<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-24773
SUBJECT TO COMPLETION DATED MARCH 12, 1998
PROSPECTUS SUPPLEMENT
(To Prospectus dated April 22, 1997)
LOGO
COMMERCIAL NET LEASE REALTY, INC.
$50,000,000
% Notes due 2005
ISSUE PRICE: %
$50,000,000
% Notes due 2008
ISSUE PRICE: %
Interest payable and
Interest on the % Notes due 2005 (the "2005 Notes") and the % Notes
due 2008 (the "2008 Notes" and, together with the 2005 Notes, the "Notes") of
Commercial Net Lease Realty, Inc. (the "Company") offered hereby is payable
semi-annually on and , commencing , 1998.
See "Description of Notes -- Principal and Interest." The 2005 Notes will mature
on , 2005 and the 2008 Notes will mature on , 2008. The
Notes may be redeemed at any time at the option of the Company, in whole or in
part, at a redemption price equal to the sum of (i) the principal amount of the
Notes being redeemed plus accrued interest thereon to the redemption date and
(ii) the Make-Whole Amount (as defined herein), if any. See "Description of
Notes -- Optional Redemption."
The Notes will be represented by one or more Global Securities (as hereinafter
defined) registered in the name of The Depository Trust Company ("DTC") or its
nominee. Interests in the Global Securities will be shown on, and transfers
thereof will be effected only through, records maintained by DTC and its
participants. Except as provided herein, Notes in definitive form will not be
issued. See "Description of Notes."
SEE "RISK FACTORS" COMMENCING ON PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT FOR A
DISCUSSION OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC (1) COMMISSIONS (2) COMPANY (1)(3)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Per 2005 Note % % %
- --------------------------------------------------------------------------------------------------------------------
Total $ $ $
- --------------------------------------------------------------------------------------------------------------------
Per 2008 Note % % %
- --------------------------------------------------------------------------------------------------------------------
Total $ $ $
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from , 1998.
(2) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $70,000.
The Notes are offered, subject to sale, when, as and if accepted by the
Underwriters and subject to approval of certain legal matters by Skadden, Arps,
Slate, Meagher & Flom LLP, counsel for the Underwriters. It is expected that
delivery of the Notes will be made on or about March , 1998 through the
facilities of DTC, against payment therefor in immediately available funds.
J.P. MORGAN & CO.
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
March , 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED WITHOUT THE DELIVERY OF A
FINAL PROSPECTUS AND PROSPECTUS SUPPLEMENT. THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS WHICH
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE NOTES. SPECIFICALLY,
THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR,
AND PURCHASE, THE NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH THEY RELATE
OR ANY OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY SUCH SECURITIES IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS NOR ANY
SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH
INFORMATION.
Statements contained or incorporated by reference in this document that are not
based on historical fact are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
include statements regarding the Company's future development activities, the
future condition and expansion of the Company's markets, the Company's ability
to meet its liquidity requirements and the Company's growth strategies, as well
as other statements which may be identified by the use of forward-looking
terminology such as "may," "will," "expect," "estimate," "anticipate,"
"continue" or similar terms, variations of those terms or the negative of those
terms. Investors should carefully consider the statements set forth under the
heading "Risk Factors" which constitute cautionary statements identifying
important factors that could cause actual results to differ materially from
those in the forward-looking statements.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROSPECTUS SUPPLEMENT
Summary..................................................... S-3
Risk Factors................................................ S-10
The Company................................................. S-12
Strategies.................................................. S-13
Properties.................................................. S-16
Use of Proceeds............................................. S-18
Ratios of Earnings to Fixed Charges......................... S-18
Capitalization.............................................. S-19
Certain Transactions........................................ S-20
Certain Federal Income Tax Considerations................... S-20
Description of Notes........................................ S-21
Underwriting................................................ S-29
Legal Matters............................................... S-29
PROSPECTUS
Available Information....................................... 2
Incorporation of Certain Documents by Reference............. 2
The Company................................................. 3
Use of Proceeds............................................. 4
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........................... 16
ERISA....................................................... 21
Plan of Distribution........................................ 23
Legal Matters............................................... 24
Experts..................................................... 24
</TABLE>
S-2
<PAGE> 3
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. As used herein, the term "Inclusive Cost" means all costs related to
acquisitions, including, but not limited to, the purchase price, legal fees and
expenses, commissions and title insurance.
THE COMPANY
Commercial Net Lease Realty, Inc., a Maryland corporation (the "Company"), is a
fully integrated self-administered real estate investment trust ("REIT") formed
in 1984 that acquires, owns, develops and manages a diversified portfolio of
high-quality, single-tenant, freestanding properties leased to major retail
businesses generally under full-credit, long-term commercial net leases. As of
December 31, 1997, the Company owned 236 net-leased properties and maintained a
20 percent ownership interest in nine additional properties held in an
unconsolidated limited partnership (together, the "Properties" and individually,
a "Property") acquired for an aggregate purchase price of approximately $561
million and having an annualized cash on cost return (on an Inclusive Cost
basis) of approximately 10.5 percent. As of December 31, 1997, the Properties
were leased to 48 tenants in 37 states and contained an aggregate of
approximately 4.6 million square feet of gross leasable area ("GLA"). See
"Properties."
The Company acquires, owns, develops and manages freestanding retail 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 $7.5 million, attract
a wide array of established retail tenants, such as Barnes & Noble, Eckerd Drug
and OfficeMax. Consequently, management believes that such properties offer
attractive opportunities for stable current return and potential capital
appreciation. 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.
Properties acquired by the Company are generally newly constructed as of the
time of acquisition. In addition, the Company generally acquires properties that
are subject to a lease in order to avoid the risks inherent in initial leasing.
The Properties are leased on a long-term basis, generally 10 to 20 years, with
renewal options for up to an additional 10 to 20 years. As of December 31, 1997,
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") as of December 31, 1997, have
initial terms extending until at least December 31, 2007. Approximately 83
percent of Base Rent is derived from leases that provide for periodic,
contractually fixed increases in base rent.
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)
423-7348.
CORE BUSINESS OBJECTIVES
The Company seeks to enhance its operating performance and financial position
through the implementation of the following core business objectives:
- DIVERSIFICATION OF LINE OF BUSINESS/GEOGRAPHIC LOCATION -- The Company
continues to diversify its property 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.
- LOCATION OF REAL ESTATE/FREESTANDING RETAIL PROPERTIES -- The Company
invests in freestanding retail properties which typically are located
within intensive commercial corridors near traffic generators such
S-3
<PAGE> 4
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. In
addition, management believes that the location and design of properties
in this niche provide flexibility in property usage and tenant selection
and an increased likelihood of advantageous re-lease terms upon
expiration or early termination of the related leases.
- TRIPLE-NET/FULL-CREDIT LEASES -- To avoid initial leasing risks, the
Company generally acquires properties which are fully leased under
long-term, full-credit leases. Management believes that the Company's
emphasis on full-credit, long-term (10 to 20 years), triple-net leases
produces a more predictable long-term income stream. The Company's
willingness to make long-term investments in retail properties offers
tenants financial flexibility and allows tenants to allocate capital to
their core businesses. The Company's leases generally 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, and generally also provide that
the tenant is responsible for roof and structural repairs. Because the
Company's leases typically do not limit the Company's recourse against
the tenant and any guarantor in the event of a default, the leases are
considered "full-credit" leases.
- CAPITAL STRUCTURE -- The Company seeks to operate with the moderate use
of leverage. Management believes that the Company's Property 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 December 31, 1997, the Company's total
indebtedness as a percentage of total assets (before accumulated
depreciation) was approximately 31 percent.
- BUILD-TO-SUIT DEVELOPMENT -- The Company occasionally acquires a vacant
undeveloped property and develops the property in accordance with the
specifications of the tenant. At the time the property is acquired, the
Company and the tenant enter into a long term lease with rent payments
commencing on completion of the building. Development of the property
allows the Company to offer the tenant a wider menu of services and is
often the preferred alternative of the tenant because the Company, by
being able to reduce overall construction costs, is often able to offer
the tenant more favorable leasing terms. The opportunity to acquire
vacant land and construct the tenant's building pursuant to the lease
also affords the Company with the advantage of possible capital
appreciation created by the development process.
RECENT DEVELOPMENTS
Completed Property Acquisitions. Between January 1, 1997 and December 31, 1997,
the Company acquired 47 properties (42 land and building parcels plus five land
only parcels) and purchased three new buildings constructed by the tenant on
three previously acquired land parcels for an aggregate purchase price of
approximately $181 million (on an Inclusive Cost basis). These 47 properties and
three buildings have approximately 1.4 million square feet of GLA, provide
approximately $18.0 million in annualized Base Rent with a resulting annualized
cash on cost return (on an Inclusive Cost basis) of approximately 10.5 percent,
and were financed with borrowings under the Company's $200 million credit
facility (the "Credit Facility"). Four new properties were acquired for
approximately $8 million in September 1997 through a limited partnership (the
"Partnership") in which a wholly-owned subsidiary of the Company is the sole
general partner and owns a 20 percent interest. The Partnership also acquired
five properties from the Company for approximately $23 million. The Company
accounts for its 20 percent interest in the Partnership under the equity method
of accounting.
Merger with the Advisor. On January 1, 1998, the Company consummated the merger
of one of its wholly owned subsidiaries with CNL Realty Advisors, Inc., the
Company's external advisor (the "Advisor"), through which the Company became a
self-administered and self-managed REIT (the "Advisor Transaction"). The terms
of the merger provided for the merger of the Advisor into a wholly owned
subsidiary of the Company pursuant to which all of the outstanding common stock
of the Advisor was exchanged for 220,000 shares of
S-4
<PAGE> 5
common stock of the Company and the right, based upon the Company's continued
growth in assets for a period of up to five years, to receive up to 1,980,000
additional shares of the Company's common stock. The stockholders of the Company
approved the consummation of the Advisor Transaction at the 1997 annual meeting
of stockholders on December 18, 1997. For a complete description of the Advisor
Transaction, see the Company's Proxy Statement dated November 13, 1997 for the
Company's 1997 annual meeting of stockholders.
Sale of Common Stock. In February 1998, the Company completed the sale of
688,172 shares of common stock to an institutional investor generating net
proceeds of approximately $11 million. The Company used the net proceeds of the
offering to repay indebtedness outstanding under the Credit Facility and to
acquire additional properties.
S-5
<PAGE> 6
PROPERTIES
The following table sets forth certain Property, tenant and retail specialty
information as of December 31, 1997, with respect to each of the retailers that
operates from a Property in the Company Property portfolio.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL TOTAL CURRENT
NUMBER OF TOTAL GLA PERCENT OF CURRENT ANNUAL ANNUAL
RETAILER PROPERTIES (SQ. FT.) TOTAL GLA BASE RENT (1) BASE RENT RETAIL SPECIALTY
-------- ---------- --------- ---------- -------------- ------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Eckerd............... 43 411,241 9.02% $ 7,140,912 12.35% Drug Stores
Barnes & Noble....... 13 374,892 8.23 5,984,922 10.35 Books
Best Buy............. 7 312,892 6.87 4,147,450 7.18 Consumer Electronics
OfficeMax............ 11 273,045 5.99 3,315,841 5.74 Office Supply
Borders Books &
Music.............. 5 143,879 3.16 3,084,714 5.34 Books
HomePlace............ 5 205,275 4.50 2,813,478 4.87 Home Furnishings and Accessories
Academy.............. 7 368,381 8.08 2,361,496 4.09 Sporting Goods
Good Guys............ 5 94,340 2.07 2,096,796 3.63 Consumer Electronics
Computer City........ 5 88,324 1.94 1,908,321 3.30 Computer and Computer Software
Hi-Lo Automotive..... 24 196,022 4.30 1,788,756 3.09 Auto Supply
Sears Homelife....... 5 187,512 4.11 1,663,631 2.88 Furniture
Burger King.......... 14 44,454 0.98 1,463,218 2.53 Restaurant
Dick's Clothing &
Sporting Goods..... 2 116,000 2.55 1,305,764 2.26 Sporting Goods
Waccamaw............. 2 108,961 2.39 1,208,074 2.09 Home Furnishings and Accessories
Luria's.............. 3 104,530 2.29 1,080,975 1.87 Catalog
Top's................ 1 63,220 1.39 1,032,000 1.78 Grocery
Hardee's............. 14 49,700 1.09 1,015,425 1.76 Restaurant
Golden Corral........ 24 132,126 2.90 1,004,140 1.74 Restaurant
Robb & Stucky........ 1 77,168 1.68 948,270 1.64 Furniture
Denny's.............. 10 44,354 0.97 929,130 1.61 Restaurant
Waremart............. 1 82,490 1.81 900,000 1.56 Grocery
Food Lion............ 4 117,690 2.58 835,200 1.44 Grocery
Food 4 Less.......... 1 54,629 1.20 830,530 1.44 Grocery
Int'l House of
Pancakes........... 7 32,063 0.70 772,423 1.34 Restaurant
Scotty's............. 2 112,875 2.48 708,789 1.23 Home Improvement
Shop & Save.......... 2 71,868 1.58 616,671 1.07 Grocery
Roger & Marv's....... 1 61,657 1.35 559,169 0.97 Grocery
Kash N' Karry........ 1 58,635 1.29 498,399 0.86 Grocery
Ro-Jack's............ 1 64,514 1.42 488,750 0.85 Grocery
Marshalls............ 1 33,000 0.72 478,500 0.83 Apparel
Oshman's Sporting
Goods.............. 1 50,000 1.10 448,500 0.77 Sporting Goods
CompUSA.............. 1 25,000 0.55 429,000 0.74 Computer and Computer Software
Dave's............... 1 68,075 1.49 408,450 0.71 Grocery
Linens 'n Things..... 1 28,700 0.63 401,800 0.69 Home Furnishings and Accessories
Pier 1 Imports....... 3 17,960 0.39 396,575 0.68 Furniture
Just For Feet........ 1 16,500 0.36 384,909 0.66 Shoes
Blockbuster Music.... 2 23,000 0.50 357,995 0.62 Music
Sports Authority..... 2 42,161 0.93 312,835 0.54 Sporting Goods
Babies "R" Us........ 1 40,000 0.88 304,000 0.53 Miscellaneous Retail
Levitz............... 1 44,539 0.98 300,638 0.52 Furniture
Kroger............... 1 36,769 0.81 228,363 0.39 Grocery
Office Depot......... 1 25,000 0.55 210,000 0.36 Office Supply
SuperValu............ 1 30,000 0.66 210,000 0.36 Grocery
Wendy's.............. 2 5,923 0.13 153,150 0.26 Restaurant
Petco................ 1 14,300 0.31 125,125 0.22 Miscellaneous Retail
Checkers............. 1 796 0.02 74,256 0.13 Restaurant
Rally's.............. 1 710 0.02 51,250 0.09 Restaurant
Pizza Hut............ 1 2,500 0.05 21,000 0.04 Restaurant
--- --------- ------ ----------- ------
Totals....... 245(2)(3) 4,557,670(3)(4) 100.00% $57,799,590(3)(4) 100.00%
=== ========= ====== =========== ======
</TABLE>
- ---------------
(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) Total number of properties includes five properties under construction.
(3) Includes nine properties with 239,477 square feet of GLA and $3.2 million of
Base Rent owned by a limited partnership in which the Company owns a 20
percent general partnership interest.
(4) Excludes GLA and Base Rent attributed to the buildings under construction
discussed in footnote (2) above.
S-6
<PAGE> 7
THE OFFERING
SECURITIES OFFERED......... $50,000,000 aggregate principal amount of the
% Notes due 2005 and $50,000,000 aggregate
principal amount of the % Notes due 2008.
MATURITY................... , 2005 with respect to the 2005 Notes
and , 2008 with respect to the 2008
Notes.
INTEREST PAYMENT DATES..... Semi-annually on and ,
commencing , 1998.
RANKING.................... The Notes will be senior unsecured obligations of
the Company and will rank equally with the
Company's other unsecured and unsubordinated
indebtedness. The Notes will be effectively
subordinated to mortgages and other secured
indebtedness of the Company and to indebtedness and
other liabilities of the Company's Subsidiaries (as
defined herein). In addition, the Notes will be
repaid solely from cash flows generated by the
Company and holders of the Notes will not have
recourse against any stockholder of the Company for
the repayment of the Notes.
USE OF PROCEEDS............ The net proceeds from the sale of the Notes will be
used to repay borrowings under the Company's Credit
Facility that were incurred principally to finance
development and acquisition activities and for
general corporate purposes. See "Use of Proceeds"
and "Underwriting."
OPTIONAL REDEMPTION........ The Notes are redeemable at any time at the option
of the Company, in whole or in part, at a
redemption price equal to the sum of (i) the
principal amount of the Notes being redeemed plus
accrued interest to the redemption date and (ii)
the Make-Whole Amount, if any. See "Description of
Notes -- Optional Redemption."
CERTAIN COVENANTS.......... The Notes contain various covenants including the
following:
- Neither the Company nor any Subsidiary may incur
any Indebtedness (as defined herein) if, after
giving effect thereto, the aggregate principal
amount of all outstanding Indebtedness of the
Company and its Subsidiaries, on a consolidated
basis, is greater than 60 percent of the sum of
(i) the Total Assets (as defined herein) of the
Company and its Subsidiaries as of the end of the
most recent calendar quarter and (ii) the
purchase price of any real estate assets or
mortgages receivable acquired, and the amount of
any securities offering proceeds received (to the
extent that such proceeds were not used to
acquire real estate assets or mortgages
receivable or used to reduce Indebtedness), by
the Company or any Subsidiary since the end of
such calendar quarter, including those proceeds
obtained in connection with the incurrence of
such additional Indebtedness.
- Neither the Company nor any Subsidiary may incur
any Indebtedness secured by any mortgage or other
lien upon any of the property of the Company or
any Subsidiary if, after giving effect thereto,
the aggregate principal amount of all outstanding
Indebtedness of the Company and its Subsidiaries,
on a consolidated basis, which is secured by any
mortgage or other lien on the property of the
Company or any Subsidiary is greater than 40
percent of the sum of (i) the Total Assets of the
Company and its Subsidiaries as of the end of the
most recent calendar quarter and (ii) the
purchase price of any real estate assets or
mortgages receivable acquired, and the amount of
any securities offering proceeds
S-7
<PAGE> 8
received (to the extent that such proceeds were
not used to acquire real estate assets or
mortgages receivable or used to reduce
Indebtedness), by the Company or any Subsidiary
since the end of such calendar quarter, including
those proceeds obtained in connection with the
incurrence of such additional Indebtedness.
- The Company and its Subsidiaries will maintain
Total Unencumbered Assets (as defined herein) of
not less than 150 percent of the aggregate
outstanding principal amount of the Unsecured
Indebtedness (as defined herein) of the Company
and its Subsidiaries on a consolidated basis.
- Neither the Company nor any Subsidiary may incur
any Indebtedness if, after giving effect thereto,
the ratio of Consolidated Income Available for
Debt Service (as defined herein) to the Annual
Debt Service Charge (as defined herein) for the
four consecutive fiscal quarters most recently
ended prior to the date on which such additional
Indebtedness is to be incurred shall have been
less than 1.5:1 on a pro forma basis after giving
effect to certain assumptions.
For a more complete description of the terms and
definitions used in the foregoing limitations, see
"Description of Notes -- Certain Covenants."
S-8
<PAGE> 9
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth certain financial information for the Company on
a historical basis, as of each of the years in the five-year period ended
December 31, 1997. The financial information for the year ended December 31,
1997 is derived from the Company's preliminary, unaudited financial statements.
The financial information for the years ended December 31, 1996, 1995, 1994 and
1993 is qualified in its entirety by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements (including
the notes thereto) incorporated by reference herein and in the accompanying
Prospectus. See "Incorporation of Certain Information by Reference" in the
accompanying Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
Dollars in thousands ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental and earned income................ $49,922 $33,209 $20,468 $12,068 $4,906
Interest and other income............... 213 160 112 221 163
------- ------- ------- ------- ------
Total revenues..................... 50,135 33,369 20,580 12,289 5,069
------- ------- ------- ------- ------
Expenses:
General and administrative.............. 1,216 1,183 722 605 478
Management and advisory fees............ 2,110 1,466 1,001 727 30
Interest................................ 11,478 7,206 3,834 498 381
State taxes (1)......................... 397 195 258 213 110
Depreciation and amortization........... 5,302 3,553 2,058 1,331 645
------- ------- ------- ------- ------
Total expenses..................... 20,503 13,603 7,873 3,374 1,921
------- ------- ------- ------- ------
Earnings before equity in earnings of
unconsolidated partnership and gain on
sale of land and buildings................ 29,632 19,766 12,707 8,915 3,148
Equity in earnings of unconsolidated
partnership............................... 102 -- -- -- --
Gain on sale of land and buildings.......... 651 73 -- -- 374
------- ------- ------- ------- ------
Net earnings....................... $30,385 $19,839 $12,707 $ 8,915 $3,522
======= ======= ======= ======= ======
OTHER DATA:
Common shares outstanding at end of
period.................................... 27,953,627 20,763,672 11,663,672 11,663,672 7,663,672
Total properties at end of period........... 236(2) 195 157 128 84
Total GLA (Sq. Ft. in thousands)............ 4,318(2) 3,053 1,729 1.139 555
Earnings before interest and taxes.......... $42,260 $27,240 $16,799 $ 9,626 $4,013
Earnings before interest, taxes,
depreciation and amortization............. $47,562 $30,793 $18,857 $10,957 $4,658
Annual debt service coverage ratio (3)...... 4.02 4.24 4.85 21.59 10.95
Ratio of earnings to fixed charges (4)...... 3.43 3.49 4.06 12.86 9.77
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate assets, net............................. $519,724 $361,444 $212,786 $148,643 $69,135
Total assets........................................ $537,014 $370,953 $219,257 $152,211 $91,619
Unsecured indebtedness.............................. $115,100 $ 58,700 $ 69,450 $ 14,800 $ --
Mortgage indebtedness............................... $ 56,736 $ 58,256 $ 13,150 $ -- $ --
Total liabilities................................... $174,870 $118,379 $ 83,415 $ 15,546 $ 474
Total stockholders' equity.......................... $362,144 $252,574 $135,842 $136,665 $91,145
</TABLE>
- ---------------
(1) State taxes consist of income and franchise taxes.
(2) Excludes nine properties owned by a limited partnership in which the Company
owns a 20 percent general partnership interest.
(3) The debt service coverage ratios are defined as Consolidated Income
Available for Debt Service divided by the Annual Debt Service Charge. See
"Description of Notes -- Certain Covenants."
(4) Ratio of earnings to fixed charges is calculated by dividing earnings by
fixed charges. For this purpose, earnings consist of net income before taxes
and extraordinary items plus fixed charges (excluding capitalized interest
costs). Fixed charges are comprised of interest expense (including
capitalized interest costs) and the amortization of debt expense and
discount or premium relating to any indebtedness, whether expensed or
capitalized.
S-9
<PAGE> 10
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 Notes offered hereby.
RELIANCE ON MANAGEMENT
The Company depends upon the services of Mr. Seneff, as Chairman of the Board of
Directors and Chief Executive Officer of the Company, and of Gary M. Ralston, as
President of the Company. Loss of the services of either Mr. Seneff or Mr.
Ralston could have a material adverse effect on the Company's business and
financial condition. Upon the consummation of the Advisor Transaction, Mr.
Seneff, as Chief Executive Officer of the Company, and Mr. Ralston, as President
of the Company, executed employment agreements with the Company. Mr. Seneff's
employment agreement does not require that he devote all of his efforts to the
Company nor is it expected that he will devote all of his efforts to the
Company.
TENANT CONCENTRATION
Eckerd Drug accounted for approximately 12.4 percent of Base Rent as of December
31, 1997. The next five largest tenants (Barnes & Noble, Best Buy, OfficeMax,
Borders Books & Music and HomePlace), in terms of Base Rent as of December 31,
1997, accounted for an aggregate of approximately 33.5 percent of Base Rent. 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. HomePlace recently filed a voluntary
petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a
result, HomePlace has the right to reject or affirm one or more leases with the
Company. While, as of the date of this Prospectus Supplement, HomePlace has not
rejected any leases with the Company, there can be no assurance that rejections
of one or all of the leases will not occur in the future. As of December 31,
1997, HomePlace leased five properties which accounted for approximately 4.9
percent of the Company's annualized Base Rent. In addition to HomePlace, Luria's
and Levitz have filed voluntary bankruptcy petitions under Chapter 11. While
Levitz has not, as of the date of this Prospectus Supplement, rejected its only
lease with the Company, Luria's has rejected each of its three leases with the
Company. As of December 31, 1997, the leases with Luria's accounted for
approximately 1.9 percent of the Company's annualized Base Rent and the lease
with Levitz accounted for less than one percent of the Company's annualized Base
Rent.
CONFLICTS OF INTEREST
Mr. Seneff currently is engaged, and in the future is expected to engage, in the
management of other entities that invest in real estate, including entities that
currently invest primarily in non-retail (excluding restaurants) triple-net
leased properties, and in other business activities. Therefore, competition may
exist in the allocation of Mr. Seneff's management time, services and functions
among the Company and the various other entities in which Mr. Seneff is involved
as well as potential competition between the Company and such entities regarding
certain real estate investment opportunities.
INDEBTEDNESS FINANCING RISKS
The Company's organizational documents do not limit the level or amount of debt
that it may incur. Currently, the Company intends to maintain a ratio of total
indebtedness to total assets (before accumulated depreciation) of not more than
50 percent, although this policy is subject to reevaluation and modification by
the Board of Directors. If this policy were modified to permit a higher degree
of leverage and the Company were to incur additional indebtedness, debt service
requirements would increase accordingly and such an increase could adversely
affect the Company's financial condition and results of operations. In addition,
increased leverage could
S-10
<PAGE> 11
increase the risk of default by the Company on its debt obligations, with the
potential for loss of cash flow to, and asset value of, the Company.
The Company is subject to the risks associated with debt financing, including
the risk that the cash provided by the Company's operating activities will be
insufficient to meet required payments of principal and interest, the risk of
rising interest rates on the Company's variable rate Credit Facility that is not
hedged, the risk that the Company will not be able to repay or refinance
existing indebtedness (which generally will not have been fully amortized at
maturity) or that the terms of such refinancing will not be as favorable as the
terms of existing indebtedness. In the event that the Company is unable to
secure financing of such indebtedness on acceptable terms, the Company might be
forced to dispose of properties upon disadvantageous terms, which might result
in losses to the Company, or to obtain financing at unfavorable terms, either of
which might adversely affect the cash flow available for debt service
obligations. The Company has attempted to hedge a portion of its interest rate
exposure with respect to the Credit Facility by entering into an agreement
limiting the 30-day LIBOR rate to 6.9 percent per annum on a notional amount of
$30 million. This interest rate cap agreement is effective through December
1999.
GENERAL REAL ESTATE RISKS
Uncontrollable Factors Affecting Performance and Value. The economic
performance and value of the Company's real estate assets will be subject to all
of the risks incident to the ownership and operation of real estate. These
include the risks normally associated with changes in general national, regional
and local economic and market conditions. Such local real estate market
conditions may include excess supply and intense competition for tenants,
including competition based on rental rates, attractiveness and location of the
property and quality of maintenance, insurance and management services. In
addition, other factors may affect the performance and value of a property
adversely, including changes in laws and governmental regulations (including
those governing usage, zoning and taxes), changes in interest rates and the
availability of financing.
Illiquidity of Real Estate Investments. Because real estate investments are
relatively illiquid, the Company's ability to vary its portfolio promptly in
response to economic or other conditions will be limited. In addition, certain
significant expenditures, such as debt service (if any), real estate taxes, and
operating and maintenance costs, generally are not reduced in circumstances
resulting in a reduction in income from the investment. The foregoing and any
other factor or event that would impede the ability of the Company to respond to
adverse changes in the performance of its investments could have an adverse
effect on the Company's financial condition and results of operations.
Environmental Matters. Investments in real property create a potential for
environmental liability on the part of the owner of such property from the
presence or discharge of hazardous substances on the property. It is the
Company's policy, as part of its acquisition due diligence process, at least 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 24 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 the Company's Phase I or Phase II environmental site assessments
have revealed the presence or discharge of hazardous substances at each of the
Properties, or that such environmental regulatory databases contained 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 Property portfolio that it believes would have a
material adverse effect on the Company's assets or financial condition.
S-11
<PAGE> 12
ACQUISITION/DEVELOPMENT RISKS
There can be no assurance that the Company will be able to implement its
investment strategies successfully or that its Property portfolio will expand at
all, or at any specified rate or to any specified size. In addition, investment
in additional real estate assets is subject to a number of risks. In particular,
investments are expected to be financed with funds drawn under the Credit
Facility, which would subject the Company to the risks described at
"-- Indebtedness Financing Risks." The Company does not intend to limit its
investments to the markets in which the Properties presently are located.
Consequently, to the extent that the Company has elected, and may in the future
elect, to invest in additional markets, the Company also is subject to the risks
associated with investment in new markets, with which management may have
relatively little experience or familiarity. Investment in additional real
estate assets also entails the other risks associated with real estate
investment generally, as described at "-- General Real Estate Risks," above.
To the extent that the Company engages in development activities, it will be
subject to the risks normally associated with such activities. Such risks
include, without limitation, risks relating to the availability and timely
receipt of zoning and other regulatory approvals, the cost and timely completion
of construction (including risks from causes beyond the Company's control, such
as weather or labor conditions or material shortages) and the availability of
financing on favorable terms. These risks could result in substantial
unanticipated delays or expense and, under certain circumstances, could prevent
completion of development activities once undertaken, any of which could have an
adverse effect on the financial condition and results of operations of the
Company and on the amount of funds available for distribution to stockholders.
LACK OF PUBLIC MARKET FOR THE NOTES
The Notes are a new issue of securities for which there is currently no active
trading market. If any of the Notes are traded after their initial issuance,
they may trade at a discount from their initial offering price, depending upon
prevailing interest rates, the market for similar securities and other factors,
including general economic conditions and the financial condition of,
performance of, and prospects for, the Company. There can be no assurance as to
the development of any market, or the liquidity of any market that may develop,
for the Notes. The Company does not intend to apply for listing of the Notes on
any securities exchange or for quotation on the Nasdaq National Market.
THE COMPANY
The Company is a fully integrated self-administered REIT that acquires, owns,
develops and manages a diversified portfolio of high-quality, single-tenant,
freestanding properties leased to major retail businesses generally under
full-credit, long-term commercial net leases. As of December 31, 1997, the
Company owned 236 net-leased Properties and a 20 percent ownership interest in
nine additional Properties held in an unconsolidated limited partnership
acquired for an aggregate purchase price of approximately $561 million and
having an annualized cash on cost return (on an Inclusive Cost basis) of
approximately 10.5 percent. As of December 31, 1997, the Properties were leased
to 48 tenants in 37 states and contain an aggregate of approximately 4.6 million
square feet of GLA.
The Company acquires, owns, develops, 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. 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.
Properties acquired by the Company are generally newly constructed as of the
time of acquisition. In addition, the Company generally acquires properties that
are subject to a lease in order to avoid the risks inherent in initial leasing.
The Company's leases are typically 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
S-12
<PAGE> 13
against the tenant and any guarantor in the event of a default and for this
reason are considered "full-credit" leases.
STRATEGIES
GENERAL
The Company's investment strategy is to acquire, own, develop and manage a
diversified portfolio of high-quality, freestanding properties leased to major
retail businesses generally 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.
OPERATING STRATEGIES
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 drug and book stores in the Company's Property 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.
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 and build-to-suit development
services 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
CNL Group, Inc. and its affiliates ("CNL Affiliates") and Mr. Seneff 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. The Company believes that its existing
relationships with nationally based tenants will enhance its ability to expand
into new geographic 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.
Full-Credit, Long-Term Net Leases. To avoid initial leasing risks, the Company
generally acquires properties which are fully leased under a long-term,
full-credit lease. Management believes that the Company's emphasis
S-13
<PAGE> 14
on full-credit, long-term, triple-net leases will produce a more predictable
long-term income stream. The properties currently in the Company Property
portfolio generally were leased for 10 to 20 year periods, with renewal options
for up to an additional 10 to 20 years. As of December 31, 1997, the average
remaining initial lease term with respect to the Properties was approximately 14
years. Leases accounting for approximately 90 percent of Base Rent as of
December 31, 1997 have initial terms extending until at least December 31, 2007.
The Company's willingness to make long-term investments in retail properties
offers tenants financial flexibility and allows 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 certain 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, 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.
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.
Properties acquired by the Company generally are newly constructed as of the
time of acquisition. The Company generally develops properties itself or
acquires its properties from third-party developers 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."
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 property
usage 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.
Active Management of Assets. The Company actively manages the Company Property
portfolio to maintain and maximize its value. The Company 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
S-14
<PAGE> 15
taxes and insurance, and annually evaluates property inspection reports. As part
of its evaluation, the Company periodically conducts site inspections. In
addition, the Company 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.
MANAGED GROWTH STRATEGIES
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. As of December 31, 1997, leases in the Company Property
portfolio representing approximately 83 percent of Base Rent include contractual
increases in base rent; leases representing approximately 31 percent of Base
Rent include percentage rent provisions; and leases representing approximately
22 percent of Base Rent include both contractual increases in base rent and
percentage rent provisions. For the year ended December 31, 1997, percentage
rent was $759,000 (approximately 1.5 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.
Property Acquisitions. The Company intends to continue to provide build-to-suit
services nationally and 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.
Between January 1, 1997 and December 31, 1997, the Company acquired 47
Properties (42 land and building parcels plus five land only parcels) and three
new buildings constructed by the tenant on three previously acquired land
parcels for an aggregate purchase price of approximately $181 million (on an
Inclusive Cost basis).
When the Company is acting as the developer, it generally acquires vacant
undeveloped property concurrent with securing a lease from the tenant and all
governmental approvals for construction and development of the tenant's store,
and then develops the tenant's store on the property pursuant to the lease which
provides, among other things, for a return to the Company on third party costs
expended in the construction and development process and which otherwise
generally provides for rent commencement upon completion of construction and the
opening of the tenant's business at the property.
FINANCING STRATEGIES
Sources of Capital for Acquisitions. The Company generally utilizes its $200
million Credit Facility to fund property acquisitions. 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, 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 public or private offerings of debt or equity securities, secured
or unsecured borrowings from banks or other lenders, the sale of properties or
undistributed funds from operations.
Ratio of Debt to Total Assets. The Company seeks to operate with 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 December
31, 1997, the Company's total indebtedness as a percentage of total assets
(before accumulated depreciation) was approximately 31 percent.
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<PAGE> 16
PROPERTIES
THE PROPERTIES
As of December 31, 1997, the Company had an ownership interest in 245 net-leased
Properties located in 37 states. Except for two Properties which are subject to
ground leases, all of the Properties owned by the Company are owned in fee
simple. The average age of the buildings in the Company Property portfolio is
approximately four years. The aggregate GLA of the Company Property portfolio is
approximately 4.6 million square feet and buildings in the Company Property
portfolio generally range in size from approximately 1,000 square feet to
approximately 82,000 square feet (1,000 to 7,000 square feet for restaurants).
The following tables set forth the diversification of the Company Property
portfolio based on retail line of business and geography by region as of
December 31, 1997:
DIVERSIFICATION BY RETAIL LINE OF BUSINESS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL PERCENT OF TOTAL CURRENT
NUMBER OF TOTAL CURRENT ANNUAL ANNUAL
RETAIL SPECIALTY PROPERTIES GLA (SQ. FT.) GLA BASE RENT (1) BASE RENT
---------------- ---------- ------------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Books................... 18 518,771 11.4% $ 9,069,636 15.7%
Drug.................... 43 411,241 9.0 7,140,912 12.4
Grocery................. 15 709,547 15.6 6,607,532 11.4
Consumer Electronics.... 12 407,232 8.9 6,244,247 10.8
Restaurant.............. 74 312,626 6.9 5,483,992 9.5
Sporting Goods.......... 12 576,542 12.6 4,428,594 7.7
Home Furnishings and
Accessories........... 8 342,936 7.5 4,423,352 7.7
Office Supply........... 12 298,045 6.5 3,525,841 6.1
Furniture............... 10 327,179 7.2 3,309,114 5.7
Computer and Computer
Software.............. 6 113,324 2.5 2,337,321 4.0
Auto Supply............. 24 196,022 4.3 1,788,756 3.1
Catalog................. 3 104,530 2.3 1,080,975 1.9
Home Improvement........ 2 112,875 2.5 708,789 1.2
Apparel................. 1 33,000 0.7 478,500 0.8
Miscellaneous Retail.... 2 54,300 1.2 429,125 0.7
Shoes................... 1 16,500 0.4 384,909 0.7
Music................... 2 23,000 0.5 357,995 0.6
--- --------- ----- ----------- -----
Totals........ 245(2)(3) 4,557,670(3)(4) 100.0% $57,799,590(3)(4) 100.0%
=== ========= ===== =========== =====
</TABLE>
- ---------------
(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) Total number of properties includes five properties under construction.
(3) Includes nine properties with 239,477 square feet of GLA and $3.2 million of
Base Rent owned by a limited partnership in which the Company owns a 20
percent general partnership interest.
(4) Excludes GLA and Base Rent attributed to the buildings under construction
discussed in footnote (2) above.
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<PAGE> 17
GEOGRAPHIC DIVERSIFICATION BY REGION
<TABLE>
<CAPTION>
PERCENT OF
TOTAL CURRENT TOTAL CURRENT
NUMBER OF PERCENT OF ANNUAL ANNUAL
REGION PROPERTIES GLA (SQ. FT.) TOTAL GLA BASE RENT(1) BASE RENT
------ ---------- ------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Southeast............... 82 1,545,887 33.9% $19,992,952 34.6%
South................... 93 1,278,296 28.0 13,969,534 24.2
Northeast............... 28 747,273 16.4 10,470,049 18.1
West.................... 16 435,380 9.6 6,953,186 12.0
Midwest................. 22 450,025 9.9 5,007,890 8.7
Rocky Mountain.......... 4 100,809 2.2 1,405,979 2.4
--- --------- ----- ----------- -----
Totals........ 245(2)(3) 4,557,670(3)(4) 100.0% $57,799,590(3)(4) 100.0%
=== ========= ===== =========== =====
</TABLE>
- ---------------
(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) Total number of properties includes five properties under construction.
(3) Includes nine properties with 239,477 square feet of GLA and $3.2 million of
Base Rent owned by a limited partnership in which the Company owns a 20
percent general partnership interest.
(4) Excludes GLA and Base Rent attributed to the buildings under construction
discussed in footnote (2) above.
REGION DATA
<TABLE>
<CAPTION>
SOUTHEAST SOUTH NORTHEAST WEST MIDWEST ROCKY MOUNTAIN
--------- ----- --------- ---- ------- --------------
<S> <C> <C> <C> <C> <C>
Alabama Louisiana Delaware Alaska Illinois Arizona
Florida Mississippi Maine California Kansas Colorado
Georgia Oklahoma Maryland Nevada Kentucky New Mexico
North Carolina Texas New Hampshire Oregon Michigan
South Carolina New Jersey Washington Minnesota
Tennessee New York Missouri
Pennsylvania North Dakota
Rhode Island Ohio
Virginia Wisconsin
West Virginia
</TABLE>
THE ACQUISITION PROCESS
The Company acquires its properties from either the retail entities that occupy
such properties or from a third-party developer of the property.
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
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<PAGE> 18
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 Third-Party 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. See
"Strategies -- Operating Strategies -- Site Selection and Property Acquisition
Analysis."
Acquisitions for Self Development. When the Company is acting as the developer,
it generally acquires vacant undeveloped property concurrent with securing a
lease from the tenant and all governmental approvals for construction and
development of the tenant's store, and then develops the tenant's store on the
property pursuant to the lease which provides, among other things, for a return
to the Company on third-party costs expended in the construction and development
process and which otherwise generally provides for rent commencement upon
completion of construction and the opening of the tenant's business at the
property. The opportunity to acquire vacant land and construct the tenant's
building pursuant to the lease also affords the Company with the advantage of
possible capital appreciation created by the development process.
USE OF PROCEEDS
The net proceeds from the offering are estimated to be approximately $99.3
million, after deducting estimated expenses and discounts from the offering. The
Company intends to use the net offering proceeds to repay $99.3 million
outstanding under the Credit Facility, which will result in the Company having
approximately $15.8 million outstanding and approximately $184.2 million
available for future borrowings under the Credit Facility. Borrowings
outstanding under the Credit Facility, which expires on June 30, 1999, currently
bear interest at a rate of LIBOR plus 1.50 percent.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the years ended December
31, 1997, 1996, 1995, 1994 and 1993 was 3.43, 3.49, 4.06, 12.86 and 9.77,
respectively. 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.
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CAPITALIZATION
The following table sets forth the historical capitalization of the Company as
of December 31, 1997 and the capitalization of the Company as of that date as
adjusted to reflect the sale of the Notes offered hereby at the face value
thereof and the application of the estimated net proceeds as described in "Use
of Proceeds." The information set forth in the following table is derived from
the preliminary, unaudited financial statements of the Company and should be
read in conjunction with the summary financial information presented elsewhere
in this Prospectus Supplement.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
HISTORICAL AS ADJUSTED
Dollars in thousands ---------- -----------
<S> <C> <C>
DEBT:
Credit Facility................................... $115,100 $ 15,807
Mortgages payable................................. 56,736 56,736
Notes due 2005.................................... -- 50,000
Notes due 2008.................................... -- 50,000
-------- --------
Total debt................................... $171,836 $172,543
-------- --------
EQUITY................................................. $362,144 $362,144
-------- --------
Total capitalization......................... $533,980 $534,687
======== ========
</TABLE>
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CERTAIN TRANSACTIONS
For the year ended December 31, 1997, the Company paid the Advisor approximately
$2.1 million in advisory fees. The Advisor was a majority owned subsidiary of
CNL Group, Inc., of which James M. Seneff, Jr., Chairman of the Board and Chief
Executive Officer of the Company, and his spouse are the only stockholders.
Prior to the consummation of the Advisor Transaction, when a CNL Affiliate
undertook the development of a property, it negotiated 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 was calculated on the
basis of a market capitalization rate and the negotiated developer's cost. The
Company purchased properties developed by CNL Affiliates at prices equal to the
negotiated developer's costs, which included reimbursement of any expenses, as
well as any development fees reflected in the developer's costs. The Company,
however, did not pay acquisition fees or expense reimbursement in connection
with the purchase of such properties.
During the year ended December 31, 1997, the Company acquired 32 properties and
three buildings which were developed by the tenant on land parcels owned by the
Company for purchase prices (exclusive of transaction fees and closing costs)
totaling $137.5 million from unrelated third-parties. In connection with the
acquisition of 27 of these properties and the three buildings, the Company paid
the Advisor $2.6 million in acquisition fees and expense reimbursement fees.
Also for the year ended December 31, 1997, the Company acquired 15 properties
for an aggregate purchase price (exclusive of transaction fees and closing
costs) of $39.3 million at an annualized cash on cost return (on an Inclusive
Cost basis) of approximately 10.9 percent from CNL Affiliates who had developed
the properties. The purchase prices paid by the Company for these 15 properties
equaled the CNL Affiliates' costs, including development fees to affiliates of
$2.6 million. No acquisition fees or expense reimbursement fees were paid to the
Advisor in connection with the acquisition of these 15 properties.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
This discussion supplements the discussion set forth in the accompanying
Prospectus under the heading "Federal Income Tax Considerations." On August 5,
1997, the President signed into law the Taxpayer Relief Act of 1997 (the "Act"),
which contains provisions affecting the qualification and taxation of REITs and
which provisions will apply to the Company beginning with its 1998 taxable year.
The relevant REIT-related provisions of the Act are summarized in this
paragraph. First, the Act repeals the 30 percent gross income test. Second,
under the Act, the Company may elect to retain and pay income tax on its net
long-term capital gains. If the Company so elects, each shareholder will take
into income his share of the retained capital gain as long-term capital gain and
will receive a credit or refund for his share of the tax paid by the Company.
The shareholder will increase the basis of his shares of the Company by an
amount equal to the excess of the retained capital gain included in his income
over the tax deemed paid by him. Third, under the Act, the Company may render a
minimal amount of impermissible "noncustomary" services to tenants and still
treat the rent received from that property as "rents from real property," as
long as the amount received for the services, or management or operation, during
any taxable year does not exceed one percent of the Company's total receipts
from the property during that year. For purposes of the foregoing, the amount
attributable to any impermissible service, or management or operation, will be
equal to at least 150 percent of the Company's direct cost for performing the
service, management, or operation. Fourth, under the Act, the Company will not
lose its REIT status for failing to send out shareholder demand letters in any
year. Instead, the Company will incur a $25,000 penalty ($50,000 for intentional
violations). Fifth, if the Company complies with the requirements for
ascertaining the ownership of its outstanding shares (including by sending out
shareholder demand letters) and does not know or have reason to know that it has
violated the 5/50 rule (i.e., the rule that no more than 50 percent in value of
the Company's outstanding shares may be owned, directly or indirectly, by five
or fewer individuals during the last half of any taxable year), it will be
treated as satisfying the 5/50 rule. Sixth, the Company may treat any
wholly-owned corporation as a "qualified REIT subsidiary" regardless of whether
the Company has always owned 100 percent of the stock of the corporation.
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<PAGE> 21
The Act also changed the maximum tax rates on capital gains applicable to
noncorporate taxpayers. For capital gain taken into account after July 28, 1997,
the maximum tax rate on long-term capital gains applicable to noncorporate
taxpayers is 28 percent for sales and exchanges of assets held for more than one
year, but not more than 18 months, and 20 percent for sales and exchanges of
assets held for more than 18 months. The maximum tax rate applicable to
noncorporate taxpayers on long-term capital gain from the sale or exchange of
"Section 1250 property" (i.e., depreciable real property) is 25 percent to the
extent that such gain would have been treated as ordinary income if the property
were "Section 1245 property." With respect to distributions designated by the
Company as capital gain dividends and any retained capital gains that the
Company is deemed to distribute in taxable years beginning on and after January
1, 1998, the Company may designate (subject to certain limits) whether a
distribution is taxable to its noncorporate stockholders at a 20 percent, 25
percent, or 28 percent rate.
Finally, the Act also changed the period for carrying forward net operating
losses from 15 years to 20 years.
DESCRIPTION OF NOTES
The following description of the particular terms of the Notes offered hereby
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of the "Debt Securities" set forth in the
accompanying Prospectus under "Description of Debt Securities," to which
reference is hereby made.
GENERAL
The 2005 Notes and the 2008 Notes each constitute a separate series of Debt
Securities (which are more fully described in the accompanying Prospectus) to be
issued under an Indenture, dated as of March , 1998 (the "Original
Indenture"), as supplemented by Supplemental Indenture No. 1 dated as of March
, 1998 (the "Supplemental Indenture" and together with the Original Indenture,
the "Indenture"), between the Company and First Union National Bank (the
"Trustee"). The form of the Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus Supplement is a part and is
available for inspection at the offices of the Company. The Indenture is subject
to, and governed by, the Trust Indenture Act of 1939, as amended (the "TIA").
The statements made hereunder relating to the Indenture and the Notes to be
issued thereunder are summaries of certain provisions thereof, do not purport to
be complete and are subject to, and are qualified in their entirety by reference
to, all provisions of the Indenture and the Notes. All capitalized terms used
but not defined herein shall have the respective meanings set forth in the
Indenture.
The 2005 Notes will be limited to an aggregate principal amount of $50,000,000
and the 2008 Notes will be limited to an aggregate principal amount of
$50,000,000. The Notes will be direct, senior unsecured obligations of the
Company and will rank equally with all other unsecured and unsubordinated
indebtedness of the Company from time to time outstanding. The Notes will be
effectively subordinated to mortgages and other secured indebtedness of the
Company and to Indebtedness and other liabilities of the Company's Subsidiaries.
Accordingly, such prior indebtedness will have to be satisfied in full before
holders of the Notes will be able to realize any value from encumbered or
indirectly-held properties. In addition, the Notes will be repaid solely from
the assets of the Company; holders of the Notes will not have recourse against
any shareholder of the Company for the repayment of the Notes.
As of December 31, 1997, on a pro forma basis after giving effect to the
Offering, the Company would have had approximately $172.5 million of
indebtedness, of which approximately $56.7 million would have been secured by 45
of the Properties. The Company may incur additional indebtedness, including
secured indebtedness, subject to the provisions described below under
"-- Certain Covenants -- Limitations on Incurrence of Indebtedness."
The Notes will only be issued in fully registered form in denominations of
$1,000 and integral multiples thereof.
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<PAGE> 22
PRINCIPAL AND INTEREST
The 2005 Notes will bear interest at percent per annum and will mature on
, 2005. The 2008 Notes will bear interest at percent per annum
and will mature on , 2008. The Notes will bear interest from
, 1998 or from the immediately preceding Interest Payment Date (as
defined below) to which interest has been paid, payable semi-annually in arrears
on and of each year, commencing , 1998
(each, an "Interest Payment Date"), to the Persons in whose name the applicable
Notes are registered in the Security Register on the preceding or
(whether or not a Business Day, as defined below), as the case may
be (each, a "Regular Record Date"). Interest on the Notes will be computed on
the basis of a 360-day year of twelve 30-day months.
If any Interest Payment Date or Stated Maturity falls on a day that is not a
Business Day, the required payment shall be made on the next Business Day as if
it were made on the date such payment was due and no interest shall accrue on
the amount so payable for the period from and after such Interest Payment Date
or Stated Maturity, as the case may be. "Business Day" means any day, other than
a Saturday or Sunday, that is neither a legal holiday nor a day on which banks
in the City of New York or in the City of Charlotte are authorized or required
by law, regulation or executive order to close.
The principal of and interest on the Notes will be payable at the corporate
trust office of First Union National Bank (the "Paying Agent") in the City of
Charlotte, North Carolina, initially located at 1525 West W.T. Harris Blvd.,
provided that, at the option of the Company, payment of interest may be made by
check mailed to the address of the Person entitled thereto as it appears in the
Security Register or by wire transfer of funds to such Person at an account
maintained within the United States.
OPTIONAL REDEMPTION
The Notes may be redeemed at any time at the option of the Company, in whole or
in part, at a redemption price equal to the sum of (i) the principal amount of
the Notes being redeemed plus accrued interest thereon to the redemption date
and (ii) the Make-Whole Amount, if any, with respect to such Notes (the
"Redemption Price").
If notice has been given as provided in the Indenture and funds for the
redemption of any Notes called for redemption shall have been made available on
the redemption date referred to in such notice, such Notes will cease to bear
interest on the date fixed for such redemption specified in such notice and the
only right of the Holders of the Notes will be to receive payment of the
Redemption Price. Notice of any optional redemption of any Notes will be given
to Holders at their addresses, as shown in the Security Register, not more than
60 nor less than 30 days prior to the date fixed for redemption. The notice of
redemption will specify, among other items, the Redemption Price and the
principal amount of the Notes held by such Holder to be redeemed.
If less than all the Notes are to be redeemed at the option of the Company, the
Company will notify the Trustee at least 45 days prior to the giving of the
redemption notice (or such shorter period as is satisfactory to the Trustee) of
the aggregate principal amount of Notes to be redeemed and their redemption
date. The Trustee shall select, in such manner as it shall deem fair and
appropriate, Notes to be redeemed in whole or in part. Notes may be redeemed in
part in the minimum authorized denomination for Notes or in any integral
multiple thereof.
"Make-Whole Amount" means, in connection with any optional redemption or
accelerated payment of any 2005 Note or 2008 Note, as the case may be, the
excess, if any, of (i) the aggregate present value as of the date of such
redemption or accelerated payment of each dollar of principal being redeemed or
paid and the amount of interest (exclusive of interest accrued to the date of
redemption or accelerated payment) that would have been payable in respect of
such dollar if such redemption or accelerated payment had not been made,
determined by discounting, on a semi-annual basis, such principal and interest
at the Reinvestment Rate (determined on the third Business Day preceding the
date such notice of redemption is given or declaration of acceleration is made)
from the respective dates on which such principal and interest would have been
payable if such redemption or accelerated payment had not been made, over (ii)
the aggregate principal amount of the respective 2005 Notes or 2008 Notes being
redeemed or paid.
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<PAGE> 23
"Reinvestment Rate" means .25% (twenty-five one hundredths of one percent) plus
the arithmetic mean of the yields under the respective headings "This Week" and
"Last Week" published in the Statistical Release under the caption "Treasury
Constant Maturities" for the maturity (rounded to the nearest month)
corresponding to the remaining life to maturity, as of the payment date of the
principal being redeemed or paid. If no maturity exactly corresponds to such
maturity, yields for the two published maturities most closely corresponding to
such maturity shall be calculated pursuant to the immediately preceding sentence
and the Reinvestment Rate shall be interpolated or extrapolated from such yields
on a straight-line basis, rounding in each of such relevant periods to the
nearest month. For such purposes of calculating the Reinvestment Rate, the most
recent Statistical Release published prior to the date of determination of the
Make-Whole Amount shall be used.
"Statistical Release" means the statistical release designated "H.15(519)" or
any successor publication which is published weekly by the Federal Reserve
System and which establishes yields on actively traded United States government
securities adjusted to constant maturities or, if such statistical release is
not published at the time of any determination of the Make-Whole Amount, then
such other reasonably comparable index which shall be designated by the Company.
CERTAIN COVENANTS
Limitations on Incurrence of Indebtedness. The Company will not, and will not
permit any Subsidiary to, incur any Indebtedness (as defined below) if,
immediately after giving effect to the incurrence of such additional
Indebtedness and the application of the proceeds thereof, the aggregate
principal amount of all outstanding Indebtedness of the Company and its
Subsidiaries (determined on a consolidated basis in accordance with GAAP) is
greater than 60 percent of the sum of (without duplication) (i) the Total Assets
(as defined below) of the Company and its Subsidiaries as of the end of the
calendar quarter covered in the Company's Annual Report on Form 10-K or
Quarterly Report on Form 10-Q, as the case may be, most recently filed with the
Commission (or, if such filing is not permitted under the Exchange Act, with the
Trustee) prior to the incurrence of such additional Indebtedness and (ii) the
purchase price of any real estate assets or mortgages receivable acquired, and
the amount of any securities offering proceeds received (to the extent that such
proceeds were not used to acquire real estate assets or mortgages receivable or
used to reduce Indebtedness), by the Company or any Subsidiary since the end of
such calendar quarter, including those proceeds obtained in connection with the
incurrence of such additional Indebtedness.
In addition to the foregoing limitation on the incurrence of Indebtedness, the
Company will not, and will not permit any Subsidiary to, incur any Indebtedness
secured by any Encumbrance (as defined below) upon any of the property of the
Company or any Subsidiary if, immediately after giving effect to the incurrence
of such additional Indebtedness and the application of the proceeds thereof, the
aggregate principal amount of all outstanding Indebtedness of the Company and
its Subsidiaries (determined on a consolidated basis in accordance with GAAP)
which is secured by any Encumbrance on property of the Company or any Subsidiary
is greater than 40 percent of the sum of (without duplication) (i) the Total
Assets of the Company and its Subsidiaries as of the end of the calendar quarter
covered in the Company's Annual Report on Form 10-K or Quarterly Report on Form
10-Q, as the case may be, most recently filed with the Commission (or, if such
filing is not permitted under the Exchange Act, with the Trustee) prior to the
incurrence of such additional Indebtedness and (ii) the purchase price of any
real estate assets or mortgages receivable acquired, and the amount of any
securities offering proceeds received (to the extent that such proceeds were not
used to acquire real estate assets or mortgages receivable or used to reduce
Indebtedness), by the Company or any Subsidiary since the end of such calendar
quarter, including those proceeds obtained in connection with the incurrence of
such additional Indebtedness.
The Company and its Subsidiaries will not at any time own Total Unencumbered
Assets (as defined below) equal to less than 150 percent of the aggregate
outstanding principal amount of the Unsecured Indebtedness (as defined below) of
the Company and its Subsidiaries on a consolidated basis.
In addition to the foregoing limitations on the incurrence of Indebtedness, the
Company will not, and will not permit any Subsidiary to, incur any Indebtedness
if the ratio of Consolidated Income Available for Debt Service (as defined
below) to the Annual Debt Service Charge (as defined below) for the four
consecutive fiscal quarters most recently ended prior to the date on which such
additional Indebtedness is to be incurred shall have been less
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<PAGE> 24
than 1.5:1 on a pro forma basis after giving effect thereto and to the
application of the proceeds therefrom, and calculated on the assumption that (i)
such Indebtedness and any other Indebtedness incurred by the Company and its
Subsidiaries since the first day of such four-quarter period and the application
of the proceeds therefrom, including to refinance other Indebtedness, had
occurred at the beginning of such period; (ii) the repayment or retirement of
any other Indebtedness by the Company and its Subsidiaries since the first day
of such four-quarter period had been repaid or retired at the beginning of such
period (except that, in making such computation, the amount of Indebtedness
under any revolving credit facility shall be computed based upon the average
daily balance of such Indebtedness during such period); (iii) in the case of
Acquired Indebtedness (as defined below) or Indebtedness incurred in connection
with any acquisition since the first day of such four-quarter period, the
related acquisition had occurred as of the first day of such period with the
appropriate adjustments with respect to such acquisition being included in such
pro forma calculation; and (iv) in the case of any acquisition or disposition by
the Company or its Subsidiaries of any asset or group of assets since the first
day of such four-quarter period, whether by merger, stock purchase or sale, or
asset purchase or sale, such acquisition or disposition or any related repayment
of Indebtedness had occurred as of the first day of such period with the
appropriate adjustments with respect to such acquisition or disposition being
included in such pro forma calculation.
Provision of Financial Information. Whether or not the Company is subject to
Section 13 or 15(d) of the Exchange Act, the Company will, to the extent
permitted under the Exchange Act, file with the Commission the annual reports,
quarterly reports and other documents which the Company would have been required
to file with the Commission pursuant to such Section 13 or 15 (d) if the Company
were so subject, such documents to be filed with the Commission on or prior to
the respective dates (the "Required Filing Dates") by which the Company would
have been required to file such documents if the Company were so subject. The
Company will also in any event (x) within 15 days of each Required Filing Date
(i) if the Company is not then subject to such Section 13 or 15(d), transmit by
mail to all Holders of Notes, as their names and addresses appear in the
Security Register, without cost to such Holders, copies of the annual reports
and quarterly reports 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 (ii) file with the Trustee copies of the
annual reports, quarterly reports and other documents that the Company would
have been required to file with the Commission pursuant to Section 13 or 15 (d)
of the Exchange Act if the Company were subject to such Sections and (y) if
filing such documents by the Company with the Commission is not permitted under
the Exchange Act, promptly upon written request and payment of the reasonable
cost of duplication and delivery, supply copies of such documents to any
prospective Holder.
Waiver of Certain Covenants. The Company may omit to comply with any term,
provision or condition of the foregoing covenants, and with any other term,
provision or condition with respect to the 2005 Notes or the 2008 Notes, as the
case may be (except any such term, provision or condition which could not be
amended without the consent of all Holders of Notes), if before or after the
time for such compliance the Holders of at least a majority in principal amount
of all of the outstanding 2005 Notes or 2008 Notes, as the case may be, by act
of such Holders, either waive such compliance in such instance or generally
waive compliance with such covenant or condition. Except to the extent so
expressly waived, and until such waiver shall become effective, the obligations
of the Company and the duties of the Trustee in respect of any such term,
provision or condition shall remain in full force and effect.
As used herein, and in the Indenture:
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the time
such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any Person or the
date the acquired Person becomes a Subsidiary.
"Advisor Transaction" means the merger of CNL Realty Advisors, Inc. with and
into a wholly-owned subsidiary of the Company which was consummated on January
1, 1998.
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<PAGE> 25
"Annual Debt Service Charge" for any period means the aggregate interest expense
for such period in respect of, and the amortization during such period of any
original issue discount of, Indebtedness of the Company and its Subsidiaries and
the amount of dividends which are payable during such period in respect of any
Disqualified Stock.
"Capital Stock" means, with respect to any Person, any capital stock (including
preferred stock), shares, interests, participations or other ownership interests
(however designated) of such Person and any rights (other than debt securities
convertible into or exchangeable for corporate stock), warrants or options to
purchase any thereof.
"Consolidated Income Available for Debt Service" for any period means Earnings
from Operations (as defined below) of the Company and its Subsidiaries plus
amounts which have been deducted, and minus amounts which have been added, for
the following (without duplication): (i) interest on Indebtedness of the Company
and its Subsidiaries, (ii) provision for taxes of the Company and its
Subsidiaries based on income, (iii) amortization of debt discount, (iv)
provisions for gains and losses on properties and property depreciation and
amortization, (v) the effect of any noncash charge resulting from a change in
accounting principles in determining Earnings from Operations for such period
and (vi) amortization of deferred charges.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which by the terms of such Capital Stock (or by the terms of any
security into which it is convertible or for which it is exchangeable or
exercisable), upon the happening of any event or otherwise (i) matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise
(other than Capital Stock which is redeemable solely in exchange for common
stock), (ii) is convertible into or exchangeable or exercisable for Indebtedness
or Disqualified Stock or (iii) is redeemable at the option of the holder
thereof, in whole or in part (other than Capital Stock which is redeemable
solely in exchange for Capital Stock which is not Disqualified Stock or the
redemption price of which may, at the option of such Person, be paid in Capital
Stock which is not Disqualified Stock), in each case on or prior to the Stated
Maturity of the Notes.
"Earnings from Operations" for any period means net earnings excluding (i) gains
and losses on sales of investments, (ii) extraordinary items, (iii) property
valuation losses and (iv) costs and expenses associated with the Advisor
Transaction (which will include the fair market value, at the time of issuance,
of the shares of the Company's common stock, $.01 par value, issuable to the
former stockholders of the Advisor as a result of the Advisor Transaction, and
reasonable attorneys' and accountants' fees and miscellaneous other expenses
incurred by the Company in connection therewith), net as reflected in the
financial statements of the Company and its Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP.
"Encumbrance" means any mortgage, lien, charge, pledge or security interest of
any kind.
"Indebtedness" of the Company or any Subsidiary means any indebtedness of the
Company or any Subsidiary, whether or not contingent, in respect of (i) borrowed
money or evidenced by bonds, notes, debentures or similar instruments whether or
not such indebtedness is secured by any Encumbrance existing on property owned
by the Company or any Subsidiary, (ii) indebtedness for borrowed money of a
Person other than the Company or a Subsidiary which is secured by any
Encumbrance existing on property owned by the Company or any Subsidiary, to the
extent of the lesser of (x) the amount of indebtedness so secured and (y) the
fair market value (as determined in good faith by the Board of Directors of the
Company) of the property subject to such Encumbrance, (iii) the reimbursement
obligations, contingent or otherwise, in connection with any letters of credit
actually issued or amounts representing the balance deferred and unpaid of the
purchase price of any property or services, except any such balance that
constitutes an accrued expense or trade payable, or all conditional sale
obligations or obligations under any title retention agreement, or (iv) the
principal amount of all obligations of the Company or any Subsidiary with
respect to redemption, repayment or other repurchase of any Disqualified Stock,
(v) any lease of property by the Company or any Subsidiary as lessee which is
reflected on the Company's consolidated balance sheet as a capitalized lease in
accordance with GAAP, and also includes, to the extent not otherwise included,
any obligation by the Company or any Subsidiary to be liable for, or to pay, as
obligor, guarantor or otherwise (other than for purposes of collection in the
ordinary course of business), Indebtedness of another Person (other than the
Company or any Subsidiary) (it being understood that
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<PAGE> 26
Indebtedness shall be deemed to be incurred by the Company or any Subsidiary
whenever the Company or such Subsidiary shall create, assume, guarantee or
otherwise become liable in respect thereof).
"GAAP" means generally accepted accounting principles applied on a consistent
basis.
"Subsidiary" means, with respect to any Person, any corporation or other entity
of which a majority of (i) the voting power of the voting equity securities or
(ii) the outstanding equity interests of which are owned, directly or
indirectly, by such Person. For the purposes of this definition, "voting equity
securities" means equity securities having voting power for the election of
directors, whether at all times or only so long as no senior class of security
has such voting power by reason of any contingency.
"Total Assets" as of any date means the sum of (i) the Undepreciated Real Estate
Assets and (ii) all other assets of the Company and its Subsidiaries determined
on a consolidated basis in accordance with GAAP (but excluding accounts
receivable and intangibles).
"Total Unencumbered Assets" means the sum of (i) those Undepreciated Real Estate
Assets not subject to an Encumbrance for borrowed money and (ii) all other
assets of the Company and its Subsidiaries not subject to an Encumbrance for
borrowed money all determined on a consolidated basis in accordance with GAAP
(but excluding accounts receivable and intangibles).
"Undepreciated Real Estate Assets" as of any date means the cost (original cost
plus capital improvements) of real estate assets of the Company and its
Subsidiaries on such date, before depreciation and amortization, determined on a
consolidated basis in accordance with GAAP.
"Unsecured Indebtedness" means Indebtedness which is not secured by any
Encumbrance upon any of the properties of the Company or any Subsidiary.
See "Description of Debt Securities -- Certain Covenants" in the accompanying
Prospectus for a description of additional covenants applicable to the Company.
EVENTS OF DEFAULT
The Indenture provides that the following events are "Events of Default" with
respect to the Notes: (a) default in the payment of any interest on any Notes
when such interest becomes due and payable that continues for a period of 30
days; (b) default in the payment of the principal of (or Make-Whole Amount, if
any, on) any Notes when due and payable; (c) default in the performance, or
breach, of any other covenant or warranty of the Company in the Indenture with
respect to the Notes and continuance of such default or breach for a period of
60 days after written notice as provided in the Indenture; (d) default under any
bond, debenture, note, mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any indebtedness for
money borrowed by the Company (or by any Subsidiary, the repayment of which the
Company has guaranteed or for which the Company is directly responsible or
liable as obligor or guarantor), having an aggregate principal amount
outstanding of at least $10,000,000, whether such indebtedness now exists or
shall hereafter be created, which default shall have resulted in such
indebtedness becoming or being declared due and payable prior to the date on
which it would otherwise have become due and payable, without such indebtedness
having been discharged, or such acceleration having been rescinded or annulled,
within a period of 10 days after written notice to the Company as provided in
the Indenture; (e) the entry by a court of competent jurisdiction of one or more
judgments, orders or decrees against the Company or any Subsidiary in an
aggregate amount (excluding amounts covered by insurance) in excess of
$10,000,000 and such judgments, orders or decrees remain undischarged, unstayed
and unsatisfied in an aggregate amount (excluding amounts covered by insurance)
in excess of $10,000,000 for a period of 30 consecutive days; and (f) certain
events of bankruptcy, insolvency or reorganization, or court appointment of a
receiver, liquidator or trustee of the Company or any Significant Subsidiary.
The term "Significant Subsidiary" has the meaning ascribed to such term in
Regulation S-X promulgated under the Securities Act. If an Event of Default
specified in clause (f) above, relating to the Company or any Significant
Subsidiary occurs, the principal amount of and the Make-Whole Amount on all
outstanding Notes shall become due and payable without any declaration or other
act on the part of the Trustee or of the Holders.
S-26
<PAGE> 27
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The provisions of Article XIV of the Indenture relating to defeasance and
covenant defeasance, which are described under "Description of Debt
Securities -- Discharge, Defeasance and Covenant Defeasance" in the accompanying
Prospectus, will apply to the 2005 Notes and the 2008 Notes. Each of the
covenants described under "-- Certain Covenants" herein and "Description of Debt
Securities -- Certain Covenants" in the accompanying Prospectus will be subject
to covenant defeasance.
BOOK-ENTRY SYSTEM
The Notes will be issued in the form of one or more fully registered global
notes ("Global Notes") which will be deposited with, or on behalf of, the
Depository Trust Company ("DTC"), and registered in the name of DTC's nominee,
Cede & Co. Except under the circumstances described below, the Notes will not be
issuable in definitive form.
Unless and until it is exchanged in whole or in part for the individual Notes
represented thereby, a Global Note may not be transferred except as a whole by
DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC
or by DTC or any nominee of DTC to a successor depository or any nominee of such
successor.
Upon the issuance of a Global Note, DTC or its nominee will credit on its
book-entry registration and transfer system the respective principal amounts of
the individual Notes represented by such Global Note to the accounts of persons
that have accounts with DTC ("Participants"). Such accounts shall be designated
by the underwriters, dealers or agents with respect to the Notes. Ownership of
beneficial interests in a Global Note will be limited to Participants or persons
that may hold interests through Participants. Ownership of beneficial interests
in such Global Note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
beneficial interests of persons who hold through Participants). The laws of some
states require that certain purchasers of securities take physical delivery of
securities in definitive form. Such limits and laws may impair the ability to
own, pledge or transfer beneficial interests in the Global Note.
So long as DTC or its nominee is the registered owner of such Global Note, DTC
or its nominee, as the case may be, will be considered the sole owner or holder
of the Notes represented by such Global Note for all purposes under the
Indenture and the beneficial owners of the Notes will be entitled only to those
rights and benefits afforded to them in accordance with DTC's regular operating
procedures. Except as provided below, owners of beneficial interest in a Global
Note will not be entitled to have any of the individual Notes registered in
their names, will not receive or be entitled to receive physical delivery of any
such Notes in definitive form and will not be considered the owners or holders
thereof under the Indenture.
Payment of principal of, any Make-Whole Amount on, and any interest on,
individual Notes represented by a Global Note registered in the name of DTC or
its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of Global Note representing such Notes. None of the Company,
the Trustee, any Paying Agent or the Security Registrar will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note
for such Notes or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, Make-Whole Amount or interest in respect of a permanent Global Note
representing any Notes, immediately will credit Participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Global Note as shown on the records of DTC or its
nominee. The Company also expects that payments by Participants to owners of
beneficial interests in such Global Note held through such Participants will be
governed by standing instructions and customary practices, as is the case with
securities held for the account of customers in bearer form or registered in
"street name." Such payments will be the responsibility of such Participants.
If DTC is at any time unwilling, unable or ineligible to continue as depository
and a successor depository is not appointed by the Company within 90 days, the
Company will issue individual Notes in exchange for the Global
S-27
<PAGE> 28
Note or Notes representing the Notes. In addition, the Company may, at any time
and in its sole discretion, determine not to have any Notes represented by one
or more Global Notes and, in such event, will issue individual Notes in exchange
for the Global Note or Notes representing the Notes. Individual Notes so issued
will be issued in denominations, unless otherwise specified by the Company, of
$1,000 and integral multiples thereof.
DTC has advised the Company of the following information regarding DTC: DTC is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code, and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC holds
securities that its Participants deposit with DTC. DTC also facilitates the
settlement among its Participants of securities transactions, such as transfers
and pledges, in deposited securities through electronic computerized book-entry
changes in its Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct Participants of DTC include
securities brokers and dealers (including the Underwriters), banks, trust
companies, clearing corporations and certain other organizations. DTC is owned
by a number of its direct Participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a direct Participant of DTC, either
directly or indirectly. The rules applicable to DTC and its participants are on
file with the Commission.
GOVERNING LAW
The Indenture will be governed by and shall be construed in accordance with the
laws of the State of New York.
NO PERSONAL LIABILITY
No past, present or future stockholder, employee, officer or director of the
Company or any successor thereof shall have any liability for any obligation,
covenant or agreement of the Company contained under the Notes or the Indenture.
Each Holder of Notes by accepting such Notes waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Notes.
S-28
<PAGE> 29
UNDERWRITING
Subject to the terms and conditions in the Underwriting Agreement dated the date
hereof (the "Underwriting Agreement"), the Company has agreed to sell to each of
the Underwriters named below (the "Underwriters"), severally, and each of the
Underwriters has severally agreed to purchase, the respective principal amount
of Notes set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT
UNDERWRITER OF 2005 NOTES OF 2008 NOTES
----------- ---------------- ----------------
<S> <C> <C>
J.P. Morgan Securities Inc. ................................
Goldman, Sachs & Co. .......................................
Salomon Brothers Inc........................................
----------- -----------
Total............................................. $50,000,000 $50,000,000
=========== ===========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the Underwriters
will be obligated to purchase all of the Notes if any are purchased.
The Underwriters have advised the Company that they propose initially to offer
the Notes directly to the public at the public offering price set forth on the
cover page of this Prospectus Supplement, and to certain dealers at such price
less a concession not in excess of percent of the principal amount of the
2005 Notes and percent of the principal amount of the 2008 Notes. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of percent of the principal amount of the 2005 Notes and percent of
the principal amount of the 2008 Notes to certain other dealers. After the
initial public offering, the public offering price and such concession may be
changed.
The 2005 Notes and the 2008 Notes are each a new issue of securities with no
established trading market. The Company has been advised by the Underwriters
that the Underwriters intend to make a market in the Notes but are not obligated
to do so and may discontinue market making at any time without notice. No
assurance can be given as to the liquidity of the trading market for the Notes.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the prices of the Notes.
Specifically, the Underwriters may overallot the Offering, creating a syndicate
short position. In addition, the Underwriters may bid for and purchase the Notes
in the open market to cover syndicate short positions or to stabilize the prices
of the Notes. Finally, the underwriting syndicate may reclaim selling
concessions allowed for distributing the Notes in the Offering, if the syndicate
repurchases previously distributed Notes in syndicate covering transactions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market prices of the Notes above independent market levels. The
Underwriters are not required to engage in these activities, and may end any of
these activities at any time.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
In the ordinary course of their respective business, affiliates of the
Underwriters have engaged, or may in the future engage, in commercial banking
and investment banking transactions with the Company.
LEGAL MATTERS
Certain legal matters, including the legality of the Notes being offered hereby,
are being passed upon for the Company by Shaw Pittman Potts & Trowbridge,
Washington, D.C., a partnership including professional corporations. Certain
legal matters related to the Offering are being passed upon for the Underwriters
by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
S-29
<PAGE> 30
[COMMERCIAL NET LEASE REALTY, INC. LOGO]
$300,000,000
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 $300,000,000 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 public offering price; (ii) in the case of Common Stock, any 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 DATE OF THIS PROSPECTUS IS APRIL 22, 1997.
<PAGE> 31
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 Commission also maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants such as the Company which file
electronically with the Commission. 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 principal office in Washington, D.C. upon
payment of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The document listed below has been filed by the Company under the Exchange
Act (Exchange Act file number 0-12989) with the Commission and is incorporated
herein by reference:
a. Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the 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.
2
<PAGE> 32
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).
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 December 31, 1996, the Company owned 195 properties
acquired for an aggregate purchase price of approximately $371 million and
having an annualized current cash on cost return (on an Inclusive Cost basis as
defined below) of approximately 10.4%. For the purposes of the Prospectus,
"Inclusive Cost" means all costs related to acquisitions, including but not
limited to the purchase price, legal 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 $7.5 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 majority 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 $700 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 (three of which were
subsequently sold). The aggregate cost of such properties was approximately
$12.8 million. As of December 31, 1996, the Company had acquired 172 additional
properties (two of which were subsequently sold) leased to 36 new tenants for an
aggregate purchase price of approximately $361 million.
Historically, the Company has not had a large enough asset base to provide
the economies of scale needed to support efficiently the extensive general and
administrative expenses of an in-house management team. As a result, the Advisor
has incurred the full expense of a management and acquisition team while
3
<PAGE> 33
receiving advisory and acquisition fees that have offset this expense. However,
management believes that the efficiencies currently experienced by employing a
third-party advisor will diminish as the Company grows and expects that as the
Company continues to grow it will be more cost effective to become
self-administered. Management is currently considering whether it may be
appropriate at this time to recommend to the Board of Directors that the Company
become self-administered. Any recommendation would be evaluated by the
Independent Directors, and any transaction by which the Company would become
self-administered would be subject to the approval of the stockholders.
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 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 year ended
December 31, 1996 was 3.49, and for the years ended December 31, 1995, 1994,
1993 and 1992 was 4.06, 12.86, 9.77 and 6.18, respectively. For the purposes of
computing these ratios, earnings have been calculated by adding fixed charges
(excluding capitalized interest) to income 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.
4
<PAGE> 34
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.
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
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<PAGE> 35
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;
(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.
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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 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 will provide 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.
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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 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
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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 (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
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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 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 Indenture, provided that such action shall not adversely
affect the interests of holders of Debt Securities of any series
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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, direction, notice, consent, waiver or other action shall be taken
into account in determining whether such request, demand, authorization,
direction, notice, consent, waiver or other action has been made, given or taken
under the Indenture.
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DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, 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 provide 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 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.
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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.
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
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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 50,000,000 shares
of Common Stock, par value $0.01 per share, as well as 50,000,000 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 March 31, 1996, the
Company had outstanding 23,393,672 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 restricted 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 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.
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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.
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.
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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.
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,
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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 1996, met the requirements for qualification 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 1997. 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.
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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 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;
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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. 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.
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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.
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.
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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 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
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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 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 Ownership."
The DOL Regulation only establishes a presumption in favor of a finding of free
transferability and, therefore, no assurance can be given
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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 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.
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EXPERTS
The financial statements of the Company as of December 31, 1996 and 1995,
and for each of the years in the three-year period ended December 31, 1996, have
been incorporated by reference from the Company's Annual Report on Form 10-K in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm 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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