Maple Grove MN 1986 7,300
KinderCare 13380 Grove Dr. Maple Grove MN 1990 6,300
Automax 520 E. Lake St. Minneapolis MN 1985 3,100
Children's World 17710 Excelsior Blvd. Minnetonka MN 1986 7,300
Children's World 3050 N. Fernbrook Ln. Plymouth MN 1986 7,300
Golden Corral 2918 N. Service Dr. Red Wing MN 1987 6,000
Joe Sensor's Bar & Grill 2350 Cleveland Ave. Roseville MN 1984 9,100
Children's World 9321 Ensign Ave. W. Bloomington MN 1982 6,000
Children's World 4465 White Bear Pkwy. White Bear Lake MN 1987 7,300
KinderCare 1000 Meadowland Drive White Bear Lake MN 1990 5,000
------------
118,400
------------
MISSISSIPPI--12 PROPERTIES
Golden Corral 640 E. Hwy. 80 Clinton MS 1983 4,900
Rex Stores 2414 Highway 45 North Columbus MS 1996 10,000
Rex Stores 1733 Highway One South Greenville MS 1996 9,100
Rex Stores 9245 Highway 49 North Gulfport MS 1996 12,000
Rex Stores 6552 Highway 49 North Hattiesburg MS 1996 12,000
Rex Stores 4445 Robinson Road Jackson MS 1996 15,100
Rex Stores 2208 S. Frontage Road Meridian MS 1996 9,000
La Petite Academy 325 Cross Park Dr. Pearl MS 1988 5,500
Aaron Rents 749 Ridgewood Road Ridgeland MS 1997 22,300
Golden Corral 310 State Line Rd. Southaven MS 1987 7,000
Rex Stores 1707 S. Gloster Avenue Tupelo MS 1996 12,000
Rex Stores 3500 Pemberton Square Blvd. Vicksburg MS 1996 10,000
------------
128,900
------------
MISSOURI--27 PROPERTIES
Golden Corral 1683 E. North Ave. Belton MO 1984 4,800
Checker Autoworks 490 S. Hwy. 7 Blue Springs MO 1989 5,700
Golden Corral 211 N. Seventh St. Blue Springs MO 1984 5,100
Golden Corral 2323 Fairlawn Ave. Carthage MO 1985 5,200
Golden Corral 719 S. Washington St. Chillicothe MO 1984 5,100
Children's World 11850 W. Florissant Ave. Florissant MO 1989 8,200
La Petite Academy 15444 New Halls Ferry Florissant MO 1989 5,400
Golden Corral 825 S. Hwy. 54 Fulton MO 1987 5,200
Children's World 7227 N. Euclid Ave. Gladstone MO 1988 8,400
Golden Corral 3913 McMasters Hannibal MO 1987 5,200
Outback 7900 N. Lindbergh Hazelwood MO 1985 6,300
Checker Autoworks 11501 E. Hwy. 24 Independence MO 1989 5,700
Econo Lube 'N Tune 4525 South Noland Road Independence MO 1996 2,800
Golden Corral 1830 E. Hwy. 61 Jackson MO 1987 5,200
Checker Autoworks 6234 Paseo Blvd. Kansas City MO 1988 5,600
</TABLE>
S-39
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
MISSOURI--27 PROPERTIES
(CONTINUED)
Checker Autoworks 4205 E. Truman Rd. Kansas City MO 1988 6,600
Checker Autoworks 7640 Wornall Rd. Kansas City MO 1988 5,800
Children's World 3801 N.E. Independence Lee's Summit MO 1989 7,900
La Petite Academy 7 Victory Dr. Liberty MO 1985 4,900
Children's World 1021 Howard George Dr. Manchester MO 1987 7,300
Golden Corral 500 E. Austin Blvd. Nevada MO 1987 5,400
Golden Corral 2004 W. Broadway Blvd. Sedalia MO 1989 6,400
Children's World 1530 S. First Capital Dr. St. Charles MO 1987 7,300
Golden Corral 1850 Zumbehl Road St. Charles MO 1995 11,400
Martin & Bayley 3010 W. Clay St. St. Charles MO 1985 6,300
Golden Corral 1702 N. Belt Hwy. St. Joseph MO 1985 5,200
Golden Corral 204 S. Service Rd. Sullivan MO 1984 5,200
------------
163,600
------------
MONTANA--2 PROPERTIES
Staples 2930 Prospect Avenue Helena MT 1997 24,600
Checker Autoworks 3121 Brooks St. Missoula MT 1987 5,400
------------
30,000
------------
NEBRASKA--9 PROPERTIES
La Petite Academy 3005 Comstock Bellevue NE 1986 5,100
Checker Autoworks 5001 N. Second Ave. Kearney NE 1990 4,100
Checker Autoworks 4405 N. 30th St. Omaha NE 1988 5,500
Checker Autoworks 10757 Q St. Omaha NE 1988 5,700
Golden Corral 10803 John Galt Blvd. Omaha NE 1995 11,300
La Petite Academy 14406 California Cir. Omaha NE 1984 5,100
La Petite Academy 5444 S. 138th St. Omaha NE 1984 5,100
La Petite Academy 10707 Birch St. Omaha NE 1987 5,400
Linens 'N Things 3375 Oakview Drive Omaha NE 1997 46,400
------------
93,700
------------
NEVADA--5 PROPERTIES
La Petite Academy 2560 N. Green Valley Pkwy. Henderson NV 1985 5,100
Checker Autoworks 1615 N. Nellis Blvd. Las Vegas NV 1987 5,400
KinderCare 1655 E. Warm Springs Rd. Las Vegas NV 1990 6,300
Checker Autoworks 3090 S. Virginia St. Reno NV 1988 5,600
La Petite Academy 2301 Sparks Blvd. Sparks NV 1988 6,700
------------
29,100
------------
NEW HAMPSHIRE--1 PROPERTY
Children's World Ten Mohawk Dr. Londonderry NH 1989 6,400
------------
6,400
------------
NEW JERSEY--2 PROPERTIES
R & S Strauss 1811 W. Marlton Pike Cherry Hill NJ 1995 16,100
La Petite Academy 943 Little Gloucester Road Clementon NJ 1991 6,600
------------
22,700
------------
NEW MEXICO--3 PROPERTIES
Checker Autoworks 4710 N.E. San Mateo Blvd. Albuquerque NM 1987 3,100
Checker Autoworks 2007 Southern Blvd. Rio Rancho NM 1988 5,700
</TABLE>
S-40
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NEW MEXICO--3 PROPERTIES
(CONTINUED)
Checker Autoworks 850 St. Michaels Dr. Sante Fe NM 1987 3,200
------------
12,000
------------
NEW YORK--5 PROPERTIES
Golden Corral 7800 Transit Road Amherst NY 1995 11,500
Golden Corral 600 Block S. Fourth St. Fulton NY 1987 7,300
Dairy Mart 380-384 Flatbush Avenue Kingston NY 1995 2,800
Rex Stores 110 Mall Blvd. Lakewood NY 1996 14,100
Wendy's 840 Arsenal St. Watertown NY 1986 2,600
------------
38,300
------------
NORTH CAROLINA--22 PROPERTIES
La Petite Academy 955 W. Chatham St. Cary NC 1984 5,100
The Pantry 5900 Tryon Road Cary NC 1995 2,400
La Petite Academy 110 Kingston Dr. Chapel Hill NC 1985 5,100
La Petite Academy 3132 Tyvola Rd. Charlotte NC 1981 5,000
La Petite Academy 9221 York Rd. Charlotte NC 1988 5,400
La Petite Academy 3505 S. Ridge Ave. Concord NC 1981 5,000
Econo Lube 'N Tune 4615 Highway 55 Durham NC 1997 2,800
Jiffy Lube 3915 N. Duke St. Durham NC 1985 1,900
La Petite Academy 4022 Wake Forest Hwy. Durham NC 1989 6,800
La Petite Academy 4702 Creekstone Dr. Durham NC 1991 6,600
Golden Corral 482 N. McPherson Church Fayetteville NC 1984 5,100
Econo Lube 'N Tune 130 Annaron Court Garner NC 1997 2,800
Econo Lube 'N Tune 4407 Landover Road Greensboro NC 1997 2,800
The Pantry 4000 S. Memorial Drive Greenville NC 1995 2,400
The Pantry 502 S. Memorial Drive Greenville NC 1995 2,400
La Petite Academy 1521 Haywood Rd. Hendersonville NC 1981 5,000
The Pantry 2561 Onslow Drive Jacksonville NC 1995 2,600
La Petite Academy 1975 W. Mountain St. Kernersville NC 1989 5,500
La Petite Academy 5115 Highgate Dr. Morrisville NC 1989 6,400
Econo Lube 'N Tune Pineville-Matthews Road Pineville NC 1997 2,700
Jiffy Lube 3925 Western Blvd. Raleigh NC 1985 1,800
Taco Bell U.S. 421 & Winkler Mill Wilkesboro NC 1987 2,200
------------
87,800
------------
OHIO--49 PROPERTIES
Don Pablo's 145 Montrose West Ave. Akron OH 1994 7,800
Golden Corral 1616 Claremont Ave. Ashland OH 1986 5,200
Dairy Mart 1304 State Road 183 Atwater OH 1995 2,500
Jiffy Lube 4497 Indian Ripple Road Beaver Creek OH 1996 2,300
Children's World 2221 N. Fairfield Rd. Beavercreek OH 1987 5,000
Golden Corral 1401 E. State Route 703 Celina OH 1987 5,300
Children's World 8150 Garnet Dr. Centerville OH 1987 5,000
Jiffy Lube 897 South Main Street Centerville OH 1996 2,400
La Petite Academy 11945 Mason Rd. Cincinnati OH 1987 5,100
7-ELEVEN 2481 Petzinger Road Columbus OH 1995 3,200
Dairy Mart 5449 Hall Rd. Columbus OH 1995 7,200
Jiffy Lube 3550 N. High St. Columbus OH 1985 2,600
Jiffy Lube 3191 E. Main St. Columbus OH 1985 2,600
Speedy Brake & Muffler 4978 West Broad Street Columbus OH 1995 5,300
Dairy Mart 310 Tallmadge Rd. Cuyahoga Falls OH 1995 2,800
Jiffy Lube 2520 Wilmington Pike Dayton OH 1985 2,000
Rex Stores 955 N. Clinton Street Defiance OH 1996 7,200
La Petite Academy 7135 Sawmill Rd. Dublin OH 1985 5,100
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
OHIO--49 PROPERTIES
(CONTINUED)
Speedy Brake & Muffler 34310 Vine Street Eastlake OH 1995 5,300
La Petite Academy 100 W. Wenger Rd. Englewood OH 1985 5,100
Children's World 2291 Reliance Dr. Forest Park OH 1987 5,000
La Petite Academy 485 Rocky Fork Blvd. Gahanna OH 1985 5,100
Dairy Mart 105 East St. Galion OH 1995 2,700
7-ELEVEN 3700 South Hamilton Road Groveport OH 1995 3,200
Jiffy Lube 1358 Main Street Hamilton OH 1996 1,800
Children's World 7305 Old Troy Pike Huber Heights OH 1990 5,000
Jiffy Lube 8371 Old Troy Pike Huber Heights OH 1996 2,300
Rex Stores 2119 E. Dorothy Lane Kettering OH 1996 10,600
Golden Corral 904 Columbus Ave. Lebanon OH 1987 5,700
Children's World 1200 Cottonwood Dr. Loveland OH 1987 4,900
Children's World 8520 Landen Dr. Maineville OH 1987 5,000
Jiffy Lube 3028 Mall Park Dr. Miamisburg OH 1985 2,000
Staples 11 Winspear Drive New Philadelphia OH 1997 24,000
Jiffy Lube 3009 Woodville Rd. Northwood OH 1986 2,600
Dairy Mart SR 795 at Oregon Road Perrysburg OH 1995 2,700
La Petite Academy 12968 N.W. Stonecreek Dr. Pickerington OH 1986 5,100
Jiffy Lube 560 W. Central Avenue Springboro OH 1997 2,400
Golden Corral 4360 Kent Rd. Stow OH 1987 7,100
Dairy Mart SR 14 & Market Square Drive Streetsboro OH 1996 3,800
Dairy Mart 3519 South County Road 25A Tipp City OH 1996 3,800
Jiffy Lube 3820 Secor Rd. Toledo OH 1986 2,600
Jiffy Lube 1360 W. Alexis Rd. Toledo OH 1986 2,000
Dairy Mart 272 N. Sandusky St. Triffin OH 1995 3,200
Golden Corral 1790 W. Main St. Troy OH 1986 5,200
Dairy Mart N. High Street North of I-76 Wadsworth OH 1996 2,700
Golden Corral 1600 Columbus Ave. Wash. Courthouse OH 1986 5,100
Children's World 72 Westerview Dr. Westerville OH 1990 8,400
La Petite Academy 4426 S. Valley Quail Blvd. Westerville OH 1985 5,000
Golden Corral 1587 Rombach Ave. Wilmington OH 1986 6,000
------------
234,000
------------
OKLAHOMA--12 PROPERTIES
La Petite Academy 812 N. 15th St. Broken Arrow OK 1983 5,000
Econo Lube 'N Tune 309 South Air Depot Blvd. Midwest City OK 1997 2,800
La Petite Academy 8821 E. Reno Midwest City OK 1985 4,900
Don Pablo's 330 Ed Noble Parkway Norman OK 1995 9,800
Don Pablo's 2737 W. Memorial Road Oklahoma City OK 1995 9,900
La Petite Academy 1532 W. Hefner Rd. Oklahoma City OK 1982 5,000
La Petite Academy 13200 S. Western Oklahoma City OK 1984 7,500
Golden Corral 7703 N. Mingo Valley Expwy. Owasso OK 1987 6,400
Golden Corral 2300 N. 14th St. Ponca City OK 1987 6,900
Econo Lube 'N Tune Hefner Rd. E. of Pennsyl Ave The Village OK 1997 2,800
Quick Trip 2749 East Admiral Place Tulsa OK 1997 3,200
La Petite Academy 11500 W. Reno Yukon OK 1985 4,800
------------
69,000
------------
OREGON--17 PROPERTIES
Schuck's Autoworks 2105 Santiam Ave. Albany OR 1987 5,600
Children's World 17225 N.W. Corridor Ct. Beaverton OR 1986 7,300
Children's World 12385 S.W. Longhorn Ln. Beaverton OR 1986 7,200
Schuck's Autoworks 3050 S.W. Cedar Hills Beaverton OR 1987 5,700
Schuck's Autoworks 2350 N.W. 9th St. Corvallis OR 1987 5,700
Taco Bell 2235 N.W. Ninth St. Corvallis OR 1987 2,300
Schuck's Autoworks 391 Coburg Rd. Eugene OR 1988 5,500
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
OREGON--17 PROPERTIES
(CONTINUED)
Golden Corral 1530 N. First St. Hermiston OR 1984 5,100
The Keg 4250 S.W. Mercantile Dr. Lake Oswego OR 1984 6,800
The Keg 13456 S.E. Mcloughlin Milwaukie OR 1984 6,700
Schuck's Autoworks 15621 S.E. Mclaughlin Blvd. Oak Grove OR 1987 5,600
Schuck's Autoworks 18120 S.E. Stark St. Portland OR 1987 5,600
Schuck's Autoworks 8310 S.E Division Portland OR 1987 5,700
Schuck's Autoworks 5915 N.E. Sandy Blvd. Portland OR 1987 4,900
Schuck's Autoworks 3863 S.E. Commercial St. Salem OR 1987 5,400
Taco Bell 3455 S.E. Commercial St. Salem OR 1989 2,400
Schuck's Autoworks 13145 S.W. Pacific Hwy. Tigard OR 1987 4,900
------------
92,400
------------
PENNSYLVANIA--5 PROPERTIES
Golden Corral 701-719 N. Pittsburgh Connellsville PA 1987 5,400
Petco 529 Scranton Carbondale Road Dickson City PA 1997 16,000
R & S Strauss 3366 Grant Avenue Philadelphia PA 1994 15,100
Jiffy Lube 936 Sproul Rd. Springfield Twp. PA 1986 2,000
Golden Corral 684 Elm Dr. Waynesburg PA 1987 5,800
------------
44,300
------------
SOUTH CAROLINA--19 PROPERTIES
Econo Lube 'N Tune 1745 San Rittenburg Blvd. Charleston SC 1997 2,800
La Petite Academy 4315 Great Oak Dr. Charleston SC 1988 5,500
La Petite Academy 902 Nabors Dr. Charleston SC 1989 5,400
Econo Lube 'N Tune 183 Harbison Blvd. Columbia SC 1997 2,800
La Petite Academy 9223 Two Notch Rd. Columbia SC 1984 5,000
The Pantry 3416 Leesburg Road Columbia SC 1995 2,600
La Petite Academy 2041 Clemson Rd. Elgin SC 1989 5,500
La Petite Academy 502 St. James Ave. Goose Creek SC 1981 5,000
Econo Lube 'N Tune 1461 North Pleasantburg Drive Greenville SC 1997 2,800
The Pantry 106 Main Road John's Isle SC 1995 2,500
La Petite Academy 573 College Park Rd. Ladson SC 1981 5,100
La Petite Academy 5625 Sunset Blvd. Lexington SC 1984 5,000
The Pantry 5372 Sunset Blvd. Lexington SC 1995 2,600
La Petite Academy 1058 Johnnie Dodds Blvd. Mt. Pleasant SC 1981 5,000
The Pantry 4625 Dick Pond Road Myrtle Beach SC 1995 2,400
The Pantry 2213 Ashley Phosphate N. Charleston SC 1995 2,400
La Petite Academy 1664 Old Trolley Rd. Summerville SC 1981 5,000
The Pantry 1397 Boone Hill Road Summerville SC 1995 2,500
La Petite Academy 15 Pinewood Rd. Sumter SC 1985 5,100
------------
75,000
------------
SOUTH DAKOTA--1 PROPERTY
Golden Corral 602 W. Sioux Ave. Pierre SD 1987 6,100
------------
6,100
------------
TENNESSEE--12 PROPERTIES
Jiffy Lube Carothers Pkwy S of Moores Ln Brentwood TN 1997 2,000
Rex Stores 1230 Volunteer Pkwy. Bristol TN 1996 12,400
Rex Stores 81 Dover Rd., Hwy 79 Clarksville TN 1996 10,000
The Pantry 5022 Murfreesboro Road La Vergne TN 1995 2,400
Aaron Rents 4883 American Way Memphis TN 1997 51,500
Children's World 5960 Knight Arnold Rd. Memphis TN 1988 8,200
Children's World 4984 Raleigh-Lagrange Rd. Memphis TN 1988 8,500
</TABLE>
S-43
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
TENNESSEE--12 PROPERTIES
(CONTINUED)
Golden Corral 2829 Covington Pike Memphis TN 1995 11,300
KinderCare 5225 Shady Ridge Dr. Memphis TN 1990 6,300
Children's World Ten Knolls Pl. Nashville TN 1989 7,300
Sante Fe Cant. & Cattlemans Cl 4285 Sidco Dr. Nashville TN 1983 10,000
The Pantry 1316 Madison Street Shelbyville TN 1995 2,500
------------
132,400
------------
TEXAS--130 PROPERTIES
La Petite Academy 103 Fountaingate Dr. Allen TX 1988 6,600
Checker Autoworks 1301 N.E. Amarillo Blvd. Amarillo TX 1988 5,700
Aaron Rents 2125 E. Division Arlington TX 1997 68,100
Children's World 1801 E. Mayfield Rd. Arlington TX 1984 5,000
Children's World 4019 Woodland Park Arlington TX 1988 8,200
Children's World 1305 W. Arbrook Arlington TX 1989 8,300
La Petite Academy 717 W. Stephens St. Arlington TX 1985 7,400
La Petite Academy 1850 N.E. Green Oaks Blvd. Arlington TX 1991 6,600
Golden Corral 1112 E. Tyler St. Athens TX 1987 6,900
Children's World 12001 Oak Knoll Dr. Austin TX 1988 8,200
Children's World 7130 Chimney Corners Austin TX 1989 8,200
Children's World 1808 Cedar Bend Dr. Austin TX 1986 7,300
Discount Tire Store 1411 W. Ben White Blvd. Austin TX 1990 6,200
La Petite Academy 11812 Millwright Pkwy. Austin TX 1982 5,000
La Petite Academy 5906 Westcreek Dr. Austin TX 1983 5,000
La Petite Academy 8105 Brodie Ln. Austin TX 1988 5,100
La Petite Academy 14611 Wells Port Dr. Austin TX 1989 7,700
La Petite Academy 3909 Adelphi Lane Austin TX 1989 6,600
La Petite Academy 9315 Chisholm Ln. Austin TX 1988 6,600
Children's World 2309 Central Dr. Bedford TX 1989 8,200
Don Pablo's 1933 Airport Way Bedford TX 1994 7,000
Golden Corral 1912 N. St. Mary'S Beeville TX 1987 5,600
Golden Corral 311 E. Commerce St. Brownwood TX 1987 6,900
Children's World 2804 Keller Springs Rd. Carrollton TX 1987 6,100
Aaron Rents 1911 South Bell Blvd. Cedar Park TX 1997 23,300
La Petite Academy 1609 N. Bell Rd. Cedar Park TX 1988 6,600
La Petite Academy 300 Greenbriar Ln. Colleyville TX 1985 5,100
Children's World 8110 Lone Shadow Converse TX 1988 8,300
Children's World 653 Parkway Blvd. Coppell TX 1986 7,200
Children's World 150 N. Moore Rd. Coppell TX 1987 5,000
Golden Corral 1155 E. Loop 304 Crockett TX 1985 4,900
Discount Tire Store 4017 W. Camp Wisdom Rd. Dallas TX 1990 6,000
Don Pablo's 9039 Vantage Point Drive Dallas TX 1995 9,800
Econo Lube 'N Tune 11632 N Central Expy. Dallas TX 1996 2,700
Whataburger 1990 W. Northwest Hwy. Dallas TX 1991 2,700
La Petite Academy 1101 E. Pleasant Run Desoto TX 1984 7,400
La Petite Academy 107 W. Danieldale Rd. Duncanville TX 1985 7,400
Golden Corral 1802 N. Mechanic El Campo TX 1985 5,200
Checker Autoworks 336 N. Zaragosa Rd. El Paso TX 1987 3,100
Checker Autoworks 10730 Pebble Hills Blvd. El Paso TX 1987 2,700
Kentucky Fried Chicken 901 E. Ennis Ave. Ennis TX 1987 2,100
Children's World 2440 Fuller-Wiser Rd. Euless TX 1987 6,100
Children's World 2011 Timbercreek Rd. Flower Mound TX 1987 5,000
Children's World 3312 Park Lake Dr. Fort Worth TX 1988 8,200
La Petite Academy 1740 W. Everman Pkwy. Fort Worth TX 1986 5,000
La Petite Academy 6050 Harris Pkwy. Fort Worth TX 1990 6,600
La Petite Academy 5432 Basswood Blvd. Fort Worth TX 1991 6,600
Whataburger 901 E. Seminary Dr. Fort Worth TX 1991 2,400
Whataburger 1425 Eastchase Pky. Ft. Worth TX 1995 3,000
</TABLE>
S-44
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
TEXAS--130 PROPERTIES
(CONTINUED)
Golden Corral 903 E. Hwy. 82 Gainesville TX 1984 4,800
Discount Tire Store 3325 S. Garland Rd. Garland TX 1990 6,500
La Petite Academy 2814 Lavon Hwy. Garland TX 1989 6,600
La Petite Academy 4165 Magna Carta Ave. Grand Prairie TX 1988 6,800
Discount Tire Store 410 Dixieland Rd. Harlingen TX 1990 6,000
Golden Corral 1501 Corsicana Hwy. Hillsboro TX 1984 4,800
Aaron Rents 243 Greens Road Houston TX 1997 70,300
Children's World 19823 Younglake Blvd. Houston TX 1988 8,200
Children's World 15003 Bellaire Blvd. Houston TX 1988 8,200
Children's World 4507 Fountainhead Dr. Houston TX 1989 4,600
Discount Tire Store 9402 Stella Link Rd. Houston TX 1990 5,600
Econo Lube 'N Tune 4448 West FM 1960 Houston TX 1997 2,600
La Petite Academy 3435 Spears Rd. Houston TX 1984 5,000
La Petite Academy 620 Maxey Rd. Houston TX 1985 5,100
La Petite Academy 17645 Keith Harrow Houston TX 1987 5,400
La Petite Academy 690 Normandy St. Houston TX 1987 5,000
La Petite Academy 15203 Bellaire Blvd. Houston TX 1985 7,300
La Petite Academy 8385 Antoine Dr. Houston TX 1987 5,400
Whataburger 9277 Richmond Ave. Houston TX 1991 2,400
Whataburger 11027 Fuqua St. Houston TX 1991 2,500
Atascocita Shopping Center 4451 E. Fm 1960 Humble TX 1986 11,100
Vacant 3511 N. Country Club Rd. Irving TX 1986 4,200
Taco Bell 2103 So. W.S. Young Dr. Killeen TX 1987 3,500
Golden Corral 1502 W. Main St. League City TX 1986 5,400
Discount Tire Store 6221 Bandera Rd. Leon Valley TX 1990 6,000
Children's World 1439 Moccassin Trail Lewisville TX 1987 5,000
Children's World 1002 Round Grove Road Lewisville TX 1988 5,000
Econo Lube 'N Tune 1550 Main Street Lewisville TX 1996 2,600
La Petite Academy 103 Kathryn Dr. Lewisville TX 1985 7,200
Checker Autoworks 5007 34th St. Lubbock TX 1987 3,100
Checker Autoworks 1318 50th St. Lubbock TX 1987 3,100
Hollywood Video 7819 Slide Road Lubbock TX 1997 7,500
Golden Corral 1901 S. First St. Lufkin TX 1985 5,200
La Petite Academy 1151 Walnut Creek Dr. Mansfield TX 1989 5,400
Don Pablo's 3900 Pavillion Court Mesquite TX 1994 8,600
Golden Corral 717 N. Bryan-Beltline Rd. Mesquite TX 1986 5,000
La Petite Academy 1019 Tripp Rd. Mesquite TX 1984 7,400
La Petite Academy 1615 Oates Drive Mesquite TX 1992 6,700
Golden Corral 810 Milam St. Mexia TX 1985 5,000
Checker Autoworks 1111 N. Midkiff Midland TX 1987 3,300
La Petite Academy 1717 Dulles Ave. Missouri City TX 1990 6,600
Children's World 6709 Meadow Crest N. N. Richland Hills TX 1988 8,200
Taco Bell 249 N. Loop 337 New Braunfels TX 1987 3,000
Checker Autoworks 2711 Andrews Hwy. Odessa TX 1987 3,100
Golden Corral 3104 Edgar Brown Dr. Orange TX 1985 5,400
Discount Tire Store 7304 Spencer Hwy. Pasadena TX 1990 6,000
La Petite Academy 821 Fairmont Pkwy. Pasadena TX 1984 5,100
Golden Corral 2602 Olton Rd. Plainview TX 1984 5,100
Children's World 3401 Silverstone Dr. Plano TX 1987 6,100
Children's World 4120 E. 14th St. Plano TX 1987 6,100
Children's World 1717 W. Plano Pkwy. Plano TX 1988 8,000
Discount Tire Store 209 Coit Road Plano TX 1990 7,000
Levitz Furniture 6400 Avenue K Plano TX 1995 111,300
Golden Corral 915 N. Hwy. 35 Bypass Port Lavaca TX 1987 5,400
Whataburger 34577 Highway 59 North Porter TX 1995 2,700
La Petite Academy 3620 Hillside Dr. Round Rock TX 1986 5,000
La Petite Academy 1510 Greenlawn Blvd. Round Rock TX 1989 6,600
Golden Corral 3324 Hwy. 66 Rowlett TX 1985 5,200
</TABLE>
S-45
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
TEXAS--130 PROPERTIES
(CONTINUED)
Children's World 11814 Parliament Dr. San Antonio TX 1989 8,400
Children's World 8680 Guilbeau Rd. San Antonio TX 1986 7,200
Children's World 8031 Culebra Rd. San Antonio TX 1988 8,300
Children's World 14230 Cross Canyon Rd. San Antonio TX 1987 7,400
Discount Tire Store 2707 N.W. Loop 410 San Antonio TX 1990 7,600
Econo Lube 'N Tune 11902 Perrin Beitel Road San Antonio TX 1995 2,800
La Petite Academy 3939 Thousand Oaks Dr. San Antonio TX 1987 5,100
La Petite Academy 5990 Village Pk. San Antonio TX 1986 6,500
La Petite Academy 16345 Judson Rd. San Antonio TX 1986 5,100
La Petite Academy 9401 Guilbeau Rd. San Antonio TX 1987 6,700
La Petite Academy 4820 Brandeis Rd. San Antonio TX 1987 5,000
La Petite Academy 111 Emerald Glade San Antonio TX 1988 6,700
Whataburger 2013 Meyers-Sealy Sealy TX 1991 2,600
La Petite Academy 1400 W. Southlake Blvd. Southlake TX 1993 6,600
Whataburger 13030 Murphy Rd. Stafford TX 1991 2,400
La Petite Academy 2615 Cordes Plaza Sugarland TX 1987 6,800
Whataburger 115 N. General Bruce Dr. Temple TX 1995 2,200
Sonshine Family Children's Ctr 714 N. 14th St. Texas City TX 1982 4,600
La Petite Academy 5202 Shadowbend Pl. The Woodlands TX 1987 7,500
Golden Corral 1240 N. Main Vidor TX 1984 5,100
La Petite Academy 6637 Oaklawn Dr. Watauga TX 1987 6,800
Golden Corral 652 N. Hwy. 77 Waxahachie TX 1987 7,000
Aaron Rents 18215 Highway 3 Webster TX 1997 22,700
------------
1,015,300
------------
UTAH--7 PROPERTIES
Discount Tire Store 2527 S. Main Bountiful UT 1990 6,200
Golden Corral 755 Main St. So. Cedar City UT 1983 4,500
La Petite Academy 325 West 1550 North Layton UT 1990 5,500
Carver's 672 South State Street Orem UT 1995 8,200
Discount Tire Store 1380 N. State St. Provo UT 1990 5,300
Carver's 10740 South Holiday Park Dr. Sandy UT 1995 10,300
La Petite Academy 2105 E. Alta Canyon Dr. Sandy UT 1990 5,400
------------
45,400
------------
VIRGINIA--17 PROPERTIES
Children's World 5124 Woodmere Dr. Centreville VA 1989 6,100
Color Tile 1648 S. Military Hwy. Chesapeake VA 1986 3,600
La Petite Academy 625 Cedar Rd. Chesapeake VA 1989 5,400
La Petite Academy 3919 Springfield Rd. Glen Allen VA 1984 5,000
East Coast Oil 10150 Hull Street Midlothian VA 1997 2,400
Hot N Now 6049 Virginia Beach Blvd. Norfolk VA 1987 3,600
La Petite Academy 3903 Cedar Ln. Portsmouth VA 1988 5,500
Children's World 7040 Forest Hill Ave. Richmond VA 1989 7,300
Econo Lube 'N Tune 3591 Courthouse Road Richmond VA 1996 2,900
La Petite Academy 11449 Robious Rd. Richmond VA 1985 5,100
East Coast Oil 488 Garrisonville Road Stafford VA 1996 2,800
Children's World 1893 First General Pkwy. Virginia Beach VA 1986 7,400
Econo Lube 'N Tune Holland Road & Arthur Avenue Virginia Beach VA 1996 2,800
Golden Corral 470 Newtown Rd. Virginia Beach VA 1987 7,000
La Petite Academy 5355 Lila Ln. Virginia Beach VA 1984 5,000
</TABLE>
S-46
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
VIRGINIA--17 PROPERTIES
(CONTINUED)
East Coast Oil 10007 James Madison Highway Warrenton VA 1996 3,600
Children's World 12345 Cotton Mill Dr. Woodbridge VA 1988 6,000
------------
81,500
------------
WASHINGTON--42 PROPERTIES
Golden Corral 2040 N. Auburn Way Auburn WA 1987 7,000
Schuck's Autoworks 15303 S.E. 37th St. Bellevue WA 1987 5,700
Schuck's Autoworks 1929 King St. Bellingham WA 1987 5,600
Schuck's Autoworks 7232 N.E. Bothell Way Bothell WA 1987 5,700
Econo Lube 'N Tune Brownsville Highway Bremerton WA 1996 2,800
Children's World 12812 S.E. Third Ave. Everett WA 1982 6,000
Schuck's Autoworks 11020 S.E. 19th Ave. Everett WA 1987 9,500
Children's World 32324 S. First Ave. Federal Way WA 1986 7,100
La Petite Academy 508 S. 348th St. Federal Way WA 1988 6,600
Schuck's Autoworks 6918 N.E. Hwy. 99 Hazel Dell WA 1988 5,600
Schuck's Autoworks 3801 W. Clearwater Kennewick WA 1987 5,700
Children's World 10016 S.E. 240th St. Kent WA 1983 6,000
Children's World 23921 S.E. 112th Ave. Kent WA 1986 7,300
Schuck's Autoworks 10105 S.E. 256th Kent WA 1987 5,700
Children's World 14230 N.E. Juanta-Woodinville Kirkland WA 1988 7,300
Schuck's Autoworks 4017 S.E. Pacific Ave. Lacey WA 1987 5,700
Golden Corral 1065 State St. Marysville WA 1987 6,000
Schuck's Autoworks 1105 State Ave. Marysville WA 1987 4,900
Schuck's Autoworks 826 Stratford Rd. Moses Lake WA 1987 5,700
Golden Corral 1493 Midway Blvd. Oak Harbor WA 1987 6,100
Schuck's Autoworks 2403 W. Court St. Pasco WA 1987 5,700
La Petite Academy 1006 S.E. 39th Ave. Puyallup WA 1988 6,700
Schuck's Autoworks 12117 S. Meridian St. Puyallup WA 1987 4,900
Azteca Restaurant 3040 N.E. 148th Ave. Redmond WA 1982 10,000
La Petite Academy 8675 N.E. 161St Ave. Redmond WA 1987 7,700
Schuck's Autoworks 15226 Bel-Red Rd. Redmond WA 1987 5,000
Children's World 11010 S.E. 176th St. Renton WA 1986 6,400
Schuck's Autoworks 3213 N.E. Sunset Renton WA 1987 5,600
Schuck's Autoworks 1440 Jadwin Ave. Richland WA 1987 5,600
Schuck's Autoworks 2728 N.E. 45th St. Seattle WA 1987 4,800
Schuck's Autoworks 1018 N.W. Silverdale Way Silverdale WA 1987 4,900
Schuck's Autoworks 15027 S. Pacific Ave. Spanaway WA 1987 5,700
Schuck's Autoworks 4123 E. Sprague Spokane WA 1987 3,100
Discount Tire Store 2410 S. 84th St. Tacoma WA 1990 6,000
Vacant 7325 W. 27th St. Tacoma WA 1984 6,800
Schuck's Autoworks 6110 Sixth Ave. Tacoma WA 1987 5,700
Schuck's Autoworks 10915 Bridgeport Way Tacoma WA 1987 5,700
Sea Galley 9825 Pacific Ave. Tacoma WA 1984 6,600
Schuck's Autoworks 11808 S.E. Millplain Vancouver WA 1987 4,900
Schuck's Autoworks 410 N. Wilbur Walla Walla WA 1987 5,500
Schuck's Autoworks 295 E. Grant Rd. Wenatchee WA 1987 5,600
Schuck's Autoworks 13706 N.E. 175th St. Woodinville WA 1987 4,800
------------
249,700
------------
WEST VIRGINIA--2 PROPERTIES
Golden Corral 1527 E. Main Oak Hill WV 1984 4,600
Rex Stores 501 Grand Central Avenue Vienna WV 1996 12,200
------------
16,800
------------
</TABLE>
S-47
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LEASABLE
TENANT(1) ADDRESS CITY STATE ACQUIRED SQUARE FEET
- ----------------------------------- ------------------------------ -------------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
WISCONSIN--11 PROPERTIES
KinderCare 3036 N. Ballard Rd. Appleton WI 1990 6,200
La Petite Academy 20550 W. Watertown Rd. Brookfield WI 1990 6,600
Taco Bell 588 Falls Rd. Grafton WI 1987 2,300
Car-X Muffler & Brake 5930 West Bluemound Road Milwaukee WI 1996 5,300
Car-X Muffler & Brake 6112 South 27th Street Milwaukee WI 1995 5,300
Golden Corral 145 7-1/2 St. Monroe WI 1987 5,700
Car-X Muffler & Brake 15650 West National Ave. New Berlin WI 1995 4,200
Golden Corral 2756 New Pinery Rd. Portage WI 1987 6,100
Golden Corral 1247 E. Green Bay St. Shawano WI 1987 6,100
Golden Corral 915 Egg Harbor Rd. Sturgeon Bay WI 1987 6,100
La Petite Academy 1821 Woodburn Rd. Waukesha WI 1990 6,600
------------
60,500
------------
WYOMING--4 PROPERTIES
La Petite Academy 3238 Sheridan St. Cheyenne WY 1984 5,100
Winger's 3626 Grand Ave. Laramie WY 1990 4,200
Golden Corral 400 N. Federal Blvd. Riverton WY 1987 5,200
Golden Corral 927 E. Coffeen Ave. Sheridan WY 1985 5,600
------------
20,100
------------
Total for 774 properties 5,788,700
------------
------------
</TABLE>
- ------------------------------
(1) See "--Matters Pertaining to Certain Properties and Tenants."
DESCRIPTION OF LEASING STRUCTURE. At August 31, 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 general, the leases require the tenant to pay
property taxes, insurance, and expenses of maintaining the property.
MATTERS PERTAINING TO CERTAIN PROPERTIES AND TENANTS. Seven of the
Company's properties were vacant as of August 31, 1997 (one of which is a
multi-tenant property and six of which are single-tenant properties) and
available for lease. As of August 31, 1997, 25 of the Company's properties which
were under lease were vacant and available for sublease by the tenant. Of these
25, 24 had tenants who were current with their rent and other lease obligations.
As of August 31, 1997, 18 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.
See "Risk Factors--Real Estate Investment Risks--Risk of Default by Major
Tenants" for a discussion of certain other matters relating to certain
properties and tenants that should be carefully considered by prospective
investors.
DEVELOPMENT OF CERTAIN PROPERTIES
Of the 43 New Properties acquired by the Company during the first eight
months of 1997, 36 were occupied as of September 15, 1997 and the remaining
seven were pre-leased and under construction pursuant to contracts under which
the tenants have agreed to develop the properties (with development
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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, all of which have been completed, are operating and
paying rent. The Company will continue to seek to acquire land for development
under similar arrangements. During the first eight months of 1997, the Company
acquired 14 development properties, seven of which have been completed, and were
operating and paying rent as of September 15, 1997.
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MANAGEMENT
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>
Thomas A. Lewis........... Vice Chairman of the Board and Chief Executive Officer; Director 44
Richard J. VanDerhoff..... President and Chief Operating Officer; Director 44
Gary M. Malino............ Senior Vice President, Chief Financial Officer and Treasurer 39
Michael R. Pfeiffer....... Senior Vice President, General Counsel and Secretary 37
Richard G. Collins........ Senior Vice President, Portfolio Acquisitions 49
Mark G. Selman............ Vice President, Portfolio Management 42
Teresa H. Miller.......... Vice President, Corporate Communications and Investor Relations 45
William E. Clark.......... Chairman of the Board; Director 60
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.
THOMAS A. LEWIS has been Chief Executive Officer of the Company since May
1997, the Vice Chairman of the Board of Directors and a Director of the Company
since September 1993 and had been with R.I.C. Advisor from 1987 until the merger
of R.I.C. Advisor with the Company on August 17, 1995 (the "Merger"). From
September 1993 to May 1997, he served as Vice President, Capital Markets. 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), an 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.
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.
GARY M. MALINO has been Senior Vice President of the Company since August
1997, the Chief Financial Officer of the Company since August 1994 and the
Treasurer of the Company since August 1995 and had been with R.I.C. Advisor from
1985 until the Merger. He also held the position of Vice President of the
Company from August 1995 to August 1997, when his title was changed to Senior
Vice President. 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 Senior Vice President of the Company since
August 1997 and the General Counsel and Secretary of the Company since August
1995 and had been with R.I.C. Advisor from 1990 until the Merger. He also served
as Vice President of the Company from August 1995 to August 1997, when his title
was changed to Senior Vice President. 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.
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RICHARD G. COLLINS has been Senior Vice President, Portfolio Acquisitions of
the Company since August 1997 and had been with R.I.C. Advisor from 1990 until
the Merger. He also served as Vice President, Portfolio Acquisitions from June
1997 to August 1997, when his title was changed to Senior Vice President,
Portfolio Acquisitions. From August 1995 to June 1997, he served as Vice
President, Portfolio Management. 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.
MARK G. SELMAN has been Vice President, Portfolio Management of the Company
since August 1997, and Director, Portfolio Management of the Company since April
1997. Prior to joining Realty Income, he was with the Real Estate Consulting
Group of KPMG Peat Marwick LLP from September 1989 to April 1997 and was a
Senior Manager from July 1995 to April 1997. From 1983 to 1988, he was an
investment advisor and registered representative for the investment firms of
Wedbush, Noble, Cook (1983-1986) and Kidder Peabody (1986-1988). He graduated
from San Diego State University with a B.S. in Finance, a B.A. in Psychology,
and a Masters in Business Administration.
TERESA H. MILLER has been Vice President, Corporate Communications and
Investor Relations of the Company since August 1997, and Director, Corporate
Communications and Investors Relations of the Company since June 1997. Prior to
joining Realty Income, she was a Director of Corporate Communications for
Mentus, Inc., an advertising and public relations firm, from January 1992 to May
1997. From September 1981 to November 1984, she was an investment advisor and
registered representative with the investment firm of PaineWebber. She graduated
from Pepperdine University with a B.S. in Finance and Business Administration.
WILLIAM E. CLARK has been the Chairman of the Board of Directors and a
Director of the Company since September 1993 and served as Chief Executive
Officer of the Company from September 1993 to May 1997. He was a co-founder and
had been a director and an officer of R.I.C. Advisor, Inc. from 1969 until the
Merger with Realty Income Corporation. He 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.
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, 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
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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.
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 five investment companies: Cohen & Steers Realty
Shares; Cohen & Steers Realty Income Fund; Cohen & Steers Total Return Realty
Fund; Cohen & Steers Special Equity Fund, Inc. and Cohen & Steers Equity Income
Fund. Additionally, he is a member of the board of directors of Essex Property
Trust and Highwoods Property Trust, two NYSE-listed REITs, 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.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS TO HOLDERS OF COMMON STOCK
The following summary of certain U.S. federal income tax considerations to
holders of Common Stock is based on current law, is for general information
only, and is not tax advice. This discussion does not purport to deal with all
aspects of taxation that may be relevant to particular stockholders in light of
their personal investment or tax circumstances, or to certain types of
stockholders subject to special treatment under the federal income tax laws,
including, without limitation, insurance companies, tax exempt organizations
(except to the extent discussed under the heading "--Taxation of Certain
Tax-Exempt Stockholders"), stockholders holding Common Stock as part of a
conversion transaction, as part of a hedge or hedging transaction, or as a
position in a straddle for tax purposes, certain financial institutions, broker-
dealers, foreign corporations, foreign partnerships and persons who are not
citizens or residents of the United States (except to the extent discussed under
the heading "--Taxation of Non-U.S. Stockholders"). This discussion should be
read in conjunction with the discussion under "Certain Federal Income Tax
Considerations" in the Prospectus. In addition, the summary below does not
consider the effect of any foreign, state, local or other tax laws that may be
applicable to prospective purchasers of Common Stock.
This Prospectus Supplement does not address the taxation of the Company or
the impact on the Company of its election to be taxed as a REIT. The federal
income tax treatment of the Company is set forth in the Prospectus under the
heading entitled "Certain Federal Income Tax Considerations." The discussion set
forth below assumes that the Company qualifies as a REIT under the Code. If in
any taxable year the Company were to fail to qualify as a REIT, the Company
would not be allowed a deduction for dividends paid to stockholders in computing
taxable income and would be subject to federal income tax on its taxable income
at regular corporate rates. As a result, the funds available for distribution to
the Company's stockholders would be reduced. See "Risk Factors--Risks Relating
to Qualification and Operations as a REIT" herein and "Certain Federal Income
Tax Considerations--Failure to Qualify" in the Prospectus.
EACH INVESTOR IS ADVISED TO CONSULT THE PROSPECTUS FOR INFORMATION REGARDING
THE FEDERAL INCOME TAX CONSIDERATIONS TO THE COMPANY OF ITS ELECTION TO BE TAXED
AS A REIT. EACH INVESTOR IS ALSO ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE ACQUISITION,
OWNERSHIP AND SALE OF THE COMMON STOCK OF THE COMPANY. INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP
AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States Federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) is an estate the income of which is
subject to United States Federal income taxation regardless of its source, or
(iv) is a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust. Notwithstanding the
preceding sentence, to the extent provided in regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date that elect to continue to be treated as United States persons, shall also
be considered U.S. Stockholders.
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. Stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taxable to them
as ordinary income and will not be eligible for the dividends received deduction
in the case of taxable U.S. Stockholders that are corporations. Distributions
that are properly designated as capital gain dividends will be taxable to
taxable U.S. Stockholders as gain (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) from the sale or
disposition of a
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capital asset held for more than one year, without regard to the period for
which the U.S. Stockholder has held its Common Stock. It is not clear whether
such amounts will be taxable at mid-term capital gain rates (applicable to gains
from the sale of assets held for more than one year but not more than eighteen
months), long-term capital gain rates (applicable to gains from the sale of
capital assets held for more than eighteen months), or some other rate. This
uncertainty may be clarified by future legislation or regulations. However, U.S.
Stockholders that are corporations may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions not designated as
capital gain dividends and in excess of current or accumulated earnings and
profits will not be currently taxable to a U.S. Stockholder to the extent that
they do not exceed the adjusted tax basis of the U.S. Stockholder's shares, but
rather will reduce the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a holder's shares they will be
included in income as capital gain (and, in the case of a taxable U.S.
Stockholder who is an individual, long-term capital gain if the shares have been
held for more than eighteen months, mid-term capital gain if the shares have
been held for more than one year but not more than eighteen months, or
short-term capital gain if the shares have been held for one year or less)
assuming the shares are a capital asset in the hands of the holder. In addition,
any dividend declared by the Company in October, November or December of any
year payable to a stockholder of record on a specified date in any such month
shall be treated as both paid by the Company and received by the stockholder on
December 31 of such year, provided that the dividend is actually paid by the
Company during January of the following calendar year. Stockholders may not
include in their individual income tax returns any net operating losses or
capital losses of the Company.
If the Company elects to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains, the Company would pay tax on such
retained net long-term capital gains. In addition, for tax years of the Company
beginning on or after January 1, 1998, to the extent designated by the Company,
a taxable U.S. Stockholder generally would (i) include its proportionate share
of such undistributed long-term capital gains in computing its long-term capital
gains in its return for its taxable year in which the last day of the Company's
taxable year falls (subject to certain limitations as to the amount so
includable), (ii) be deemed to have paid the capital gains tax imposed on the
Company on the designated amounts included in such taxable U.S. Stockholder's
long-term capital gains, (iii) receive a credit or refund for such amount of tax
deemed paid by it, (iv) increase the adjusted basis of its shares of Common
Stock by the difference between the amount of such includable gains and the tax
deemed to have been paid by it, and (v) in the case of a taxable U.S.
Stockholder that is a corporation, appropriately adjust its earnings and profits
for the retained capital gains in accordance with Treasury Regulations to be
prescribed by the IRS.
Distributions made by the Company and gain arising from the sale or exchange
by a taxable U.S. Stockholder of shares of Common Stock will not be treated as
passive activity income, and, as a result, such stockholders generally will not
be able to apply any "passive losses" against such income or gain. Distributions
made by the Company (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment income limitation. Gain arising from the sale or other disposition of
Common Stock, however, will not be treated as investment income under certain
circumstances.
Upon the sale or other disposition of shares of Common Stock, gain or loss
will be recognized by a taxable U.S. Stockholder in an amount equal to the
difference between (i) the amount of cash and fair market value of any property
received on such sale or other disposition, and (ii) the taxable U.S.
Stockholder's adjusted basis in the Common Stock. Such gain or loss will be
capital gain or loss if the shares of Common Stock have been held by the U.S.
Stockholder as a capital asset, and, in the case of a taxable U.S. Stockholder
who is an individual, will be mid-term or long-term gain or loss if such shares
have been held for more than one year or eighteen months, respectively. In
general, any loss upon a sale or exchange of shares by a taxable U.S.
Stockholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of distributions from the Company required to be treated by such taxable
U.S. Stockholder as long-term capital gain.
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BACK-UP WITHHOLDING
Information concerning the amount of dividends paid during each calendar
year, and the amount of tax withheld, if any, will be reported to the Company's
taxable U.S. Stockholders and the IRS. Under the backup withholding rules, a
taxable U.S. Stockholder may be subject to backup withholding at the rate of 31%
with respect to dividends paid unless such stockholder (a) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact, or (b) provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A taxable U.S.
Stockholder that does not provide his correct taxpayer identification number may
also be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be creditable against the taxable U.S. Stockholder's income tax
liability. In addition, the Company may be required to withhold a portion of
capital gain distributions to any taxable U.S. Stockholders who fail to certify
their non-foreign status to the Company. See "--Taxation of Non-U.S.
Stockholders."
TAXATION OF CERTAIN TAX-EXEMPT STOCKHOLDERS
Generally, a tax-exempt investor that is exempt from tax on its investment
income, such as an individual retirement account ("IRA") or a 401(k) plan, that
holds the Common Stock as an investment will not be subject to tax on
distributions paid by the Company. However, if such tax-exempt investor is
treated as having purchased its Common Stock with borrowed funds, some or all of
its distributions from the Common Stock will be subject to tax. In addition,
under some circumstances certain pension plans (including 401(k) plans but not
including IRAs and government pension plans) that own more than 10% (by value)
of the Company's outstanding Common Stock, could be subject to tax on a portion
of their Common Stock dividends even if their Common Stock is held for
investment and is not treated as acquired with borrowed funds. The Ownership
Limit, however, should generally prevent this result (see "Restrictions on
Ownership and Transfers of Capital Stock" in the Prospectus).
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Stockholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United States
federal income tax and does not address state, local or foreign tax consequences
that may be relevant to a Non-U.S. Stockholder in light of its particular
circumstances, including, for example, if the investment in the Company is
connected to the conduct by a Non-U.S. Stockholder of a United States trade or
business. In addition, this discussion is based on a current law, which is
subject to change, and assumes that the Company qualifies for taxation as a
REIT. Prospective Non-U.S. Stockholders should consult with their own tax
advisers to determine the impact of federal, state, local and foreign income tax
laws with regard to an investment in Common Stock, including any reporting
requirements.
DISTRIBUTIONS. Distributions by the Company to a Non-U.S. Stockholder that
are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the Company as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of the
Company. Such distributions ordinarily will be subject to withholding of United
States federal income tax on a gross basis (that is, without allowance of
deductions) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the Non-U.S. Stockholder of a United States trade
or business or, if an income tax treaty applies, as attributable to a United
States permanent establishment of the Non-U.S. Stockholder. Dividends that are
effectively connected with such a trade or business or are attributable to such
United States permanent establishment will be subject to tax on a net basis
(that is, after allowance of deductions) at graduated rates, in the same manner
as U.S. Stockholders are taxed with respect to such dividends and are generally
not subject to
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withholding. Any such dividends received by a Non-U.S. Stockholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations, not currently in effect, however, a Non-U.S.
Stockholder who wished to claim the benefit of an applicable treaty rate would
be required to satisfy certain certification and other requirements. Under
certain treaties, lower withholding rates generally applicable to dividends do
not apply to dividends from a REIT, such as the Company. Certain certification
and disclosure requirements must be satisfied to be exempt from withholding
under the effectively connected income and permanent establishment exemptions
discussed above.
Distributions in excess of current or accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Stockholder to the extent that
they do not exceed the adjusted basis of the stockholder's Common Stock, but
rather will reduce the adjusted basis of such stock. For FIRPTA withholding
purposes (discussed below), such distributions (I.E., distributions that are not
made out of earnings and profits) will be treated as consideration for the sale
or exchange of shares of Common Stock. To the extent that such distributions
exceed the adjusted basis of a Non-U.S. Stockholder's Common Stock, they will
give rise to gain from the sale or exchange of his stock, the tax treatment of
which is described below. For withholding purposes, pursuant to current Treasury
Regulations, the Company is required to treat all distributions as if made out
of current or accumulated earnings and profits. However, amounts thus withheld
are generally refundable if it is subsequently determined that such distribution
was, in fact, in excess of current or accumulated earnings and profits of the
Company. A Non-U.S. Stockholder may obtain such a refund by filing the
appropriate claim for refund with the IRS.
Distributions to a Non-U.S. Stockholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those arising
from the disposition of a United States real property interest) generally will
not be subject to United States federal income taxation, unless (i) investment
in the Common Stock is effectively connected with the Non-U.S. Stockholder's
United States trade or business (or, if an income tax treaty applies, is
attributable to a United States permanent establishment of the Non-U.S.
Stockholder), in which case the Non-U.S. Stockholder will be subject to the same
treatment as U.S. Stockholders with respect to such gain (except that a
stockholder that is a foreign corporation may also be subject to the 30% branch
profits tax, as discussed above) or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who is present in the United States for 183 days or
more during the taxable year and has a "tax home" in the United States, in which
case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains.
Distributions to a Non-U.S. Stockholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests will
cause the Non-U.S. Stockholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Stockholders would thus generally be entitled to offset its gross income by
allowable deductions and would pay tax on the resulting taxable income at the
same rates applicable to domestic stockholders (subject to a special alternative
minimum tax in the case of nonresident alien individuals). Also, such gain may
be subject to a 30% branch profits tax in the hands of a Non-U.S. Stockholder
that is a corporation and is not entitled to treaty relief or exemption, as
discussed above. The Company is required to withhold 35% of any such
distribution. That amount is creditable against the Non-U.S. Stockholder's
United States Federal income tax liability. To the extent that such withholding
exceeds the actual tax owed by the Non-U.S. Stockholder, the Non-U.S.
Stockholder may claim a refund from the IRS.
The Company or any nominee (E.G., a broker holding shares in street name)
may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to
determine whether withholding is required on gains realized from the disposition
of United States real property interests. A domestic person who holds shares of
Common Stock on behalf of a Non-U.S. Stockholder will bear the burden of
withholding.
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SALE OF COMMON STOCK. Gain recognized by a Non-U.S. Stockholder upon the
sale or exchange of shares of Common Stock generally will not be subject to
United States taxation unless such shares constitute a "United States real
property interest" within the meaning of the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA"). The Common Stock will not constitute a "United
States real property interest" so long as the Company is a "domestically
controlled REIT." A "domestically controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock is
held directly or indirectly by Non-U.S. Stockholders. The Company believes that
it is a "domestically controlled REIT," and therefore that the sale of shares of
Common Stock are not subject to taxation under FIRPTA. However, because the
shares of Common Stock are publicly traded, no assurance can be given that the
Company will continue to be a "domestically-controlled REIT." Notwithstanding
the foregoing, gain from the sale or exchange of shares of Common Stock not
otherwise subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i)
investment in the stock is effectively connected with the Non-U.S. Stockholder's
United States trade or business (or, if an income tax treaty applies, is
attributable to a United States permanent establishment of the Non-U.S.
Stockholder), or (ii) the Non-U.S. Stockholder is a nonresident alien individual
who is present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States. In such case, the nonresident alien
individual will be subject to a 30% tax on the amount of such individual's gain.
If the Company does not qualify as or ceases to be a
"domestically-controlled REIT," gain arising from the sale or exchange by a
Non-U.S. Stockholder of shares of Common Stock would be subject to United States
taxation under FIRPTA as a sale of a "United States real property interest"
unless the shares are "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market (E.G., the New York Stock
Exchange) and the selling Non-U.S. Stockholder held no more than 5% (after
applying certain constructive ownership rules) of the shares of Common Stock
during the shorter of (i) the period during which the taxpayer held such shares
or (ii) the 5-year period ending on the date of the disposition of such shares.
If gain on the sale or exchange of shares of Common Stock were subject to
taxation under FIRPTA, the Non-U.S. Stockholder would be subject to regular
United States income tax with respect to such gain in the same manner as a U.S.
Stockholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations), and the purchaser of the stock would be required to withhold and
remit to the IRS 10% of the purchase price. The 10% withholding tax will not
apply if the shares are "regularly traded" in an established securities market.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Stockholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Stock by or through a foreign office of a foreign
broker. Information reporting (but not backup withholding) will apply, however,
to a payment of the proceeds of a sale of Common Stock by a foreign office of a
broker that (a) is a United States person, (b) derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States or (c) is a "controlled foreign corporation" (generally, a foreign
corporation controlled by United States stockholders) for United States tax
purposes, unless the broker has documentary evidence in its records that the
holder is a Non-U.S. Stockholder and certain other conditions are met, or the
stockholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of Common Stock is subject
to both backup withholding and information reporting unless the stockholder
certifies under penalty of perjury that the stockholder is a Non-U.S.
Stockholder, or otherwise establishes an exemption. Backup withholding is not an
additional tax. A Non-U.S. Stockholder may obtain a refund of any amounts
withheld under the backup withholding rules by filing the appropriate claim for
refund with the IRS.
S-57
<PAGE>
NEW WITHHOLDING REGULATIONS. Final regulations dealing with withholding tax
on income paid to foreign persons and related matters (the "New Withholding
Regulations") were issued by the Treasury Department on October 6, 1997 and are
expected to be published in the Federal Register on October 14, 1997. In
general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but unify
current certification procedures and forms and clarify reliance standards. For
example, the New Withholding Regulations adopt a certification rule which was in
the proposed regulations, under which a foreign stockholder who wishes to claim
the benefit of an applicable treaty rate with respect to dividends received from
a United States corporation will be required to satisfy certain certification
and other requirements. In addition, the New Withholding Regulations require a
corporation that is a REIT to treat as a dividend the portion of a distribution
that is not designated as a capital gain dividend or return of basis and apply
the 30% withholding tax (subject to any applicable deduction or exemption) to
such portion, and to apply the FIRPTA withholding rules (discussed above) with
respect to the portion of the distribution designated by the REIT as capital
gain dividend. The New Withholding Regulations will generally be effective for
payments made after December 31, 1998, subject to certain transition rules. THE
DISCUSSION SET FORTH ABOVE IN "TAXATION OF NON-U.S. STOCKHOLDERS" DOES NOT TAKE
THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S. STOCKHOLDERS
ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW
WITHHOLDING REGULATIONS.
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement"), the Company has agreed to sell to the U.S.
Underwriters named below (the "U.S. Underwriters"), and the U.S. Underwriters
have severally agreed to purchase, the number of shares of Common Stock set
forth opposite their respective names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................................... 432,000
A.G. Edwards & Sons, Inc......................................................... 432,000
PaineWebber Incorporated......................................................... 432,000
Sutro & Co. Incorporated......................................................... 432,000
Wheat, First Securities, Inc..................................................... 432,000
----------
Total.................................................................. 2,160,000
----------
----------
</TABLE>
The Company has also entered into a purchase agreement (the "International
Purchase Agreement" and, together with the U.S. Purchase Agreement, the
"Agreements") with Merrill Lynch International, A.G. Edwards & Sons, Inc.,
PaineWebber International (U.K.) Ltd., Sutro & Co. Incorporated and Wheat, First
Securities, Inc. (the "International Managers"). Subject to the terms and
conditions set forth in the International Purchase Agreement, the Company has
agreed to sell to the International Managers, and the International Managers
have severally agreed to purchase, an aggregate of 540,000 shares of Common
Stock. The initial public offering price per share and the underwriting discount
per share are identical under the U.S. Purchase Agreement and the International
Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement, the
several U.S. Underwriters and the several International Managers (collectively,
the "Underwriters"), respectively, have agreed, subject to the terms and
conditions set forth therein, to purchase all of the shares of Common Stock
being sold pursuant to such Agreement if any of the shares of Common Stock being
sold pursuant to such Agreement are purchased. The U.S. Purchase Agreement
provides that, in the event of a default by a U.S. Underwriter, the purchase
commitments of the non-defaulting U.S. Underwriters may in certain
S-58
<PAGE>
circumstances be increased, and the International Purchase Agreement provides
that, in the event of a default by an International Manager, the purchase
commitments of the non-defaulting International Managers may in certain
circumstances be increased. The closing with respect to the sale of the shares
of Common Stock pursuant to the U.S. Purchase Agreement is a condition to the
closing with respect to the sale of the shares of Common Stock pursuant to the
International Purchase Agreement, and the closing with respect to the sale of
the shares of Common Stock pursuant to the International Purchase Agreement is a
condition to the closing with respect to the sale of the shares of Common Stock
pursuant to the U.S. Purchase Agreement.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") which provides for the
coordination of their activities. Under the terms of the Intersyndicate
Agreement, the U.S. Underwriters and the International Managers are permitted to
sell shares of Common Stock to each other. Pursuant to the Intersyndicate
Agreement, sales may be made between the U.S. Underwriters and the International
Managers of such number of shares of Common Stock as may be mutually agreed. The
price of any shares of Common Stock so sold shall be the initial public offering
price, less an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and
any dealer to whom they sell shares of Common Stock will agree to offer to sell
or sell shares of Common Stock only to persons whom they believe are United
States Persons or Canadian Persons (as defined in the Intersyndicate Agreement)
or to persons whom they believe intend to reoffer or resell the same to United
States Persons or Canadian Persons, and the International Managers and any bank,
broker or dealer to whom they sell shares of Common Stock will agree not to
offer to sell or sell shares of Common Stock to persons whom they believe to be
United States Persons or Canadian Persons or to persons whom they believe intend
to reoffer or resell the same to United States Persons or Canadian Persons,
except in each case for transactions pursuant to the Intersyndicate Agreement
which, among other things, permits the Underwriters to purchase from each other
and offer for resale such number of shares of Common Stock as the selling
Underwriter or Underwriters and the purchasing Underwriter or Underwriters may
agree.
The U.S. Underwriters have advised the Company that they propose initially
to offer the shares of Common Stock offered hereby 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 $.85 per share.
The U.S. Underwriters may allow, and such dealers may reallow, a discount not in
excess of $.10 per share on sales to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days after the date hereof, to purchase up to 324,000 additional shares of
Common Stock and to the International Managers an option, exercisable for 30
days after the date hereof, to purchase up to 81,000 additional shares of Common
Stock, in each case solely to cover over-allotments, if any, at the initial
public offering price less the underwriting discount and less an amount per
share equal to any dividends or distributions payable by the Company on the
shares offered hereby but not payable on the shares purchased by the U.S.
Underwriters or the International Managers, as the case may be, upon the
exercise of such option. To the extent that the U.S. Underwriters exercise this
option, each of the U.S. Underwriters will be obligated, subject to certain
conditions, to purchase approximately the same percentage of such shares which
the number of shares of Common Stock to be purchased by it shown in the
foregoing table bears to the total number of shares of Common Stock set forth in
such table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has agreed that, for a period of 90 days from the date of this
Prospectus Supplement, the Company will not, without the prior written consent
of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
directly or indirectly (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of any
shares of Common Stock or any securities convertible into
S-59
<PAGE>
or exercisable or exchangeable for Common Stock or file any registration
statement under the Securities Act with respect to the foregoing or (ii) enter
into any swap or other agreement or transaction that transfers, in whole or in
part, directly or indirectly, the economic consequences of ownership of Common
Stock, whether any such swap, agreement, or other transaction described in (i)
or (ii) above is to be settled by delivery of Common Stock, other securities,
cash or otherwise. The foregoing sentence shall not apply to (A) the Common
Stock to be sold in the Offering, (B) any shares of Common Stock issued by the
Company upon the exercise of any option outstanding on the date of this
Prospectus Supplement, (C) any shares of Common Stock issued or options to
purchase Common Stock granted pursuant to existing employee benefit plans or (D)
any shares of Common Stock issued pursuant to any non-employee director stock
plan.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the U.S. Underwriters are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with this Offering (I.E., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement), the U.S.
Underwriters may reduce that short position by purchasing Common Stock in the
open market. The U.S. Underwriters may also elect to reduce any short position
through the exercise of all or part of the over-allotment options described
above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither 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 Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the Common Stock to be issued in connection with the
Offering will be passed upon for the Company by Ballard Spahr Andrews &
Ingersoll, Baltimore, Maryland. Certain legal matters relating to 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-60
<PAGE>
PROSPECTUS
$300,000,000
REALTY INCOME CORPORATION
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
------------------------
Realty Income Corporation, a Maryland 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, $1.00 par value per share (the
"Preferred Stock"), or (iii) shares of its Common Stock, $1.00 par value per
share (the "Common Stock"), with an aggregate public offering price of up to
$300,000,000 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 shares of Preferred Stock
or Common Stock, covenants and any initial public offering price; (ii) in the
case of Preferred Stock, the specific designation, preferences, conversion and
other rights, voting powers, restrictions, limitations as to transferability,
dividends and other distributions and terms and conditions of redemption 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 October 1, 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 documents listed below have been filed by the Company under the Exchange
Act with the Commission and are incorporated herein by reference:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(ii) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997;
(iii) the Company's Current Report on Form 8-K dated May 5, 1997; and
(iv) the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
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, a Maryland 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 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 August 19, 1997, the
Company directly owned controlling interests in 771 properties located
throughout the United States.
The Company commenced operations as a REIT on August 15, 1994 through the
merger and consolidation of 25 public and private real estate limited
partnerships (the "Consolidation"). From September 1993 until May 28, 1997, the
Company existed as a corporation formed under the laws of the State of Delaware
(the "Delaware Company"). In March 1997, the Company formed Realty Income of
Maryland, Inc., a Maryland corporation and wholly-owned subsidiary of the
Delaware Company (the "Maryland Company"), specifically for the purpose of
reincorporating the Company under the laws of the State of Maryland (the
"Reincorporation"). The Maryland Company conducted no business and had no
material assets or liabilities prior to May 28, 1997. On May 28, 1997, the
Delaware Company was merged into the Maryland Company pursuant to an Agreement
and Plan of Merger approved by the Company's stockholders. Upon completion of
the merger, the Maryland Company changed its name to Realty Income Corporation.
The Reincorporation did not result in any change in the Company's business,
assets or liabilities and did not result in any relocation of management or
other employees. For a more complete description of the potential effects of the
Reincorporation, reference is hereby made to the section entitled,
"Reincorporation of the Company in Maryland and Related Changes to the Rights of
Stockholders" of the Company's Proxy Statement filed with the Commission on
March 28, 1997 in connection with its 1997 Annual Meeting of Stockholders, which
section is incorporated by reference herein.
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 construction 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 and the six months
ended June 30, 1997 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 (collectively, the "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 period.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, ------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
6x 14x 10x 39x 5,865x
</TABLE>
3
<PAGE>
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.
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.
4
<PAGE>
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;
(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;
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(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;
(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 Company and the applicable 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
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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 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 in registered form, 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.
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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.
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.
Except as may otherwise be provided in the Prospectus Supplement relating to
any series of Debt Securities, the term "Subsidiary", as used in the Indenture,
means with respect to the Company, any other Person of which more than 50% of
(i) the equity or other ownership interests or (ii) the total voting power of
shares of capital stock or other ownership interests entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers, trustees or general or managing partners thereof is at the time owned
by the Company or one or more of the other Subsidiaries of the Company or a
combination thereof.
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
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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 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,
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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 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 any 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.
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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 of a series created 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
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
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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.
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
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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
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
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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.
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 100,000,000 shares of Common Stock, $1.00
par value per share. As of August 19, 1997, the Company had outstanding
22,994,964 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 charter (the "Charter") and Bylaws (the "Bylaws").
TERMS
Subject to the preferential rights of any other shares or series of stock
and to the provisions of the Charter regarding the restrictions on transfer of
stock, holders of Common Stock are entitled to receive dividends when, as and if
authorized and declared by the Company's Board of Directors out of assets
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legally available therefor. Payment and authorization 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
adequate provision for payment of the debts and other liabilities of the Company
and the preferential amounts owing with respect to any outstanding Preferred
Stock. Subject to the provisions of the Charter regarding the restrictions on
transfer of stock, each outstanding share of Common Stock entitles the holder to
one vote on all matters submitted to a vote of stockholders, including the
election of directors and, except as provided with respect to any other class or
series of stock, the holders of such shares will possess the exclusive voting
power. The Company's Board of Directors is divided into three classes of
directors. The initial terms of the Class I, Class II and Class III directors
will expire in 1998, 1999 and 2000, respectively. Beginning in 1998, directors
of each class will be chosen for three-year terms upon the expiration of their
current terms and each year one class of directors will be elected by the
stockholders. The staggered terms of directors may reduce the possibility of a
tender offer or an attempt to change control of the Company even though a tender
offer or change in control might involve a premium price for the Common Stock or
otherwise be in the best interest of the stockholders. Holders of Common Stock
do not have cumulative voting rights in the election of directors, which means
that holders of more than 50% of all the shares of the Company's Common Stock
voting for the election of directors can elect all the directors of the class
standing for election at the time if they choose to do so and the holders of the
remaining shares cannot elect any directors of such class. Holders of shares of
Common Stock do not have preemptive rights, which means they have no right under
the Charter, Bylaws or Maryland law to acquire any additional shares of Common
Stock that may be issued by the Company at a subsequent date. Holders of shares
of Common Stock have no preference, conversion, exchange, sinking fund,
redemption or appraisal rights. All shares of Common Stock now outstanding are,
and additional shares of Common Stock offered will be when issued, fully paid
and nonassessable.
Under the Maryland General Corporation Law (the "MGCL"), a Maryland
corporation generally cannot dissolve, amend its charter, merge, sell all or
substantially all of its assets, engage in a share exchange or engage in similar
transactions outside the ordinary course of business unless approved by the
affirmative vote of stockholders holding at least two thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes entitled to be cast on the matter) is set forth in
the corporation's charter. The Charter provides that any such action shall be
effective if approved by the affirmative vote of holders of shares entitled to
cast a majority of all the votes entitled to be cast on the matter.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other classes or series of stock and to establish
the number of shares in each class or series and to set the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
transferability, dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
MARYLAND BUSINESS COMBINATION LAW
Under the MGCL, certain "business combinations" (including certain issuances
of equity securities) between a Maryland corporation and any person who
beneficially owns ten percent or more of the voting power of the corporation's
shares (an "Interested Stockholder") or an affiliate thereof are prohibited for
five years after the most recent date on which the Interested Stockholder
becomes an Interested Stockholder. Thereafter, any such business combination
must be approved by two super-majority stockholder votes unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. The business combinations provisions of the MGCL do not apply, however,
to business combinations that are approved or exempted by the Board of Directors
prior to the time that the Interested Stockholder becomes an Interested
Stockholder.
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These provisions of the MGCL may delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interests of the stockholders.
MARYLAND CONTROL SHARE ACQUISITIONS LAW
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
As permitted by the MGCL, the Bylaws contain a provision exempting the
Company from the control share acquisition statute any and all acquisitions by
any person of the Company's shares of stock. There can be no assurance that such
provision will not be amended or eliminated by the Board of Directors at any
time in the future.
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."
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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 20,000,000 shares of Preferred Stock,
$1.00 par value per share, of which no shares were outstanding as of August 19,
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 Charter (including any applicable Articles
Supplementary) and the Bylaws.
The Charter authorizes the Board of Directors to classify any unissued
shares of Preferred Stock and to reclassify any previously classified but
unissued shares of any class or series, as authorized by the Board of Directors.
Prior to issuance of shares of each series, the Board is required by the MGCL
and the Charter to set, subject to the provisions of the Charter regarding the
restrictions on transfer of stock, the preferences, conversion or other rights,
voting powers, restrictions, limitations as to transferability, dividends or
other distributions, qualifications and terms or conditions of redemption for
each such series. Thus, the Board could authorize the issuance of shares of
Preferred Stock with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interest. As of the date hereof, no shares of
Preferred Stock are outstanding and the Company has no present plans to issue
any Preferred Stock. 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 of and other information concerning the
Preferred Stock, including:
(1) the title 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;
(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;
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(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) whether liquidation preferences on Preferred Stock shall be counted
as liabilities of the Company in determining whether distributions to junior
stockholders can be made under the MGCL;
(15) 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
(16) 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. 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 authorized and 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 date set forth in the
applicable Prospectus Supplement. If the Company's Board of Directors fails to
authorize 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 or paid for any
future period.
If any shares of Preferred Stock of any series or class are outstanding, no
full dividends shall be authorized 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, then full cumulative dividends have been or contemporaneously are
authorized and paid or authorized 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
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a cumulative dividend, then full dividends for the then current dividend period
have been or contemporaneously are authorized and paid or authorized 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, then all dividends authorized 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 authorized pro rata so that the amount of dividends authorized 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 authorized and paid or authorized 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 authorized and paid
or authorized and a sum sufficient for the payment thereof is set apart for
payment for the then current dividend period, then no dividends (other than in
the Common Stock or other stock of the Company ranking junior to the Preferred
Stock of such series or class as to dividends and upon liquidation) shall be
authorized or paid or set aside for payment nor shall any other distribution be
authorized or made on the Common Stock or any other 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 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 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.
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 stock of the Company, the terms of
such Preferred Stock may provide that, if no such stock shall have been
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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 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 authorized and paid or authorized 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 authorized and paid or
authorized and a sum sufficient for the payment thereof is set apart for payment
for the then current dividend period, then 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 authorized and paid or
authorized 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 authorized and paid or authorized 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 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.
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
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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 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 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 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 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 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
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 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
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the provisions of the Charter or the Articles Supplementary 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.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series or class
of Preferred Stock are convertible into shares of 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
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
The following summary of certain restrictions on the ownership and transfer
of shares of stock of the Company does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the applicable provisions of
the Charter and Bylaws.
In order for the Company to qualify as a REIT under the Code, no more than
50% in value of its outstanding shares of stock may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year for which an election to be treated as a REIT has been made). In addition,
if the Company, or an owner of 10% or more of the Company, actually or
constructively owns 10% or more of a tenant of the Company (or a tenant of any
partnership in which the Company is a partner), the rent received by the Company
(either directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Code. A
REIT's stock must also be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of twelve months or during a
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proportionate part of a shorter taxable year (other than the first year for
which an election to be treated as a REIT has been made).
Because the Company expects to continue to qualify as a REIT, the Charter
contains restrictions on the ownership and transfer of Common Stock which are
intended to assist the Company in complying with these requirements. The Charter
provides that, subject to certain specified exceptions, no person or entity may
own, or be deemed to own by virtue of the applicable constructive ownership
provisions of the Code, more than 9.8% (by number or value, whichever is more
restrictive) of the outstanding shares of Common Stock (the "Ownership Limit").
The constructive ownership rules of the Code are complex, and may cause shares
of Common Stock owned actually or constructively by a group of related
individuals and/or entities to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.8% of the shares of Common
Stock (or the acquisition of an interest in an entity that owns, actually or
constructively, Common Stock) by an individual or entity, could, nevertheless
cause that individual or entity, or another individual or entity, to own
constructively in excess of 9.8% of the outstanding Common Stock and thus
violate the Ownership Limit, or such other limit as permitted by the Board of
Directors. The Board of Directors may, but in no event is required to, waive the
Ownership Limit with respect to a particular stockholder if it determines that
such ownership will not jeopardize the Company's status as a REIT. As a
condition of such waiver, the Board of Directors may require a ruling from the
Internal Revenue Service or an opinion of counsel satisfactory to it and/or
undertakings or representations from the applicant with respect to preserving
the REIT status of the Company.
The Charter further prohibits (i) any person from actually or constructively
owning shares of Common Stock of the Company that would result in the Company
being "closely held" under Section 856(h) of the Code or otherwise cause the
Company to fail to qualify as a REIT, and (ii) any person from transferring
shares of Common Stock of the Company if such transfer would result in shares of
stock of the Company being beneficially owned by fewer than 100 persons
(determined without reference to any rules of attribution).
Any person who acquires or attempts to acquire actual or constructive
ownership of shares of stock of the Company that will violate any of the
foregoing restrictions on transferability and ownership is required to give
notice immediately to the Company and provide the Company with such other
information as the Company may request in order to determine the effect of such
transfer on the Company's status as a REIT. The foregoing restrictions on
transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interest of the Company to attempt
to qualify, or to continue to qualify, as a REIT and such determination is
approved by a two thirds vote of the Company's stockholders as required by the
Charter. Except as otherwise described above, any change in the Ownership Limit
would require an amendment to the Charter.
Pursuant to the Charter, if any purported transfer of Common Stock or any
other event would otherwise result in any person violating the Ownership Limit
or such other limit as permitted by the Board of Directors, or result in the
Company being "closely held" under Section 856(h) of the Code or otherwise cause
the Company to fail to qualify as a REIT, then that number of shares in excess
of the Ownership Limit or such other limit shall be transferred to a trust for
the benefit of a charitable beneficiary as described below and the purported
transferee (the "Prohibited Transferee"), shall acquire no rights (or, in the
case of any event other than a purported transfer, the person or entity holding
record title to any such excess shares (the "Prohibited Owner") shall cease to
have any rights) in such excess shares. Any such excess shares described above
will be transferred automatically, by operation of law, to a trust, the
beneficiary of which will be a qualified charitable organization selected by the
Company (the "Beneficiary"). Such automatic transfer shall be deemed to be
effective as of the close of business on the business day prior to the date of
such violative transfer. Within 20 days of receiving notice from the Company of
the transfer of shares to the trust, the trustee of the trust (who shall be
designated by the Company and be unaffiliated with the Company and any
Prohibited Transferee or Prohibited Owner) will be required to sell such excess
shares to a person or entity who could own such shares without violating the
Ownership Limit,
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or such other limit as permitted by the Board of Directors, and distribute to
the Prohibited Transferee or Prohibited Owner, as applicable, an amount equal to
the lesser of the price paid by the Prohibited Transferee or Prohibited Owner
for such excess shares or the net sales proceeds received by the trust for such
excess shares. In the case of any excess shares resulting from any event other
than a transfer, or from a transfer for no consideration (such as a gift), the
trustee will be required to sell such excess shares to a qualified person or
entity and distribute to the Prohibited Owner an amount equal to the lesser of
the Market Price (as defined in the Charter) of such excess shares as of the
date of such event or the net sales proceeds received by the trust for such
excess shares. In either case, any proceeds in excess of the amount
distributable to the Prohibited Transferee or Prohibited Owner, as applicable,
will be distributed to the Beneficiary. Prior to a sale of any such excess
shares by the trust, the trustee will be entitled to receive, in trust for the
Beneficiary, all dividends and other distributions paid by the Company with
respect to such excess shares, and also will be entitled to exercise all voting
rights with respect to such excess shares. Subject to Maryland law, effective as
of the date that such shares have been transferred to the trust, the trustee
shall have the authority (at the trustee's sole discretion) (i) to rescind as
void any vote cast by a Prohibited Transferee or Prohibited Owner, as
applicable, prior to the discovery by the Company that such shares have been
transferred to the trust and (ii) to recast such vote in accordance with the
desires of the trustee acting for the benefit of the Beneficiary. However, if
the Company has already taken irreversible corporate action, then the trustee
shall not have the authority to rescind and recast such vote. Any dividend or
other distribution paid to the Prohibited Transferee or Prohibited Owner (prior
to the discovery by the Company that such shares had been automatically
transferred to a trust as described above) will be required to be repaid to the
trustee upon demand for distribution to the Beneficiary. In the event that the
transfer to the trust as described above is not automatically effective (for any
reason) to prevent violation of the Ownership Limit or such other limit as
permitted by the Board of Directors, then the Charter provides that the transfer
of the excess shares will be void.
In addition, shares of stock of the Company held in the trust shall be
deemed to have been offered for sale to the Company, or its designee, at a price
per share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the trust (or, in the case of a devise or gift or
other transaction which does not involve a purchase of stock, the Market Price
as of the day of the event which resulted in the transfer of such excess shares
to the trust) and (ii) the Market Price on the date the Company, or its
designee, accepts such offer. The Company shall have the right to accept such
offer until the trustee has sold the shares of stock held in the trust. Upon
such a sale to the Company, the interest of the Beneficiary in the shares sold
shall terminate and the trustee shall distribute the net proceeds of the sale to
the Prohibited Transferee or Prohibited Owner.
If any purported transfer of shares of Common Stock would cause the Company
to be beneficially owned by fewer than 100 persons, such transfer will be null
and void in its entirety and the intended transferee will acquire no rights to
the stock.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above. The foregoing ownership
limitations could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for the Common Stock or
otherwise be in the best interest of stockholders.
Under the Charter, each stockholder shall upon demand be required to
disclose to the Company in writing such information as the Company may request
in order to determine the Company's status as a REIT.
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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 URGED 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.
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 12,
1997 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.
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
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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 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 and the amount of its distributions. 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 believes that it has satisfied condition (5) and that it has
issued sufficient shares to allow it to satisfy condition (6). In addition, the
Company's Charter 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
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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 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
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services considered to be rendered to the occupant of the property, other than
through an independent contractor from whom the Company derives no revenue.
Notwithstanding the foregoing, the Company may take certain of the actions set
forth in (i) through (iv) above to the extent such actions will not, based on
the advice of tax counsel to the Company, jeopardize the Company's tax status as
a REIT.
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 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) public 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
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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.
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. 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. Accordingly, as
a result of the Merger, 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.
29
<PAGE>
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 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.
TAXPAYER RELIEF ACT OF 1997
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act
of 1997 (H.R. 2014), which will have the effect of modifying certain
REIT-related Code provisions for tax years beginning on or after January 1,
1998. Some of the potentially significant REIT-related changes contained in this
legislation include: (i) the rule disqualifying a REIT for any year in which it
fails to comply with certain regulations requiring the REIT to monitor its stock
ownership is replaced with an intermediate financial penalty; (ii) the rule
disqualifying a REIT in any year that it is "closely held" does not apply if
during such year the REIT complied with certain regulations which require the
REIT to monitor its stock ownership, and the REIT did not know or have reason to
know that it was closely held; (iii) a REIT is permitted to render a DE MINIMIS
amount of impermissible services to tenants in connection with the management of
property and still treat amounts received with respect to such property (other
than certain amounts relating to such services) as qualified rent; (iv) the
rules regarding attribution to partnerships for purposes of defining
30
<PAGE>
qualified rent and independent contractors are modified so that attribution
occurs only when a partner owns a 25% or greater interest in the partnership;
(v) the 30% gross income test is repealed; (vi) any corporation wholly-owned by
a REIT is permitted to be treated as a qualified REIT subsidiary regardless of
whether such subsidiary has always been owned by the REIT; (vii) the ordering
rule for purposes of the requirement that newly-electing REITs distribute
earnings and profits accumulated in non-REIT years is modified; (viii) the class
of excess noncash items for purposes of the REIT distribution requirements is
expanded; (ix) the rules regarding the treatment of hedges are modified; and (x)
certain other Code provisions relating to REITs are amended. Some or all of the
provisions could affect both the Company's operations and its ability to
maintain its REIT status for its taxable years beginning in 1998.
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
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
31
<PAGE>
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
Ballard Spahr Andrews & Ingersoll. Certain legal matters will be passed upon for
the Company by Latham & Watkins.
32
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
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 OR 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>
Prospectus Supplement Summary.................. S-3
Risk Factors................................... S-13
Use of Proceeds................................ S-18
Distribution Policy............................ S-18
Capitalization................................. S-19
Price Range of Common Stock and Distribution
History...................................... S-20
Business and Properties........................ S-21
Management..................................... S-50
Certain U.S. Federal Income Tax Considerations
to Holders of Common Stock................... S-53
Underwriting................................... S-58
Legal Matters.................................. S-60
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................. 17
Restrictions on Ownership and Transfers of
Capital Stock................................ 22
Certain Federal Income Tax Considerations...... 25
Plan of Distribution........................... 31
Experts........................................ 32
Legal Matters.................................. 32
</TABLE>
2,700,000 SHARES
[LOGO]
COMMON STOCK
------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
SUTRO & CO. INCORPORATED
WHEAT FIRST BUTCHER SINGER
OCTOBER 8, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 1, 1997)
2,700,000 SHARES
[LOGO]
COMMON STOCK
------------------
Realty Income Corporation, a Maryland corporation (the "Company" or "Realty
Income"), is a fully integrated, self-administered and self-managed real estate
investment trust ("REIT") that acquires, owns and manages net leased, retail
properties. The Company 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 and, through its predecessors,
has been in the real estate investment business since 1969. As of August 31,
1997, the Company owned a diversified portfolio of 774 properties located in 42
states with over 5.7 million square feet of leasable space. Over 99 percent of
the Company's single-tenant properties were leased as of August 31, 1997
pursuant to leases with an average remaining term (excluding extension options)
of approximately 8.4 years.
The Company currently pays regular monthly distributions to holders of its
outstanding shares of common stock, par value $1.00 per share ("Common Stock").
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under the
symbol "O." On October 8, 1997, the last reported sale price of the Common Stock
on the NYSE was $27 1/16 per share.
All of the 2,700,000 shares of Common Stock being offered hereby are being
sold by Realty Income. Of the 2,700,000 shares of Common Stock offered hereby,
540,000 shares are being offered outside of the United States and Canada by the
International Managers (the "International Offering") and 2,160,000 shares are
being offered in a concurrent offering inside the United States and Canada by
the U.S. Underwriters (the "U.S. Offering" and, together with the International
Offering, the "Offering"). The price to public and underwriting discount per
share are identical for the International Offering and the U.S. Offering. See
"Underwriting."
The shares of Common Stock are subject to certain restrictions on ownership
and transfer designed to preserve the Company's status as a REIT for federal
income tax purposes. See "Restrictions on Ownership and Transfers of Capital
Stock" in the accompanying Prospectus.
SEE "RISK FACTORS" BEGINNING ON PAGE S-13 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
------------------------
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 DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share............................................ $27.00 $1.415 $25.585
Total(3)............................................. $72,900,000 $3,820,500 $69,079,500
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $400,000.
(3) The Company has granted the International Managers and U.S. Underwriters
(the "Underwriters") options, exercisable within 30 days after the date
hereof, to purchase up to 81,000 and 324,000 additional shares of Common
Stock, respectively, in each case to cover over-allotments, if any. If all
such shares are purchased, the total Price to Public, Underwriting Discount
and Proceeds to Company will be $83,835,000, $4,393,575 and $79,441,425,
respectively. See "Underwriting."
------------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued by the Company and delivered to and
accepted by the Underwriters, 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 Common
Stock will be made in New York, New York on or about October 15, 1997.
--------------------------
MERRILL LYNCH INTERNATIONAL
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INTERNATIONAL
SUTRO & CO. INCORPORATED
WHEAT FIRST BUTCHER SINGER
----------------
The date of this Prospectus Supplement is October 8, 1997.
<PAGE>
NEW WITHHOLDING REGULATIONS. Final regulations dealing with withholding tax
on income paid to foreign persons and related matters (the "New Withholding
Regulations") were issued by the Treasury Department on October 6, 1997 and are
expected to be published in the Federal Register on October 14, 1997. In
general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but unify
current certification procedures and forms and clarify reliance standards. For
example, the New Withholding Regulations adopt a certification rule which was in
the proposed regulations, under which a foreign stockholder who wishes to claim
the benefit of an applicable treaty rate with respect to dividends received from
a United States corporation will be required to satisfy certain certification
and other requirements. In addition, the New Withholding Regulations require a
corporation that is a REIT to treat as a dividend the portion of a distribution
that is not designated as a capital gain dividend or return of basis and apply
the 30% withholding tax (subject to any applicable deduction or exemption) to
such portion, and to apply the FIRPTA withholding rules (discussed above) with
respect to the portion of the distribution designated by the REIT as capital
gain dividend. The New Withholding Regulations will generally be effective for
payments made after December 31, 1998, subject to certain transition rules. THE
DISCUSSION SET FORTH ABOVE IN "TAXATION OF NON-U.S. STOCKHOLDERS" DOES NOT TAKE
THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S. STOCKHOLDERS
ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW
WITHHOLDING REGULATIONS.
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"International Purchase Agreement"), the Company has agreed to sell to the
International Managers named below (the "International Managers"), and the
International Managers have severally agreed to purchase, the number of shares
of Common Stock set forth opposite their respective names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------- -----------------
<S> <C> <C>
Merrill Lynch International................................................... 108,000
A.G. Edwards & Sons, Inc...................................................... 108,000
PaineWebber International (U.K.) Ltd.......................................... 108,000
Sutro & Co. Incorporated...................................................... 108,000
Wheat, First Securities, Inc.................................................. 108,000
-------
Total......................................................... 540,000
-------
-------
</TABLE>
The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement" and, together with the International Purchase Agreement, the
"Agreements") with Merrill Lynch, Pierce, Fenner & Smith Incorporated, A.G.
Edwards & Sons, Inc., PaineWebber Incorporated, Sutro & Co. Incorporated and
Wheat, First Securities, Inc. (the "U.S. Underwriters"). Subject to the terms
and conditions set forth in the U.S. Purchase Agreement, the Company has agreed
to sell to the U.S. Underwriters, and the U.S. Underwriters have severally
agreed to purchase, an aggregate of 2,160,000 shares of Common Stock. The
initial public offering price per share and the underwriting discount per share
are identical under the International Purchase Agreement and the U.S. Purchase
Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement, the
several International Managers and the several U.S. Underwriters (collectively,
the "Underwriters"), respectively, have agreed, subject to the terms and
conditions set forth therein, to purchase all of the shares of Common Stock
being sold pursuant to such Agreement if any of the shares of Common Stock being
sold pursuant to such Agreement are purchased. The International Purchase
Agreement provides that, in the event of a default by an International Manager,
the purchase commitments of the non-defaulting International Managers may in
certain circumstances be increased, and the U.S. Purchase Agreement provides
that, in the event of
S-58
<PAGE>
a default by a U.S. Underwriter, the purchase commitments of the non-defaulting
U.S. Underwriters may in certain circumstances be increased. The closing with
respect to the sale of the shares of Common Stock pursuant to the International
Purchase Agreement is a condition to the closing with respect to the sale of the
shares of Common Stock pursuant to the U.S. Purchase Agreement, and the closing
with respect to the sale of the shares of Common Stock pursuant to the U.S.
Purchase Agreement is a condition to the closing with respect to the sale of the
shares of Common Stock pursuant to the International Purchase Agreement.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") which provides for the
coordination of their activities. Under the terms of the Intersyndicate
Agreement, the International Managers and the U.S. Underwriters are permitted to
sell shares of Common Stock to each other. Pursuant to the Intersyndicate
Agreement, sales may be made between the International Managers and the U.S.
Underwriters of such number of shares of Common Stock as may be mutually agreed.
The price of any shares of Common Stock so sold shall be the initial public
offering price, less an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and
any dealer to whom they sell shares of Common Stock will agree to offer to sell
or sell shares of Common Stock only to persons whom they believe are United
States Persons or Canadian Persons (as defined in the Intersyndicate Agreement)
or to persons whom they believe intend to reoffer or resell the same to United
States Persons or Canadian Persons, and the International Managers and any bank,
broker or dealer to whom they sell shares of Common Stock will agree not to
offer to sell or sell shares of Common Stock to persons whom they believe to be
United States Persons or Canadian Persons or to persons whom they believe intend
to reoffer or resell the same to United States Persons or Canadian Persons,
except in each case for transactions pursuant to the Intersyndicate Agreement
which, among other things, permits the Underwriters to purchase from each other
and offer for resale such number of shares of Common Stock as the selling
Underwriter or Underwriters and the purchasing Underwriter or Underwriters may
agree.
The International Managers have advised the Company that they propose
initially to offer the shares of Common Stock offered hereby 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 $.85 per share. The International Managers may allow, and such dealers may
reallow, a discount not in excess of $.10 per share on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Company has granted to the International Managers an option, exercisable
for 30 days after the date hereof, to purchase up to 81,000 additional shares of
Common Stock and to the U.S. Underwriters an option, exercisable for 30 days
after the date hereof, to purchase up to 324,000 additional shares of Common
Stock, in each case solely to cover over-allotments, if any, at the initial
public offering price less the underwriting discount and less an amount per
share equal to any dividends or distributions payable by the Company on the
shares offered hereby but not payable on the shares purchased by the
International Managers or the U.S. Underwriters, as the case may be, upon the
exercise of such option. To the extent that the International Managers exercise
this option, each of the International Managers will be obligated, subject to
certain conditions, to purchase approximately the same percentage of such shares
which the number of shares of Common Stock to be purchased by it shown in the
foregoing table bears to the total number of shares of Common Stock set forth in
such table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has agreed that, for a period of 90 days from the date of this
Prospectus Supplement, the Company will not, without the prior written consent
of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
directly or indirectly (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of any
shares of Common Stock or any securities convertible into
S-59
<PAGE>
or exercisable or exchangeable for Common Stock or file any registration
statement under the Securities Act with respect to the foregoing or (ii) enter
into any swap, agreement or other agreement or transaction that transfers, in
whole or in part, directly or indirectly, the economic consequences of ownership
of Common Stock, whether any such swap or other transaction described in (i) or
(ii) above is to be settled by delivery of Common Stock, other securities, cash
or otherwise. The foregoing sentence shall not apply to (A) the Common Stock to
be sold in the Offering, (B) any shares of Common Stock issued by the Company
upon the exercise of any option outstanding on the date of this Prospectus
Supplement, (C) any shares of Common Stock issued or options to purchase Common
Stock granted pursuant to existing employee benefit plans or (D) any shares of
Common Stock issued pursuant to any non-employee director stock plan.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the U.S. Underwriters are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with this Offering (I.E. if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement), the U.S.
Underwriters may reduce that short position by purchasing Common Stock in the
open market. The U.S. Underwriters may also elect to reduce any short position
through the exercise of all or part of the over-allotment options described
above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither 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 Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Each International Manager has agreed that (i) it has not offered or sold
and will not offer or sell any shares of Common Stock to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995; (ii) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the Common
Stock to a person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a
person to whom such document may otherwise lawfully be issued or passed on; and
(iii) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
any shares of Common Stock in, from or otherwise involving the United Kingdom.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
their country of purchase, in addition to the offering price set forth on the
cover page hereto.
LEGAL MATTERS
The validity of the Common Stock to be issued in connection with the
Offering will be passed upon for the Company by Ballard Spahr Andrews &
Ingersoll, Baltimore, Maryland. Certain legal matters relating to 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-60
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
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 OR 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>
Prospectus Supplement Summary.................. S-3
Risk Factors................................... S-13
Use of Proceeds................................ S-18
Distribution Policy............................ S-18
Capitalization................................. S-19
Price Range of Common Stock and Distribution
History...................................... S-20
Business and Properties........................ S-21
Management..................................... S-50
Certain U.S. Federal Income Tax Considerations
to Holders of Common Stock................... S-53
Underwriting................................... S-58
Legal Matters.................................. S-60
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................. 17
Restrictions on Ownership and Transfers of
Capital Stock................................ 22
Certain Federal Income Tax Considerations...... 25
Plan of Distribution........................... 31
Experts........................................ 32
Legal Matters.................................. 32
</TABLE>
2,700,000 SHARES
[LOGO]
COMMON STOCK
------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH INTERNATIONAL
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INTERNATIONAL
SUTRO & CO. INCORPORATED
WHEAT FIRST BUTCHER SINGER
OCTOBER 8, 1997
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