<PAGE>
Filed pursuant to Rule 424(b)(2)
File No. 33-61165
PROSPECTUS SUPPLEMENT
(To Prospectus dated October 18, 1995)
[LOGO]
3,500,000 SHARES
COMMERCIAL NET LEASE REALTY, INC.
COMMON STOCK
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Commercial Net Lease Realty, Inc. (the "Company") is a real estate
investment trust that acquires, owns and manages a diversified portfolio of
high-quality, single-tenant, freestanding properties leased to major retail
businesses under full-credit, long-term commercial net leases. As of September
30, 1995, the Company owned 154 properties located in 26 states acquired for an
aggregate purchase price of approximately $210 million and containing an
aggregate of approximately 1.7 million square feet of gross leasable area. Such
properties have an average remaining lease term of approximately 14 years. See
"Properties."
The 3,500,000 shares of common stock of the Company (the "Common Stock")
offered hereby (the "Offering") are being sold by the Company. The Common Stock
is traded on the New York Stock Exchange under the symbol "NNN." The last
reported sale price of the Common Stock on the New York Stock Exchange on
January 23, 1996 was $13.00. See "Price Range of Common Stock and Dividends" and
"Description of Common Stock" contained in the accompanying Prospectus.
SEE "RISK FACTORS" FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE
COMMON STOCK ON PAGES S-9 TO S-11 OF THIS PROSPECTUS SUPPLEMENT.
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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. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share........................... $13.00 $.715 $12.285
Total(3)............................ $45,500,000 $2,502,500 $42,997,500
</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 of the Offering estimated at $600,000, payable by
the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
525,000 additional shares of Common Stock solely to cover overallotments, if
any. If such shares are purchased, the total Price to Public, Underwriting
Discounts and Proceeds to Company will be $52,325,000, $2,877,875 and
$49,447,125, respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if issued by the Company and
delivered to and accepted by the Underwriters, subject to certain conditions. It
is expected that delivery of the shares of Common Stock will be made on or about
January 29, 1996, at the offices of Smith Barney Inc., 388 Greenwich Street, New
York, New York 10013.
SMITH BARNEY INC.
GOLDMAN, SACHS & CO.
LEGG MASON WOOD WALKER
INCORPORATED
J.C. BRADFORD & CO.
THE ROBINSON-HUMPHREY
COMPANY, INC.
January 23, 1996
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[GRAPHICS]
The inside front cover of the Prospectus Supplement displays six pictures of
Properties owned by the Company. The pictures shown are (1) Barnes & Noble
located in Houston, Texas, (2) Eckerd Drug located in Colleyville, Texas, (3)
OfficeMax located in Dallas, Texas, (4) Burger King located in Tappahannock,
Virginia, (5) Sears Homelife located in Clearwater, Florida and (6) Linens 'N
Things located in Freehold, New Jersey.
In addition, there is a map of the United States showing the location by
city of the Properties owned by the Company.
Finally, there is a caption of the "NNN" logo and the name "Commercial Net
Lease Realty, Inc."
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................................................................. S-1
Risk Factors.............................................................................................. S-9
The Company............................................................................................... S-12
Strategies................................................................................................ S-13
Use of Proceeds........................................................................................... S-17
Price Range of Common Stock and Dividends................................................................. S-18
Distribution Policy....................................................................................... S-19
Capitalization............................................................................................ S-19
Selected Financial Data................................................................................... S-20
Properties................................................................................................ S-23
Management of the Company................................................................................. S-31
Certain Transactions...................................................................................... S-34
Underwriting.............................................................................................. S-36
Legal Matters............................................................................................. S-36
PROSPECTUS
Available Information..................................................................................... 2
Incorporation of Certain Documents by Reference........................................................... 2
The Company............................................................................................... 3
Use of Proceeds........................................................................................... 3
Ratios of Earnings to Fixed Charges....................................................................... 4
Description of Debt Securities............................................................................ 4
Description of Common Stock............................................................................... 14
Description of Common Stock Warrants...................................................................... 16
Federal Income Tax Considerations......................................................................... 17
ERISA Considerations...................................................................................... 22
Plan of Distribution...................................................................................... 23
Experts................................................................................................... 24
Legal Matters............................................................................................. 24
</TABLE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
i
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PROSPECTUS SUPPLEMENT SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, OR INCORPORATED HEREIN OR THEREIN BY
REFERENCE. EXCEPT AS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVERALLOTMENT OPTION AND NO
EXERCISE OF CURRENTLY OUTSTANDING OPTIONS TO PURCHASE UP TO 578,100 SHARES OF
COMMON STOCK PURSUANT TO THE COMPANY'S 1992 STOCK OPTION PLAN. THE TERM
"INCLUSIVE COST" MEANS ALL COSTS RELATED TO ACQUISITIONS, INCLUDING BUT NOT
LIMITED TO THE PURCHASE PRICE, LEGAL AND ACCOUNTING FEES AND EXPENSES,
COMMISSIONS AND TITLE INSURANCE.
THE COMPANY
Commercial Net Lease Realty, Inc., a Maryland corporation (the "Company"),
is a real estate investment trust (a "REIT") formed in 1984 that acquires, owns
and manages a diversified portfolio of high-quality, single-tenant, freestanding
properties leased to major retail businesses under full-credit, long-term
commercial net leases. As of September 30, 1995, the Company owned 154
properties (the "Properties") acquired for an aggregate purchase price of
approximately $210 million and having an annualized current cash on cost return
(on an Inclusive Cost basis) of approximately 10.3 percent. The Properties are
leased to 30 tenants located in 26 states, contain an aggregate of approximately
1.7 million square feet of gross leasable area ("GLA") and are 100 percent
leased.
Properties acquired by the Company are generally newly constructed as of the
time of acquisition. Accordingly, the average age of the buildings in the
Company Property portfolio (the "Company Portfolio") is approximately three
years. In addition, the Company acquires only properties that are subject to a
lease in order to avoid the risks inherent in initial leasing. The Company's
leases typically provide that the tenant bears responsibility for substantially
all property costs and expenses associated with ongoing maintenance and
operation, including utilities, property taxes and insurance ("triple-net"
leases), and generally also provide that the tenant is responsible for roof and
structural repairs. The Company's leases typically do not limit the Company's
recourse against the tenant and any guarantor in the event of a default, and for
this reason are considered "full-credit" leases. All of the Company's properties
have been 100 percent leased since the Company's formation in 1984. The
Properties are leased on a long-term basis, generally 15 to 20 years, with
renewal options for an additional 10 to 20 years. As of September 30, 1995, the
average remaining initial lease term of the Properties was approximately 14
years. Leases representing approximately 90 percent of annualized base rental
income from the Properties (the "Base Rent") for the nine months ended September
30, 1995 have initial terms extending until at least December 31, 2005. See
"Properties -- Description of Leases."
CNL Realty Advisors, Inc. (the "Advisor") is the Company's advisor, and has
responsibility for the Company's day-to-day operations. See "The Company -- The
Advisor." The principal office of the Company is located at 400 East South
Street, Suite 500, Orlando, Florida 32801, and the Company's telephone number is
407/422-1574.
OBJECTIVES AND STRATEGIES
OBJECTIVES
The Company's primary objectives are to provide predictable and increasing
cash flow available for distribution to stockholders and to maintain and enhance
the value of its properties. The Company presently intends to achieve these
objectives by implementing specific growth, operating and financing strategies,
as summarized below.
S-1
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GROWTH STRATEGIES
- Acquiring additional well-located, freestanding retail properties that are
leased to high-quality tenants with significant market presence, and that
provide a stable current return on the Company's investment in excess of
the Company's blended cost of capital and the potential for capital
appreciation
- Entering into long-term leases that provide for periodic contractual
increases in rent and/or percentage rent based upon a percentage of a
tenant's gross sales over a pre-determined level
OPERATING STRATEGIES
- Acquiring properties that are subject to long-term leases to avoid the
risks inherent in initial leasing, and structuring such leases on a
triple-net or similar basis under which the tenants bear the principal
portion of the financial and operational responsibility for the properties
- Targeting tenants whose competitive position and financial strength should
enable them to meet their obligations throughout the terms of their leases
and obtaining the best possible underlying credit quality by requiring the
corporate parent of a tenant to lease the property or guarantee the
tenant's obligations under the lease
- Maintaining and developing long-term working relationships with targeted
established retail companies by providing nationwide sale/leaseback
financing on multiple properties, thereby adding additional efficiency and
value to the retailers and the Company
- Extensively analyzing potential investment locations in terms of long-term
viability for the tenant and the site's market value
- Diversifying the Company's investments among distinct retail segments, as
well as by tenant and geographic location
- Actively monitoring the assets of the Company to maximize their value
FINANCING STRATEGIES
- Financing property acquisitions with the source of capital deemed most
advantageous at the time, including borrowing under the Company's $100
million revolving credit facility (the "Credit Facility"), utilizing
long-term debt, or issuing debt or equity in public or private offerings
- Enhancing stockholder return through appropriate use of leverage while
maintaining a ratio of total indebtedness to total assets (before
depreciation) of not more than 50 percent
RECENT DEVELOPMENTS
- - COMPLETED PROPERTY ACQUISITIONS. Between October 1, 1994 and September 30,
1995, the Company acquired 48 Properties and purchased new buildings
constructed by the tenant on four previously acquired land parcels for an
aggregate purchase price of approximately $86.6 million (on an Inclusive Cost
basis). See "Properties -- The Acquisition Process -- ACQUISITION FROM RETAIL
OCCUPANTS." These Properties have approximately 724,000 square feet of GLA,
provide approximately $9.0 million in annualized Base Rent with a resulting
annualized cash on cost return (on an Inclusive Cost basis) of approximately
10.4 percent, and were financed in part by approximately $46.5 million net
proceeds from the public offering of shares of the Company's common stock (the
"Common Stock") in September 1994 (the "Prior Offering") and in part by the
proceeds from the Company's Credit Facility.
- - ACQUISITION PIPELINE. Since October 1, 1995, the Company has purchased three
properties and one newly constructed building on a previously acquired land
parcel. The three properties were acquired at the end of December 1995 and the
newly constructed building was acquired in January 1996. Through mid-February
1996, the Company intends to purchase six properties and newly
S-2
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constructed buildings on six land parcels it currently owns. The acquisition
of these properties plus the three properties acquired in December 1995 and
the newly constructed building acquired in January 1996 are hereinafter
referred to as the "Acquisition Properties." The total purchase price of the
Acquisition Properties is expected to be approximately $49.7 million (on an
Inclusive Cost basis) and the projected annualized initial cash on cost return
(on an Inclusive Cost basis) is estimated to be approximately 10.5 percent.
The Acquisition Properties are expected to be located in nine states and are
expected to be leased to Barnes & Noble (six properties representing 190,000
square feet of GLA), Food 4 Less (one property representing 54,400 square
feet), Academy (one property representing 52,500 square feet), Waccamaw (one
property representing 55,560 square feet), OfficeMax (one property
representing 38,667 square feet), Borders Books & Music (one property
representing 30,000 square feet), Eckerd (three properties representing 28,512
square feet) and Computer City (two properties representing 23,936 square
feet). The Company's Board of Directors has also tentatively approved either
contracts or letters of intent to acquire 11 additional properties (the
"Additional Properties") by the end of the second quarter of 1996 for a total
purchase price of approximately $35.2 million (on an Inclusive Cost basis).
The closing of the transactions contemplated by these purchase contracts and
letters of intent, as well as the closing of the Acquisition Properties, is,
in each case, subject to the Company's due diligence review of various matters
related to the subject property, including environmental reviews, and the
satisfaction of customary closing conditions by the seller of the property. In
some instances, the Company may have the opportunity to acquire an Additional
Property before acquiring an Acquisition Property, and may elect to pursue
this opportunity if management believes the acquisition is in the Company's
best interests. The Company anticipates that the purchase of the Acquisition
Properties and the Additional Properties will be funded by a combination of
net proceeds from the Offering (defined below), the Credit Facility and the
Permanent Debt Financing (defined below).
- - FINANCIAL PERFORMANCE. Since the date of the Prior Offering through September
30, 1995, the Company Portfolio has increased from 106 Properties to 154
Properties or from approximately $123 million of assets to $210 million of
assets. In addition, funds from operations and cash available for distribution
have increased from approximately $6.7 million and $6.6 million or $0.87 and
$0.87 per share, respectively, for the nine months ended September 30, 1994,
to approximately $10.7 million and $10.6 million or $0.91 and $0.91 per share,
respectively, during the same period in 1995.
- - PERMANENT DEBT FINANCING. To secure long-term fixed rate financing, the
Company entered into a $52.6 million mortgage loan commitment (the
"Commitment") on October 30, 1995 with Principal Mutual Life Insurance
Company, the proceeds of which will be used to pay down the Credit Facility.
The permanent debt financing (the "Permanent Debt Financing") to be made
pursuant to the Commitment is secured by 43 Properties designated in the
Commitment. The Permanent Debt Financing consists of two loans that will bear
interest at a fixed weighted average rate of approximately 7.26 percent and
will have a weighted average maturity of 7.2 years. The first loan of $13.2
million was closed on December 14, 1995 and the second loan of $39.4 million
is expected to close in late January 1996. See "Strategies -- Financing
Strategies -- PERMANENT DEBT FINANCING."
- - CREDIT FACILITY FOR ACQUISITIONS. In April 1995, the Company increased the
amount available under the Credit Facility to $100 million, of which $72.9
million was outstanding at September 30, 1995. Upon completion of the sale of
shares of Common Stock offered hereby (the "Offering") and the closing of the
Permanent Debt Financing, the Company intends to repay approximately $45.1
million outstanding under the Credit Facility. The interest rate on amounts
outstanding under the Credit Facility is 1.7 percent over 30-day LIBOR (5.875
percent as of September 30, 1995). The Company intends to draw on the Credit
Facility as needed to acquire future properties. See "Strategies -- Financing
Strategies -- SOURCES OF CAPITAL FOR ACQUISITIONS."
- - NEWLY LEASED PROPERTIES, EXPANDED RELATIONSHIPS AND GEOGRAPHIC
DIVERSITY. Since the Prior Offering through September 30, 1995, the Company
has developed new leasing relationships with Academy (three leases), Borders
Books & Music (two leases), Hi-Lo Automotive (24 leases), Levitz (one lease)
S-3
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and Scotty's (two leases) representing GLA of approximately 523,000 square
feet or approximately 31.5 percent of the Company's total GLA. In addition,
the Company has expanded its existing leasing relationships with Eckerd (eight
leases) and OfficeMax (one lease) representing GLA of approximately 97,000
square feet or approximately 5.9 percent of the Company's total GLA. The
Company has entered into new geographic markets by leasing Properties to
Academy (two Properties) and Barnes & Noble (one Property) in the Houston,
Texas metropolitan area and providing first-time sale/leaseback financing in
Arizona for Levitz and in Oklahoma for Barnes & Noble. The Company believes
that its existing relationships with nationally based tenants will enhance its
ability to further expand into new markets.
PROPERTIES
The Company typically acquires, owns and manages freestanding properties
leased to individual tenants. The properties typically are located within
intensive commercial traffic corridors near traffic generators such as regional
malls, business developments and major thoroughfares. Management believes that
properties with these characteristics are desired by tenants because they offer
high visibility to passing traffic, ease of access, tenant control over the
site's hours of operation and maintenance standards and distinctive building
design which promotes greater customer identification. In addition, management
believes that freestanding properties permit tenants to open new stores quickly,
due to the short development cycles generally associated with such properties,
and provide tenants with flexibility in responding to changing retail trends.
See "Properties -- The Properties."
Management also believes that many retailers interested in occupying
freestanding single-tenant properties of the type acquired by the Company prefer
to lease rather than own such properties, which enables them to allocate their
capital to their core businesses rather than real estate. Additionally,
management believes the Company's ability to provide targeted established
retailers with nationwide sale/leaseback financing on a number of properties
adds additional efficiency and value to retailers and the Company. To avoid some
of the risks associated with property ownership, the Company structures its
leases on a triple-net or similar basis under which tenants bear the principal
portion of the financial and operational responsibility for the properties.
Management believes that leases structured on this basis provide the Company
with a stable current return and the potential for capital appreciation of its
assets. See "Strategies -- Operating Strategies -- FULL-CREDIT, LONG-TERM NET
LEASES" and "Properties -- Description of Leases."
S-4
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The following table sets forth certain Property, tenant and retail specialty
information as of September 30, 1995, with respect to each of the retailers that
operates from a Property in the Company Portfolio.
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TOTAL PERCENT OF
NUMBER OF TOTAL GLA PERCENT OF BASE TOTAL
RETAILER PROPERTIES (SQ. FT.) TOTAL GLA RENT (1) BASE RENT RETAIL SPECIALTY
- ------------------------- --------- ------------ ---------- -------------- ---------- ----------------------
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Barnes & Noble (2)....... 9 113,850(2) 6.87%(2) $ 3,015,728(2) 13.88%(2) Books
Eckerd................... 15 134,715 8.13 1,956,248 9.00 Drug Stores
Hi-Lo Automotive......... 24 196,022 11.82 1,788,756 8.23 Automotive Replacement
Parts
Burger King.............. 14 44,454 2.68 1,463,218 6.73 Restaurants
Borders Books & Music.... 2 63,200 3.81 1,401,382 6.45 Books
OfficeMax................ 4 99,624 6.01 1,079,775 4.97 Office Supplies
Golden Corral............ 27 148,638 8.97 1,062,581 4.89 Restaurants
Hardee's................. 14 49,700 3.00 1,015,425 4.67 Restaurants
Denny's.................. 10 44,354 2.67 914,787 4.21 Restaurants
Food Lion................ 4 120,885 7.29 835,200 3.84 Supermarkets
Int'l House of
Pancakes................ 7 32,063 1.93 772,423 3.56 Restaurants
Academy (2).............. 3 105,881(2) 6.39(2) 720,003(2) 3.31(2) Sporting Goods
Scotty's................. 2 112,875 6.81 670,911 3.09 Home Improvement
Sears Homelife........... 2 82,896 5.00 664,916 3.06 Furniture
Marshalls................ 1 33,000 1.99 470,250 2.16 Apparel
Computer City............ 1 25,000 1.51 464,750 2.14 Electronic Products
Oshman's................. 1 50,000 3.02 448,500 2.06 Sporting Goods
CompUSA.................. 1 25,000 1.51 429,000 1.98 Computers
Food 4 Less (2).......... 1 (2) (2) 420,390(2) 1.94(2) Grocery
Linens 'n Things......... 1 28,700 1.73 401,800 1.85 Home Furnishings and
Accessories
The Good Guys!........... 1 15,000 0.91 381,714 1.76 Electronics
Levitz................... 1 44,539 2.69 300,638 1.38 Furniture
Blockbuster Music Plus... 1 16,500 1.00 255,750 1.18 Music
Office Depot............. 1 25,000 1.51 210,000 0.96 Office Supplies
Best Buy................. 1 26,700 1.61 160,200 0.74 Electronics and Major
Appliances
Wendy's.................. 2 5,923 0.36 153,150 0.71 Restaurants
Pier I Imports........... 1 9,000 0.54 135,000 0.62 Decorative Home
Furnishings
Checkers................. 1 796 0.05 62,500 0.29 Restaurants
Rally's.................. 1 710 0.04 51,250 0.23 Restaurants
Pizza Hut................ 1 2,500 0.15 23,952 0.11 Restaurants
--- ------------ ---------- -------------- ----------
Totals............... 154 1,657,525(3) 100.00% $21,730,197(3) 100.00%
--- ------------ ---------- -------------- ----------
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(1) Base Rent includes income from operating leases and earned income from
direct financing leases but excludes percentage (contingent) rental income
and non-cash lease accounting adjustments.
(2) The Company currently owns and leases six land parcels to Barnes & Noble
(four Properties), Academy (one Property) and Food 4 Less (one Property). As
of September 30, 1995, these tenants were constructing buildings on each of
the parcels. Leases covering these land parcels have been executed and
provide for ground rent to be paid during construction and additional rent
to be paid after the buildings are completed, acquired by the Company and
leased back to the tenant. The Company anticipates that total construction
costs for the improvements (including the costs associated with the newly
constructed building purchased in January 1996) will be approximately $17
million. Upon completion of construction, which is anticipated to occur in
mid-February 1996, these Properties (including the newly constructed
building) will provide for approximately 270,000 square feet of GLA (Barnes
& Noble, 163,000 square feet; Academy, 52,500 square feet; and Food 4 Less,
54,400 square feet) and approximately $1.8 million of Base Rent (Barnes &
Noble, $1.2 million; Academy, $224,000; and Food 4 Less, $408,000).
(3) Excludes GLA and Base Rent attributed to the buildings under construction
discussed in footnote (2) above.
S-5
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THE OFFERING
All of the shares of Common Stock being offered hereby are being sold by the
Company.
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Common Stock Offered................... 3,500,000 shares of Common Stock (1)
Common Stock Outstanding after the Offering..... 15,163,672 shares of Common Stock (2)
Use of Proceeds................................. The Company intends to use the net proceeds from the Offering
and the proceeds from the Permanent Debt Financing for the
acquisition of the Acquisition Properties, the repayment of
indebtedness outstanding under the Credit Facility and for
nominal working capital purposes
New York Stock Exchange Symbol.................. "NNN"
</TABLE>
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(1) Does not include up to 525,000 shares of Common Stock that may be issued
upon exercise of the Underwriters' overallotment option.
(2) Does not include approximately 578,100 shares of Common Stock issuable upon
the exercise of currently outstanding options.
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth certain financial information for the Company
on a historical and pro forma basis, and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements incorporated by reference to the
Prospectus accompanying this Prospectus Supplement. The pro forma information of
the Company gives effect to (i) $46.5 million in net proceeds from the sale of
4,000,000 shares of Common Stock in the Prior Offering (the "Prior Offering
Transaction"), and (ii) the completion and sale of 3,500,000 shares of Common
Stock offered hereby at an Offering price of $13.00 per share and the
application of the net proceeds therefrom, the receipt of $52.6 million of
proceeds from the Permanent Debt Financing, the purchase of the Acquisition
Properties for approximately $49.7 million and the repayment of approximately
$45.1 million previously drawn under the Credit Facility (collectively, the
"Offering Transactions").
The pro forma statements of earnings for the year ended December 31, 1994
and the nine months ended September 30, 1995 give effect to the Prior Offering
Transaction and the Offering Transactions as if such transactions had occurred
on January 1, 1994. Such pro forma statements of earnings also treat all
properties acquired during the year ended December 31, 1994 and the nine months
ended September 30, 1995 and the Acquisition Properties as if they had been
acquired and fully leased as of January 1, 1994. The pro forma balance sheet as
of September 30, 1995 gives effect to the Offering Transactions as if such
transactions had occurred on September 30, 1995.
The pro forma information does not purport to represent what the Company's
financial position or results of operations actually would have been if the
transactions reflected had in fact occurred on the date or at the beginning of
the period indicated, or to project the Company's financial position or results
of operations at any future date or any future period.
S-6
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SUMMARY SELECTED PRO FORMA AND HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------------- --------------------------------------------
PRO FORMA PRO FORMA
OPERATING DATA: 1995 1995 1994 1994 1994 1993 1992
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Revenues:
Rental income (1)................... $ 21,698 $ 14,597 $ 8,279 $ 28,988 $ 12,068 $ 4,906 $ 2,528
Interest and other income (2)....... 142 98 151 184 221 163 76
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Total revenues.................... 21,840 14,695 8,430 29,172 12,289 5,069 2,604
----------- --------- --------- ----------- --------- --------- ---------
EXPENSES:
General and administrative (3)...... 609 551 472 774 605 478 255
Management and advisory fees (4).... 1,004 740 490 1,361 728 307 89
Interest (5)........................ 4,502 2,335 412 5,562 498 381 302
State taxes (6)..................... 284 188 167 482 213 110 38
Depreciation and amortization (7)... 2,500 1,463 941 3,351 1,330 645 369
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Total expenses.................... 8,899 5,277 2,482 11,530 3,374 1,921 1,053
----------- --------- --------- ----------- --------- --------- ---------
Net earnings before gain on sale of
land and buildings................... 12,941 9,418 5,948 17,642 8,915 3,148 1,551
Gain on sale of land and buildings.... 0 0 0 0 0 374 11
----------- --------- --------- ----------- --------- --------- ---------
Net earnings.......................... $ 12,941 $ 9,418 $ 5,948 $ 17,642 $ 8,915 $ 3,522 $ 1,562
----------- --------- --------- ----------- --------- --------- ---------
----------- --------- --------- ----------- --------- --------- ---------
Net earnings per share before gain on
sale of land and buildings........... $ 0.85 $ 0.81 $ 0.78 $ 1.16 $ 1.04 $ 0.85 $ 0.94
Weighted average common shares
outstanding.......................... 15,164 11,664 7,664 15,164 8,606 3,712 1,635
Dividends paid per common share....... -- $ 0.87 $ 0.85 -- $ 1.14 $ 1.10 $ 1.08
OTHER DATA:
Total properties at end of period... 163 154 106 163 128 84 41
Funds from operations (8)........... $ 15,119 $ 10,659 $ 6,700 $ 20,546 $ 9,992 $ 3,884 $ 1,879
Cash available for distribution
(9)................................ -- $ 10,557 $ 6,646 -- $ 9,848 $ 3,817 $ 1,879
Funds from operation per share...... $ 1.00 $ 0.91 $ 0.87 $ 1.36 $ 1.16 $ 1.05 $ 1.15
Cash available for distribution per
share.............................. -- $ 0.91 $ 0.87 -- $ 1.15 $ 1.03 $ 1.15
Percent of properties leased........ 100% 100% 100% 100% 100% 100% 100%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------------------------- -------------------------------
PRO FORMA
BALANCE SHEET DATA: (10) 1995 1995 1994 1994 1993 1992
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Real estate assets, net (11)................ $ 255,430 $ 204,686 $ 120,099 $ 148,643 $ 69,135 $ 22,324
Notes payable............................... $ 80,403 $ 72,900 $ 31,505 $ 14,800 -- $ 8,500
Total stockholders' equity.................. $ 174,951 $ 132,553 $ 90,579 $ 136,665 $ 91,145 $ 14,388
</TABLE>
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(1) Pro forma amounts represent rental income as if the properties acquired
during the year ended December 31, 1994 and the nine months ended September
30, 1995 (the "New Properties") and the Acquisition Properties had been
acquired and fully leased as of January 1, 1994.
(2) Pro forma interest income decreased for the year ended December 31, 1994
due to a decrease in the amount of cash available for investment in
interest bearing accounts as a result of the acquisition of the New
Properties and the Acquisition Properties. Pro forma interest income
increased for the nine months ended September 30, 1995 due to an increase
in average cash balances from the receipt of rental income from the New
Properties and the Acquisition Properties.
(3) Pro forma general and administrative expenses increased due to incremental
expenses associated with having additional shares of Common Stock
outstanding and due to increased unused commitment fees under the Credit
Facility.
(4) Pro forma management and advisory fees increased as a result of increased
funds from operations.
(5) Pro forma interest expense increased primarily as a result of the pro forma
increase in indebtedness in connection with the Offering Transactions. Pro
forma interest expense for the nine months ended September 30, 1995 and the
year ended December 31, 1994 was based on the average 30-day LIBOR rates in
effect for those periods of 6.01 percent and 4.47 percent, respectively,
plus 1.70 percent relating to the Credit Facility and weighted average
interest rate of approximately 7.26 percent relating to the Permanent Debt
Financing.
(6) State taxes consist of income and franchise taxes. Pro forma state taxes
increased based on additional rental income.
(7) Pro forma depreciation and amortization increased primarily as a result of
an increase in depreciation on the New Properties and the Acquisition
Properties as well as an increase in amortization in connection with the
Permanent Debt Financing.
(FOOTNOTES CONTINUED ON NEXT PAGE)
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<PAGE>
(8) Funds from operations has been calculated in accordance with the definition
of "funds from operations" recently clarified by NAREIT defined as net
income, computed in accordance with generally accepted accounting
principles, excluding gains or losses from debt restructurings and sales of
property, plus depreciation and after adjustments for unconsolidated
partnerships and joint ventures. Under the method previously used by the
Company which included adjustments to net income for amortization of
deferred financing costs and non-cash lease accounting adjustments, funds
from operations would have been $14,580, $10,351 and $6,517 for the pro
forma nine months ended September 30, 1995 and the historical nine months
ended September 30, 1995 and 1994, respectively, and would have been
$19,845, $9,731, $3,779 and $1,879 for the pro forma year ended December
31, 1994 and the historical years ended December 31, 1994, 1993 and 1992,
respectively. Non-cash lease accounting adjustments for the pro forma nine
months ended September 30, 1995 and for the historical nine months ended
September 1995 and 1994 were $862, $530 and $373, respectively. Non-cash
lease accounting adjustments for the pro forma year ended December 31, 1994
and the historical years ended December 31, 1994, 1993 and 1992 were
$1,149, $515, $125 and $9, respectively. Funds from operations should not
be considered as a substitute for net income as an indication of the
Company's performance or as a substitute for cash flow as a measure of its
liquidity.
(9) The Company's estimated recurring, annual capital expenditures required to
maintain any Property subject to a lease that does not require the tenant
to make such expenditures are deducted from funds from operations in
computing cash available for distribution.
(10) Pro forma balance sheet data assumes that the Offering Transactions had
occurred on September 30, 1995.
(11) Net of accumulated depreciation of approximately $5,000 and $3,400 as of
September 30, 1995 and 1994, respectively, and $3,800, $2,700 and $2,100 at
December 31, 1994, 1993 and 1992, respectively.
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<PAGE>
RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Prospectus Supplement and the accompanying Prospectus, prospective
investors should carefully review the following considerations in determining
whether to acquire the Company's common stock (the "Common Stock") offered
hereby.
DEPENDENCE ON MAJOR TENANTS
Barnes & Noble accounts for approximately 13.9 percent of Base Rent (defined
below) as of September 30, 1995. The next four largest tenants (Eckerd, Flagstar
Companies, Inc. on behalf of Hardee's and Denny's, Hi-Lo Automotive and Burger
King) in terms of Base Rent as of September 30, 1995, account for an aggregate
of approximately 32.8 percent of Base Rent. See "Properties -- The Properties."
The default, financial distress or bankruptcy of one or more of these tenants
could cause vacancies among certain of the Properties, which would reduce the
revenues of the Company until the affected Properties are re-let, and could
decrease the ultimate sale value of each such Property. Upon the expiration of
the leases that are currently in place, the Company may not be able to re-lease
a vacant Property at a comparable lease rate or without incurring additional
expenditures in connection with such re-leasing.
CONFLICTS OF INTEREST
From time to time the Company may engage in transactions with CNL Affiliates
(defined below), including the acquisition of properties developed by such CNL
Affiliates. See "Strategies," "The Properties -- The Acquisition Process" and
"Certain Transactions." The price to the Company of any property that may be
developed by a CNL Affiliate typically includes all direct costs of development,
such as land and construction costs, closing costs and a market-rate development
fee which generally is equal to five to 10 percent of the total cost of the
property. This development fee generally is treated as a cost of the property by
the CNL Affiliate and the tenant, and therefore is included in the calculation
of Base Rent.
Certain officers and directors of CNL Realty Advisors, Inc., the Company's
advisor (the "Advisor"), and of the Company currently are engaged, and in the
future are expected to engage, in the management of other entities that invest
in real estate, and in other business activities. Competition therefore will
exist in the allocation of such directors' and officers' management time,
services and functions among the Company and the various other entities in which
such directors and officers are involved. The Company's bylaws require that any
decision by the Company with respect to the purchase or sale of real property or
the leasing of the Company's real property be approved separately by the
Independent Directors and the Board of Directors. The Company's bylaws also
require that transactions between the Company and its directors or executive
officers, or between the Company and any entity in which one of the Company's
directors or executive officers is a director or executive officer or has a
material financial interest, be approved by a majority of the directors not
interested in the transaction.
James M. Seneff, Jr. and Robert A. Bourne, directors and officers of the
Company and of the Advisor, also are associated with various CNL Affiliates that
are involved in the sale of interests in, and management of, entities that
currently invest primarily in triple-net leased properties. One or more of these
CNL Affiliates from time to time may acquire properties that also would be
appropriate investments for the Company. At such time as the Company wishes to
acquire a property that also would be suitable for acquisition by a CNL
Affiliate, a conflict of interest could develop. Messrs. Seneff and Bourne, as
directors of the Company, have a fiduciary obligation to act in the best
interest of the stockholders of the Company and, as principals of the CNL
Affiliates, to act in the best interest of the investors.
CNL Group, Inc., the parent company of the Advisor, the Advisor, and Messrs.
Seneff and Bourne have granted the Company a right of first refusal to consider
and acquire any freestanding retail properties (other than restaurant
properties) that become available for acquisition by them or any
S-9
<PAGE>
other CNL Affiliate. No similar right of first refusal has been requested by or
granted to the Company as to restaurant properties, due primarily to the
Company's focus on diversifying into retail segments other than the restaurant
segment. Management of the Company believes that, to the extent conflicts
develop with respect to particular restaurant properties, such conflicts should
not have a material adverse effect on the Company, although there can be no
assurance in this regard.
INTEREST RATE FLUCTUATIONS; FINANCING RISKS
All borrowings under the Company's $100 million revolving line of credit
(the "Credit Facility") bear interest at variable rates equal to, at the
Company's option, either (i) 1.7 percent over 30-day LIBOR or (ii) the lender's
prime rate in effect from time to time. If the variable rate index associated
with such indebtedness increases, interest payments on this variable rate debt
also will increase, which will result in decreased funds available for
distribution to stockholders. In December 1994, the Company entered into an
agreement to limit interest charged to the Company to a fixed 30-day LIBOR rate
of 7.25 percent per annum on a notional amount of $25 million. This interest
rate cap agreement is effective through June 1996. At this time, management has
not entered into other interest rate cap or swap agreements, although management
intends to enter into such agreements in the future. Management will continue to
evaluate the desirability of these agreements from time to time.
The Company's ability to expand and, to the extent funded with debt, to
maintain the Company Portfolio (defined below) is dependent upon its access to
capital at costs which permit it to derive positive returns from its
investments. There is no assurance the Company will at all times have such
access. In particular, the Company is subject to the risks normally associated
with debt financing, including the risk that the Company's funds from operations
will be insufficient to meet required payments of principal and interest and the
risk that the leases or Properties which secure the payment of the indebtedness
could be seized upon a failure by the Company to make required payments, with a
resulting loss of income to the Company. Advances under the Credit Facility and
the Permanent Debt Financing (defined below) are secured by a collateral
assignment of rents and leases of all Properties owned by the Company, and
advances under the Permanent Debt Financing are also secured by mortgages on 43
Properties. The Company has agreed not to encumber the Properties securing the
Permanent Debt Financing without the lender's consent. Further, the Company has
agreed under the Credit Facility that it will not encumber the Properties or
incur additional indebtedness, subject to certain exceptions, without the
lenders' consents. See "Strategies -- Financing Strategies." These covenants
limit the Company's ability to obtain additional financing during the terms of
the Credit Facility and the Permanent Debt Financing. While there is no
assurance that the Company will be able to refinance its Credit Facility or the
Permanent Debt Financing, if the Company refinances or is required to refinance
the Credit Facility or the Permanent Debt Financing to obtain additional
financing, the terms of any such refinancing could be less favorable to the
Company than the terms of the Credit Facility or the Permanent Debt Financing
and could adversely affect the Company's financial results and its ability to
make distributions to stockholders.
The organizational documents of the Company do not contain any substantial
limitation on the amount or percentage of indebtedness the Company may incur.
Accordingly, the Board of Directors could alter or eliminate the Company's
current debt policy. See "Strategies -- Financing Strategies -- RATIO OF DEBT TO
TOTAL ASSETS." If this policy were changed, the Company could become highly
leveraged, resulting in an increase in debt service that could adversely affect
the Company's revenues and its ability to make distributions to stockholders.
POTENTIAL EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK
The market price of equity securities of publicly-traded companies is
determined in part by the attractiveness of the yield on such securities in
relation to prevailing market interest rates. An increase in market interest
rates generally may lead prospective purchasers of the Common Stock to demand a
higher anticipated annual yield from future dividends, which, in turn, may
adversely affect
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the market price of the Common Stock. Moreover, the market value of the Common
Stock could be substantially and adversely impacted by changes in general market
conditions or fluctuations in the market for equity securities.
RELIANCE ON MANAGEMENT
The Company depends upon the services of the Advisor, Mr. Seneff, as
Chairman of the Board of Directors and Chief Executive Officer of the Company,
and Mr. Bourne, as President and a director of the Company. Loss of the service
of the Advisor or Messrs. Seneff or Bourne could have a material adverse effect
on the Company's business and financial condition. In addition, the loan
agreement for the Company's Credit Facility contains a covenant requiring that
no material change in senior management occur during the loan term. The Company
has not entered into employment agreements with Messrs. Seneff and Bourne.
Messrs. Seneff and Bourne do not presently and are not expected to devote all
their efforts to the Company.
ENVIRONMENTAL MATTERS
It is the Company's policy, as part of its acquisition due diligence
process, to obtain a Phase I environmental site assessment for each property.
All of the Properties have been subjected to Phase I environmental site
assessments, other than the 27 Properties leased to Golden Corral Corporation
("Golden Corral") which were acquired under agreements executed before Phase I
environmental site assessments became common practice. In 1994, the Company
obtained a review by an environmental consultant of environmental regulatory
databases containing a compilation of information by federal and state
environmental agencies regarding sites reported to be contaminated to determine
the status of the Golden Corral Properties. The Company was advised by its
consultant that none of the Golden Corral Properties was identified in those
databases. There can be no assurance, however, that such databases contain a
complete and total list of all contaminated sites reported by federal and state
environmental agencies.
The Company is not aware of any environmental liability with respect to any
Property in the Company Portfolio that it believes would have a material adverse
effect on the Company's assets or financial condition. See "Properties --
Environmental Matters."
S-11
<PAGE>
THE COMPANY
GENERAL
Commercial Net Lease Realty, Inc., a Maryland corporation (the "Company"),
is a real estate investment trust (a "REIT") formed in 1984 that acquires, owns
and manages a diversified portfolio of high-quality, single-tenant, freestanding
properties leased to major retail businesses under full-credit, long-term
commercial net leases. As of September 30, 1995, the Company owned 154
properties (the "Properties") acquired for an aggregate purchase price of
approximately $210 million and having an annualized current cash on cost return
(on an Inclusive Cost basis) of approximately 10.3 percent. The Properties are
leased to 30 tenants in 26 states, contain an aggregate of approximately 1.7
million square feet of gross leasable area ("GLA") and are 100 percent leased.
The Company focuses on acquiring freestanding properties that are located
within intensive commercial corridors near traffic generators such as regional
malls, business developments and major thoroughfares. These properties, which
generally have purchase prices of up to $5.0 million, attract a wide array of
established retail tenants, such as Barnes & Noble, Eckerd and OfficeMax.
Consequently, management believes that such properties offer attractive
opportunities for stable current return and potential capital appreciation. In
addition, management believes that the location and design of properties in this
niche provide flexibility in use and tenant selection and an increased
likelihood of advantageous re-lease terms. See "Strategies -- Operating
Strategies."
Properties acquired by the Company are generally newly constructed as of the
time of acquisition. Accordingly, the average age of the buildings in the
Company Property portfolio (the "Company Portfolio") is approximately three
years. In addition, the Company acquires only properties that are subject to a
lease in order to avoid the risks inherent in initial leasing. The Company's
leases typically provide that the tenant bears responsibility for substantially
all property costs and expenses associated with ongoing maintenance and
operation, including utilities, property taxes and insurance ("triple-net"
leases), and generally also provide that the tenant is responsible for roof and
structural repairs. The Company's leases typically do not limit the Company's
recourse against the tenant and any guarantor in the event of a default, and for
this reason are considered "full-credit" leases. All of the Company's properties
have been 100 percent leased since the Company's formation in 1984. The
Properties are leased on a long-term basis, generally 15 to 20 years, with
renewal options for an additional 10 to 20 years. As of September 30, 1995, the
average remaining initial lease term of the Properties was approximately 14
years. Leases representing approximately 90 percent of annualized base rental
income from the Properties (the "Base Rent") for the nine months ended September
30, 1995 have initial terms extending until at least December 31, 2005.
Approximately 68 percent of Base Rent is derived from leases that provide for
periodic, contractually fixed increases in base rent. In addition, many leases
also require the payment of percentage rent, which is computed based on a
percentage of the tenant's gross sales over an agreed upon level and is designed
to permit the Company, over time, to share in a percentage of the revenues from
the tenant's sales growth. See "Properties -- Description of Leases."
The Company's total revenues increased from approximately $2.6 million for
the fiscal year ended December 31, 1992 to $5.1 million and $12.3 million for
the fiscal years ended December 31, 1993 and 1994, respectively, and funds from
operations for the same periods increased from approximately $1.9 million to
$3.9 million and $10.0 million, respectively. The Company has historically
financed its acquisitions from funds raised in offerings of Common Stock or from
its credit facilities.
THE ADVISOR
CNL Realty Advisors, Inc. (the "Advisor") is the Company's advisor. The
Advisor is a wholly owned subsidiary of CNL Group, Inc. ("CNL Group"), a
diversified real estate company with expertise in commercial net leased
investments that currently owns and manages, either directly or through
affiliates (collectively, "CNL Affiliates"), a property portfolio with a cost in
excess of $600 million. Under the direction of the Company's Board of Directors,
the Advisor has responsibility for the day-to-day operations of the Company,
including investment analysis, acquisitions, due diligence, and asset
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<PAGE>
management and accounting services. Management of the Company believes that the
Advisor's extensive experience and long-term relationships throughout the
commercial net leased property industry benefits the Company in selecting,
acquiring and managing its properties, thereby providing the Company with a
competitive advantage in the management and operation of its real estate assets
and in the identification of attractive investments. See "Certain Transactions."
At the time the Company retained the Advisor in July 1992 the Company owned 28
properties leased to one tenant. The aggregate cost of such properties was
approximately $12.8 million. As of September 30, 1995, the Company had acquired
129 additional properties (three of which were subsequently sold) leased to 29
new tenants for an aggregate purchase price of approximately $198.9 million.
Management believes that the efficiencies currently experienced by employing
a third-party advisor will diminish as the Company grows and expects that at the
point at which the Company is incurring $2.5 million or more in combined annual
general and administrative expenses and advisory fees, it will become more cost
effective to be self-administered. Management will consider recommending to the
Company's Board of Directors at that time that the Company become
self-administered. Management anticipates that any proposed transaction by which
the Company would become self-administered would be submitted to the
stockholders for their approval.
STRATEGIES
GENERAL
The Company's investment strategy is to acquire, own and manage a
diversified portfolio of high-quality, freestanding properties leased to major
retail businesses under full-credit, long-term, triple-net leases.
The Company has attracted as tenants both major national and regional retail
businesses and "category killer" retailers, which offer an extensive variety of
merchandise in a defined product category at competitive prices through a
"superstore" format. This format offers consumers the convenience of in-depth
product selection in a single location.
GROWTH STRATEGIES
ACQUISITION OPPORTUNITIES. The Company intends to continue to acquire
freestanding retail properties, leased primarily to "category killer" retailers
or other major national or regional businesses, at rental rates which generate
returns higher than the Company's blended cost of capital as the predominant
method of growth of the Company. Since October 1, 1995, the Company has
purchased three properties and one newly constructed building on a previously
acquired land parcel. The three properties were acquired at the end of December
1995 and the newly constructed building was acquired in January 1996. Through
mid-February 1996, the Company intends to purchase six properties and newly
constructed buildings on six land parcels it currently owns. The acquisition of
these properties plus the three properties acquired in December 1995 and the
newly constructed building acquired in January 1996 are hereinafter referred to
as the "Acquisition Properties." The total purchase price of the Acquisition
Properties is expected to be approximately $49.7 million (on an Inclusive Cost
basis) and the projected annualized initial cash on cost return (on an Inclusive
Cost basis) is estimated to be approximately 10.5 percent. The Acquisition
Properties are expected to be located in nine states and are expected to be
leased to Barnes & Noble (six properties representing 190,000 square feet of
GLA), Food 4 Less (one property representing 54,400 square feet), Academy (one
property representing 52,500 square feet), Waccamaw (one property representing
55,560 square feet), OfficeMax (one property representing 38,667 square feet),
Borders Books & Music (one property representing 30,000 square feet), Eckerd
(three properties representing 28,512 square feet) and Computer City (two
properties representing 23,936 square feet). The Company's Board of Directors
has tentatively approved either contracts or letters of intent to acquire 11
additional properties (the "Additional Properties") by the end of the second
quarter of 1996 for a total purchase price of approximately $35.2 million (on an
Inclusive Cost basis). The closing of the transactions contemplated by these
purchase contracts and letters of intent, as well as the closing of the
Acquisition Properties,
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<PAGE>
is, in each case, subject to the Company's due diligence review of various
matters related to the subject property, including environmental reviews, and
the satisfaction of customary closing conditions by the seller of the property.
In some instances, the Company may have the opportunity to acquire an Additional
Property before acquiring an Acquisition Property, and may elect to pursue this
opportunity if management believes the acquisition is in the Company's best
interests. The Company anticipates that the purchase of the Acquisition
Properties and the Additional Properties will be funded by a combination of net
proceeds from the Offering, the Credit Facility and the Permanent Debt
Financing.
The Company invests in properties which typically are located within
intensive commercial corridors near traffic generators such as regional malls,
business developments and major thoroughfares. Management perceives the benefits
of this format to tenants to include high visibility to passing traffic, ease of
access, tenant control over the site's operating hours and maintenance standards
and distinctive building design which promotes greater customer identification.
Management believes that certain tenants prefer this format because it provides
tenants with flexibility in responding to changing retail trends and permits
faster development of new stores due to short development cycles generally
associated with such properties (approximately six to 12 months), thereby
enabling tenants to satisfy their targeted growth in new stores more quickly.
Management believes that the broad market appeal of and growing demand for
freestanding retail properties facilitates diversification of its portfolio.
This type of property has the potential to be easily adapted to a variety of
tenants and has relatively low re-leasing costs. For these reasons, freestanding
single-tenant retail properties provide the Company with flexibility in use and
in tenant selection when the properties are re-let upon lease expiration.
Accordingly, management believes that properties of this type, when leased to
high-quality tenants with significant market presence, provide attractive
opportunities for stable current return and the potential for capital
appreciation.
RENTAL RATE INCREASES. The Company will continue its practice of seeking to
enter into leases which provide for periodic contractual increases in base rent
and/or percentage rent based upon a percentage of a tenant's gross sales over a
predetermined level. The contractual increases in base rent and the percentage
rent formulas are not linked to consumer price index (CPI) based adjustments. As
of September 30, 1995, leases in the Company Portfolio representing
approximately 68 percent of Base Rent include contractual increases in base
rent; leases representing approximately 45 percent of Base Rent include
percentage rent provisions; and leases representing approximately 23 percent of
Base Rent include both contractual increases in base rent and percentage rent
provisions. See "Properties -- Description of Leases." For the nine months ended
September 30, 1995, percentage rent was $579,055 (approximately four percent of
total revenues). Management believes that percentage rent clauses offer the
Company an opportunity to participate, over time, in the increase in revenues
from the tenant's sales growth and provide a partial hedge against inflation.
OPERATING STRATEGIES
FULL-CREDIT, LONG-TERM NET LEASES. To avoid initial lease-up risks, the
Company purchases only properties which are fully leased under a long-term,
full-credit lease. Since its inception in 1984, the Company has had no unleased
properties. Management believes that the Company's emphasis on full-credit,
long-term, triple-net leases will produce a predictable long-term income stream.
The properties currently in the Company Portfolio generally were leased for 15
to 20 year periods, with renewal options for an additional 10 to 20 years.
Leases accounting for approximately 90 percent of Base Rent for the nine months
ended September 30, 1995 have terms extending until at least December 31, 2005.
The Company's willingness to make long-term investments in retail properties
offers the tenants financial flexibility and allows the tenants to allocate
capital to their core businesses. During the lease term and any renewal periods,
tenants generally pay base rent, including periodic increases in the amount of
base rent, and, in many cases, also pay percentage rent based on the tenants'
gross sales. The triple-net nature of the Company's leases also enhances the
predictability of its income stream by placing the principal portion of the
financial and operational responsibility of property ownership,
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<PAGE>
maintenance and use on the tenants. The Company's leases typically do not limit
the Company's recourse against tenants and any guarantors in the event of a
default, and for this reason are considered "full-credit" leases.
DEVELOPING AND MAINTAINING RELATIONSHIPS WITH QUALITY TENANTS. Management
seeks to develop and maintain long-term working relationships with established
retail companies by providing sale/leaseback financing on multiple properties to
target retailers on a national basis, thereby adding additional efficiency and
value to retailers and the Company. Management targets tenants whose competitive
position and financial strength should enable them to meet their obligations
throughout the leases' terms and obtain the best possible underlying credit
quality by requiring the corporate parent of a tenant to lease the property or
guarantee the tenant's obligations under the lease. Management believes that the
Company's success in attracting high-quality tenants is based on a number of
factors, including its relationships with financial institutions and
unaffiliated brokers, as well as the reputation of the Advisor, other CNL
Affiliates and Messrs. Seneff and Bourne in the commercial net leased property
industry. In addition, in management's view, the Company's relationships with
its tenants are fostered by the broad range of services it offers to tenants.
These services, which include providing market surveys, site selection analyses
and facility management consulting, are designed to aid a tenant in the
selection and operation of a specific site. Management further believes that its
ability to commit to a tenant's future sale/leaseback financing requirements
enhances the relationships between the Company and its tenants. See "--
Financing Strategies." These activities have furthered the Company's strategy of
providing nationwide sale/leaseback financing to established retailers. In
addition, pursuing this strategy has allowed the Company to enter into new
geographic markets by leasing properties to Academy (two Properties) and Barnes
& Noble (one Property) in the Houston, Texas metropolitan area and providing
first-time sale/leaseback financing in Arizona for Levitz and in Oklahoma for
Barnes & Noble. The Company believes that its existing relationships with
nationally based tenants will enhance its ability to further expand into new
markets.
The Company conducts an extensive analysis of prospective tenants, which
includes evaluating each prospective tenant on the basis of its competitive
market position and financial strength. To evaluate the tenant's competitive
position, the Company assesses trends in per store sales, overall changes in
consumer preferences and the tenant's ability to adapt to changes in market and
competitive conditions. To evaluate the tenant's financial strength, the Company
analyzes the tenant's historical financial performance and current financial
condition.
SITE SELECTION AND PROPERTY ACQUISITION ANALYSIS. Before acquiring
properties, the Company engages in extensive review and analysis of potential
sites. The Company typically conducts an analysis of each site to determine both
its long-term viability for the tenant and its value in the market. Attributes
evaluated with respect to each site include the demographics of the market area
as they relate to consumer demand, traffic patterns, traffic counts, surrounding
land uses, traffic generators such as regional malls, accessibility, visibility,
competition and parking. As part of this due diligence process, an experienced
site acquisition specialist personally inspects the market area, verifies market
area data and performs an in-depth site and building conditions inspection. The
Company also obtains a Phase I environmental site assessment report from an
environmental consulting firm for each site and a facilities inspection report
from an engineering firm for any site with a building exceeding approximately
7,500 square feet of GLA.
Management believes that the Company also benefits from extensive,
sophisticated site selection procedures used by tenants. Major retail companies
that lease freestanding properties typically have proven expertise in selecting
development sites designed to maximize sales throughout the life of the
property. Because the financial success of such tenants depends heavily upon the
locations of their properties, such tenants generally expend significant
resources on site analysis to select the most desirable sites.
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Properties acquired by the Company generally are newly constructed as of the
time of acquisition. The Company generally acquires its properties from the
developer, which may be a CNL Affiliate, or from the corporate entity that
occupies the property. Management analyzes the components of each property's
acquisition with the objective of obtaining the most favorable purchase price,
consistent with the Company's investment objectives. If the Company acquires a
recently developed property from a tenant, the purchase price typically equals
the development cost of the property, which management independently verifies.
In some instances, the Company may purchase undeveloped land concurrent with the
tenant securing governmental approvals for construction and development of a
store, and lease the land back to the tenant during the construction period
under a contractual arrangement that requires the tenant to develop the property
and to sell the completed improvements to the Company at a future date at a cost
not exceeding a predetermined budgeted amount. In all cases, the Company
negotiates a rental rate with the tenant that is designed to produce an
attractive yield. See "Properties -- The Acquisition Process."
DIVERSIFICATION. The Company continues to diversify its portfolio to
include a full spectrum of retail businesses as tenants. Due to the wide array
of creditworthy retail businesses, the Company has been able to diversify its
investments among distinct retail segments, as well as by tenant and by
geographic location. In pursuing its diversification strategy, the Company
targets retailers which management views as leaders in their respective market
segments and which have the financial strength to compete effectively. The
concentration of restaurants and drug, automotive and book stores in the Company
Portfolio reflects the fact that in recent years such retail lines of trade have
aggressively sought to use single-tenant, freestanding properties. The Company
believes that other retail lines of business, such as home building suppliers
and computer and electronic retailers, will move toward greater use of
single-tenant, freestanding properties. As they do, the Company expects that it
will continue to meet the widening demands of its market and that its portfolio
of properties will reflect the greater use of freestanding properties by these
additional lines of business.
ACTIVE MANAGEMENT OF ASSETS. The Company, through the Advisor, actively
manages the Company Portfolio to maximize its value. The Advisor regularly
monitors the tenants' compliance with the Company's leases, particularly the
lease requirements relating to maintenance of the property and the obligation to
pay property taxes and insurance, and annually evaluates property inspection
reports. As part of its evaluation, the Advisor periodically conducts site
inspections. In addition, the Advisor regularly assesses each tenant's financial
condition and also analyzes gross sales attributable to each property subject to
a lease containing a percentage rent provision to determine whether there are
any trends or significant changes that merit additional investigation.
FINANCING STRATEGIES
SOURCES OF CAPITAL FOR ACQUISITIONS. In April 1995, the Company increased
the amount available under the Credit Facility to $100 million. The Credit
Facility expires on June 30, 1997, subject to the Company's option upon the
satisfaction of certain customary conditions to extend the term for an
additional 12 months. Among other things, the Credit Facility enables the
Company to commit to purchase several properties as a group and to lease each of
these properties to a single tenant under an agreed form of lease. Such
commitments for multiple properties provide tenants with a more efficient real
estate capital source for development of future stores. In addition to the
Credit Facility and the Permanent Debt Financing (defined below), the Company
intends to finance future acquisitions and repay indebtedness by utilizing the
source of capital that management considers most advantageous at the time. Such
sources may include proceeds from the public or private offering of debt or
equity securities, secured or unsecured borrowings from banks or other lenders,
the sale of properties and undistributed funds from operations.
PERMANENT DEBT FINANCING. The Company entered into a $52.6 million mortgage
loan commitment (the "Commitment") on October 30, 1995 with Principal Mutual
Life Insurance Company ("Principal"), the proceeds of which will be used to pay
down the Credit Facility. The permanent debt financing (the "Permanent Debt
Financing") to be made pursuant to the Commitment is secured by
S-16
<PAGE>
43 Properties designated in the Commitment. The Permanent Debt Financing
consists of two loans that will bear interest at a fixed weighted average rate
of approximately 7.26 percent and will have a weighted average maturity of 7.2
years. The first loan of $13.2 million, which closed on December 14, 1995, will
be repaid in monthly payments of interest only with the balance due on the
fourth anniversary. The second loan of $39.4 million, which is expected to close
in January 1996, will be repaid in monthly payments of principal and interest
based on a 17-year amortization schedule with the balance due on the tenth
anniversary of the loan. Either loan may be prepaid in whole or in part provided
that the Company pays a premium equal to the greater of (i) one percent of the
principal amount being repaid or (ii) the excess of what principal and interest
would have been paid to Principal over the term of such loan had such prepayment
not occurred discounted based on a U.S. Treasury based calculation over the
principal amount being prepaid. The Permanent Debt Financing will not reduce the
amount available under the Credit Facility.
RATIO OF DEBT TO TOTAL ASSETS. The Company will seek to enhance stockholder
return through the moderate use of leverage. Management believes that the
Company Portfolio and the predictability and stability of the underlying cash
flow will permit the Company to obtain attractive long-term debt financing. The
Company intends to maintain a ratio of total indebtedness to total assets
(before accumulated depreciation) of not more than 50 percent. Based on the
Company's balance sheet as of September 30, 1995, the Company's debt as a
percentage of assets was approximately 35 percent.
USE OF PROCEEDS
The net proceeds from the Offering are estimated to be approximately $42.4
million at an Offering price of $13.00 per share (approximately $48.8 million if
the Underwriters' overallotment option is exercised in full), after deducting
estimated Offering expenses and underwriting discounts. The Company intends to
use the net Offering proceeds and the proceeds from the Permanent Debt Financing
to purchase the Acquisition Properties, to repay $45.1 million outstanding under
the Credit Facility, which will result in the Company having approximately $72.2
million available for future borrowings under the Credit Facility, and for
nominal working capital purposes. Borrowings outstanding under the Credit
Facility, which expires on June 30, 1997, currently bear interest at a rate of
1.7 percent over 30-day LIBOR, which at September 30, 1995 equaled 5.875
percent.
S-17
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock has been traded on the New York Stock Exchange under the
symbol "NNN" since January 7, 1994. From July 31, 1992 to January 7, 1994, the
Common Stock was traded on the American Stock Exchange. Prior to July 31, 1992,
the Common Stock was traded in the over-the-counter market and reported on the
NASDAQ National Market System. For each calendar quarter indicated, the
following table reflects the respective high and low sales prices for the Common
Stock in the relevant market and the dividends per share paid in each such
period.
<TABLE>
<CAPTION>
PRICE
--------------------
HIGH LOW DIVIDENDS
--------- --------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1992
First Quarter................................................................ $ 10.000 $ 9.000 $ 0.27
Second Quarter............................................................... 10.250 9.250 0.27
Third Quarter................................................................ 12.125 9.250 0.27
Fourth Quarter............................................................... 12.500 11.375 0.27
YEAR ENDED DECEMBER 31, 1993
First Quarter................................................................ $ 14.000 $ 11.750 $ 0.27
Second Quarter............................................................... 15.000 13.125 0.27
Third Quarter................................................................ 14.375 13.125 0.28
Fourth Quarter............................................................... 14.625 13.000 0.28
YEAR ENDED DECEMBER 31, 1994
First Quarter................................................................ $ 14.375 $ 13.250 $ 0.28
Second Quarter............................................................... 14.500 13.250 0.28
Third Quarter................................................................ 14.000 12.875 0.29
Fourth Quarter............................................................... 12.625 11.875 0.29
YEAR ENDED DECEMBER 31, 1995
First Quarter................................................................ $ 12.500 $ 11.750 $ 0.29
Second Quarter............................................................... 13.750 11.875 0.29
Third Quarter................................................................ 13.625 12.125 0.29
Fourth Quarter............................................................... 13.375 12.500 0.29
YEAR ENDED DECEMBER 31, 1996
First Quarter (through January 23, 1996)..................................... $ 13.375 $ 12.750 (1)
</TABLE>
- ------------------------------
(1) On January 2, 1996, the Board of Directors declared a dividend of $0.29 per
share payable February 15, 1996 to shareholders of record on January 15,
1996. Shareholders of Common Stock purchased in the Offering will not be
eligible to receive this dividend.
The last reported sale price of the Common Stock on the New York Stock
Exchange on January 23, 1996 was $13.00. As of December 31, 1995, there were
1,429 stockholders of record of the Common Stock.
The Company has paid 44 consecutive quarterly dividends since its formation
in 1984. The current indicated annualized dividend is $1.16 per share.
S-18
<PAGE>
DISTRIBUTION POLICY
In order to qualify as a REIT for federal income tax purposes, among other
things, the Company must pay out as dividends at least 95 percent of its "real
estate investment trust taxable income." See "Federal Income Tax Considerations"
in the accompanying Prospectus. The declaration of dividends is within the
discretion of the Board of Directors and depends upon the Company's
distributable funds, current and projected cash requirements, tax considerations
and other factors. Currently, it is the Company's policy to maintain and, if
possible, increase its current dividend to the extent that funds are available
from operations after retaining sufficient cash for reserves and working capital
purposes.
A portion of the Company's dividends may be deemed to be ordinary income,
capital gain income or a return of capital to its stockholders. The Company
annually provides its stockholders with a statement as to its designation of the
taxability of its dividends. See "Federal Income Tax Considerations" in the
accompanying Prospectus. For 1995, 1994, 1993 and 1992, cash dividends paid per
share have been taxable as set forth below.
<TABLE>
<CAPTION>
1995 1994 1993 1992
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Ordinary income........................................... $ 0.92 $ 0.95 $ 0.97 $ 0.97
Capital gains............................................. -- -- 0.13 --
Return of capital......................................... 0.24 0.19 -- 0.11
--------- --------- --------- ---------
Total dividends....................................... $ 1.16 $ 1.14 $ 1.10 $ 1.08
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1995, and as adjusted to give effect to (i) the Offering at an
Offering price of $13.00 per share after deducting underwriting discounts and
commissions and estimated Offering expenses and (ii) the Permanent Debt
Financing. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements, which are incorporated by reference in the
accompanying Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
---------------------------
ACTUAL AS ADJUSTED
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
Notes Payable.............................................................. $ 72,900 $ 80,403(1)
Stockholders' Equity
Common Stock, $0.01 par value, authorized 30,000,000 shares; issued and
outstanding 11,663,672 shares; issued and outstanding as adjusted
15,163,672 shares....................................................... 117 152
Excess Stock, $0.01 par value, authorized 30,000,000 shares, none issued
and outstanding......................................................... -- --
Capital in excess of par value............................................. 138,629 180,992
Accumulated dividends in excess of net earnings............................ (6,193) (6,193)
----------- --------------
Total Stockholders' Equity............................................... 132,553 174,951
----------- --------------
Total Capitalization................................................... $ 205,453 $ 255,354
----------- --------------
----------- --------------
</TABLE>
- ------------------------------
(1) Represents $27,803 outstanding under the Credit Facility and $52,600
outstanding under the Permanent Debt Financing.
S-19
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain financial information for the Company
on a historical and pro forma basis, and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements incorporated by reference to the
Prospectus accompanying this Prospectus Supplement. The pro forma information of
the Company gives effect to (i) $46.5 million in net proceeds from the sale of
4,000,000 shares of Common Stock in the Prior Offering (the "Prior Offering
Transaction"), and (ii) the completion and sale of 3,500,000 shares of Common
Stock offered hereby at an Offering price of $13.00 per share and the
application of the net proceeds therefrom, the receipt of $52.6 million of
proceeds from the Permanent Debt Financing, the purchase of the Acquisition
Properties for approximately $49.7 million and the repayment of approximately
$45.1 million previously drawn under the Credit Facility (collectively, the
"Offering Transactions").
The pro forma statements of earnings for the year ended December 31, 1994
and the nine months ended September 30, 1995 give effect to the Prior Offering
Transaction and the Offering Transactions as if such transactions had occurred
on January 1, 1994. Such pro forma statements of earnings also treat all
properties acquired during the year ended December 31, 1994 and the nine months
ended September 30, 1995 and the Acquisition Properties as if they had been
acquired and fully leased as of January 1, 1994. The pro forma balance sheet as
of September 30, 1995 gives effect to the Offering Transactions as if such
transactions had occurred on September 30, 1995.
The pro forma information does not purport to represent what the Company's
financial position or results of operations actually would have been if the
transactions reflected had in fact occurred on the date or at the beginning of
the period indicated, or to project the Company's financial position or results
of operations at any future date or any future period.
S-20
<PAGE>
SELECTED PRO FORMA AND HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30, YEAR ENDED DECEMBER 31,
--------------------------- -----------------------------------
PRO FORMA PRO FORMA
1995 1995 1994 1994 1994 1993 1992
--------- ------- ------ --------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental income (1)................ $21,698 $14,597 $8,279 $ 28,988 $12,068 $4,906 $2,528
Interest and other income (2).... 142 98 151 184 221 163 76
--------- ------- ------ --------- ------- ------ ------
Total revenues................. 21,840 14,695 8,430 29,172 12,289 5,069 2,604
--------- ------- ------ --------- ------- ------ ------
EXPENSES:
General and administrative (3)... 609 551 472 774 605 478 255
Management and advisory fees
(4)............................. 1,004 740 490 1,361 728 307 89
Interest (5)..................... 4,502 2,335 412 5,562 498 381 302
State taxes (6).................. 284 188 167 482 213 110 38
Depreciation and amortization
(7)............................. 2,500 1,463 941 3,351 1,330 645 369
--------- ------- ------ --------- ------- ------ ------
Total expenses................. 8,899 5,277 2,482 11,530 3,374 1,921 1,053
--------- ------- ------ --------- ------- ------ ------
Net earnings before gain on sale of
land and buildings................ 12,941 9,418 5,948 17,642 8,915 3,148 1,551
Gain on sale of land and
buildings......................... 0 0 0 0 0 374 11
--------- ------- ------ --------- ------- ------ ------
Net earnings....................... $12,941 $ 9,418 $5,948 $ 17,642 $ 8,915 $3,522 $1,562
--------- ------- ------ --------- ------- ------ ------
--------- ------- ------ --------- ------- ------ ------
Net earnings per share before gain
on sale of land and buildings..... $ 0.85 $ 0.81 $ 0.78 $ 1.16 $ 1.04 $ 0.85 $ 0.94
Weighted average common shares
outstanding....................... 15,164 11,664 7,664 15,164 8,606 3,712 1,635
Dividends paid per common share.... -- $ 0.87 $ 0.85 -- $ 1.14 $ 1.10 $ 1.08
OTHER DATA:
Total properties at end of
period.......................... 163 154 106 163 128 84 41
Funds from operations (8)........ $15,119 $10,659 $6,700 $ 20,546 $ 9,992 $3,884 $1,879
Cash available for distribution
(9)............................. -- $10,557 $6,646 -- $ 9,848 $3,817 $1,879
Funds from operation per share... $ 1.00 $ 0.91 $ 0.87 $ 1.36 $ 1.16 $ 1.05 $ 1.15
Cash available for distribution
per share....................... -- $ 0.91 $ 0.87 -- $ 1.15 $ 1.03 $ 1.15
Percent of properties leased..... 100% 100% 100% 100% 100% 100% 100%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------------------------- -------------------------------
PRO FORMA
1995 1995 1994 1994 1993 1992
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (10)
Real estate assets, net (11)..................... $ 255,430 $ 204,686 $ 120,099 $ 148,643 $ 69,135 $ 22,324
Notes payable.................................... $ 80,403 $ 72,900 $ 31,505 $ 14,800 -- $ 8,500
Total stockholders' equity....................... $ 174,951 $ 132,553 $ 90,579 $ 136,665 $ 91,145 $ 14,388
</TABLE>
- ------------------------------
(1) Pro forma amounts represent rental income as if the properties acquired
during the year ended December 31, 1994 and the nine months ended September
30, 1995 (the "New Properties") and the Acquisition Properties had been
acquired and fully leased as of January 1, 1994.
(2) Pro forma interest income decreased for the year ended December 31, 1994
due to a decrease in the amount of cash available for investment in
interest bearing accounts as a result of the acquisition of the New
Properties and the Acquisition Properties. Pro forma interest income
increased for the nine months ended September 30, 1995 due to an increase
in average cash balances from the receipt of rental income from the New
Properties and the Acquisition Properties.
(3) Pro forma general and administrative expenses increased due to incremental
expenses associated with having additional shares of Common Stock
outstanding and due to increased unused commitment fees under the Credit
Facility.
(4) Pro forma management and advisory fees increased as a result of increased
funds from operations.
(5) Pro forma interest expense increased primarily as a result of the pro forma
increase in indebtedness in connection with the Offering Transactions. Pro
forma interest expense for the nine months ended September 30, 1995 and the
year ended
(FOOTNOTES CONTINUED ON NEXT PAGE)
S-21
<PAGE>
December 31, 1994 was based on the average 30-day LIBOR rates in effect for
those periods of 6.01 percent and 4.47 percent, respectively, plus 1.70
percent relating to the Credit Facility and weighted average interest rate
of approximately 7.26 percent relating to the Permanent Debt Financing.
(6) State taxes consist of income and franchise taxes. Pro forma state taxes
increased based on additional rental income.
(7) Pro forma depreciation and amortization increased primarily as a result of
an increase in depreciation on the New Properties and the Acquisition
Properties as well as an increase in amortization in connection with the
Permanent Debt Financing.
(8) Funds from operations has been calculated in accordance with the definition
of "funds from operations" recently clarified by NAREIT defined as net
income, computed in accordance with generally accepted accounting
principles, excluding gains or losses from debt restructurings and sales of
property, plus depreciation and after adjustments for unconsolidated
partnerships and joint ventures. Under the method previously used by the
Company which included adjustments to net income for amortization of
deferred financing costs and non-cash lease accounting adjustments, funds
from operations would have been $14,580, $10,351 and $6,517 for the pro
forma nine months ended September 30, 1995 and the historical nine months
ended September 30, 1995 and 1994, respectively, and would have been
$19,845, $9,731, $3,779 and $1,879 for the pro forma year ended December
31, 1994 and the historical years ended December 31, 1994, 1993 and 1992,
respectively. Non-cash lease accounting adjustments for the pro forma nine
months ended September 30, 1995 and for the historical nine months ended
September 1995 and 1994 were $862, $530 and $373, respectively. Non-cash
lease accounting adjustments for the pro forma year ended December 31, 1994
and the historical years ended December 31, 1994, 1993 and 1992 were
$1,149, $515, $125 and $9, respectively. Funds from operations should not
be considered as a substitute for net income as an indication of the
Company's performance or as a substitute for cash flow as a measure of its
liquidity.
(9) The Company's estimated recurring, annual capital expenditures required to
maintain any Property subject to a lease that does not require the tenant
to make such expenditures are deducted from funds from operations in
computing cash available for distribution.
(10) Pro forma balance sheet data assumes that the Offering Transactions had
occurred on September 30, 1995.
(11) Net of accumulated depreciation of approximately $5,000 and $3,400 as of
September 30, 1995 and 1994, respectively, and $3,800, $2,700 and $2,100 at
December 31, 1994, 1993 and 1992, respectively.
S-22
<PAGE>
PROPERTIES
THE PROPERTIES
As of September 30, 1995, the Company owned 154 freestanding, net leased
Properties located in 26 states. All of the Properties owned by the Company are
owned in fee simple and are 100 percent leased. The average age of the buildings
in the Company Portfolio is approximately three years. The aggregate GLA of the
Company Portfolio is approximately 1.7 million square feet and buildings in the
Company Portfolio generally range in size from approximately 7,000 square feet
to approximately 50,000 square feet (800 to 5,000 square feet for restaurants).
The following charts set forth certain information regarding each of the
Properties.
<TABLE>
<CAPTION>
LEASE
GLA DATE EXPIRATION
RETAILER LOCATION (STREET ADDRESS) CITY STATE (SQ. FT.) ACQUIRED (1)
- ----------------------- ----------------------------- ----------------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Academy................ 14300 Westheimer Road Houston TX 52,500 05/95 05/2015
13150 Breton Ridge Houston TX 53,381 06/95 06/2015
Cloyce Dr #1H-820 N. Richland Hills TX 28,000(2) 08/95 08/2015
Barnes & Noble......... 960-B S. Colorado Blvd. Denver CO 35,000 09/94 02/2013
7626 Westheimer Road Houston TX 39,000 10/94 02/2013
1900 International Speedway Daytona Beach FL 28,000(2) 09/95 09/2010
Sears Drive & Johnston Street Lafayette LA 30,000(2) 06/95 06/2010
Memorial Rd. & May Ave. Oklahoma City OK 30,000(2) 06/95 06/2010
760 SE Maynard Rd. Cary NC 40,000(2) 05/95 05/2013
#2592 Broward Mall Plantation FL 35,000(2) 05/95 05/2013
122 Brandon Town Cntr. Brandon FL 21,700 08/94(3) 02/2010
4136 N. Road 98 Lakeland FL 18,150 07/94(3) 02/2010
Best Buy............... 5625 So. Padre Island Drive Corpus Christi TX 26,700 11/93 01/2009
Blockbuster Music
Plus.................. 9147 Skillman Street Dallas TX 16,500 04/94 03/2006
Borders Books & Music.. 9750 West Broad Street Richmond VA 25,000 06/95 05/2015
101 Geoffrey Drive Wilmington DE 38,200 12/94 11/2014
Burger King............ 758 West Dixie Drive Asheboro NC 3,136 07/92 09/2005
2808 South Hamilton Road Columbus OH 3,163 06/93 06/2006
13005 Round Lake Blvd. Coon Rapids MN 3,432 06/93 06/2006
4977 East Main Street Galliano LA 2,915 07/92 09/2005
3579 Savannah Hwy. John's Island SC 2,853 07/92 09/2005
100 West McNeese St. Lake Charles LA 2,650 07/92 09/2005
1409 East Main St. Lancaster OH 2,625 07/92 09/2005
688 S. Willow St. Manchester NH 4,820 05/93 09/2006
1183 Tracetown Shopping Ctr. Natchez MS 2,846 07/92 09/2005
946 Creswell Lane Opelousas LA 2,743 06/93 06/2006
250 North Main St. Rochester NH 4,696 05/93 09/2006
841 East Maryland St. St. Paul MN 2,535 06/93 06/2006
1810 Tappahannock Blvd. Tappahannock VA 2,710 07/92 09/2005
23027 Van Dyke Ave. Warren MI 3,330 07/92 09/2005
Checkers............... 2495 S. Orange Ave. Orlando FL 796 07/92 05/2011
CompUSA................ 25262 El Paseo Road Mission Viejo CA 25,000 02/94(3) 01/2015
Computer City.......... 7440 SW 88th St. Miami FL 25,000 04/94 04/2009
Denny's................ 2943 S. Arlington Rd. Akron OH 4,775 05/93 05/2013
1515 East Main St. Duncan SC 4,922 05/93 05/2013
3900 S. Holden Rd. Greensboro NC 4,794 05/93 05/2013
2521 Wade Hampton Blvd. Greenville SC 6,896 05/93 09/2012
6905 State Highway 6 Houston TX 4,220 05/93 05/2013
1840 S.C. Highway 14 East Landrum SC 3,267 05/93 09/2012
3998 Highway 150 West Mooresville NC 4,374 05/93 09/2012
1231 Frontage Road Santee SC 2,832 05/93 05/2013
1500 SW Wanarnaker Road Topeka KS 3,576 06/93 03/2013
1005 Spring Villas Point Winter Springs FL 4,698 01/94 07/2013
Eckerd................. 1800 Brown Blvd. Arlington TX 8,640 02/94 01/2014
4610 Frankford Rd. Dallas TX 8,640 01/94 01/2014
3141 Broadway Blvd. Garland TX 8,640 02/94 01/2014
47 High Street Millville NJ 8,640 03/94 02/2014
2806 Nogalitos Ave. San Antonio TX 8,739 12/93 11/2013
Eckerd (cont.)......... 4367 Hicks Road Atlanta GA 8,996 03/94 01/2014
210 Bridgeton Pike Mantua NJ 8,750 06/94 08/2013
215 N. Texas Blvd. Alice TX 8,640 06/95 06/2015
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
LEASE
GLA DATE EXPIRATION
RETAILER LOCATION (STREET ADDRESS) CITY STATE (SQ. FT.) ACQUIRED (1)
- ----------------------- ----------------------------- ----------------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
317 Amarillo Blvd. East Amarillo TX 9,504 12/94 11/2014
2102 W. Washington Street Amarillo TX 9,504 12/94 12/2014
815 S. Georgia Street Amarillo TX 9,504 12/94 12/2014
4814 Colleyville Blvd. Colleyville TX 9,504 06/95 06/2015
695 N. Delsea Drive Glassboro NJ 8,870 12/94 12/2014
1999 Osceola Pkwy. Kissimmee FL 9,504 04/95 04/2015
970 N. Main Street Vineland NJ 8,640 11/94 10/2014
Food 4 Less............ Broadway & West Street Lemon Grove CA 54,400(2) 07/95 07/2015
Food Lion.............. 3710 Brainerd Rd. Chattanooga TN 29,000 10/93 09/2013
Route 2, Box 2500 Keystone Heights FL 30,690 05/93 05/2013
2303 Bedford Ave. Lynchburg VA 32,195 01/94 10/2013
1140 Winchester Avenue Martinsburg WV 29,000 08/94 08/2014
Golden Corral.......... 1910 Veteran Memorial Drive Abbeville LA 5,504 04/85 04/2002
302 Loop 59 North Atlanta TX 5,504 01/85 01/2002
703 East Sam Rayburn Hwy. Bonham TX 5,504 12/84 12/2001
Highway 287 North Bowie TX 5,504 05/85 05/2002
825 Hurst Street Center TX 5,504 12/84 12/2001
317 7th Street Clanton AL 5,504 05/85 05/2002
1415 W. Main Street Durant OK 5,519 08/89 05/2002
Highway 32 North Edenton NC 5,504 11/84 11/2001
905 E. Ennis Avenue Ennis TX 5,504 07/85 07/2002
1404 S. McKenzie St. Foley AL 5,504 10/94 10/2001
1902 Hwy. 182 West Franklin LA 5,504 07/85 07/2002
1300 Armory Drive Franklin VA 5,504 02/87 06/2002
518 East Main Fredericksburg TX 5,504 04/85 04/2002
519 N. Wood Street Gilmer TX 5,504 12/84 12/2001
1820 Sarah DeWitt Gonzales TX 5,504 04/85 04/2002
2402 Beaumont Street Jacksonville TX 5,504 05/85 05/2002
322 U.S. Highway 27 South Lake Placid FL 5,504 05/85 05/2002
Highway 259 South Leitchfield KY 5,504 12/84 12/2001
1205 W. Hwy. 1431 Marble Falls TX 5,504 06/85 06/2002
3696 Austell Road Marietta GA 5,504 12/84 12/2001
121 Homer Road Minden LA 5,519 03/89 03/2002
1981 N. Wickham Rd. Melbourne FL 5,504 07/85 07/2002
1725 West Oaklawn Pleasanton TX 5,504 05/85 05/2002
165 Barton Avenue Rockledge FL 5,504 12/84 12/2001
525 S. Highway 96 Silsbee TX 5,504 12/84 12/2001
4201 College Drive Vernon TX 5,504 03/85 03/2002
1936 Hwy 92 West Woodstock GA 5,504 11/84 11/2001
Hardee's............... 2784 Highway 501 Aynor SC 3,550 10/93 09/2013
519 E. Main Street Biscoe NC 3,550 10/93 09/2013
2146 Sweeney Hollow Road Chalkville AL 3,550 10/93 09/2013
1117 Hampshire Pike Columbia TN 3,550 10/93 09/2013
837 Gulf Shores Parkway Gulf Shores AL 3,550 10/93 09/2013
761 Goodman Road Horn Lake MS 3,550 10/93 09/2013
1610 Curtiss Drive Iuka MS 3,550 10/93 09/2013
2102 W. Market Street Johnson City TN 3,550 10/93 09/2013
6321 Cottage Hill Rd. Mobile AL 3,550 10/93 09/2013
106 W. Central Ave. Petal MS 3,550 10/93 09/2013
1019 McConnell's Hwy. Rock Hill SC 3,550 10/93 09/2013
1964 11 E. Bypass Tusculum TN 3,550 10/93 09/2013
280 Warrior Jasper Rd. Warrior AL 3,550 10/93 09/2013
229 Highway 45 South West Point MS 3,550 10/93 09/2013
Hi-Lo Automotive....... 5300 South Cooper Arlington TX 7,360 11/94 11/2009
11440 Airline Highway Baton Rouge LA 7,252 12/94 12/2009
4098 Florida Blvd. Baton Rouge LA 7,161 10/94 10/2009
1537 Hwy 190 East Copperas Cove TX 7,234 10/94 10/2009
5211 Lemmon Ave. Dallas TX 7,360 12/94 12/2009
821 Closner Edinberg TX 7,171 10/94 10/2009
200 NW 28th Street Ft. Worth TX 7,344 11/94 11/2009
274 University Drive Ft. Worth TX 7,344 11/94 11/2009
601 West Berry Ave. Ft. Worth TX 13,500 10/94 10/2009
1313 W. Buckingham Garland TX 7,344 11/94 11/2009
</TABLE>
S-24
<PAGE>
<TABLE>
<CAPTION>
LEASE
GLA DATE EXPIRATION
RETAILER LOCATION (STREET ADDRESS) CITY STATE (SQ. FT.) ACQUIRED (1)
- ----------------------- ----------------------------- ----------------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Hi-Lo Automotive
(cont.)............... 6550 W. Bellfort Avenue Houston TX 16,589 11/94 11/2009
620 Hwy. 332 West Lake Jackson TX 7,153 10/94 10/2009
2424 Galloway Mesquite TX 7,360 10/94 10/2009
2231 West Pioneer Pkwy. Pantego TX 7,344 10/94 10/2009
508 North Cage Ave. Pharr TX 6,639 11/94 11/2009
6345 Lake Worth Blvd. Lake Worth TX 7,400 09/95 09/2010
503 Highway 71 Bastrop TX 5,670 09/95 09/2010
1934 Garrison Eagle Pass TX 7,483 09/95 09/2010
614 N. University Drive Nacogdoches TX 7,338 09/95 09/2010
1501 Pat Booker Universal City TX 7,360 09/95 09/2010
2024 Nolana Avenue McAllen TX 9,000 09/95 09/2010
14 Tidwell Road Houston TX 12,000 09/95 09/2010
13602 Nacogdoches Road San Antonio TX 7,360 09/95 09/2010
1720 H K Dodgen Loop S.W. Temple TX 8,256 09/95 09/2010
Int'l House of
Pancakes.............. 5920 W. Interstate 20 Arlington TX 4,522 12/93 12/2018
8640 E. Hwy. 30 Ft. Worth TX 4,535 12/93 12/2018
6870 W. Cheyenne Avenue Las Vegas NV 4,500 12/93 12/2018
9253 E. Independence Blvd. Matthews NC 4,686 12/93 12/2018
1920 Bell Road Phoenix AZ 4,770 12/93 12/2018
12725 Southwest Freeway Stafford TX 4,547 10/93 09/2018
10893 Sunset Hills Plaza Sunset Hills MO 4,503 10/93 09/2018
Levitz................. 7310 South Priest Drive Tempe AZ 44,539 01/95 06/2014
Linens 'n Things....... 200 Trotters Way Freehold NJ 28,700 08/94 01/2010
Marshalls.............. 200 Trotters Way Freehold NJ 33,000 08/94 01/2010
Office Depot........... 2501 E. Randol Mill Road Arlington TX 25,000 01/94 08/2008
OfficeMax.............. 5625 S. Padre Island Drive Corpus Christi TX 29,140 11/93 08/2007
15440 Dallas Parkway Dallas TX 23,500 12/93 01/2009
4504 Eastgate Blvd. Cincinnati OH 23,484 07/94 10/2013
2255 W. Howard Street Evanston IL 23,500 06/95 05/2010
Oshman's............... 15490 Dallas Parkway Dallas TX 50,000 03/94 01/2015
Pier I Imports......... 9147 Skillman Street Dallas TX 9,000 04/94 03/2001
Pizza Hut.............. 2215 West Oak Ridge Road Orlando FL 2,500 08/93 01/2000
Rally's................ 3033 Cherry Street Toledo OH 710 07/92 12/2009
Scotty's............... 2290 S. Semoran Blvd. Orlando FL 56,905 06/95 06/2015
6103 N. Orange Blossom Trail Orlando FL 55,970 06/95 06/2015
Sears Homelife......... 15701 U.S. Hwy 19 Clearwater FL 46,800 05/93 06/2007
2000 Principal Row Orlando FL 36,096 05/93 12/2006
The Good Guys!......... 646 W. Hammer Lane Stockton CA 15,000 07/94 07/2009
Wendy's................ 41 Gravois Road Fenton MO 2,848 07/92 05/2005
500 S. Highway 17-92 Longwood FL 3,075 07/92 11/1997
------------
Total.............. 1,657,525(4)
------------
------------
</TABLE>
- ------------------------------
(1) Most leases include two to four extension terms of five years each,
exercisable at the tenant's option.
(2) The Company currently owns and leases six land parcels to Barnes & Noble
(four Properties), Academy (one Property) and Food 4 Less (one Property).
As of September 30, 1995, these tenants were constructing buildings on each
of the parcels. Leases covering these land parcels have been executed and
provide for ground rent to be paid during construction and additional rent
to be paid after the buildings are completed, acquired by the Company and
leased back to the tenent. The Company anticipates that total construction
costs for the improvements (including the costs associated with the newly
constructed building purchased in January 1996) will be approximately $17
million. Upon completion of construction, which is anticipated to occur in
mid-February 1996, these Properties (including the newly constructed
building) will provide for approximately 270,000 square feet of GLA (Barnes
& Noble, 163,000 square feet; Academy, 52,500 square feet; and Food 4 Less,
54,400 square feet) and approximately $1.8 million of Base Rent (Barnes &
Noble, $1.2 million; Academy, $224,000; and Food 4 Less, $408,000).
(3) Date acquired represents the acquisition date of the land portion of these
Properties. The building was purchased upon completion of construction,
which generally occurs approximately six to 12 months after land is
acquired.
(4) Excludes GLA attributed to the buildings under construction discussed in
footnote (2) above.
S-25
<PAGE>
The following table sets forth certain Property, tenant and guarantor
information as of September 30, 1995 with respect to each of the retailers that
operates from a Property in the Company Portfolio.
<TABLE>
<CAPTION>
TOTAL PERCENT OF
NUMBER OF TOTAL GLA PERCENT OF TOTAL
RETAILER PROPERTIES (SQ. FT.) TOTAL GLA BASE RENT (1) BASE RENT TENANT OR GUARANTOR
- ------------------------ --------------- ------------ ------------- -------------- ------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Barnes & Noble (2)...... 9 113,850(2) 6.87%(2) $ 3,015,728(2) 13.88%(2) Barnes & Noble, Inc.
Eckerd.................. 15 134,715 8.13 1,956,248 9.00 Eckerd Corporation
Hi-Lo Automotive........ 24 196,022 11.82 1,788,756 8.23 Hi-Lo Automotive, Inc.
Burger King............. 14 44,454 2.68 1,463,218 6.73 Burger King Corp.
Borders Books & Music... 2 63,200 3.81 1,401,382 6.45 Kmart Corporation
OfficeMax (3)........... 4 99,624 6.01 1,079,775 4.97 Kmart Corporation
Intelligent Electronics, Inc.
Golden Corral........... 27 148,638 8.97 1,062,581 4.89 Golden Corral Corp.
Hardee's................ 14 49,700 3.00 1,015,425 4.67 Flagstar Companies, Inc.
Denny's................. 10 44,354 2.67 914,787 4.21 Flagstar Companies, Inc.
Food Lion............... 4 120,885 7.29 835,200 3.84 Food Lion, Inc.
Int'l House of
Pancakes............... 7 32,063 1.93 772,423 3.56 IHOP, Inc.
Academy (2)............. 3 105,881(2) 6.39(2) 720,003(2) 3.31(2) Academy Corp.
Scotty's................ 2 112,875 6.81 670,911 3.09 Scotty's, Inc.
Sears Homelife.......... 2 82,896 5.00 664,916 3.06 Sears, Roebuck & Co.
Marshalls............... 1 33,000 1.99 470,250 2.16 Melville Corporation
Computer City........... 1 25,000 1.51 464,750 2.14 Tandy Corp.
Oshman's................ 1 50,000 3.02 448,500 2.06 Oshman's Sporting Goods, Inc.
CompUSA................. 1 25,000 1.51 429,000 1.98 CompUSA, Inc.
Food 4 Less (2)......... 1 (2) (2) 420,390 (2) 1.94 (2) Ralphs Grocery Company
Linens 'n Things........ 1 28,700 1.73 401,800 1.85 Melville Corporation
The Good Guys!.......... 1 15,000 0.91 381,714 1.76 The Good Guys, Inc.
Levitz.................. 1 44,539 2.69 300,638 1.38 Levitz Furniture Company of
the Midwest, Inc.
Blockbuster Music Plus.. 1 16,500 1.00 255,750 1.18 Sound Warehouse, Inc.
Office Depot............ 1 25,000 1.51 210,000 0.96 Office Depot, Inc.
Best Buy................ 1 26,700 1.61 160,200 0.74 Best Buy Co., Inc.
Wendy's (4)............. 2 5,923 0.36 153,150 0.71 Davco Food, Inc.
Orlando Foods, Inc.
Pier I Imports.......... 1 9,000 0.54 135,000 0.62 Pier I Imports, Inc.
Checkers................ 1 796 0.05 62,500 0.29 Checkers Drive In
Restaurants, Inc.
Rally's................. 1 710 0.04 51,250 0.23 Rally's, Inc.
Pizza Hut............... 1 2,500 0.15 23,952 0.11 Semoran Management Corp.
--- ------------ ------------- -------------- -------------
Totals.............. 154 1,657,525 (5) 100.00 % $ 21,730,197 (5) 100.00 %
--- ------------ ------------- -------------- -------------
--- ------------ ------------- -------------- -------------
</TABLE>
- ------------------------------
(1) Base Rent includes rental income from operating leases and earned income
from direct financing leases but excludes percentage (contingent) rental
income and non-cash lease accounting adjustments.
(2) The Company currently owns and leases six land parcels to Barnes & Noble
(four Properties), Academy (one Property) and Food 4 Less (one Property).
As of September 30, 1995, these tenants were constructing buildings on each
of the parcels. Leases covering these land parcels have been executed and
provide for ground rent to be paid during construction and additional rent
to be paid after the buildings are completed, acquired by the Company and
leased back to the tenant. The Company anticipates that total construction
costs for the improvements (including the costs associated with the newly
constructed building purchased in January 1996) will be approximately $17
million. Upon completion of construction, which is anticipated to occur in
mid-February 1996, these Properties will (including the newly constructed
building) provide for approximately 270,000 square feet of GLA (Barnes &
Noble, 163,000 square feet; Academy, 52,500 square feet; and Food 4 Less,
54,400 square feet) and approximately $1.8 million of Base Rent (Barnes &
Noble, $1.2 million; Academy, $224,000; and Food 4 Less, $408,000).
(3) Leases for three Properties are guaranteed by Kmart Corporation. A lease
for one Property is guaranteed by Intelligent Electronics, Inc.
(4) The tenant for one Property is Davco Food, Inc. and the tenant for the
other Property is Orlando Foods, Inc. Each tenant is a franchisee of
Wendy's.
(5) Excludes GLA and Base Rent attributed to the buildings under construction
discussed in footnote (2) above.
S-26
<PAGE>
THE ACQUISITION PROCESS
The Company acquires its properties from either the retail entities that
occupy such properties or the developer of the property, which may be a CNL
Affiliate.
ACQUISITIONS FROM RETAIL OCCUPANTS. When purchasing a property from the
retail entity which occupies it, the Company is able to meet the tenant's needs
by tailoring the terms of the lease and by varying the mix of rental stream
payments among base rent, fixed periodic contractual rent increases and rent
based on a percentage of the tenant's gross sales. If the property has been
developed recently, the purchase price typically equals the original development
cost of the property, which management verifies independently. Retail businesses
are often motivated to enter into such sale/leaseback arrangements as a form of
off-balance sheet financing to provide additional capital for reinvestment in
their core businesses.
The Company occasionally purchases undeveloped land concurrent with the
tenant securing governmental approvals for construction and development of a
store. In these cases, the Company leases the land back to the tenant during the
construction period under a contractual arrangement which requires the tenant to
develop the property and to sell the completed improvements to the Company at a
future date at a cost not to exceed a predetermined budgeted amount. In these
instances, the lease executed at the time the land is purchased by the Company
is structured to provide the Company with a specified rate of return based on
the Company's total cost in purchasing the property. The development of these
properties generally is completed within 12 months of entering into the land
lease. Generally, after purchasing the completed improvements, the Company
leases the improvements back to the retailer on terms which provide the Company
with the same rate of return as the initial ground lease. This lease structure
is often preferred by rapidly expanding retailers that desire to free up capital
invested in the land as quickly as possible for reinvestment in their core
businesses.
ACQUISITIONS FROM DEVELOPERS. The Company occasionally acquires an existing
property, subject to a long-term lease, from the owner or developer of the
property. In these instances, the seller is often motivated to receive cash for
the value created through the successful development and leasing of the
property. While the Company buys such a property based on the intrinsic value of
the lease in place, it sometimes is able to renegotiate the terms of the lease
with the tenant, thereby increasing the value of the property. The Company is
able to renegotiate such leases largely as a result of its extensive retail
relationships and knowledge of the net lease business. The Company sometimes
purchases properties from developers that are CNL Affiliates. In such instances,
the purchase price paid by the Company equals all direct costs of development by
the CNL Affiliate, such as land and construction costs and closing costs, as
well as a market-rate development fee equal to five to 10 percent of the CNL
Affiliate's cost of developing the property. The development fee charged by CNL
Affiliates is negotiated with the tenant and management believes such fees are
at or below the market rates for comparable development services when contracted
from third parties. The property is sold to the Company with the lease in place.
The development fee is included in the cost of the property and, therefore, is
included in the calculation of Base Rent.
SITE SELECTION AND PROPERTY ACQUISITION ANALYSIS. Before acquiring
properties, the Company engages in an extensive review and analysis of potential
sites. The Company typically conducts an analysis of each site to determine both
its long-term viability for the tenant and its value in the market. Attributes
evaluated with respect to each site include the demographics of the market area
as they relate to consumer demand, traffic patterns, traffic counts, surrounding
land uses, traffic generators such as regional malls, accessibility, visibility,
competition and parking. As part of this due diligence process, an experienced
site acquisition specialist personally inspects the market area, verifies market
area data and performs an in-depth site and building conditions inspection. The
Company also obtains a Phase I environmental site assessment report from an
independent environmental consulting firm for each site and a facilities
inspection report from an independent engineering firm for any site with a
building exceeding approximately 7,500 square feet of GLA.
S-27
<PAGE>
Management believes that the Company also benefits from extensive,
sophisticated site selection procedures used by tenants. Major retail companies
that lease freestanding properties typically have proven expertise in selecting
development sites designed to maximize sales throughout the life of the
property. Because the financial success of such tenants depends heavily upon the
locations of their properties, such tenants generally expend significant
resources on site analysis to select the most desirable sites.
DESCRIPTION OF LEASES
Initial lease terms for the Properties typically are, or are expected to be,
15 to 20 years, with renewal options for an additional 10 to 20 years (in the
aggregate). As of September 30, 1995, the average remaining initial lease term
with respect to the Properties was approximately 14 years. Leases accounting for
approximately 90 percent of annualized Base Rent for the nine months ended
September 30, 1995, have initial lease terms extending until at least December
31, 2005. All of the Company's properties have been 100 percent leased since the
Company's formation in 1984.
The following table shows the number of leases in the Company Portfolio
which expire each calendar year through the year 2005, as well as the number of
leases which expire after December 31, 2005. The table does not reflect the
exercise of any of the renewal options provided to the tenant under the terms of
such leases.
LEASE EXPIRATION TABLE
<TABLE>
<CAPTION>
GLA BASE RENT
------------------------ ---------------------------
YEAR NUMBER SQ. FT. PERCENT AMOUNT PERCENT
- ------------------------------------------------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
1995............................................. 0 0 0.00% $ 0 0.00%
1996............................................. 0 0 0.00 0 0.00
1997............................................. 1 3,075 0.19 60,750 0.28
1998............................................. 0 0 0.00 0 0.00
1999............................................. 0 0 0.00 0 0.00
2000............................................. 1 2,500 0.15 23,952 0.11
2001............................................. 11 64,040 3.86 516,113 2.38
2002............................................. 17 93,598 5.65 681,468 3.14
2003............................................. 0 0 0.00 0 0.00
2004............................................. 0 0 0.00 0 0.00
2005............................................. 9 25,913 1.56 984,900 4.53
Thereafter....................................... 115 1,468,399 88.59 19,463,014 89.56
--- ----------- ----------- -------------- -----------
Totals....................................... 154 1,657,525 100.00% $ 21,730,197 100.00%
--- ----------- ----------- -------------- -----------
--- ----------- ----------- -------------- -----------
</TABLE>
As of September 30, 1995, leases in the Company Portfolio representing
approximately 68 percent of Base Rent include periodic contractual increases in
base rent; leases representing approximately 45 percent of Base Rent include
percentage rent provisions; and leases representing approximately 23 percent of
Base Rent include both contractual increases in base rent and percentage rent
provisions. The contractual increases in base rent and the percentage rent
formulas are not linked to consumer price index (CPI) based adjustments. Leases
which provide for increases in annual base rent do so on a periodic basis. The
first such increase generally occurs after five years of the lease term. These
increases generally range in amount from six to 12 percent after every five
years of the lease term, with a weighted average increase of approximately 10
percent after every five years. Since most of the Properties were acquired in
1994 or thereafter, a significant number of such contractual rent increases will
not become effective until 1999. In addition, for those Properties that provide
for the payment of percentage rent, such rent is generally in the range of two
to eight percent of the tenant's annual gross sales, less the amount of annual
base rent payable in that lease year. For the nine months ended September 30,
1995, percentage rent was $579,055 (approximately four percent of total
revenues).
Substantially all of the Company's leases are triple-net leases that provide
that the tenants bear responsibility for substantially all of the costs and
expenses associated with the ongoing maintenance and operation of the leased
properties, including utilities, property taxes and insurance. The remainder
S-28
<PAGE>
of the Company's leases are on terms which management believes are substantially
the same as those of its triple-net leases, except that the Company retains
responsibility for certain common area maintenance obligations, some of which
are subject to reimbursement by the tenant, and in a limited number of cases,
for a portion of the insurance costs, which are subject to reimbursement by the
tenant either under a specific term of the lease or as part of the general
reimbursement by the tenant for the costs and expenses associated with
maintenance and operation of the leased property.
The Company's leases generally also provide that the tenants are responsible
for roof and structural repairs. Structural repairs generally are repairs and
improvements required by law, long-term capital items such as roof repair or
replacement, and, in limited cases, replacement of heating and air conditioning
systems. The Company utilizes warranties and maintenance contracts to reduce its
exposure for those items as to which it bears financial responsibility.
Management believes that it has minimized the expenses that may be associated
with such items by requiring quality property construction (including a bonded
roof) and purchasing new or recently constructed properties, since these types
of properties may be expected to require fewer repairs than older ones. It is
not possible, however, in all instances to completely insulate the Company,
which ultimately may bear some of the costs and expenses normally associated
with property ownership. Management currently estimates that expenditures and
reserves for these items will be approximately $150,000 per year. Based on these
estimates, management is of the view that the Company will be able to pay these
expenses through retained funds from operations or borrowings.
Lease provisions relating to casualty loss and condemnation vary among the
Company's leases. The leases with respect to the Company's restaurant properties
and most of the Company's retail properties generally obligate the tenant to
repair and restore the property or to substitute another property for the
damaged or condemned property. Under the leases of the remaining properties, the
Company generally is required to repair or restore a property in the event of
casualty loss or condemnation, although it is entitled to casualty insurance
proceeds, including proceeds, if any, for loss of rent, or condemnation proceeds
in such circumstances. To the extent that the tenant may abate its rent payments
pending the repair or restoration of a property and such abatement is not offset
by casualty proceeds, the Company's rental income may be adversely affected. In
a number of the Company's leases, the tenant may terminate its lease upon
casualty or condemnation. In substantially all of these leases, the tenant's
right to terminate the lease is conditioned on one or more of the following
factors: (i) the damage or the taking being of a material nature, (ii) the
damage or taking occurring within the last few years of the lease term (and the
tenant not exercising its option to extend the lease), or (iii) the period of
time necessary to repair the premises not exceeding a specified number of
months.
A substantial number of the Company's leases include purchase options in
favor of the tenant, generally at not less than fair market value, or a right of
first refusal if the Company should seek to sell a property. Under certain
circumstances, a tenant generally may assign its lease or sublet the property
without the Company's approval, although the tenant typically remains liable
under the lease and the guarantor, if any, typically remains liable under its
guaranty subsequent to assignment or sublease. Under certain of the leases, the
tenant has a right, under specified circumstances, to substitute a comparable
property for a property leased from the Company. Leases representing less than
five percent of Base Rent contain provisions that allow the tenant to terminate
the lease, subject to certain conditions, including that no default has occurred
and is continuing and that the property has become uneconomic or unsuitable for
its designated use, provided that the tenant offers to purchase the property
from the Company. While the purchase price varies depending on when the offer to
purchase the property is made, for a number of these properties it could equal
the property's then net book value. The Company is not obligated to accept such
offer, although the lease is terminated in any event. If the tenant resells the
property within 24 months after its purchase, the tenant must pay the
S-29
<PAGE>
Company any additional net sales proceeds realized by the tenant from such sale.
Because substantially all of the properties subject to this condition are
currently generating percentage rent, and because of the conditions to
termination, management believes that it is unlikely that these leases will be
terminated, at least as to any significant number of properties.
ENVIRONMENTAL MATTERS
It is the Company's policy, as part of its acquisition due diligence
process, to obtain a Phase I environmental site assessment for each property,
which generally involves inspection of site conditions without invasive testing
such as sampling or analysis of soil, groundwater or other media or conditions.
Where the Company believes the results of a Phase I environmental site
assessment warrant further investigation, the Company has undertaken in the
past, and will undertake in the future, a Phase II environmental site
assessment, which generally involves testing of soil, groundwater or other media
or conditions. In the event that an environmental site assessment indicates that
a problem or a potential problem exists, the Company generally would elect not
to purchase the property or, if the Company believes that the problem is not
material, may purchase the property and require the seller or another
responsible party to remediate the problem prior to the Company's purchase of
the property or indemnify the Company for environmental liabilities. A number of
the Company's leases provide that the Company retains liability for certain
specified environmental problems, or for all environmental problems, on a
property unless such problem was caused by an act or omission by the tenant.
Some of the Company's leases require the tenant to indemnify the Company for
environmental liabilities. There can be no assurance, however, that such
indemnities from the tenant, the seller or the responsible party, as the case
may be, would be available or uncontested if liabilities arise.
All of the Properties have been subjected to Phase I environmental site
assessments, other than the 27 Golden Corral Properties which were acquired
under agreements executed before Phase I environmental site assessments became
common practice. No Phase I assessment has revealed any environmental liability
that the Company believes would have a material adverse effect on the Company's
business, assets or results of operations, nor is the Company aware of any such
liability. In 1994, the Company obtained a review by an environmental consultant
of environmental regulatory databases containing a compilation of information by
federal and state environmental agencies regarding sites reported to be
contaminated to determine the status of the Golden Corral Properties. The
Company was advised by its consultant that none of the Golden Corral Properties
were identified in those databases. There can be no assurance, however, that
such databases contain a complete and total list of all contaminated sites
reported by federal and state environmental agencies.
The Company is not aware of any environmental liability with respect to any
Property in the Company Portfolio that it believes would have a material adverse
effect on the Company's assets or financial condition.
LITIGATION
As of the date of this Prospectus Supplement, the Company was not a party to
any material legal proceedings.
S-30
<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, who are elected or
appointed annually, are listed below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- -------------------------- --- --------------------------------------------------------------
<S> <C> <C>
James M. Seneff, Jr.* 49 Chairman of the Board and Chief Executive Officer
Robert A. Bourne* 48 President and Director
Edward Clark 75 Director
Willoughby T. Cox, Jr. 68 Director
Clifford R. Hinkle 47 Director
Ted B. Lanier 61 Director
Kevin B. Habicht* 36 Executive Vice President, Chief Financial Officer and
Assistant Secretary
Gary M. Ralston* 45 Executive Vice President and Chief Operating Officer
Lynn E. Rose* 46 Secretary and Treasurer
</TABLE>
- ------------------------
* Affiliated with the Advisor.
JAMES M. SENEFF, JR. has served as a director of the Company since June 1992
and its Chief Executive Officer and Chairman of its Board of Directors since
July 1992, as well as Chief Executive Officer and Chairman of the Board of the
Advisor since its inception in 1991. Mr. Seneff has served as Chief Executive
Officer, director and a principal stockholder of CNL Group since its formation
in 1973. Mr. Seneff served on the Florida State Commission on Ethics in 1986. He
was a member of the Florida Investment Advisory Council, which oversees the $40
billion Florida state retirement plan, from 1986 to June 1994, and was Chairman
of the Council from 1991 to 1992. Since 1971, Mr. Seneff has been active in the
acquisition, development and management of real estate projects throughout the
United States.
ROBERT A. BOURNE has served as a director of the Company since June 1992, as
its President since July 1992, and as President of the Advisor since its
inception in 1991. Mr. Bourne, a certified public accountant, also serves as
President of CNL Group and as President and a director of CNL Institutional
Advisors, Inc., a registered investment advisor. Since 1979, Mr. Bourne has been
active in the acquisition, development and management of real estate projects
throughout the United States.
EDWARD CLARK has served on the Company's Board of Directors since April 1991
and was Chairman of the Board from that time until July 1992. Mr. Clark served
as President of the Company from 1984 until July 1992. Mr. Clark has been a
consultant to Golden Corral and to its parent corporation, Investors Management
Corporation, a privately held corporation, on tax and financial matters since
1982. From 1966 to 1980, Mr. Clark, a certified public accountant, was a partner
in the public accounting firm of Peat Marwick Mitchell & Co.
WILLOUGHBY T. COX JR. has served as a director of the Company since June
1992 and currently is a private real estate investor. From 1960 to 1985, Mr. Cox
was a Mortgage Loan Correspondent for the State of Florida for Connecticut
Mutual Life Insurance Company. From 1978 through 1981, Mr. Cox also was employed
as a Florida Agriculture Mortgage Loan Correspondent for Aetna Life and Casualty
Insurance Company. He currently serves as the Agricultural Loan Correspondent
for the State of Florida for Batterymarch-AgriVest, the successor to the
Agricultural Loan Department of Connecticut Mutual Life Insurance Company. Mr.
Cox is a former director of Orange State Bank, Landmark Bank of Orlando and
Atico Savings Bank and a former Vice Chairman of Pan American Bank of Orlando.
Mr. Cox has been involved in real estate related activities in Florida since
1950, including real estate brokerage, management, mortgage lending, appraisal
and construction. Mr. Cox holds the Counselor of Real Estate designation and is
a MAI (Member, Appraisal Institute).
S-31
<PAGE>
CLIFFORD R. HINKLE has served as a director of the Company since June 1993.
Since 1991, Mr. Hinkle has been the President of Flagler Capital Corporation,
which provides financial advisory and investment banking services, and he was a
director of MHI Group, which owns and operates funeral homes and cemeteries,
until November 1995. From 1987 to 1991, Mr. Hinkle was the Executive Director of
the State Board of Administration of Florida and managed over $40 billion in
various trust funds.
TED B. LANIER has served as a director of the Company since April 1988 and
was the Chief Executive Officer of Triangle Bank and Trust Company, Raleigh,
North Carolina ("Triangle"), from January 1988 until March 1991. Mr. Lanier also
was the Chairman of Triangle from January 1989 until March 1991 and its
President from January 1988 to January 1989. Since his retirement in 1991 as
Chairman and Chief Executive Officer of Triangle, Mr. Lanier has managed his
personal investments.
KEVIN B. HABICHT has served as Executive Vice President, Chief Financial
Officer and Assistant Secretary of the Company and the Advisor since December
1993. Mr. Habicht previously served as Vice President of the Company from July
1992 through December 1993 and as Vice President of the Advisor since its
inception in 1991. Since 1983, Mr. Habicht has also served as an officer of
various CNL Affiliates and since 1990, has served as a Senior Vice President of
CNL Institutional Advisors, Inc. From 1981 to 1983, Mr. Habicht, a certified
public accountant and a Chartered Financial Analyst, was employed by Coopers &
Lybrand, Certified Public Accountants. Mr. Habicht is the brother-in-law of
James M. Seneff, Jr., Chief Executive Officer and Chairman of the Board of the
Company and the Advisor.
GARY M. RALSTON has served as Executive Vice President and Chief Operating
Officer of the Company and of the Advisor since December 1993. In his capacities
as Chief Operating Officer and Executive Vice President, Mr. Ralston is
primarily responsible for overseeing the Company's property acquisitions. Mr.
Ralston previously served as Vice President of the Company from July 1992
through December 1993 and as Vice President of the Advisor since its inception
in 1991. From 1988 to 1992, he also served as a Senior Vice President of CNL
Properties, Inc., a real estate investment and asset/ property management
company affiliated with CNL Group. From 1983 to 1988, Mr. Ralston was a Vice
President of ENCO, a real estate investment and asset/property management firm
located in Lakeland, Florida. Mr. Ralston holds the Certified Commercial
Investment Member and Society of Industrial and Office Realtors designations and
is also a Florida licensed Real Estate Broker, Mortgage Broker and Certified
Building Contractor. Mr. Ralston is a member of the Board of Directors of the
National Association of Realtors, Chairman of its Commercial Finance Committee
and a member of the Capital Consortium.
LYNN E. ROSE has served as Secretary and Treasurer of the Company since July
1992 and as Secretary of the Advisor since its inception in 1991. Ms. Rose, a
certified public accountant, also has served as Controller of CNL Group since
1987 and as Chief Financial Officer of CNL Institutional Advisors, Inc. since
its inception in 1990.
CERTAIN KEY EMPLOYEES OF THE ADVISOR
The backgrounds of Messrs. Seneff, Bourne, Habicht and Ralston and of Ms.
Rose are described above at "-- Directors and Executive Officers."
The Advisor employs personnel who have extensive experience in selecting and
managing freestanding retail properties. In addition to the directors and
executive officers listed above, the following individuals are involved in the
acquisition and management of the Company's properties.
JAMES W. BASTIAN has served as Senior Vice President for Acquisitions of
both the Company and the Advisor since December 1993 and served as Vice
President of Acquisitions of CNL Investment Company from 1989 to 1993.
Previously, Mr. Bastian served as Southeastern Director of Real Estate for Rite
Aid Corporation (1989), as National Director of Real Estate and Construction for
Quaker State Corp. (1987 to 1989), and as Director of National Development for
Wendy's International (1984
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to 1987) . Mr. Bastian is a member of the National Association of Corporate Real
Estate Executives (NACORE) and has over 20 years of experience in asset/property
management, real estate acquisition and development.
ROBERT D. BOOS joined the Company in August of 1995 as Senior Vice President
of Corporate Acquisitions. From 1982 to 1995, Mr. Boos served as Vice President
of Real Estate and Development for Eckerd, the nation's third largest retail
drug chain, with responsibility for the implementation of the Company's new
store development program. During his tenure, he designed and implemented the
Company's freestanding drug store concept which now accounts for 75 percent of
all new stores opened by Eckerd. Mr. Boos has over 20 years of retail real
estate experience beginning with Ponderosa System, Inc. where he was Vice
President of Real Estate. Mr. Boos is also Florida State Director of the
International Council of Shopping Centers (ICSC), a member of the National
Association of Corporate Real Estate Executives (NACORE), and a Director of the
Merchants Association of Florida.
THOMAS E. MORSE has served as Senior Vice President for Acquisitions for
both the Company and the Advisor since December 1993 and served as a Senior Vice
President of CNL Properties, Inc. from 1991 to 1993. Prior to joining CNL
Properties, Inc., Mr. Morse worked for 11 years for Ferncreek Properties, first
as an Executive Vice President (1982 to 1988) and then as President (1988 to
1990). Mr. Morse is a member of the National Association of Realtors.
JEFFREY F. BASS has served as Vice President of Real Estate of the Advisor
since February 1994. Prior to joining the Advisor, Mr. Bass was President of
Jeffrey F. Bass & Associates, a real estate brokerage firm (1989 to 1994),
Executive Vice President of Gulfstream Retail Centers (1988 to 1989), and Vice
President and General Manager of the Florida Retail Division of Vantage
Properties, Inc. (1985 to 1988). Mr. Bass has 20 years of experience in retail
and real estate, beginning with five years at Eckerd where he was Real Estate
Manager. Mr. Bass is also a member of the National Association of Corporate Real
Estate Executives (NACORE).
MEZ R. BIRDIE joined CNL Properties, Inc. in 1992 as its Director of Retail
Management and now serves as Vice President for Property Management of both the
Company and the Advisor. From 1987 to 1992, Mr. Birdie served as Director of
Property Management for Charles Wayne Properties, Inc. Mr. Birdie has received
the Certified Property Manager designation awarded by the Institute of Real
Estate Management and the Certified Shopping Center Manager designation awarded
by the International Council of Shopping Centers (ICSC), and has a total of 14
years experience in the field of commercial and residential property management.
EDGAR J. MCDOUGALL has served as Vice President of the Company since July
1992 and is a Senior Vice President of the Advisor. Since 1990, Mr. McDougall
has been an officer of various entities affiliated with CNL Group. From November
1987 until joining CNL Group in 1990, Mr. McDougall served as President of
Colony Land Company, a company organized to develop single-family homesites in
Orlando, Florida. From 1985 to 1987, Mr. McDougall served as the Sales Manager
of the Orlando office of Coldwell Banker Commercial Group, Inc., a diversified
real estate company involved in the sale and leasing of commercial properties.
COURTNEY S. HUBBARD joined the Advisor as Director of Due Diligence and
Research in February 1995. Ms. Hubbard is a MAI (Member, Appraisal Institute)
and a certified general real estate appraiser in the State of Florida. Prior to
joining the Advisor, Ms. Hubbard was a senior associate at Clayton, Roper &
Marshall, a real estate appraisal and consulting firm (1991 to 1995), a senior
associate with Kampe Appraisals, Inc. (1989 to 1991), an intern with Cuddeback
and Traczyk Appraisal Services as part of earning a Master of Arts degree in
Real Estate (1988 to 1989), and a researcher/appraiser with Don Emerson
Appraisal Company (1986 to 1988).
INDEPENDENT DIRECTORS
Under the Company's Bylaws, a majority of the Company's Board of Directors
are required to be Independent Directors. Independent Directors are directors
who are not affiliated directly or indirectly, with any person to whom the
Company has delegated management duties (an "advisor"),
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<PAGE>
whether by reason of ownership of, ownership interest in, employment by,
business or professional relationship with, or service as an officer or director
of such advisor or any affiliate thereof. A director may be deemed an
Independent Director only if he performs no services for the Company other than
as a director. The Board of Directors has the authority to make a binding
determination as to whether a director meets the definition of Independent
Director. Messrs. Clark, Cox, Hinkle and Lanier, constituting a majority of the
current Board of Directors, are Independent Directors.
At least one member of each committee of the Company's Board of Directors
and a majority of the members of the Audit Committee must be Independent
Directors. See "-- Committees of the Board of Directors."
The Company's Bylaws require that any decision by the Company with respect
to the purchase or sale of real property or the leasing of the Company's real
property be approved separately by the Independent Directors and the Board of
Directors. The Company's Bylaws also require that transactions between the
Company and its directors or executive officers, or between the Company and any
entity in which one of the Company's directors or executive officers is a
director or executive officer or has a material financial interest, be approved
by a majority of the directors not interested in the transaction.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has a standing Audit Committee, the members of which are
selected by the full Board of Directors each year. The Audit Committee makes
recommendations to the Board of Directors as to the independent accountants of
the Company and reviews with such accounting firm the scope of the audit and the
results of the audit upon its completion. The members of the Audit Committee
currently are Messrs. Clark, Cox and Lanier.
The Company also has a standing Compensation Committee, the members of which
are selected by the full Board of Directors each year. The principal function of
the Compensation Committee is to make awards of stock options under the 1992
Commercial Net Lease Realty, Inc. Stock Option Plan (the "Option Plan") and to
set the terms of such stock options in accordance with the terms of such Option
Plan. The members of the Compensation Committee currently are Messrs. Clark,
Hinkle and Lanier.
CERTAIN TRANSACTIONS
Certain CNL Affiliates were issued 346,172 shares of the Company's Common
Stock with respect to the CNL Transaction (as defined in the accompanying
Prospectus) that are subject to piggyback registration rights in certain
circumstances. In connection with the Offering, such piggyback registration
rights have been waived.
In the fiscal year ended December 31, 1995, the Company acquired 22
properties and four buildings which were developed by the tenant on land parcels
owned by the Company for purchase prices totaling $57.0 million from unrelated
third parties. In connection with these acquisitions, the Company paid the
Advisor $937,363 in acquisition fees and expense reimbursement fees. Also in the
fiscal year ended December 31, 1995, the Company acquired seven properties for
an aggregate purchase price of $18.1 million at an annualized cash on cost
return (on an Inclusive Cost basis) of approximately 10.6 percent from CNL
Affiliates who had developed the properties. The purchase prices paid by the
Company for these seven properties equaled the CNL Affiliate's costs, including
development fees to affiliates of $1,105,689. No acquisition fees or expense
reimbursement fees were paid to the Advisor in connection with the acquisition
of these seven properties.
Effective January 1, 1996, the Company renewed the advisory agreement with
the Advisor (the "Advisory Agreement"), which provides for the Advisor to
receive an annual fee based on funds from operations, as defined in the Advisory
Agreement, which is payable monthly, equal to
(i) seven percent of annual funds from operations up to $10,000,000,
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<PAGE>
(ii) six percent of annual funds from operations in excess of
$10,000,000 but less than $20,000,000, and
(iii) five percent of annual funds from operations in excess of
$20,000,000.
For purposes of the Advisory Agreement, funds from operations generally
includes the Company's net income, determined in accordance with generally
accepted accounting principles, as adjusted for the following items: (i)
increased by depreciation, amortization and other similar non-cash charges, (ii)
increased by any extraordinary losses, (iii) decreased by any extraordinary
gains, (iv) increased by the amount of any advisory fees and (v) increased or
decreased for any non-cash lease accounting adjustments.
When a CNL Affiliate undertakes the development of a property, it negotiates
with the tenant a "developer's cost," comprised of both "hard" costs of
development and "soft" costs, including reimbursement of certain of the CNL
Affiliate's expenses and a development fee generally equal to five to 10 percent
of the total cost of the property. The rent on the developed property generally
is calculated on the basis of market capitalization rate and the negotiated
developer's cost. The Company purchases properties developed by CNL Affiliates
at prices equal to the negotiated developer's costs, which include reimbursement
of any expenses, as well as any development fees reflected in the developer's
costs. The Company, however, does not pay acquisition fees or expense
reimbursement in connection with the purchase of such properties.
During 1994, the Company acquired one property for a purchase price of
$548,487 from a CNL Affiliate at its cost for an annualized cash on cost return
(on an Inclusive Cost basis) of approximately 11.3 percent. The affiliate had
purchased and temporarily held title to the land portion of this property
pending the tenant's completion of construction of the building on the property.
In connection with the acquisition of this property and the acquisition of 37
other properties with a total purchase price of approximately $70.7 million from
unrelated third parties during 1994, the Company paid the Advisor $1.4 million
in acquisition fees and expense reimbursement fees. Also during 1994, the
Company acquired six properties, for an aggregate purchase price of
approximately $6.7 million at an annualized cash on cost return (on an Inclusive
Cost basis) of approximately 10.4 percent from CNL Affiliates who had developed
the properties. The purchase prices paid by the Company for these six properties
equaled the CNL Affiliate's costs, including development fees to affiliates of
$573,753. No acquisition fees or expense reimbursement fees were paid to the
Advisor in connection with the acquisition of these six properties. All of the
CNL Affiliates are controlled by Messrs. Seneff and Bourne. The terms of the
purchase of each property acquired from a CNL Affiliate were approved by a
majority of the Company's Independent Directors who had no interest in the
transaction. Management believes that the prices for these properties were at
least as favorable as the prices of such properties if purchased from unrelated
third parties.
In 1995 and 1994, the Company paid the Advisor approximately $1,000,000 and
$728,000, respectively, in advisory fees. The Advisor is a wholly owned
subsidiary of CNL Group, of which James M. Seneff, Jr., Chairman of the Board
and Chief Executive Officer of the Company, and his spouse are the stockholders.
S-35
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") by and among the Company and Smith Barney Inc.,
Goldman, Sachs & Co., Legg Mason Wood Walker Incorporated, J.C. Bradford & Co.
and The Robinson-Humphrey Company, Inc. (the "Underwriters"), the Underwriters
have severally agreed to purchase from the Company the number of shares of
Common Stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Smith Barney Inc........................................................................... 700,000
Goldman, Sachs & Co........................................................................ 700,000
Legg Mason Wood Walker Incorporated........................................................ 700,000
J.C. Bradford & Co......................................................................... 700,000
The Robinson-Humphrey Company, Inc......................................................... 700,000
-----------
Total.................................................................................... 3,500,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Stock offered hereby
are subject to the approval of certain legal matters by their counsel and to
certain other conditions. The Underwriters are obligated to take and pay for all
of the shares of Common Stock offered hereby (other than those covered by the
Underwriters' overallotment option) if any such shares of Common Stock are
taken.
The Underwriters propose to offer the Common Stock directly to the public at
the price set forth on the cover page hereof and to certain dealers at a price
less a concession not in excess of $.42 per share below the price to public. The
Underwriters may allow and such dealers may reallow a concession not in excess
of $.10 per share to certain other dealers. The Underwriters have informed the
Company that the Underwriters do not intend to confirm sales to accounts over
which they have discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus Supplement, to purchase up to an
additional 525,000 shares of Common Stock pro rata from the Company at the price
to the public set forth on the cover page hereof, less the underwriting
discount. The Underwriters may exercise such options solely for the purpose of
covering overallotments, if any, incurred in connection with the sale of the
Common Stock offered hereby. To the extent such options are exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such Underwriter's name in the preceding table bears to the total
number of shares of Common Stock in such table.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
and to offer the several Underwriters certain rights of contribution.
The Company, James M. Seneff, Jr. and Robert A. Bourne have agreed that, for
a period of 180 days after the date of this Prospectus Supplement, they will
not, without the prior written consent of the Underwriters, offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock, subject to
certain exceptions set forth in the Underwriting Agreement.
LEGAL MATTERS
Legal matters with respect to the shares of Common Stock offered hereby will
be passed upon for the Company by Shaw, Pittman, Potts & Trowbridge, Washington,
D.C., a partnership including professional corporations. Certain legal matters
will be passed upon for the Underwriters by Willkie Farr & Gallagher, New York,
New York.
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<PAGE>
[LOGO]
$200,000,000
COMMERCIAL NET LEASE REALTY, INC.
DEBT SECURITIES, COMMON STOCK AND COMMON STOCK WARRANTS
------------------------
Commercial Net Lease Realty, Inc. (the "Company") may from time to time
offer in one or more series (i) its debt securities (the "Debt Securities"),
which may be senior debt securities or subordinated debt securities, (ii) Common
Stock, par value $.01 per share (the "Common Stock"), or (iii) warrants to
purchase Common Stock (the "Common Stock Warrants"), with an aggregate public
offering price of up to $200,000,000 on terms to be determined at the time or
times of offering. The Debt Securities, Common Stock or Common Stock Warrants
(collectively, the "Offered Securities") may be offered, separately or together,
in separate classes or series in amounts, at prices and on terms to be set forth
in a supplement to this Prospectus (a "Prospectus Supplement").
The specific terms of the Offered 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, ranking, currency,
form (which may be registered or bearer, or certified or global), authorized
denominations, maturity, rate (or manner of calculation thereof) and time of
payment of interest, terms for redemption at the option of the Company or
repayment at the option of the holder thereof, terms for sinking fund payments,
terms for conversion into Common Stock or other securities of the Company, and
any initial public offering price; (ii) in the case of Common Stock, any initial
public offering price; and (iii) in the case of Common Stock Warrants, the
duration, offering price, exercise price and detachability. In addition, such
specific terms may include limitations on direct or beneficial ownership and
restrictions on transfer of the Offered 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.
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 Offered Securities
covered by such Prospectus Supplement.
The Offered 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 Offered
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 Offered Securities may be sold
without delivery of the applicable Prospectus Supplement describing the method
and terms of the offering of such class or series of Offered 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 ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
------------------------
THE DATE OF THIS PROSPECTUS IS OCTOBER 18, 1995.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated thereunder and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company with the Commission, may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, Seven
World Trade Center, 13th Floor, New York, New York 10048 and Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material also can be obtained from the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Company's Common Stock is listed on the New York
Stock Exchange under the ticker symbol "NNN." Reports, proxy statements and
other information concerning the Company also may be inspected at the New York
Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement (the
"Registration Statement") (of which this Prospectus is a part) on Form S-3 under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Offered Securities. This Prospectus does not contain all of the information
set forth in the Registration Statement, including the exhibits and schedules
thereto, certain parts of which are omitted as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus as to the
contents of any document are necessarily summaries of such documents, and in
each instance reference is made to the copy of such documents filed with the
Commission, each such statement being qualified in all respects by such
reference. For further information regarding the Company and the Offered
Securities, reference is hereby made to the Registration Statement and to the
exhibits and schedules filed or incorporated as a part thereof which may be
obtained from the Commission at its principle 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:
a. Annual Report on Form 10-K for the fiscal year ended December 31,
1994; and
b. Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
c. Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
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 Offered 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 any subsequently filed document which 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.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, on the written
request of any such person, a copy of any or all of the documents incorporated
herein by reference, except the exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). Requests for such
copies should be directed to Kevin B. Habicht, Commercial Net Lease Realty,
Inc., 400 East South Street, Suite 500, Orlando, Florida 32801 (telephone
number: 407/422-1574).
2
<PAGE>
THE COMPANY
Commercial Net Lease Realty, Inc., a Maryland corporation (the "Company"),
is a real estate investment trust (a "REIT") formed in 1984 that acquires, owns
and manages a diversified portfolio of high-quality, single-tenant, freestanding
properties leased to major retail businesses under full-credit, long-term
commercial net leases. As of June 30, 1995, the Company owned 142 properties
acquired for an aggregate purchase price of approximately $194 million and
having an annualized current cash on cost return (on an Inclusive Cost basis as
defined below) of approximately 10.29%. For the purposes of the Prospectus,
"Inclusive Cost" means all costs related to acquisitions, including but not
limited to the purchase price, legal and accounting fees and expenses,
commissions and title insurance.
The Company focuses on acquiring freestanding properties that are located
within intensive commercial corridors near traffic generators, such as regional
malls, business developments and major thoroughfares. These properties, which
generally have purchase prices of up to $5 million, attract a wide array of
established retail tenants. Consequently, management believes that such
properties offer attractive opportunities for stable current return and
potential capital appreciation. In addition, management believes that the
location and design of properties in this niche provide flexibility in use and
tenant selection and an increased likelihood of advantageous re-lease terms.
The Company has been successful in attracting tenants that operate in a
variety of retail segments, including Eckerd Drug, Marshalls and Burger King,
and "category killer" retailers such as Barnes & Noble Bookstores, OfficeMax,
Computer City and Linens 'n Things. "Category killer" retailers offer an
extensive variety of merchandise in a defined product category at competitive
prices through a "superstore" format, providing the convenience of in-depth
product selection in a single location. The Company intends to continue leasing
properties it acquires in the future to "category killer" retailers or other
major national or regional retail businesses.
CNL Realty Advisors, Inc. (the "Advisor") is the Company's advisor. The
Advisor is a wholly owned subsidiary of CNL Group, Inc. ("CNL Group"), a
diversified real estate company with expertise in commercial net leased
investments that currently owns and manages, either directly or through
affiliates (collectively, "CNL Affiliates"), a property portfolio with a cost in
excess of $600 million. Under the direction of the Company's Board of Directors,
the Advisor has responsibility for the day-to-day operations of the Company,
including investment analysis and development, acquisitions, due diligence, and
asset management and accounting services. Management of the Company believes
that the Advisor's extensive experience and long-term relationships throughout
the commercial net leased property industry benefits the Company in selecting,
acquiring and managing its properties. In focusing on acquiring freestanding
properties that are located within intensive commercial corridors which have
been successful in attracting a variety of retail tenants, including "category
killer" retailers, management of the Company also believes that the Advisor
provides the Company with a competitive advantage in the management and
operation of its real estate assets and in the identification of attractive
investments. At the time the Company retained the Advisor in July 1992 the
Company owned 28 properties leased to one tenant. The aggregate cost of such
properties was approximately $12.8 million. As of June 30, 1995, the Company had
acquired 117 additional properties leased to 28 tenants for an aggregate
purchase price of approximately $182.7 million, which currently provide an
annualized cash on cost return (on an Inclusive Cost basis) of approximately
10.42% percent.
The principal office of the Company is located at 400 East South Street,
Suite 500, Orlando, Florida 32801 and the Company's telephone number is
407/422-1574.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Offered Securities
for general corporate purposes, which may
3
<PAGE>
include the repayment of certain indebtedness outstanding at such time, the
acquisition of single tenant freestanding properties as suitable opportunities
arise and the expansion and improvement of certain properties in the Company's
portfolio.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the six months ended
June 30, 1995 was 6.04, and for the years ended December 31, 1994, 1993 and 1992
was 12.86, 9.77 and 6.18, respectively. The Company had no debt for the fiscal
years ending December 31, 1991 and 1990. For the purposes of computing these
ratios, earnings have been calculated by adding fixed charges (excluding
capitalized interest) to income (loss) before taxes and extraordinary items.
Fixed charges consist of interest costs, whether expensed or capitalized, and
amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized.
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 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, 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 the provisions thereof, do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all provisions
of the Indenture and such Debt Securities. Capitalized terms used but not
defined herein shall have the respective meanings set forth in the Indenture.
TERMS
The particular terms of the Debt Securities offered by a Prospectus
Supplement will be described in the particular Prospectus Supplement, along with
any applicable modifications of or additions to the general terms of the Debt
Securities as described herein and in the applicable Indenture and any
applicable federal income tax considerations. Accordingly, for a description of
the terms of any series of Debt Securities, reference must be made to both the
Prospectus Supplement relating thereto and the description of the Debt
Securities set forth in this Prospectus.
Except as set forth in any Prospectus Supplement, the Debt Securities may be
issued without limits as to aggregate principal amount, in one or more series,
in each case as established from time to time by the Company's Board of
Directors or as 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 issuance 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 percentage of the principal amount 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 which is convertible into Common
Stock or other equity securities of the Company, or the method by which any
such portion shall be determined;
(4) if such Debt Securities are convertible, any limitation to the
ownership or transferability of the Common Stock or other equity securities
of the Company into which such Debt Securities are convertible in connection
with the preservation of the Company's status as a REIT;
(5) the date or dates, or the method for determining the 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 the date or dates,
from which any such 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) or
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 to
such Debt Securities and the applicable Indenture may be served;
(9) the period or periods 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 option of the Company, if the
Company is to have such an 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 (and premium, if any)
or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not be, based on a currency, currencies, currency unit
or units or composite currency or currencies) and the manner in which such
amounts shall be determined;
(13) any additions to, modifications of or deletions from the terms of
such Debt Securities with respect to the events of default or covenants set
forth in the applicable Indenture;
(14) whether such Debt Securities will be issued in certificated or
book-entry form;
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(15) whether such Debt Securities will be in registered or bearer form
or both and, if and to the extent in registered form, the denominations
thereof if other than $1,000 and any integral multiple thereof and, if and
to the extent in bearer form, the denominations thereof and terms and
conditions relating thereto;
(16) the applicability, if any, of the defeasance and covenant
defeasance provisions described herein or set forth in the applicable
Indenture, or any modification thereof;
(17) the terms, if any, upon which such Debt Securities may be
convertible into Common Stock or other equity securities of the Company (and
the class thereof) and the terms and conditions upon which such conversion
will be effected, including, without limitation, the initial conversion
price or rate and the conversion period;
(18) whether and under what circumstances the Company will pay
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;
(19) the provisions, if any, relating to the security provided for such
Debt Securities; and
(20) any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). 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.
Except as may be set forth in the applicable Prospectus Supplement, the Debt
Securities will not contain any provisions that would limit the ability of the
Company to incur indebtedness or that would afford holders of Debt Securities
protection in a highly leveraged or similar action involving the Company or in
the event of a change of control of the Company. However, certain restrictions
on ownership and transfers of the Company's Common Stock and the Company's other
equity securities designed to preserve its status as a REIT may act to prevent
or hinder a change of control. See "Description of Common Stock -- Restrictions
on Ownership." Reference is made to the applicable Prospectus Supplement for
information with respect to any deletion from, modification of or addition to
the events of default or covenants of the Company that are described below,
including any addition of a covenant or other provision providing event risk or
similar protection.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise specified 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, 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.
Any interest not punctually paid or duly provided for on any date upon which
interest is payable with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the holder on the applicable regular record
date and may either be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
applicable Trustee, notice of which shall be
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given to the holder of such Debt Security not less than 10 days prior to such
Special Record Date, or may be paid at any time in any other lawful manner, all
as more completely described in the applicable Indenture.
Subject to certain limitations applicable to Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the applicable Trustee. In
addition, subject to certain limitations applicable to 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 corporate trust office of
the applicable Trustee. Every Debt Security surrendered for conversion,
registration of transfer or exchange must be duly endorsed or accompanied by a
written instrument of transfer. 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. If the applicable Prospectus Supplement
refers to any transfer agent (in addition to the Trustee) initially designated
by the Company with respect to any series of Debt Securities, the Company may at
any time rescind the designation of any such transfer agent or approve a change
in the location at which any such transfer agent acts, except that the Company
will be required to maintain a transfer agent in each place of payment for such
series. The Company may at any time designate additional transfer agents with
respect to any series of Debt Securities.
Neither the Company nor any Trustee will be required (i) to issue, register
the transfer of or exchange Debt Securities of any series during a period
beginning at the opening of business 15 days before any selection of Debt
Securities of that series to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption; (ii) to register the
transfer of or exchange any Debt Security, or portion thereof, called for
redemption, except the unredeemed portion of any Debt Security being redeemed in
part; or (iii) to issue, register the transfer of or exchange any Debt Security
which has been surrendered for repayment at the option of the holder, except the
portion, if any, of such Debt Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE
Each Indenture provides that the Company may consolidate with, or sell,
lease or convey all or substantially all of its assets to, or merge with or
into, any other corporation, provided that (a) either the Company must be the
continuing corporation, or the successor corporation (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 must expressly assume payment of the
principal of (and premium, if any), and interest on, all of the outstanding Debt
Securities and the due and punctual performance and observance of all of the
covenants and conditions contained in the applicable Indenture; (b) immediately
after giving effect to such transaction and treating any indebtedness which
becomes an obligation of the Company or any subsidiary as a result thereof as
having been incurred by the Company or such subsidiary at the time of such
transaction, no event of default under the applicable Indenture, and no event
which, 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 officer's certificate
and legal opinion concerning such conditions shall be delivered to the Trustee.
CERTAIN COVENANTS
EXISTENCE. Except as permitted under "-- Merger, Consolidation or Sale,"
the Indenture will require the Company to do or cause to be done all things
necessary to preserve and keep in full force and effect its corporate existence,
rights (by articles of incorporation, bylaws or statute) and franchises;
PROVIDED, HOWEVER, that the Company will not be required to preserve any right
or franchise if it determines that the preservation thereof is no longer
desirable in the conduct of its business.
MAINTENANCE OF PROPERTIES. The Indenture will require the Company to cause
all of its properties used or useful in the conduct of its business or the
business of any subsidiary to be maintained and
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kept in good condition and must cause to be made all necessary repairs,
renewals, replacements, betterments and improvements thereof, all as in the
judgment of the Company 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 will not be prevented
from selling or otherwise disposing for value its properties in the ordinary
course of business.
INSURANCE. The Indenture will require the Company to, and to cause each of
its subsidiaries to, keep or cause to be kept in force upon all of its
properties and operations policies of insurance carried with responsible
companies in such amounts and covering all such risks as shall be customary in
the industry in accordance with prevailing market conditions and availability.
PAYMENT OF TAXES AND OTHER CLAIMS. The Indenture will require the Company
to pay or discharge or cause to be paid or discharged (or, if applicable, cause
to be transferred to bond or other security), before the same shall become
delinquent, (a) all taxes, assessments and governmental charges levied or
imposed upon it or any subsidiary or upon the income, profits or property of the
Company or any subsidiary, and (b) all lawful claims for labor, materials and
supplied which, if unpaid, might by law become a lien upon the property of the
Company or any subsidiary, PROVIDED, HOWEVER, that the Company will not be
required to pay or discharge (or transfer to bond or other security) or cause to
be paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity it being contested in good faith by appropriate
proceedings.
PROVISION OF FINANCIAL INFORMATION. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Indenture will require the
Company, within 15 days after each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
documents with the Commission if the Company were so subject, (a) to transmit by
mail to all holders of Debt Securities, as their names and addresses appear in
the applicable register for such Debt Securities, without cost to such holders,
copies of the annual reports, quarterly reports and other documents that the
Company would have been required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act if the Company were subject to such Sections,
(b) to file with the Trustee copies of the annual reports, quarterly and other
documents that the Company would have been required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act if the Company were subject
to such Sections, and (c) to supply promptly upon written request and payment of
the reasonable cost of duplication and delivery, copies of such documents to any
prospective holder of Debt Securities.
ADDITIONAL COVENANTS. Any additional covenants of the Company with respect
to any of the series of Debt Securities will be set forth in the Prospectus
Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the applicable indenture, the 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 at its maturity; (c) default in making any sinking fund
payment as required for any Debt Security of such series; (d) default in the
performance of any other covenant of the Company contained in the applicable
Indenture (other than a covenant added to such Indenture solely for the benefit
of a series of Debt Securities issued thereunder other than such series),
continued for 60 days after written notice as provided in such Indenture; (e)
default under any evidence of indebtedness of the Company or any mortgage,
indenture or other instrument under which such indebtedness is issued or by
which such indebtedness is secured which results in the acceleration of
indebtedness in an aggregate principal amount exceeding $10,000,000, but only if
such indebtedness is not discharged or such acceleration is not rescinded or
annulled as provided in the applicable Indenture; (f) certain events of
bankruptcy, insolvency or reorganization, or court appointment of a receiver,
liquidator or trustee, of the Company or of any Significant Subsidiary or of the
respective property of either; and
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(g) any other event of default provided with respect to that series of Debt
Securities. The term "Significant Subsidiary" means each significant subsidiary
(as defined in Regulation S-X promulgated under the Securities Act) of the
Company.
If an Event of Default under any Indenture with respect to Debt Securities
of any series issued thereunder 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
of 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 (or of all Debt Securities then
outstanding under such Indenture, as the case may be) has been made, the holders
of not less than a majority in principal amount of Debt Securities of such
series (or of each series of Debt Securities then outstanding under such
Indenture, as the case may be) may rescind and annul such declaration and its
consequences if (a) the Company shall have deposited with such Trustee all
required payments of the principal of (and premium, if any) and interest on the
Debt Securities of such series (or of all Debt Securities then outstanding under
such Indenture, as the case may be), plus certain fees, expenses, disbursements
and advances of the applicable Trustee and (b) all events of default, other than
the nonpayment of accelerated principal (or specified portion thereof) with
respect to Debt Securities of such series (or of all Debt Securities then
outstanding under such Indenture, as the case may be) have been cured or waived
as provided in such Indenture. The Indenture will also provide that the holders
of not less than a majority in principal amount of the Debt Securities of any
series (or of each series of Debt Securities then outstanding under the
applicable Indenture, as the case may be) may waive any past default with
respect to such series and its consequences, except a default (x) in the payment
of the principal of (or premium, if any) or interest on any Debt Security of
such series or (y) 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 affected thereby.
The Indenture will provide that the Trustee thereunder is required to give
notice to the holders of Debt Securities issued thereunder within 90 days of a
default under the Indenture unless such default shall have been cured or waived;
PROVIDED, HOWEVER, that such Trustee may withhold notice to the holders of any
such 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 the
interest of such holders.
The Indenture will provide that no holder of Debt Securities of any series
issued thereunder may institute any proceeding, judicial or otherwise, with
respect to such Indenture or for any remedy thereunder, except in the case of
the failure of the applicable 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 reasonable indemnity.
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 the Debt Securities held by that holder at the
respective due dates thereof.
Subject to provisions in the Indenture relating to its duties in case of
default, the Trustee thereunder is under no obligation to exercise any of its
rights or powers under such Indenture at the request or direction of any holders
of any series of Debt Securities then outstanding under such Indenture, unless
such holders shall have offered to such Trustee reasonable security or
indemnity. The holders of not less than a majority in principal amount of the
outstanding Debt Securities of any series (or of each series of Debt Securities
then outstanding under such Indenture, as the case may be) shall have the right
to direct the time, method and place of conducting any proceeding for any remedy
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available to such Trustee, or of exercising any trust or power conferred upon
such Trustee. However, such Trustee may refuse to follow any direction which is
in conflict with any law or such Indenture, which may involve such Trustee in
personal liability or which 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 must
delivery to each Trustee under the Indentures a certificate, signed by one of
several specified officers, stating whether 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 INDENTURES
Modifications and amendments of any Indenture may be made only with the
consent of the holders of not less than a majority in principal amount of all
outstanding Debt Securities issued thereunder which are affected by such
modification or amendment; PROVIDED, HOWEVER, that no such modification or
amendment may, without the consent of the holder of each such Debt Security
affected thereby, (a) change the stated maturity of the principal of, or any
installment of interest (or premium, if any) on, any such Debt Security; (b)
reduce the principal amount of, or the rate of amount of interest on, or any
premium payable on redemption of, any such Debt Security, or reduce the amount
of principal of an Original Issue Discount Security that would be due and
payable upon declaration of acceleration of the maturity thereof or would be
provable in bankruptcy, or adversely affect any right of repayment of the holder
of any such Debt Security; (c) change the place of payment, or the currency or
currencies, 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; (e) reduce the
percentage of outstanding Debt Securities of any series necessary to modify or
amend the applicable 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 such Indenture; or (f) modify any of the
foregoing provisions or any of the provisions relating to the waiver of certain
past defaults or certain covenants, except to increase the required percentage
to effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the holder of such Debt Security.
The holders of a majority in aggregate principal amount of outstanding Debt
Securities of each series may, on behalf of all holders of Debt Securities of
that series, waive, insofar as that series is concerned, compliance by the
Company with certain covenants in the applicable Indenture, including those
described in "-- Certain Covenants."
Modifications and amendments of the Indenture may be made by the Company and
the Trustee without the consent of any holder of Debt Securities issued
thereunder for any of the following purposes: (a) to evidence the succession of
another person to the Company as obligor under such Indenture; (b) to add to the
covenants of the Company for the benefit of the holders of all or any series of
Debt Securities issued thereunder or to surrender any right or power conferred
upon the Company in such Indenture; (c) to add events of default for the benefit
of the holders of all or any series of Debt Securities issued thereunder; (d) to
add or change any provisions of such Indenture to facilitate the issuance of, or
to liberalize certain terms of, Debt Securities issued thereunder in bearer
form, or to permit or facilitate the issuance of such Debt Securities in
uncertificated form, provided that such action shall not adversely affect the
interests of the holders of such Debt Securities of any series in any material
respect; (e) to change or eliminate any provision of such Indenture, provided
that any such change or elimination shall become effective only when there are
no Debt Securities outstanding of any series issued thereunder created prior
thereto which are entitled to the benefit of such provision; (f) to secure the
Debt Securities issued thereunder; (g) to establish the form or terms of Debt
Securities of any series issued thereunder, including the provisions and
procedures, if applicable, for the conversion of such Debt Securities into
Common Stock of the Company; (h) to provide for the acceptance of appointment by
a successor Trustee or facilitate the administration of the trusts under such
Indenture by more than one Trustee; (i) to cure any ambiguity, defect or
inconsistency in such
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Indenture, provided that such action shall not adversely affect the interests of
holders of Debt Securities of any series issued thereunder in any material
respect; or (j) to supplement any of the provisions of such Indenture to the
extent necessary to permit or facilitate defeasance and discharge of any series
of such Debt Securities issued thereunder, provided that such action shall not
adversely affect the interests of the holders of the Debt Securities of any
series issued thereunder in any material respect.
The Indenture will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series issued
thereunder have given any request, demand, authorization, direction, notice,
consent or waiver thereunder or whether a quorum is present at a meeting of
holders of such 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 a Debt Security denominated in a foreign currency that shall
be deemed outstanding shall be the U.S. dollar equivalent, determined on the
issue date for such Debt Security, of the principal amount (or, in the case of
an Original Issue Discount Security, the U.S. dollar equivalent on the issue
date of such Debt Security of the amount determined as provided in (a) above);
(c) the principal amount of an indexed security that shall be deemed outstanding
shall be the principal face amount of such indexed security at original
issuance, unless otherwise provided with respect to such indexed security in the
applicable Indenture; and (d) Debt Securities owned by the Company or any other
obligor upon the Debt Securities or any affiliate of the Company or of such
other obligor shall be disregarded.
The Indenture will contain provisions for convening meetings of the holders
of Debt Securities of a series issued thereunder. A meeting may 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 applicable Indenture.
Except for any consent that must be given by the holder of each Debt Security
affected by certain modifications and amendments of the Indenture, any
resolution presented at a meeting or adjourned meeting duly reconvened at which
a quorum is present may be adopted by the affirmative vote of the holders of a
majority in principal amount of the outstanding Debt Securities of that series;
PROVIDED, HOWEVER, that, except as referred to above, any resolution with
respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the holders of a
specified percentage which is less than a majority in principal amount of the
outstanding Debt Securities of a series may be adopted at a meeting or adjourned
meeting duly reconvened at which a quorum is present by the affirmative vote of
the holders of such specified percentage in principal amount of the outstanding
Debt Securities of that series. Any resolution passed or decision taken at any
meeting of holders of Debt Securities of any series duly held in accordance with
the Indenture will be binding on all holders of Debt Securities of that series.
The quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be persons holding or representing a majority in principal amount
of the outstanding Debt Securities of a series; PROVIDED, HOWEVER, that if any
action is to be taken at such meeting with respect to a consent or waiver which
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 provisions described above, 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 applicable Indenture expressly provides may be made, given or
taken by the holders of a specified percentage in principal amount of all
outstanding Debt Securities affected thereby, or of the holders of such series
and one or more additional series: (a) there shall be no minimum quorum
requirement for such meeting and (b) the principal amount of the outstanding
Debt Securities of such series that vote in favor of such request, demand,
authorization,
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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, the
Company may discharge certain obligations to holders of any series of Debt
Securities that have not already been delivered to the Trustee for cancellation
and that either have become due and payable or will become due and payable
within one year (or scheduled for redemption within one year) by irrevocably
depositing with such 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.
The Indenture will provides that, unless otherwise indicated in the
applicable Prospectus Supplement, the Company may elect either (a) to defease
and be discharged from any and all obligations (except for the obligation to pay
additional amounts, if any, upon the occurrence of certain events of tax,
assessment or governmental charge with respect to payments on such Debt
Securities and the obligations to register the transfer or exchange of such Debt
Securities, to replace temporary or mutilated, destroyed, lost or stolen Debt
Securities, to maintain an office or agency in respect of such Debt Securities
and to hold moneys for payment in trust) with respect to such Debt Securities
("defeasance") or (b) to be released from its obligations with respect to such
Debt Securities under the applicable Indenture (being the restrictions described
under the caption "-- Certain Covenants") or if provided in the applicable
Prospectus Supplement, its obligations with respect to any other covenant, and
any omission to comply with such obligations shall not constitute a default or
an event of default with respect to such Debt Securities ("covenant
defeasance"), in either case upon the irrevocable deposit by the Company with
the applicable Trustee, in trust, of an amount, in such currency or currencies,
currency unit or units or composite currency or currencies in which such Debt
Securities are payable at stated maturity, or Government Obligations (as defined
below), or both, applicable to such Debt Securities which through the scheduled
payment of principal and interest in accordance with their terms will provide
money in an amount sufficient to pay the principal of (and premium, if any) and
interest on such Debt Securities, and any mandatory sinking fund or analogous
payments thereon, on the scheduled due dates therefor.
Such a trust may only be established if, among other things, the Company has
delivered to the applicable Trustee an opinion of Counsel (as specified in the
applicable Indenture) to the effect that the holders of such Debt Securities
will not recognize income, gain or loss for U.S. federal income tax purposes as
a result of such defeasance or covenant defeasance and will be subject to U.S.
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such defeasance or covenant defeasance had not
occurred, and such opinion of Counsel, in the case of defeasance, must refer to
and be based upon a ruling of the Internal Revenue Service or a change in
applicable United States federal income tax law occurring after the date of such
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 which 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
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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 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 shall 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 such
cessation of usage 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 actions 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 described 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 in the applicable Indenture (which Sections
would no longer be applicable to such Debt Securities) or clause (g) thereunder
with respect to any other covenants as to which there has been covenant
defeasance, the amount in such currency, currency unit or composite currency in
which such Debt Securities are payable and Government Obligations on deposit
with the applicable Trustee, will be sufficient to pay amounts due on such Debt
Securities at the time of their stated maturity but may not be sufficient to pay
amounts due on such Debt Securities at the time of the acceleration resulting
from such event of default. In any such event, the Company would remain liable
to make payments 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.
CONVERTIBLE DEBT SECURITIES
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common 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, 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.
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Reference is made to the section captioned "Description of Common Stock" for
a general description of the Common Stock to be acquired upon the conversion of
Debt Securities, including a description of certain restrictions on the
ownership of the Common Stock.
BOOK-ENTRY DEBT 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 authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $0.01 per share, as well as 30,000,000 shares of Excess
Stock, par value $0.01 per share, issuable in exchange for Common Stock as
described in the Company's articles of incorporation. At June 30, 1995, the
Company had outstanding 11,633,672 shares of Common Stock. All issued and
outstanding shares of Common Stock are duly authorized, validly issued, fully
paid and nonassessable.
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 Common Stock will be
issuable upon conversion of Debt Securities or upon the exercise of the Warrants
to purchase Common Stock issued by the Company. 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 articles of
incorporation and bylaws.
COMMON STOCK
The holders of Common Stock elect all directors and are entitled to one vote
per share on all matters submitted to a vote of the stockholders. Stockholders
are entitled to receive dividends when, as and if declared by the Board of
Directors out of funds legally available for that purpose. Upon any liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share pro rata in any distribution to stockholders. Holders of Common Stock
have no preemptive, subscription or conversion rights. The Common Stock will,
when issued, be fully paid and nonassessable and will not be subject to
preemptive or other similar rights.
The Company purchased from six limited partnerships and one general
partnership 14 properties in July 1992, and purchased from a trust one property
in August 1993, in exchange for the issuance to the partnerships and the trust
of an aggregate of 346,172 shares of Common Stock (the "CNL Transaction"). All
of the shares issued in connection with the CNL Transaction are subject to
piggyback registration rights under certain circumstances.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT, not more than 50 percent in value of
its outstanding Common Stock may be owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year; the shares must be beneficially owned (without
reference to any rules of attribution) 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; and certain other requirements must be satisfied. See
"Federal Income Tax Considerations -- Taxation of the Company."
To ensure that five or fewer individuals do not own more than 50 percent in
value of the outstanding Common Stock, the Company's articles of incorporation
provide that, subject to certain exceptions, no holder may own, or be deemed to
own by virtue of the attribution provisions of the
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Code, more than 9.8 percent in value (the "Ownership Limit") of the outstanding
Common Stock. The Board of Directors may waive the Ownership Limit if evidence
satisfactory to the Company and the Company's tax counsel is presented that such
ownership will not then or in the future jeopardize the Company's status as a
REIT. As a condition of such waiver, the Board of Directors may require opinions
of counsel satisfactory to it and/or an undertaking from the applicant with
respect to preserving the status of the company as a REIT.
The Ownership Limit will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. In addition to preserving the Company's status as a REIT, the
Ownership Limit may prevent any person or small group of persons from acquiring
unilateral control of the Company.
If the ownership, transfer or acquisition of shares of Common Stock, or
change in capital structure of the Company or other event or transaction would
result in (a) any Person (as defined below) owning (applying certain attribution
rules) Common Stock in excess of the Ownership Limit, (b) fewer than 100 Persons
owning the Common Stock, (c) the Company being "closely held" within the meaning
of Section 856(h) of the Code, or (d) the Company failing any of the gross
income requirements of Section 856(c) of the Code or otherwise failing to
qualify as a REIT, then the ownership, transfer or acquisition, or change in
capital structure or other event or transaction that would have such effect will
be void as to the purported transferee or owner, and the purported transferee or
owner will not have or acquire any rights to the Common Stock to the extent
required to avoid such a result. Common Stock owned, transferred or proposed to
be transferred in excess of the Ownership Limit or which would otherwise
jeopardize the Company's status as a REIT will automatically be converted to
Excess Stock. A holder of Excess Stock is not entitled to distributions, voting
rights, and other benefits with respect to such shares except for the right to
payment of the purchase price for the shares (or, in the case of a devise or
gift or similar event which results in the issuance of Excess Stock, the fair
market value at the time of such devise or gift or event) and the right to
certain distributions upon liquidation. Any dividend or distribution paid to a
proposed transferee or holder of Excess Stock shall be repaid to the Company
upon demand. Excess Stock shall be subject to repurchase by the Company at its
election. The purchase price of any Excess Stock shall be equal to the lesser of
(i) the price paid in such purported transaction (or, in the case of a devise or
gift or similar event resulting in the issuance of Excess Stock, the fair market
value at the time of such devise or gift or event), or (ii) the fair market
value of such Common Stock on the date on which the Company or its designee
determines to exercise its repurchase right. If the foregoing transfer
restrictions are determined to be void or invalid by virtue of any legal
decision, statute, rule or regulation, then the purported transferee of any
Excess Stock may be deemed, at the option of the Company, to have acted as an
agent on behalf of the Company in acquiring such Excess Stock and to hold such
Excess Stock on behalf of the Company.
For purposes of the Company's articles of incorporation, the term "Person"
shall mean an individual, corporation, partnership, estate, trust (including a
trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a
trust permanently set aside to be used exclusively for the purposes described in
Section 642(c) of the Code, association, private foundation within the meaning
of Section 509(a) of the Code, joint stock company or other entity, or a group
as that term is used for purposes of Section 13(d)(3) of the Exchange Act; but
does not include an underwriter which participated in a public offering of
Common Stock for a period of sixty (60) days following the purchase by such
underwriter of Common Stock therein, provided that the foregoing exclusions
shall apply only if the ownership of such Common Stock by such underwriter would
not cause the Company to fail to qualify as a REIT by reason of being "closely
held" within the meaning of Section 856(a) of the Code or otherwise cause the
Company to fail to qualify as a REIT.
All certificates representing Common Stock will bear a legend referring to
the restrictions described above.
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The articles of incorporation of the Company provide that all persons who
own, directly or by virtue of the attribution provisions of the Code, more than
5.0 percent of the outstanding Common Stock, or such lower percentage as may be
required pursuant to regulations under the Code or as may be requested by the
Board of Directors, must file a written notice with the Company no later than
January 31 of each year with respect to the prior year containing (a) the name
and address of such owner, (b) the number of shares of Common Stock owned by
such holder and (c) a description of how such shares are held. In addition, each
stockholder shall be required to disclose, upon demand, to the Company in
writing such information with respect to the direct indirect and constructive
ownership of shares as the directors deem necessary to comply with the
provisions of the Code as applicable to a REIT or to comply with the
requirements of any taxing authority or governmental agency.
The ownership limitations described above may have the effect of precluding
acquisitions of control of the Company by a third party.
TRANSFER AGENT
First Union National Bank of North Carolina is the Transfer Agent of the
Common Stock.
DESCRIPTION OF COMMON STOCK WARRANTS
The Company may issue Common Stock Warrants for the purchase of Common
Stock. Common Stock Warrants may be issued independently or together with any
other Offered Securities offered by any Prospectus Supplement and may be
attached to or separate from such Offered Securities. Each series of Common
Stock Warrants will be issued under a separate warrant agreement (each, a
"Warrant Agreement") to be entered into between the Company and a warrant agent
specified in the applicable Prospectus Supplement (the "Warrant Agent"). The
Warrant Agent will act solely as an agent of the Company in connection with the
Common Stock Warrants of such series and will not assume any obligation or
relationship of agency or trust for or with any holders or beneficial owners of
Common Stock Warrants. The following sets forth certain general terms and
provisions of the Common Stock Warrants offered hereby. Further terms of the
Common Stock Warrants and the applicable Warrant Agreements will be set forth in
the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Common
Stock Warrants in respect of which this Prospectus is being delivered,
including, where applicable, the following: (a) the title of such Common Stock
Warrants; (b) the aggregate number of such Common Stock Warrants; (c) the price
or prices at which such Common Stock Warrants will be issued; (d) the number of
shares of Common Stock purchasable upon exercise of such Common Stock Warrants;
(e) the designation and terms of the other Offered Securities with which such
Common Stock Warrants are issued and the number of such Common Stock Warrants
issued with each such Offered Security; (f) the date, if any, on and after which
such Common Stock Warrants and the related Common Stock will be separately
transferable; (g) the price at which each share of Common Stock purchasable upon
exercise of such Common Stock Warrants may be purchased; (h) the date on which
the right to exercise such Common Stock Warrants shall commence and the date on
which such right shall expire; (i) the minimum or maximum amount of such Common
Stock Warrants which may be exercised at any one time; (j) information with
respect to book-entry procedures, if any; (k) any limitations on the acquisition
or ownership of such Common Stock Warrants which may be required in order to
maintain the status of the Company as a REIT; (l) a discussion of certain
federal income tax considerations; and (m) any other terms of such Common Stock
Warrants, including terms, procedures and limitations relating to the exchange
and exercise of such Common Stock Warrants.
Reference is made to the section captioned "Description of Common Stock" for
a general description of the Common Stock to be acquired upon the exercise of
the Common Stock Warrants, including a description of certain restrictions on
the ownership of Common Stock.
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FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax consequences
of the ownership of the Common Stock of the Company, prepared by Shaw, Pittman,
Potts & Trowbridge, tax counsel to the Company ("Tax Counsel"). This discussion
is based upon the laws, regulations, and reported rulings and decisions in
effect as of the date of this Prospectus (or, in the case of certain
regulations, proposed as of such date), all of which are subject to change,
retroactively or prospectively, and to possibly differing interpretations. This
discussion does not purport to deal with the federal income tax consequences
applicable to all investors in light of their particular investment
circumstances, or to all categories of investors, some of whom may be subject to
special rules (including, for example, insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States). No ruling on
the federal, state or local tax considerations relevant to the operation of the
Company, or to the purchase, ownership or disposition of the Common Stock, has
been requested from the Internal Revenue Service (the "Service") or other tax
authority. Tax Counsel has rendered certain opinions discussed herein and
believes that if the Service were to challenge the conclusions of Tax Counsel,
such conclusions should prevail in court. However, opinions of counsel are not
binding on the Service or on the courts, and no assurance can be given that the
conclusions reached by Tax Counsel would be sustained in court. Investors should
consult their own tax advisors in determining the federal, state, local, foreign
and other tax consequences to them of the purchase, ownership and disposition of
the Common Stock of the Company.
TAXATION OF THE COMPANY
GENERAL. Since its inception, the Company has elected, and believes it has
qualified, to be taxed as a REIT for federal income tax purposes, as defined in
Sections 856 through 860 of the Code. The provisions of the Code pertaining to
REITs are highly technical and complex. If various conditions imposed by the
Code are met, a REIT is, with limited exceptions, not taxed at the corporate
level on income that is currently distributed to the REIT's stockholders.
Undistributed income is taxed at regular corporate rates and may be subject to a
4 percent excise tax. In addition, a REIT may be subject to the "alternative
minimum tax" on its items of tax preference and is subject to income tax at the
highest corporate rate on income from foreclosure property and to penalty taxes
on excessive unqualified income and prohibited transactions.
If the Company fails to qualify as a REIT for any taxable year and certain
relief provisions do not apply, the Company will be subject to federal income
tax (including alternative minimum tax) as an ordinary corporation on its
taxable income at regular corporate rates without any deduction or adjustment
for distributions to holders of Common Stock. To the extent that the Company
would, as a consequence, be subject to tax liability for any such year, the
amount of cash available for satisfaction of its liabilities and for
distribution to holders of Common Stock would be reduced. Distributions to
holders of Common Stock generally would be taxable as ordinary income to the
extent of current and accumulated earnings and profits and, subject to certain
limitations, would be eligible for the corporate dividends received deduction,
but there can be no assurance that any such distributions would be made. The
Company would not be eligible to elect REIT status for the four subsequent
taxable years, unless its failure to qualify was due to reasonable cause and not
willful neglect and unless certain other requirements were satisfied.
OPINION OF TAX COUNSEL. Based upon representations made by officers of the
Company with respect to relevant factual matters, upon the existing Code
provisions, rules and regulations promulgated thereunder (including proposed
regulations) and reported administrative and judicial interpretations thereof,
upon Tax Counsel's independent review of such documents and other information as
Tax Counsel deemed relevant in the circumstances and upon the assumption that
the Company will operate in the manner described in this Prospectus, Tax Counsel
has advised the Company that, in its opinion, (a) the Company has, for the years
1984 through 1994, met the requirements for qualification
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and taxation as a REIT and (b) the Company's proposed method of operation will
enable it to meet the requirements for qualification and taxation as a REIT for
1995. It must be emphasized, however, that the Company's ability to qualify as a
REIT is dependent upon actual operating results and future actions and events by
the Company and others, and no assurance can be given that the actual results of
the Company's operations and the future actions and events will enable the
Company to satisfy in any given year the requirements for qualification and
taxation as a REIT.
REQUIREMENTS FOR QUALIFICATION AS A REIT. As discussed more fully below,
the Code defines a REIT as a corporation (a) which is managed by one or more
trustees or directors; (b) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest; (c)
which would be taxable, but for Sections 856 through 860 of the Code, as a
domestic corporation; (d) which is neither a financial institution nor an
insurance company; (e) the beneficial ownership of which is held by 100 or more
persons; (f) which is not closely held; and (g) which meets certain other tests
regarding the nature of its assets and income and the amount of its
distributions.
OWNERSHIP TESTS. More specifically, the ownership requirements of a REIT
are that (a) during the last half of each taxable year not more than 50 percent
of the Company's outstanding shares may be owned, directly or indirectly, by
five or fewer individuals and (b) there must be at least 100 stockholders on at
least 335 days of such 12-month taxable year (or a proportionate number of days
of a short taxable year). In order to meet these requirements, or to otherwise
obtain, maintain or reestablish REIT status, and for no other purpose, the
Company's articles of incorporation empowers the Board of Directors to redeem,
at its option, a sufficient number of shares or to restrict the transfer thereof
to bring or to maintain the ownership of shares of the Company in conformity
with the requirements of the Code. The redemption price to be paid will be fair
market value as reflected in the latest quotations, or, if no quotations are
available, the net asset value of the shares as determined by the Board of
Directors.
Under the Company's articles of incorporation, each holder of common stock
is required, upon demand, to disclose to the Board of Directors in writing such
information with respect to direct and indirect ownership of shares of the
Company as the Board of Directors deems necessary to comply with provisions of
the Code applicable to the Company, or to comply with the requirements of any
other appropriate taxing authority. Certain Treasury regulations govern the
method by which the Company is required to demonstrate compliance with these
stock ownership requirements and the failure to satisfy such regulations could
cause the Company to fail to qualify as a REIT. The Company has represented that
it has met, and expects to meet, these stock ownership requirements for each
taxable year.
ASSET TESTS. At the end of each quarter of a REIT's taxable year, at least
75 percent of the value of its total assets must consist of "real estate
assets," cash and cash items (including receivables) and government securities.
The balance of a REIT's assets generally may be invested without restriction,
except that holdings of securities not within the 75 percent class of assets
generally must not, with respect to any issuer, exceed 5 percent of the value of
the REIT's assets or 10 percent of the issuer's outstanding voting securities.
The term "real estate assets" includes real property, interests in real
property, leaseholds of land or improvements thereon, and any property
attributable to the temporary investment of new capital (but only if such
property is stock or a debt instrument and only for the one-year period
beginning on the date the REIT receives such capital). The Company has
represented that at the end of each quarter it has met, and expects in the
future to continue to meet, this asset test.
INCOME TESTS. A REIT also must meet three separate tests with respect to
its sources of income for each taxable year.
(i) THE 75 PERCENT AND 95 PERCENT TESTS. In general, at least 75 percent of
a REIT's gross income (excluding income from prohibited transactions) for each
taxable year must be from rents from real property, interest on obligations
secured by mortgages on real property, gains from the sale or other disposition
of real property and certain other sources. In addition, a REIT must derive at
least 95 percent of its gross income (excluding income from prohibited
transactions) for each taxable year
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from any combination of the items of income which qualify under the 75 percent
test, from dividends and interest and from gains from the sale, exchange or
other disposition of certain stocks and securities.
Rents received by a REIT will qualify as "rents from real property" in
satisfying the gross income requirements 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
of sales. The Company's leases provide for either fixed rent, sometimes with
scheduled escalations, or a fixed minimum rent and a percentage of gross
receipts in excess of some threshold. 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 Company, or an owner of 10 percent or
more of the Company, directly or constructively owns 10 percent 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
percent of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." The Company anticipates that none of its gross annual income will be
considered attributable to rents that are based in whole or in part on the
income or profits of any person; that no more than a DE MINIMIS amount of its
gross annual income will be considered attributable to the rental of personal
property; and that none of its gross annual income will be from Related Party
Tenants. Finally, for rents received to qualify as "rents from real property,"
the Company generally must not operate or manage the property or furnish or
render services to tenants, other than through an "independent contractor" from
whom the Company derives no revenue. The "independent contractor" requirement,
however, does not apply to the extent the services provided by the Company are
"usually or customarily rendered" in connection with the rental space for
occupancy only and are not otherwise considered "rendered to the occupant." The
Company or CNL Advisors will provide certain services with respect to the
Properties. The Company does not anticipate that any of these services will be
(a) of a type other than those usually or customarily rendered in connection
with the rental space for occupancy only or (b) of a type considered rendered to
any of the occupants of the Properties.
Should an entity fail to satisfy either or both of the 75 percent or 95
percent tests for any taxable year, it may still qualify as a REIT if (a) such
failure is due to reasonable cause and not willful neglect; (b) it reports the
nature and amount of each item of its income on a schedule attached to its tax
return for such year; and (c) the reporting of any incorrect information is not
due to fraud with intent to evade tax. However, even if these three requirements
were met and the REIT were not disqualified, a penalty tax of 100 percent would
be imposed by reference to the amount by which the REIT failed the 75 percent or
95 percent test (whichever amount is greater). No mitigation provision applies
if the 30 percent income test, described below, is failed. In such case, the
Company will cease to qualify as a REIT.
(ii) THE 30 PERCENT TEST. In addition to the 75 percent and 95 percent
tests, a REIT must derive less than 30 percent of its gross income (including
gross income from prohibited transactions) from the sale or other disposition of
(i) real property held for less than four years (other than foreclosure property
or property involuntarily or compulsorily converted through destruction,
condemnation or similar events); (ii) stocks or securities held for less than
one year; and (iii) property sold or otherwise disposed of in a prohibited
transaction. The Company has represented that it has not recognized and does not
expect that it will recognize gross income of a type, in an amount or at a time
which would cause it to fail the 30 percent test.
DISTRIBUTION REQUIREMENTS. A REIT must distribute annually to its
stockholders ordinary income dividends in an amount equal to at least (a) 95
percent of the sum of (i) its "real estate investment trust taxable income"
(before deduction of dividends paid and excluding any net capital gains) and
(ii) the excess of net income from foreclosure property over the tax on such
income, minus (b) certain excess non-cash income. Real estate investment trust
taxable income generally is the taxable income of a REIT computed as if it were
an ordinary corporation, with certain adjustments.
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Distributions must be made in the taxable year to which they relate or, if
declared before the timely filing of the REIT's tax return for such year and
paid not later than the first regular dividend payment after such declaration,
in the following taxable year. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95 percent, but
less than 100 percent, of its real estate investment trust taxable income, as
adjusted, it will be subject to tax thereon at regular ordinary and capital gain
corporate tax rates. Furthermore, if the Company should fail to distribute
during each calendar year at least the sum of (x) 85 percent of its ordinary
income, (y) 95 percent of its net capital gain net income for such year and (z)
any undistributed taxable income from prior periods, the Company would be
subject to a 4 percent excise tax on the excess of such required distribution
over the amounts actually distributed.
The Company has represented that it has made and intends to make
distributions to stockholders that will be sufficient to meet the annual
distribution requirements. Under some circumstances, however, it is possible
that the Company may not have sufficient funds from its operations to pay cash
dividends to satisfy these distribution requirements. If the cash available to
the Company is insufficient, the Company might raise cash in order to make the
distributions by borrowing funds, issuing new securities or selling assets. If
the Company ultimately were unable to satisfy the 95 percent distribution
requirement, it would fail to qualify as a REIT and, as a result, would be
subject to federal income tax as an ordinary corporation without any deduction
or adjustment for distributions to holders of the Common Stock.
If the Company were to fail to meet the 95 percent distribution requirement
as a result of an adjustment to the Company's tax returns by the Service, the
Company could maintain its qualification as a REIT by paying a "deficiency
dividend" (plus a penalty and interest) within a specified period which will be
permitted as a deduction in the taxable year with respect to which the
adjustment is made.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS. For any taxable year in which
the Company qualifies as a REIT for federal income tax purposes, distributions
by the Company to its stockholders that are United States persons (generally,
any person other than a nonresident alien individual, a foreign trust or estate
or a foreign partnership or corporation) generally will be taxed as ordinary
income. Amounts received by such United States persons that are properly
designated as capital gain dividends by the Company generally will be taxed as
long-term capital gain (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the stockholder has held his Common Stock. However, corporate stockholders
may be required to treat up to 20 percent of certain capital gain dividends as
ordinary income. Such ordinary income and capital gain are not eligible for the
dividends received deduction allowed to corporations. Distributions to such
United States persons in excess of the Company's current or accumulated earnings
and profits will be considered first a tax-free return of capital, reducing the
tax basis of each stockholder's Common Stock, and then, to the extent the
distribution exceeds each stockholder's basis, a gain realized from the sale of
Common Stock. The Company will notify each stockholder as to the portions of
each distribution which, in its judgment, constitute ordinary income, capital
gain or return of capital. Any dividend that is (a) declared by the Company in
October, November or December of any calendar year and payable to stockholders
of record on a specified date in such months and (b) actually paid by the
Company in January of the following year, shall be deemed to have been both paid
by the Company and received by the stockholders on December 31 of such calendar
year and, as a result, will be includable in gross income of the stockholders
for the taxable year which includes such December 31.
Stockholders may not deduct on their income tax returns any net operating or
net capital losses of the Company. Net operating losses may be carried forward
by the Company for 15 years and used to reduce taxable income and the amounts
that the Company will be required to distribute in order to remain qualified as
a REIT. Net capital losses may be carried forward by the Company for five years
and used to reduce capital gains. Losses not used within the relevant period
expire.
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Upon the sale or other disposition of the Company's Common Stock, a
stockholder generally will recognize capital gain or loss equal to the
difference between this amount realized on the sale or other disposition and the
adjusted basis of the shares involved in the transaction. Such gain or loss will
be long-term capital gain or loss if, at the time of sale or other disposition,
the shares involved have been held for more than one year. In addition, if a
stockholder receives a capital gain dividend with respect to a share of Common
Stock which he has held for six months or less at the time of sale or other
disposition, any loss recognized by the stockholder will be treated as long-term
capital loss to the extent of the amount of the capital gain dividend that was
treated as long-term capital gain.
Distributions from the Company and gain from the disposition of Common Stock
will not be treated as passive activity income and, therefore, stockholders will
not be able to apply any "passive activity losses" against such income.
Dividends from the Company (to the extent they do not constitute a return of
capital or capital gain dividends) and, on an elective basis, capital gain
dividends and gain from the disposition of Common Stock generally will be
treated as investment income for purposes of the investment income limitation.
The state and local income tax treatment of the Company and its stockholders
may not conform to the federal income tax treatment described above. (For
example, in most states, individual stockholders who are residents of the state
will be subject to state income tax on dividends and gains on their shares in
the Company, but the state of Delaware -- unlike most, if not all, other states
- -- also taxes nonresident stockholders of a REIT on dividends and gains from the
REIT to the extent, if any, that such income is attributable to property located
in Delaware.) As a result, investors should consult their own tax advisors for
an explanation of how other state and local tax laws would affect their
investment in Common Stock.
BACKUP WITHHOLDING. The Company will report to its stockholders and the IRS
the amount of distributions paid during each calendar year, and the amount of
tax withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at a rate of 31 percent with respect to
distributions paid unless such other holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A stockholder that does not
provide the Company with his correct taxpayer identification number also may be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the stockholder's income tax liability.
TAXATION OF TAX-EXEMPT STOCKHOLDERS. Distributions by the Company to a
stockholder that is a tax-exempt entity generally will not constitute "unrelated
business taxable income" ("UBTI") as defined in Section 512(a) of the Code,
provided that the tax-exempt entity has not financed the acquisition of its
shares with "acquisition indebtedness" within the meaning of the Code and the
shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity. For taxable years beginning after December 31, 1993, however,
qualified trusts that hold more than 10 percent (by value) of the shares of
certain REITs may be required to treat a certain percentage of the distributions
of such REITs as UBTI. The conditions which trigger this requirement do not
currently exist, and the Company does not anticipate that they will ever exist.
This requirement will apply only if (a) the REIT would not qualify as such for
federal income tax purposes but for the application of a "look-through"
exception to the five or fewer requirement applicable to shares being held by
qualified trusts and (b) the REIT is "predominantly held" by qualified trusts. A
REIT is predominantly held if either (i) a single qualified trust holds more
than 25 percent by value of the REIT interests or (ii) one or more qualified
trusts, each owning more than 10 percent by value of the REIT interests, hold in
the aggregate more than 50 percent of the REIT interests. The percentage of any
REIT dividend treated as UBTI is equal to the ratio of (i) the UBTI earned by
the REIT (treating the REIT as if it were a qualified trust and therefore
subject to tax on UBTI) to (ii) the total gross income (less certain associated
expenses of the REIT). A DE MINIMIS exception applies where the ratio set forth
in the preceding sentence is less than 5 percent for any year. For these
purposes, a qualified trust is any trust
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described in Section 401(a) of the Code and exempt from tax under Section 501(a)
of the Code. The provisions requiring qualified trusts to treat a portion of
REIT distributions as UBTI will not apply if the REIT is able to satisfy the
five or fewer requirements without relying upon the "look-through" exception.
The existing restrictions on ownership of shares in the articles of
incorporation will prevent the application of the provisions treating a portion
of the REIT distributions as UBTI to tax-exempt entities purchasing shares
pursuant to the Offering, absent a waiver of the restrictions by the Board of
Directors.
ERISA CONSIDERATIONS
THE FOLLOWING IS A SUMMARY OF MATERIAL CONSIDERATIONS ARISING UNDER THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA") AND THE
PROHIBITED TRANSACTION PROVISIONS OF SECTION 4975 OF THE CODE THAT MAY BE
RELEVANT TO PROSPECTIVE INVESTORS. THIS DISCUSSION DOES NOT PURPORT TO DEAL WITH
ALL ASPECTS OF ERISA OR THE CODE THAT MAY BE RELEVANT TO PARTICULAR INVESTORS IN
LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. A PROSPECTIVE INVESTOR THAT IS AN
EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA, A TAX-QUALIFIED RETIREMENT PLAN, AN IRA,
OR A GOVERNMENTAL, CHURCH, OR OTHER PLAN THAT IS EXEMPT FROM ERISA IS ADVISED TO
CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING
UNDER APPLICABLE PROVISIONS OF ERISA, THE CODE, AND STATE LAW WITH RESPECT TO
THE PURCHASE, OWNERSHIP, OR SALE OF THE OFFERED SECURITIES BY SUCH PLAN OR IRA.
FIDUCIARY DUTIES AND PROHIBITED TRANSACTIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to ERISA (an "ERISA Plan") should consider the fiduciary
standards under ERISA in the context of the ERISA Plan's particular
circumstances before authorizing an investment of any portion of the ERISA
Plan's assets in the Offered Securities. Accordingly, such fiduciary should
consider (a) whether the investment satisfies the diversification requirements
of Section 404(a)(1)(C) of ERISA; (b) whether the investment is in accordance
with the documents and instruments governing the ERISA Plan as required by
Section 404(a)(1)(D) of ERISA; (c) whether the investment is prudent under
Section 404(a)(1)(B) of ERISA; and (d) whether the investment is solely in the
interests of the ERISA Plan participants and beneficiaries and for the exclusive
purpose of providing benefits to the ERISA Plan participants and beneficiaries
and defraying reasonable administrative expenses of the ERISA Plan as required
by Section 404(a)(1)(A) of ERISA.
In addition to the imposition of fiduciary standards, ERISA and Section 4975
of the Code prohibit a wide range of transactions between an ERISA Plan, an IRA,
or certain other plans (collectively, a "Plan") and persons who have certain
specified relationships to the Plan ("parties in interest" within the meaning of
ERISA and "disqualified persons" within the meaning of the Code). Thus, a Plan
fiduciary or person making an investment decision for a Plan also should
consider whether the acquisition or the continued holding of the Offered
Securities might constitute or give rise to a direct or indirect prohibited
transaction.
PLAN ASSETS
The prohibited transaction rules of ERISA and the Code apply to transactions
with a Plan and also to transactions with the "plan assets" of a Plan. The "plan
assets" of a Plan include the Plan's interest in an entity in which the Plan
invests and, in certain circumstances, the assets of the entity in which the
Plan holds such interest. The term "plan assets" is not specifically defined in
ERISA or the Code, nor, as of the date hereof, has it been interpreted
definitively by the courts in litigation. On November 13, 1986, the United
States Department of Labor, the governmental agency primarily responsible for
administering ERISA, adopted a final regulation (the "DOL Regulation") setting
out
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the standards it will apply in determining whether an equity investment in an
entity will cause the assets of such entity to constitute "plan assets." The DOL
Regulation applies for purposes of both ERISA and Section 4975 of the Code.
Under the DOL Regulation, if a Plan acquires an equity interest in an
entity, which equity interest is not a "publicly-offered security," the Plan's
assets generally would include both the equity interest and an undivided
interest in each of the entity's underlying assets unless certain specified
exceptions apply. The DOL Regulation defines a publicly-offered security as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an
effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the end
of the fiscal year of the issuer during which the offering occurred). The Common
Stock is being sold in an offering registered under the Securities Act and will
be registered within the relevant time period under Section 12(b) of the
Exchange Act.
The DOL Regulation provides that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. However, a class of securities will not fail
to be "widely held" solely because the number of independent investors falls
below 100 subsequent to a public offering as a result of events beyond the
issuer's control. The Company expects the Common Stock to be "widely held."
The DOL Regulation provides that whether a security is "freely transferable"
is a factual question to be determined on the basis of all the relevant facts
and circumstances. The DOL Regulation further provides that when a security is
part of an offering in which the minimum investment is $10,000 or less, as is
the case with this Offering, certain restrictions ordinarily will not affect,
alone or in combination, the finding that such securities are freely
transferable. The Company believes that the restrictions imposed under the
articles of incorporation on the transfer of the Common Stock are limited to
restrictions on transfer generally permitted under the DOL Regulation and are
not likely to result in the failure of the Common Stock to be "freely
transferable." See "Description of Common Stock-Restrictions on Transfer." The
DOL Regulation only establishes a presumption in favor of a finding of free
transferability and, therefore, no assurance can be given that the Department of
Labor and the U.S. Treasury Department would not reach a contrary conclusion
with respect to the Common Stock.
Assuming that the Common Stock will be "widely held" and "freely
transferable," the Company believes that the Common Stock will be
publicly-offered securities for purposes of the DOL Regulation and that the
assets of the Company will not be deemed to be "plan assets" of any plan that
invests in the Common Stock.
Additional ERISA considerations that apply to the acquisition or continued
holding of Offered Securities that are Common Stock Warrants or Debt Securities
which are convertible into equity securities will be contained in the applicable
Prospectus Supplement.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters for
public offering and sale by them or may sell the Offered Securities to investors
directly or through agents. Any such underwriter or agent involved in the offer
and sale of the Offered Securities will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price or
prices, which may be changed, related 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
Offered Securities upon the terms and conditions set forth in an applicable
Prospectus Supplement. In connection with the sale of Offered Securities,
underwriters may be deemed to have received compensation from the Company in the
form of underwriting discounts or commissions and
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<PAGE>
may also receive commissions from purchasers of Offered Securities for whom they
may act as agent. Underwriters may sell Offered Securities to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions from the underwriters 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 Offered 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 Offered 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 Offered Securities may be deemed to be
underwriting discounts and commissions under the Securities Act. 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.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to delayed
delivery contracts ("Contracts") providing for payment and delivery on the date
or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the aggregate principal amount of Securities sold
pursuant to Contracts shall be not less or more than, the respective amounts
stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions, but will in all cases be
subject to the approval of the Company. Contracts will not be subject to any
conditions except (i) the purchase by an institution of the Offered Securities
covered by its Contracts shall not at the time of delivery be prohibited under
the laws of any jurisdiction in the United States to which such institution is
subject and (ii) if the Offered Securities are being sold to underwriters, the
Company shall have sold to such underwriters the total principal amount of the
Offered Securities less the principal amount thereof covered by Contracts.
Certain of the underwriters 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.
EXPERTS
The financial statements incorporated in this Prospectus by reference from
the Company's Annual Report on Form 10-K have been audited by KPMG Peat Marwick
LLP, independent auditors, as stated in their report, which is incorporated
herein by reference, and have been so incorporated in reliance upon the report
of such firm given upon the their authority as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the Offered Securities will be passed upon for the Company
by Shaw, Pittman, Potts & Trowbridge, Washington, D.C., a partnership including
professional corporations. In addition, the description of federal income tax
consequences contained in this Prospectus is based upon the opinion of Shaw,
Pittman, Potts & Trowbridge.
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[GRAPHICS]
The inside back cover of the Prospectus Supplement displays six pictures of
Properties owned by the Company. The pictures shown are (1) Food Lion located in
Keystone Heights, Florida, (2) Computer City located in Miami, Florida, (3)
International House of Pancakes located in Stafford, Texas, (4) Best Buy located
in Corpus Christie, Texas, (5) Marshalls located in Freehold, New Jersey and (6)
Borders located in Wilmington, Delaware.
In addition, there is a pie chart depicting "Line of Trade Diversification,"
including: (1) Home Furnishings & Accessories, (2) Apparel, (3) Home
Improvement, (4) Office Supply, (5) Eating & Drinking, (6) Bookstores, (7) Drug
Stores, (8) Sporting Goods, (9) Consumer Electronics, (10) CD, Tape, Software,
(11) Grocers, (12) Auto Supply Service and (13) Furniture. There is also a pie
chart depicting "Tenant Diversification," including: (1) Burger King, (2) Barnes
& Noble, (3) Borders, (4) Sears Homelife, (5) Eckerd, (6) Academy, (7) Food
Lion, (8) Scotty's, (9) Golden Corral, (10) Denny's, (11) OfficeMax, (12)
Hardee's, (13) IHOP, (14) Hi-Lo Auto, (15) Marshalls, (16) Computer City, (17)
CompUSA, (18) Food 4 Less, (19) Linens 'n Things, (20) Oshman's and (21) other.
Finally, there is a caption of the "NNN" logo and the name "Commercial Net
Lease Realty, Inc."
<PAGE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Supplement Summary..................... S-1
Risk Factors...................................... S-9
The Company....................................... S-12
Strategies........................................ S-13
Use of Proceeds................................... S-17
Price Range of Common Stock and Dividends......... S-18
Distribution Policy............................... S-19
Capitalization.................................... S-19
Selected Financial Data........................... S-20
Properties........................................ S-23
Management of the Company......................... S-31
Certain Transactions.............................. S-34
Underwriting...................................... S-36
Legal Matters..................................... S-36
PROSPECTUS
Available Information............................. 2
Incorporation of Certain Documents by Reference... 2
The Company....................................... 3
Use of Proceeds................................... 3
Ratios of Earnings to Fixed Charges............... 4
Description of Debt Securities.................... 4
Description of Common Stock....................... 14
Description of Common Stock Warrants.............. 16
Federal Income Tax Considerations................. 17
ERISA Considerations.............................. 22
Plan of Distribution.............................. 23
Experts........................................... 24
Legal Matters..................................... 24
</TABLE>
3,500,000 SHARES
COMMERCIAL NET LEASE REALTY, INC.
COMMON STOCK
[LOGO]
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PROSPECTUS SUPPLEMENT
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SMITH BARNEY INC.
GOLDMAN, SACHS & CO.
LEGG MASON WOOD WALKER
INCORPORATED
J.C. BRADFORD & CO.
THE ROBINSON-HUMPHREY
COMPANY, INC.
JANUARY 23, 1996
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