<PAGE> 1
Filed Pursuant to Rule 424(b)(2).
Registration No. 333-64511
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES NOR MAY WE ACCEPT OFFERS TO BUY
THEM, WITHOUT FIRST DELIVERING A FINAL PROSPECTUS SUPPLEMENT AND ACCOMPANYING
PROSPECTUS. THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 14, 1999
PROSPECTUS SUPPLEMENT
(To Prospectus Dated October 22, 1998)
[COMMERCIAL NET LEASE REALTY LOGO]
$ 00,000,000
COMMERCIAL NET LEASE REALTY, INC.
% NOTES DUE 200
The notes will bear interest at the rate of % per year. Interest on
the notes is payable on and , of each year
beginning , 1999. The notes will mature on ,
200 . CNLR may redeem some or all of the notes at any time. The redemption
prices are discussed under the caption "Description of Notes -- Optional
Redemption."
The notes will be senior obligations of CNLR and will rank equally with all
of CNLR's other unsecured senior indebtedness.
------------------
INVESTING IN THE NOTES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE S-13 IN THIS PROSPECTUS SUPPLEMENT.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement or the related prospectus is truthful or complete. any
representation to the contrary is a criminal offense.
------------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
-------- ------------
<S> <C> <C>
Public Offering Price % $
Underwriting Discount % $
Proceeds to CNLR (before expenses) % $
</TABLE>
Interest on the notes will accrue from , 1999 to the date
of delivery.
------------------
The underwriters are offering the notes subject to various conditions. The
underwriters expect to deliver the notes to purchasers on or about
, 1999.
------------------
Joint Book-Running Managers
J.P. MORGAN & CO. SALOMON SMITH BARNEY
------------------
FIRST UNION CAPITAL MARKETS CORP. GOLDMAN, SACHS & CO.
, 1999
<PAGE> 2
(INTENTIONALLY LEFT BLANK)
S-2
<PAGE> 3
THE PROSPECTUS THAT ACCOMPANIES THIS PROSPECTUS SUPPLEMENT CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING, AND YOU ARE URGED TO READ BOTH
THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL TO OBTAIN MATERIAL
INFORMATION CONCERNING THE NOTES AND AN INVESTMENT IN THE NOTES.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS SUPPLEMENT.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary..................................................... S- 4
Risk Factors................................................ S-13
Use of Proceeds............................................. S-16
Ratios of Earnings to Fixed Charges......................... S-16
Capitalization.............................................. S-17
The Company................................................. S-17
Strategies.................................................. S-18
Properties.................................................. S-22
Certain Transactions........................................ S-24
Certain Federal Income Tax Considerations................... S-24
Description of Notes........................................ S-26
Underwriting................................................ S-35
Legal Matters............................................... S-36
PROSPECTUS
Available Information....................................... 2
Incorporation of Certain Documents by Reference............. 2
The Company................................................. 3
Use of Proceeds............................................. 3
Ratios of Earnings to Fixed Charges and Preferred Stock
Dividends................................................. 4
Description of Debt Securities.............................. 4
Description of Preferred Stock.............................. 13
Description of Depositary Shares............................ 18
Description of Common Stock................................. 21
Description of Common Stock Warrants........................ 23
Federal Income Tax Considerations........................... 24
ERISA Considerations........................................ 31
Plan of Distribution........................................ 32
Experts..................................................... 33
Legal Matters............................................... 33
</TABLE>
S-3
<PAGE> 4
SUMMARY
This summary highlights selected information from this prospectus
supplement and the accompanying prospectus. It is not intended to be complete
and may not contain all of the information you should consider before investing
in the notes. You should read this summary along with the more detailed
information and financial information appearing elsewhere in this prospectus
supplement and the accompanying prospectus, including the documents attached as
exhibits.
THE COMPANY
Commercial Net Lease Realty, Inc. is a Maryland corporation formed in 1984
that qualifies as, and operates as, a real estate investment trust for federal
income tax purposes. We are also a fully integrated and self-administered real
estate investment trust, which means that we do not employ an outside advisor to
make investment decisions and to conduct our day-to-day operations. Our
principal executive office is located at 455 South Orange Avenue, Suite 700,
Orlando, Florida 32801, and our telephone number is (407) 265-7348.
BUSINESS
As our principal business, we acquire, own, manage and indirectly develop a
diversified portfolio of high-quality, single-tenant, freestanding properties
which we lease to major retail businesses. Our leases are generally "triple-net"
leases. Under a triple-net lease, the tenant bears responsibility for
substantially all property costs and expenses associated with ongoing
maintenance and operation, including utilities, property taxes and insurance.
Our leases are considered "full-credit" leases because they do not typically
limit our recourse against the tenant and any guarantor in the event of a
default. As of March 31, 1999, we owned 272 properties and maintained a 20
percent general partnership interest in nine additional properties held in an
unconsolidated partnership. We acquired our properties for an aggregate purchase
price of approximately $734 million. We receive an annualized cash on cost
return of approximately 10.1 percent from the properties. We calculate cash on
cost return on an inclusive cost basis, meaning that all costs related to
acquisitions, including, but not limited to the purchase price, legal fees and
expenses, commissions and title insurance are included in the cost of a
property. As of March 31, 1999, our properties were leased to 56 tenants in 35
states and contained an aggregate of approximately 6.2 million square feet of
gross leasable area. For additional information, see "Properties."
We focus on acquiring freestanding properties located in areas with high
levels of commercial traffic, such as commercial developments near 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.
We believe that such properties offer attractive opportunities for a stable
level of rent payments from tenants (current return) and the potential for
increases in value of the properties (capital appreciation). In addition, we
believe that the location and design of this type of property provide
flexibility in how we use a property and which tenant we select. We also believe
that these factors contribute to a stronger likelihood that we can re-lease the
property on advantageous terms upon expiration or early termination of the
lease.
We generally acquire properties that are newly constructed but which are
already subject to a lease. This acquisition strategy avoids the risks inherent
in initial leasing. We lease our properties to tenants on a long-term basis,
generally 10 to 20 years, with renewal options typically for an additional 10 to
20 years. As of March 31, 1999, the weighted average remaining initial lease
term of our properties was approximately 14.6 years, and leases representing
approximately 85 percent of annualized base rental income from our properties
(which we call base rent) have initial terms
S-4
<PAGE> 5
extending until at least December 31, 2009. Approximately 82 percent of base
rent is derived from leases that provide for periodic, contractually fixed
increases in the base rent payable by the tenant.
CORE BUSINESS OBJECTIVES
We seek to enhance our operating performance and financial position through
the implementation of the following core business objectives:
- We Underwrite Long-Term Triple-Net/Full-Credit Leases -- To avoid initial
lease-up risks, we generally acquire only properties which are fully
leased under a long-term, full-credit lease. We believe that our emphasis
on full-credit, long-term (10 to 20 years), triple-net leases will
produce a predictable long-term income stream. Our willingness to make
long-term investments in retail properties offers tenants financial
flexibility and allows them to allocate capital to their core businesses.
- We Minimize Investment Risk through Diversification of Line of
Business/Geographic Location -- We continue to diversify our portfolio to
include a full spectrum of retail businesses as tenants, including
distinct retail segments as well as a diversity of tenants and geographic
locations. We target retailers which we view as leaders in their
respective market segments and which have the financial strength to
compete effectively. As of March 31, 1999, our properties were leased to
56 tenants in 35 states representing 21 different retail lines of
business.
- We Develop and Maintain Relationships with Quality Tenants -- We seek to
develop and maintain long-term working relationships with established
retail companies by providing sale/ leaseback financing and, through our
affiliation with Commercial Net Lease Realty Services, Inc.,
build-to-suit services on multiple properties to target retailers on a
national basis, thereby adding additional efficiency and value to
ourselves and the retailers. In our view, our relationships with our
tenants are fostered by the broad range of services we offer 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.
- Our Real Estate is Located in Highly Visible Areas -- We invest in
properties which typically are located in areas with high levels of
commercial traffic, such as commercial developments near regional malls,
business developments and major thoroughfares. These locations provide
our tenants with high visibility to passing traffic, ease of access,
control over the site's operating hours and maintenance standards and
distinctive building design, thereby promoting greater customer
identification.
- The Design of Our Properties Provides Tenants with Great
Flexibility -- Due to the short development cycles generally associated
with our properties (approximately six to 12 months), our retail property
format provides tenants with flexibility in responding to changing retail
trends and permits faster development of new stores. This enables our
tenants to add new stores quickly and in the most efficient manner.
- We Maintain a Conservative Capital Structure -- We seek to operate with a
moderate use of leverage. We believe that our portfolio of properties and
the predictability and stability of the underlying cash flow will permit
us to obtain attractive long-term debt financing. We intend to maintain a
ratio of total indebtedness to total assets (total purchase price before
accumulated depreciation) of not more than 50 percent. Based on our
balance sheet as of March 31, 1999, the total indebtedness as a
percentage of total assets (total purchase price before accumulated
depreciation) was approximately 44 percent.
S-5
<PAGE> 6
- We Offer Tenants Build-to-Suit Development Capabilities -- Through our
affiliation with Commercial Net Lease Realty Services, Inc., we provide
build-to-suit development to retailers. These build-to-suit services
allow us to offer the tenant a wider menu of services and we believe
tenants often prefer that we develop the property because we can reduce
overall construction costs. Upon completing the development and
construction of a property, Commercial Net Lease Realty Services may sell
the completed property to us or to an unrelated third party and retain a
development fee.
RECENT DEVELOPMENTS
- Recent Property Acquisitions. Between January 1, 1999 and March 31,
1999, we invested an aggregate amount of $62.5 million (on an inclusive
cost basis) to: (i) acquire 26 properties; (ii) purchase two new
buildings constructed by a tenant on previously acquired land parcels;
(iii) complete construction on five buildings on previously acquired land
parcels; and (iv) fund construction in progress on nine projects. These
26 properties and seven buildings have approximately 660,000 square feet
of gross leasable "area" or "space," provide approximately $5.5 million
in annualized base rent with a resulting annualized cash on cost return
(on an inclusive cost basis) of approximately 9.7 percent, and were
financed by the proceeds from our $200 million credit facility. Since
April 1, 1999, we have acquired two properties and completed construction
on four buildings for an aggregate purchase price of $9.4 million (on an
inclusive cost basis).
- Acquisitions Made During 1998. During the twelve months ended December
31, 1998, we invested an aggregate amount of $150.7 million (on an
inclusive cost basis) to: (i) acquire 55 properties (23 of which were
land only parcels, 14 of which were under construction at March 31,
1999); (ii) purchase one new building constructed by a tenant on a
previously acquired land parcel; (iii) complete construction on 14
buildings on five land parcels acquired by us in 1997 and nine land
parcels acquired by us in 1998; and (iv) fund construction in progress on
11 projects.
- Recent Property Dispositions. In addition to our property acquisitions,
between January 1, 1999 and March 31, 1999, we sold 39 properties, 38 of
which were restaurant properties, for an aggregate sales price of
approximately $39.4 million and received net proceeds of approximately
$38.9 million. As a result of these dispositions, we recognized a gain of
approximately $5 million. We sold these properties to reduce our exposure
to the risks of owning restaurant properties and to raise capital to
continue to allow us to pursue our core business objectives of acquiring
properties which we lease to major retail businesses.
- Merger with the Advisor. Effective January 1, 1998, we acquired CNL
Realty Advisors, Inc., our external advisor. As a result of this merger,
we became a fully integrated, self-administered and self-managed real
estate investment trust. The merger agreement provided for the merger of
the advisor into a wholly owned subsidiary. Under the terms of the
acquisition agreement, all of the outstanding common stock of the advisor
was exchanged for ten percent of the share consideration (220,000 shares
of our common stock). The balance of the share consideration (1,980,000
additional shares of our common stock) is to be paid over time based upon
our completed property acquisitions and completed development projects in
accordance with the merger agreement. Our stockholders approved the
consummation of this transaction at the 1997 annual meeting of
stockholders on December 18, 1997. For a complete description of the
transaction, see our Proxy Statement dated November 13, 1997 for the 1997
annual meeting of our stockholders.
S-6
<PAGE> 7
- Build-to-Suit Development. In connection with our acquisition of CNL
Realty Advisors, we acquired our advisor's development capabilities. On
May 1, 1999, we contributed the development business and invested $10.9
million of debt and equity in Commercial Net Lease Realty Services in
exchange for shares of preferred stock and non-voting common stock. The
purpose of the transaction was to provide us with greater flexibility in
providing build-to-suit development services for our existing tenants and
for unrelated third parties and still comply with the regulations
necessary to allow us to maintain our qualification as a real estate
investment trust. We also have extended a $30 million line of credit to
Commercial Net Lease Realty Services for the purposes of acquiring and
developing retail properties. Any disbursements under the line of credit
will be secured by a mortgage on the properties acquired. Upon completing
the development and construction of a property, Commercial Net Lease
Realty Services may sell the completed property to us or to an unrelated
third party and retain a development fee. We may receive dividends on our
investment in Commercial Net Lease Realty Services.
- Equity and Debt Issuance. During 1998, we completed sales of an
aggregate of 988,172 shares of common stock in three offerings. These
offerings generated net proceeds of approximately $116 million. In
addition, in March 1998, we completed a debt offering of 7 1/8% notes due
2008 generating net proceeds of approximately $98.5 million. We used the
net proceeds of the three stock offerings and the debt offering to repay
indebtedness under our credit facility.
- 1998 and First Quarter 1999 Operating Results. Our revenue for the year
ended December 31, 1998 was $64.8 million versus $50.1 million for the
same period in 1997. Our funds from operations for the year ended
December 31, 1998 were $1.45 per share on a diluted basis versus $1.41
per share for the year ended December 31, 1997. We generally consider
funds from operations to be an appropriate measure of our operating
performance because it provides investors with an understanding of our
ability to incur and service debt and to make capital expenditures. Our
revenue for the first quarter of 1999 was $18.8 million versus $15.4
million for the same period in 1998. Our funds from operations for the
first quarter of 1999 were $.38 per share on a diluted basis versus $.37
per share for the first quarter of 1998.
S-7
<PAGE> 8
PROPERTIES AND TENANTS
The following table sets forth certain property and tenant information as
of March 31, 1999, with respect to each of the retailers that operates from a
property in our property portfolio.
<TABLE>
<CAPTION>
TOTAL GROSS PERCENT OF
TOTAL LEASABLE TOTAL GROSS PERCENT OF
NUMBER OF AREA LEASABLE BASE TOTAL
RETAILER PROPERTIES (SQ. FT.) AREA RENT(1) BASE RENT GUARANTOR
-------- ---------- ----------- ----------- ----------- ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Eckerd Drug.......... 55 524,575 8.44% $ 9,937,243 13.74% Eckerd Corporation
Barnes & Noble....... 14 399,798 6.43% 6,562,422 9.07% Barnes & Noble, Inc.
OfficeMax............ 17 396,076 6.38% 4,881,340 6.75% OfficeMax, Inc./
KMart Corp.
Best Buy............. 8 360,777 5.81% 4,602,370 6.36% Best Buy Co., Inc.
Good Guys............ 9 180,401 2.90% 3,745,048 5.18% The Good Guys, Inc.
Academy.............. 10 511,624 8.23% 3,263,159 4.51% Academy Corporation
Borders Books &
Music.............. 5 143,879 2.32% 3,084,714 4.26% Borders, Inc./
KMart Corp.
Heilig-Meyers........ 17 464,590 7.48% 2,696,980 3.73% Heilig-Meyers Company
HomePlace............ 3 155,275 2.50% 2,171,478 3.00% HomePlace
Holdings, Inc.
Hi-Lo Automotive..... 24 196,022 3.16% 1,788,756 2.47% Hi-Lo Automotive,
Inc.
Waccamaw............. 3 162,591 2.62% 1,744,374 2.41% Waccamaw Corporation
Sears Homelife....... 5 187,512 3.02% 1,693,631 2.34% Sears Roebuck & Co.
Sports Authority..... 4 166,025 2.67% 1,634,403 2.26% The Sports
Authority, Inc.
Food 4 Less.......... 2 105,154 1.69% 1,516,331 2.10% Food 4 Less of
California, Inc.
Wal-Mart............. 7 435,826 7.01% 1,448,213 2.00% Wal-Mart Stores, Inc.
Dick's Clothing &
Sporting........... 2 116,000 1.87% 1,305,764 1.81% Dicks Clothing &
Sporting Goods,
Inc.
Bed Bath & Beyond.... 3 90,450 1.45% 1,265,000 1.75% Bed Bath &
Beyond, Inc.
Office Depot......... 3 64,367 1.04% 1,231,554 1.70% Office Depot, Inc.
Top's................ 1 63,220 1.02% 1,032,000 1.43% Supervalu, Inc.
Robb & Stucky........ 1 77,168 1.24% 923,663 1.28% Robb & Stucky, Ltd.
Waremart............. 1 82,490 1.33% 900,000 1.24% Supervalu, Inc.
Dave & Buster's...... 1 56,470 0.91% 888,250 1.23% Dave & Busters, Inc.
Computer City........ 3 48,957 0.79% 886,767 1.23% Tandy Corporation
Golden Corral........ 20 110,095 1.77% 884,267 1.22% Golden Corral Corp.
International House
of Pancakes........ 7 32,063 0.51% 865,114 1.19% IHOP, Inc.
Food Lion............ 4 117,690 1.89% 835,200 1.15% Food Lion, Inc.
Scotty's............. 2 112,875 1.82% 708,789 0.98% Scotty's, Inc.
Kash N' Karry........ 5 58,635 0.94% 634,162 0.88% Kash N' Karry Food
Stores, Inc.
Shop & Save.......... 2 71,868 1.16% 616,671 0.85% Supervalu, Inc.
Roger & Marv's....... 1 61,657 0.99% 590,937 0.82% Supervalu, Inc.
Pier 1 Imports....... 6 24,793 0.40% 590,409 0.82% Pier 1 Imports, Inc.
PETsMART............. 1 26,040 0.42% 562,150 0.78% PETsMART, Inc.
Target (5)........... 3 0 0.00% 553,897 0.76% Dayton Hudson
Corporation
Ro-Jack's............ 1 64,514 1.04% 488,750 0.68% Supervalu, Inc.
Marshalls............ 1 33,000 0.53% 478,500 0.66% Melville Corporation
CompUSA.............. 1 25,000 0.40% 471,900 0.65% CompUSA, Inc.
</TABLE>
S-8
<PAGE> 9
<TABLE>
<CAPTION>
TOTAL GROSS PERCENT OF
TOTAL LEASABLE TOTAL GROSS PERCENT OF
NUMBER OF AREA LEASABLE BASE TOTAL
RETAILER PROPERTIES (SQ. FT.) AREA RENT(1) BASE RENT GUARANTOR
-------- ---------- ----------- ----------- ----------- ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Oshman's Sporting
Goods.............. 1 50,000 0.80% $ 448,500 0.62% Oshmans Sporting
Goods, Inc.
Ross Dress for
Less............... 1 29,500 0.48% 414,736 0.57% Ross Stores, Inc.
Dave's............... 1 68,075 1.10% 408,450 0.56% Supervalu, Inc.
Linens 'n Things..... 1 28,700 0.46% 401,800 0.55% Melville Corporation
7-Eleven............. 2 5,951 0.10% 395,400 0.55% 7-Eleven/Southland
Corporation
Just For Feet........ 1 16,500 0.27% 384,909 0.53% Just For Feet, Inc.
Michael's............ 1 26,304 0.42% 341,956 0.47% Michaels Stores, Inc.
Babies "R" Us........ 1 40,000 0.64% 304,000 0.42% Baby Superstore, Inc.
Levitz............... 1 44,539 0.72% 300,638 0.41% Levitz Furniture Co.
of the Midwest, Inc.
Vons (5)............. 1 0 0.00% 244,688 0.34% The Vons Companies,
Inc.
Kroger............... 1 36,769 0.59% 228,363 0.32% Kroger Co.
Wendy's.............. 3 5,923 0.09% 213,150 0.30% Wendy's
International,
Inc./Orlando
Food, Inc.
SuperValu............ 1 30,000 0.48% 210,000 0.29% Supervalu, Inc.
Lucky (5)............ 3 0 0.00% 194,342 0.27% Lucky Stores, Inc.
Petco................ 1 14,300 0.23% 125,125 0.17% Petco Animal
Supplies, Inc.
Blockbuster Music.... 1 6,500 0.11% 102,245 0.14% Viacom, Inc.
Checkers............. 1 796 0.01% 74,256 0.10% Checkers Drive in
Restaurants, Inc.
Rally's.............. 1 710 0.01% 51,250 0.07% Rally's, Inc.
Pizza Hut............ 1 2,500 0.04% 21,000 0.03% Semoran
Management Corp.
Party City (6)....... 1 0 0.00% 0 0.00% Party City
Corporation
Excess or Vacant
Properties......... 4 78,860 1.27% 0 0.00%
--- --------- ------ ----------- ------
Totals 281 6,213,404 100.00% $72,349,015 100.00%
=== ========= ====== =========== ======
(2)(3)(4) (3)(4) (3)(4)
</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 nine properties under construction.
(3) Includes nine properties with 239,477 square feet of gross leasable "area"
or "space" and $3.2 million of base rent owned by a limited partnership in
which we own a 20% general partnership interest.
(4) Excludes gross leasable "area" or "space" and base rent attributed to the
buildings under construction discussed in footnote (2) above.
(5) For these properties we own only the underlying land, which we lease to the
tenants.
(6) As of March 31, 1999, the Party City property was under construction and we
were not receiving any base rent. In April, the building, which contains
12,000 square feet of gross leaseable "area" or "space," was completed and
the lease became effective providing for $189,000 of annualized base rent.
S-9
<PAGE> 10
THE OFFERING
SECURITIES OFFERED..................... We are offering a total of $
million of percent
notes.
MATURITY............................... The notes will mature on ,
200 .
INTEREST PAYMENT DATES................. Interest will be paid semi-annually
on and of each
year beginning , 1999.
RANKING................................ The notes will be senior unsecured
obligations and will rank equally
with our other unsecured and
unsubordinated indebtedness. The
notes will rank behind any of our
mortgages and other secured
indebtedness and to indebtedness and
other liabilities of our
subsidiaries.
USE OF PROCEEDS........................ The net proceeds from the sale of
the notes will be used to repay
borrowings under our credit facility
that were incurred principally to
finance development and acquisition
activities. See "Use of Proceeds."
OPTIONAL REDEMPTION.................... We may redeem some or all of the
notes at any time at the redemption
prices, including any "Make-Whole
Amounts," described in the section
"Description of Notes" under the
heading "Optional Redemption," plus
any interest that is due and unpaid
on the date we redeem the notes.
CERTAIN COVENANTS...................... We will issue the notes under an
indenture with First Union National
Bank, as trustee. The indenture
will, among other things, restrict
our ability, and the ability of our
subsidiaries, to:
- Incur debt without meeting
certain tests.
- Secure debt with our assets and
the assets of our subsidiaries.
- Sell certain assets or merge with
other companies.
For more details, see the section
"Description of Notes" under the
heading "Certain Covenants."
S-10
<PAGE> 11
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
We derived the historical financial information set forth below from our
audited financial statements for 1996 through 1998 and unaudited financial
statements for the three months ended March 31, 1998 and March 31, 1999,
respectively. The information is only a summary and you should read it together
with our historical financial statements (and related notes) contained in our
annual and quarterly reports and other information, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations," that
we have filed with the Securities and Exchange Commission (see "Incorporation of
Certain Documents by Reference" in the accompanying prospectus), as well as the
financial information included in this prospectus supplement.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------- ---------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental and earned income.................. $ 17,632 $ 14,769 $ 61,750 $ 49,922 $ 33,209
Interest and other income................. 1,198 606 3,023 213 160
----------- ----------- ----------- ----------- -----------
Total revenues.......................... 18,830 15,375 64,773 50,135 33,369
----------- ----------- ----------- ----------- -----------
Expenses:
General and administrative(1)............. 2,339 1,598 7,735 1,448 1,191
Real estate expenses...................... 98 164 599 165 187
Management and advisory fees(1)........... -- -- -- 2,110 1,466
Interest.................................. 4,777 3,000 13,460 11,478 7,206
Depreciation and amortization............. 1,993 1,572 6,759 5,302 3,553
Expenses incurred acquiring Advisor(2).... 4,928 4,692 5,501 -- --
----------- ----------- ----------- ----------- -----------
Total expenses.......................... 14,135 11,026 34,054 20,503 13,603
----------- ----------- ----------- ----------- -----------
Earnings before equity in earnings of
unconsolidated partnership and gain on
sale of land and buildings................ 4,695 4,349 30,719 29,632 19,766
Equity in earnings of unconsolidated
partnership............................... 92 91 367 102 --
Gain on sale of land and buildings.......... 5,043 -- 1,355 651 73
----------- ----------- ----------- ----------- -----------
Net earnings............................ $ 9,830 $ 4,440 $ 32,441 $ 30,385 $ 19,839
=========== =========== =========== =========== ===========
OTHER DATA:
Common stock outstanding at end of period... 30,033,278 29,184,762 29,521,089 27,953,627 20,763,672
Total properties at end of period........... 272(3) 240(3) 285(3) 236(3) 195
Total gross leasable area (Sq. Ft. in
thousands)................................ 5,974(3) 4,402(3) 5,503(3) 4,318(3) 3,053
EBITDA(4)................................... $ 16,564 $ 13,791 $ 57,009 $ 46,911 $ 30,720
Ratio of EBITDA to interest expense......... 3.47 4.60 4.24 4.09 4.26
Ratio of earnings to fixed charges(5)....... 3.75 3.60 3.41 3.43 3.49
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------- ------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate assets, total purchase price................ $704,662 $541,224 $680,022 $534,688 $371,047
Real estate assets, net................................. $683,928 $524,680 $658,757 $519,724 $361,444
Total assets............................................ $713,593 $552,753 $685,595 $537,014 $370,953
Total liabilities....................................... $322,511 $174,328 $301,705 $174,870 $118,379
Total stockholders' equity.............................. $391,082 $378,425 $383,890 $362,144 $252,574
</TABLE>
(footnotes on following page)
S-11
<PAGE> 12
- ---------------
(1) Effective January 1, 1998, we became internally advised and managed and
commenced paying salaries and benefits to our approximately 63 employees.
Prior to January 1, 1998, we had no employees and paid management and
advisory fees and acquisition and development fees to our external advisor.
(2) On December 15, 1997, our stockholders approved an Agreement and Plan of
Merger with CNL Realty Advisors, Inc. whereby the stockholders of CNL Realty
Advisors agreed to exchange 100% of the outstanding shares of common stock
of CNL Realty Advisors for up to 2,200,000 shares of our common stock. As of
March 31, 1999, we have issued 650,000 shares and incurred expenses of
$10,429,000.
(3) Excludes nine properties owned by a limited partnership in which we own a 20
percent general partnership interest.
(4) EBITDA represents net income before interest expense, income taxes,
depreciation and amortization. EBITDA is not intended to represent cash flow
from operations as defined by GAAP and you should not consider it as an
alternative to cash flow as a measure of liquidity or as an alternative to
net earnings as an indicator of operating performance. EBITDA is included in
this prospectus supplement because management believes that certain
investors find it to be a useful tool for measuring a company's ability to
service its debt. EBITDA as calculated by us may not be comparable to
calculations as presented by other companies, even in the same industry.
(5) 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-12
<PAGE> 13
RISK FACTORS
In addition to the other information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus, you should
carefully review the following considerations in determining whether to purchase
the notes.
RELIANCE ON MANAGEMENT
We depend upon the services of Mr. Seneff, as Chairman of the Board of
Directors and Chief Executive Officer, and of Gary M. Ralston, as President.
Loss of the services of either of Mr. Seneff or Mr. Ralston could have a
material adverse effect on our business and financial condition. We have entered
into employment agreements with both Mr. Seneff and Mr. Ralston. Our agreement
with Mr. Seneff does not require that he devote all of his efforts to us nor is
it expected that he will devote all of his efforts to us.
TENANT CONCENTRATION; TENANT BANKRUPTCY
Eckerd Drug accounted for approximately 13.7 percent of the annualized base
rental income from our properties (which we call base rent) as of March 31,
1999. Our next five largest tenants (Barnes & Noble, OfficeMax, Best Buy, Good
Guys and Academy), in terms of base rent as of March 31, 1999, accounted for an
aggregate of approximately 31.9 percent of base rent. The default, financial
distress or bankruptcy of one or more of these tenants could cause vacancies
among certain of our properties. Such vacancies would reduce our revenues until
we were able to re-let the affected properties, and could decrease the ultimate
sale value of each such property. Upon the expiration of the leases that are
currently in place, we may not be able to re-lease a vacant property at a
comparable lease rate or without incurring additional expenditures in connection
with such re-leasing.
CONFLICTS OF INTEREST
Mr. Seneff manages numerous business ventures, and his responsibilities to
these other ventures will reduce the amount of time that he may devote to us.
INDEBTEDNESS FINANCING RISKS
While our organizational documents do not limit the level or amount of debt
that we may incur, it is our current policy to maintain a ratio of total
indebtedness to total assets (before accumulated depreciation) of not more than
50 percent. However, this policy is subject to reevaluation and modification by
the Board of Directors. If the Board of Directors modifies this policy to permit
a higher degree of leverage and we incur additional indebtedness, debt service
requirements would increase accordingly. Such an increase could adversely affect
our financial condition and results of operations. In addition, increased
leverage could increase the risk that we may default on our debt obligations,
with resulting losses to our cash flow and asset value.
We are subject to the risks associated with debt financing. These risks
include the risks that we may be unable to generate sufficient cash through our
operating activities to meet required payments of principal and interest and
that rising interest rates may cause the rate of our variable rate credit
facility to rise. In addition, we may not be able to repay or refinance existing
indebtedness (which generally will not have been fully amortized at maturity) or
refinance existing indebtedness at terms that are as favorable as the terms of
existing indebtedness. In the event that we are unable to secure financing of
such indebtedness on acceptable terms, we may be forced to resort to
alternatives that may adversely affect our ability to generate cash to pay our
debt service obligations, such as disposing of properties on disadvantageous
terms (which may also result in losses) and obtaining financing at unfavorable
terms.
S-13
<PAGE> 14
GENERAL REAL ESTATE RISKS
Uncontrollable Factors Affecting Performance and Value. Changes in general
national, regional and local economic and market conditions may affect our
economic performance and the value of our real estate assets. 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, our ability to adjust our portfolio promptly in
response to economic or other conditions is limited. Certain significant
expenditures, such as debt service (if any), real estate taxes, and operating
and maintenance costs, generally do not change in response to economic or other
conditions. This combination of variable revenue and relatively fixed
expenditures may result, under certain market conditions, in reduced income from
investment. Such reduction in investment income could have an adverse effect on
our financial condition and results of operations.
Environmental Matters. Under various federal, state and local laws and
regulations, current and/or prior owners of real property may be liable for the
costs of removal or remediation of certain hazardous substances or petroleum.
Such liability may be imposed without regard to the owner's knowledge of, or
responsibility for, such hazardous substances or petroleum. It is our policy, as
part of our acquisition due diligence process, to obtain at least a Phase I
environmental site assessment for each property. Other than 20 properties which
we acquired under agreements executed before Phase I environmental site
assessments became common practice, all of our properties have been subjected to
Phase I environmental site assessments. The 20 properties which were not
subjected to Phase I site assessment are now leased to Golden Corral
Corporation. To determine the status of the Golden Corral properties, we hired
an environmental consultant in 1994 to review environmental regulatory databases
containing a compilation of information by federal and state environmental
agencies regarding sites reported to be contaminated. The consultant advised us
that none of the Golden Corral properties were identified in those databases at
that time. Since we focus on acquiring properties located within intensive
commercial corridors, certain of the properties are located near or adjacent to,
or themselves have or may have contained, businesses using storage tanks or
solvents or other chemicals. In certain instances, evaluation, removal or
remediation of these conditions are ongoing. We cannot assure that we are aware
of all adverse conditions relating to the properties or that the costs of
addressing adverse environmental conditions would not be material. See
"Strategies -- Operating Strategies -- Perform Extensive Site Selection and
Property Acquisition Analysis."
Certain Continuing Obligations to Tenants. While our leases are typically
triple-net leases, and generally also provide that the tenant is responsible for
all costs associated with a property, including repairs, certain leases require
that we have the obligation to make structural and roof repairs. In addition,
certain leases have certain workmanship and design covenants that we are
required to perform in the event that the general contractor fails to build the
properties to the designed specifications.
ACQUISITION/DEVELOPMENT RISKS
We cannot assure that we will be able to implement our investment
strategies successfully. Additionally, we cannot assure that our property
portfolio will expand at all, or if it will expand 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, we expect to finance investments
with funds drawn under our credit facility, which would subject the company to
the risks described at "-- Indebtedness Financing Risks." Because we expect to
invest in markets other than the ones in which our current properties
S-14
<PAGE> 15
are located, we will also be subject to the risks associated with investment in
new markets that may be relatively unfamiliar to our management. 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 we engage in development activities, we 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 our control, such as weather or
labor conditions or material shortages) and the ability to obtain both
construction and permanent financing on favorable terms. These risks could
result in substantial unanticipated delays or expenses and, under certain
circumstances, could either prevent completion of development activities once
undertaken or provide a tenant the opportunity to terminate a lease. Any of
these situations could have an adverse effect on our financial condition and
results of operations and on the amount of funds available for distribution to
stockholders.
PENDING LITIGATION
We are a co-defendant in a lawsuit filed on December 10, 1998 in the United
States District Court for the District of Puerto Rico. The plaintiff is alleging
that we are in breach of a ground lease agreement with the plaintiff regarding a
land parcel owned by the plaintiff who is seeking damages of $7,500,000 and/or
specific performance of the execution of the ground lease. We believe that we
will prevail in this suit and intend to vigorously defend our position. If we
were to be held liable for the total damages sought, it could materially affect
the our earnings.
FEDERAL INCOME TAX RISKS -- FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST
We intend to operate in a manner that will allow us to continue to qualify
as a real estate investment trust. Although we believe that we have been
organized as, and our past and present operations qualify us as, a real estate
investment trust, we cannot assure you that this is true, or that we will remain
qualified as a real estate investment trust in the future. This is because
qualification as a real estate investment trust involves the application of
highly technical and complex Internal Revenue Code provisions for which there
are only limited judicial or administrative interpretations and involves the
determination of various factual matters and circumstances not entirely within
our control.
If we fail to qualify as a real estate investment trust, we will not be
allowed a deduction for distributions to stockholders in computing taxable
income and would become subject to federal income tax at regular corporate rates
in the year of disqualification. In this event, we could be subject to
potentially significant tax liabilities, and the amount of cash available for
distribution to stockholders would be reduced and possibly eliminated. Unless
entitled to relief under certain statutory provisions, we would also be
disqualified from treatment as a real estate investment trust for the four
taxable years following the year during which qualification was lost.
LACK OF PUBLIC MARKET FOR THE NOTES
The notes are a new issue of securities for which there are currently no
active trading markets. 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 our financial
condition, performance, and prospects. We cannot assure the development of any
market, or the liquidity of any market that may develop, for the notes. We do
not intend to apply for listing of the notes on any securities exchange or for
quotation on the Nasdaq National Market.
S-15
<PAGE> 16
YEAR 2000 COMPLIANCE
Significant uncertainty exists in the software industry concerning the
potential effects associated with "Year 2000" issues. In 1997, we initiated a
review and assessment of our hardware and software to confirm that it will
function properly in processing dates pertaining to the Year 2000. Our core
processing software vendor and the majority of our other vendors have
represented to us that they believe their hardware and software are or will be
Year 2000 compliant before the end of 1999. We are currently in the process of
arranging for independent testing of our hardware and software for compliance to
be substantially completed before the end of 1999. There can be no assurance
that our software contains all necessary date code changes. Our failure to
comply with Year 2000 requirements may disrupt our ability to conduct business
or otherwise service our customers. We do not currently expect that the costs
related to Year 2000 requirements will be material to our financial condition or
results of operation. However, our ability to predict the costs associated with
Year 2000 compliance is subject to some uncertainties, and we may incur
additional unexpected expenditures in connection with Year 2000 compliance,
which could be material. For more information, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" incorporated by
reference herein and in the accompanying Prospectus.
FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made in this prospectus
supplement under the captions "Summary," "Risk Factors" and "The Company," and
elsewhere in this prospectus supplement are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When we use the
words "anticipate," "assume," "believe," "estimate," "expect," "intend," and
other similar expressions in this prospectus supplement, they are generally
intended to identify forward-looking statements. You should not rely on
forward-looking statements since they involve known and unknown risks,
uncertainties and other factors which are, in some cases, beyond our control and
which could materially affect our actual results, performance or achievements.
USE OF PROCEEDS
The net proceeds from the offering are estimated to be approximately
$ million, after deducting estimated expenses and discounts from the
offering. The Company intends to use the net offering proceeds to repay
$ million outstanding under its credit facility. After this repayment,
the Company will have approximately $ million outstanding and
approximately $ million available for future borrowings under the
credit facility as of . Borrowings outstanding under the Credit
Facility, which expires on July 30, 2000, currently bear interest at a rate of
LIBOR plus 1.25 percent.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the quarter ended
March 31, 1999 was 3.75 and for the years ended December 31, 1998, 1997, 1996,
1995 and 1994 was 3.41, 3.43, 3.49, 4.06 and 12.86, 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 the amortization of debt expense and discount or premium
relating to any indebtedness, whether expensed or capitalized.
S-16
<PAGE> 17
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of March 31, 1999 and the capitalization of the Company as of that date as
adjusted to reflect the sale of the notes offered hereby and the application of
the estimated net proceeds as described in "Use of Proceeds." The information
set forth in the following table should be read in conjunction with the summary
financial information presented elsewhere in this prospectus supplement and the
Consolidated Financial Statements (including the notes thereto) incorporated by
reference herein and in the accompanying prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
DEBT:
Credit Facility...................................... $161,100 $
Mortgages payable.................................... 54,618
Notes due 2008....................................... 99,749
Notes due 200 ......................................
-------- --------
Total debt................................... $315,467 $
-------- --------
EQUITY:
Preferred stock, $0.01 par value.
Authorized 15,000,000 shares;
none issued and outstanding
Common stock, $0.01 par value.
Authorized 90,000,000 shares;
issued and outstanding 30,033,278................. 300
Excess stock, $0.01 par value.
Authorized 105,000,000 shares;
none issued and outstanding
Capital in excess of par value....................... 393,379
Retained earnings (deficit).......................... (2,597)
-------- --------
Total stockholders' equity........................... 391,082
-------- --------
Total capitalization......................... $706,549 $
======== ========
</TABLE>
THE COMPANY
The Company is a fully integrated real estate investment trust (a "REIT")
that acquires, owns, manages and indirectly develops a diversified portfolio of
high-quality, single-tenant, freestanding properties leased to major retail
businesses generally under full-credit, long-term commercial net leases (each a
"Property" and collectively, the "Properties"). As of March 31, 1999, the
Company owned 272 Properties and a 20 percent general partnership interest in
nine additional Properties held in an unconsolidated partnership. The Company
acquired these Properties for an aggregate purchase price of approximately $734
million. The Properties have an annualized cash on cost return (on an inclusive
cost basis) of approximately 10.1 percent. The Properties are leased to 56
tenants in 35 states and contain an aggregate of approximately 6.2 million
square feet of gross leasable area ("GLA").
The Company acquires, owns, manages and indirectly develops freestanding
properties leased to single tenants. The Properties typically are located within
intensive commercial traffic corridors near traffic generators such as regional
malls, business developments and major thoroughfares. Manage-
S-17
<PAGE> 18
ment believes that properties with these characteristics are desired by tenants
because they offer high visibility to passing traffic, ease of access, tenant
control over the site's hours of operation and maintenance standards and
distinctive building design which promotes greater customer identification. In
addition, management believes that freestanding properties permit tenants to
open new stores quickly due to the shorter development cycles generally
associated with such properties and provide tenants with flexibility in
responding to changing retail trends.
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 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, 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. This format offers
consumers 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.
OPERATING STRATEGIES
Underwrite Full-Credit, Long-Term Net Leases. To avoid initial lease-up
risks, the Company generally acquires only properties which are fully leased
under a long-term, full-credit lease. Management believes that the Company's
emphasis on full-credit, long-term, triple-net leases will produce a predictable
long-term income stream. The properties currently in the Company's Property
portfolio generally were leased for 10 to 20 year periods, with renewal options
for an additional 10 to 20 years. Leases accounting for approximately 85 percent
of base rent as of March 31, 1999, have initial terms extending until at least
December 31, 2009. 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 principle
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.
Develop and Maintain Relationships with Quality Tenants. Management seeks
to develop and maintain long-term working relationships with established retail
companies by providing build-to-suit services and sale/leaseback financing on
multiple properties to target retailers on a national basis, thereby adding
additional efficiency and value to retailers and the Company. Management targets
S-18
<PAGE> 19
tenants whose competitive position and financial strength should enable them to
meet their obligations throughout the leases' terms and to obtain the best
possible underlying credit quality by requiring the corporate parent of the
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
affiliates of 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 tenants based throughout the
United States 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.
Minimize Investment Risk Through Diversification of Line of
Business/Geographic Location. 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.
Perform Extensive 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 at least 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 7,500 square feet of GLA.
In the event that an environmental site assessment identifies an adverse
environmental condition which the Company believes is not material, the Company
may proceed to purchase the property but generally will require that the
condition be removed or remediated prior to its purchase, or that other
S-19
<PAGE> 20
arrangements be made to address environmental conditions at the property after
closing. Despite these arrangements, there can be no assurance that the Company
will not be required to incur material costs to address contamination at any of
its properties. See also "Risk Factors -- General Real Estate
Risks -- Environmental Matters."
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. In addition, due
to the short development cycles generally associated with such properties
(approximately six to 12 months), this format provides tenants flexibility in
responding to changing retail trends and permits faster development for new
stores. This enables the Company's tenants to add new stores quickly.
Properties acquired by the Company generally are newly constructed as of
the time of acquisition. The Company generally acquires its properties from the
developer, 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.
Offer Tenants Build-to-Suit Development Capabilities. In connection with
the Company's acquisition of CNL Realty Advisors, its external advisor, the
Company acquired the advisor's development capabilities. On May 1, 1999, the
Company contributed the development business and invested $10.9 million of debt
and equity in Commercial Net Lease Realty Services, Inc. in exchange for shares
of preferred stock and nonvoting common stock. The purpose of the transaction
was to provide the Company with greater flexibility in providing build-to-suit
development services for its existing tenants and for unrelated third parties
and still comply with the regulations necessary to allow the Company to maintain
its qualification as a real estate investment trust. The Company also has
extended a $30 million line of credit to Commercial Net Lease Realty Services
for the purposes of acquiring and developing retail properties. Any
disbursements under the line of credit will be secured by a mortgage on the
properties acquired. Upon completing the development and construction of a
property, Commercial Net Lease Realty Services may sell the completed property
to the Company or to an unrelated third party and retain a development fee. We
may receive dividends on our investment in Commercial Net Lease Realty Services.
S-20
<PAGE> 21
Active Management of Assets. The Company actively manages its portfolio of
Properties to maintain and maximize its value. The Company regularly monitors
tenants' compliance with the Company's leases, particularly the lease
requirements relating to maintenance of the Property and the obligation to pay
property taxes and insurance, and annually evaluates property inspection
reports. As part of its evaluation, the 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 March 31, 1999, leases in the Company's
Property portfolio representing approximately 82 percent of Base Rent included
contractual increases in base rent; leases representing approximately 29 percent
of Base Rent included percentage rent provisions; and leases representing
approximately 19 percent of Base Rent included both contractual increases in
base rent and percentage rent provisions. See "Properties -- Description of
Leases." For the quarter ended March 31, 1999, percentage rent was approximately
$133,000 (approximately 0.7 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.
Completed Property Acquisitions. The Company's predominant growth strategy
is to continue to acquire freestanding retail properties, leased primarily to
"category killer" retailers or other major national or regional businesses, at
rental rates which generate returns higher than the Company's blended cost of
capital. Additionally, the Company expects to grow, through its relationship
with Commercial Net Lease Realty Services, Inc., by providing build-to-suit
development for its existing tenants and for unrelated third parties. Between
January 1, 1999 and March 31, 1999, the Company invested an aggregate amount of
$62.5 million (on an inclusive cost basis) to acquire 26 Properties, purchase
two new buildings constructed by a tenant on previously acquired land parcels,
complete construction of five buildings on previously acquired land parcels and
fund construction in progress on nine projects.
FINANCING STRATEGIES
Sources of Capital for Acquisitions. The Company generally utilizes its
$200 million credit facility (the "Credit Facility") to fund property
acquisitions. Among other things, the Credit Facility, which expires in July
2000, 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 whatever 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 a
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 (total
purchase price before accumulated depreciation) of not more than 50 percent.
Based on the Company's balance sheet as of
S-21
<PAGE> 22
March 31, 1999, the Company's total indebtedness as a percentage of total assets
(total purchase price before accumulated depreciation) was approximately 44
percent.
PROPERTIES
THE PROPERTIES
As of March 31, 1999, the Company had an ownership interest in 281
net-leased Properties or Properties under development located in 35 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 five years. The
aggregate GLA of the Company Property portfolio is approximately 6.2 million
square feet and buildings in the Company Property portfolio generally range in
size from approximately 1,000 square feet to approximately 110,000 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 diversification and geographic
diversification by region as of March 31, 1999:
Diversification by Retail Line of Business
March 31, 1999
<TABLE>
<CAPTION>
PERCENT
OF TOTAL
CURRENT
NUMBER OF GLA PERCENT OF CURRENT ANNUAL ANNUAL
RETAIL SPECIALTY PROPERTIES (SQ. FT.) TOTAL GLA BASE RENT(1) BASE RENT
---------------- ---------- --------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Drug Stores............................ 55 524,575 8.44% $ 9,937,243 13.74%
Books.................................. 19 543,677 8.75% 9,647,136 13.34%
Consumer Electronics................... 17 541,178 8.71% 8,347,418 11.54%
Grocery Stores......................... 24 760,072 12.23% 7,899,894 10.92%
Sporting Goods......................... 17 843,649 13.58% 6,651,826 9.19%
Home Furnishings....................... 16 461,809 7.43% 6,173,062 8.53%
Office Supplies........................ 20 460,443 7.42% 6,112,894 8.45%
Furniture.............................. 24 773,809 12.45% 5,614,912 7.76%
Restaurants............................ 34 208,557 3.36% 2,997,287 4.14%
Discount Store Chains.................. 10 435,826 7.01% 2,002,110 2.77%
Auto Supplies.......................... 24 196,022 3.15% 1,788,756 2.47%
Computer and Computer Software......... 4 73,957 1.19% 1,358,667 1.88%
Apparel................................ 2 62,500 1.01% 893,236 1.23%
Home Improvement....................... 2 112,875 1.82% 708,789 0.98%
Pet Supplies........................... 2 40,340 0.65% 687,275 0.95%
Convenience Stores..................... 2 5,951 0.10% 395,400 0.55%
Shoe Stores............................ 1 16,500 0.27% 384,909 0.53%
Craft Stores........................... 1 26,304 0.42% 341,956 0.47%
Childrens' Apparel & Accessories....... 1 40,000 0.64% 304,000 0.42%
Video Tapes & Games Rental............. 1 6,500 0.10% 102,245 0.14%
Party Supplies (5)..................... 1 -- 0.00% -- 0.00%
Excess or Vacant Properties............ 4 78,860 1.27% -- 0.00%
--- --------- ------ ----------- ------
SUBTOTALS.................... 281 6,213,404 100.00% $72,349,015 100.00%
=== ========= ====== =========== ======
(2)(3)(4) (3)(4) (3)(4)
</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 nine properties under construction. In
addition, with respect to five of these properties, we own only the
underlying land, which we lease to the tenants.
(footnotes continued on following page)
S-22
<PAGE> 23
(3) Includes nine properties with 239,477 square feet of gross leasable "area"
or "space" and $3.2 million of base rent owned by a limited partnership in
which we own a 20% general partnership interest.
(4) Excludes gross leasable "area" or "space" and base rent attributed to the
buildings under construction discussed in footnote (2) above.
(5) As of March 31, 1999, the Party City property was under construction and we
were not receiving any base rent. In April, the building, which contains
12,000 square feet of gross leasable "area" or "space," was completed and
the lease became effective providing for $189,000 of annualized base rent.
Geographic Diversification by Region
March 31, 1999
<TABLE>
<CAPTION>
PERCENT OF
CURRENT
NUMBER OF GLA PERCENT OF CURRENT ANNUAL ANNUAL
REGION PROPERTIES (SQ. FT.) TOTAL GLA BASE RENT BASE RENT
------ ---------- --------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Southeast.............................. 79 1,665,416 26.81% $20,249,819 27.99%
South.................................. 103 1,997,574 32.15% 17,849,118 24.67%
Northeast.............................. 38 1,125,422 18.11% 14,057,536 19.43%
West................................... 31 668,554 10.76% 11,838,079 16.36%
Midwest................................ 23 628,866 10.12% 6,784,963 9.38%
Rocky Mountain......................... 7 127,572 2.05% 1,569,500 2.17%
--- --------- ------ ----------- ------
TOTALS....................... 281 6,213,404 100.00% $72,349,015 100.00%
=== ========= ====== =========== ======
</TABLE>
DESCRIPTION OF LEASES
The Company's leases are generally "triple-net" leases. Under a triple-net
lease, the tenant bears responsibility for substantially all property costs and
expenses associated with ongoing maintenance and operation, including utilities,
property taxes and insurance. The Company's leases are considered "full-credit"
leases because they do not typically limit the Company's recourse against the
tenant and any guarantor in the event of a default.
Initial lease terms for the Properties typically are, or are expected to
be, 10 to 20 years, with renewal options for an additional 10 to 20 years (in
the aggregate). As of March 31, 1999, the weighted average remaining initial
lease term with respect to the Properties was approximately 14.6 years. Leases
accounting for approximately 85 percent of annualized base rent as of March 31,
1999 have initial lease terms extending until at least December 31, 2009.
THE ACQUISITION PROCESS
The Company acquires its properties from either the retail entities that
occupy such properties or from the 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
S-23
<PAGE> 24
leases the land back to the tenant during the construction period under a
contractual arrangement which requires the tenant to develop the property and to
sell the completed improvements to the Company at a future date at a cost not to
exceed a predetermined budgeted amount. In these instances, the lease executed
at the time the land is purchased by the Company is structured to provide the
Company with a specified rate of return based on the Company's total cost in
purchasing the property. The development of these properties generally is
completed within 12 months of entering into the ground 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 and fund part of
construction costs.
Acquisitions from Developers. The Company occasionally acquires an
existing property, subject to a long-term lease, from the owner or developer of
the property. In these instances, the seller is often motivated to receive cash
for the value created through the successful development and leasing of the
property. While the Company buys such a property based on the intrinsic value of
the lease in place, it sometimes is able to renegotiate the terms of the lease
with the tenant, thereby increasing the value of the property. The Company is
able to renegotiate such leases largely as a result of its extensive retail
relationships and its knowledge of the net-lease business. See "Strategies --
Operating Strategies -- Perform Extensive Site Selection and Property
Acquisition Analysis."
CERTAIN TRANSACTIONS
The Company serves as the manager of Net Lease Institutional Realty, L.P.
(the "Partnership), a limited partnership in which the Company holds a 20
percent general partnership interest. Pursuant to a management agreement, the
Partnership paid the Company $55,000 in asset management fees during the quarter
ended March 31, 1999, and $218,000 in asset management fees during the year
ended December 31, 1998.
In March 1999, the Company sold 38 of its properties to CNL American
Properties Fund, Inc. ("APF") for a total of $36,568,000 and received net
proceeds of $36,173,000, resulting in a gain of $5,363,000 for financial
reporting purposes. Mr. Seneff, the Chairman and Chief Executive Officer of the
Company, and Robert A. Bourne, the Vice Chairman of the Company, are members of
the board of directors of APF. This transaction was negotiated on behalf of the
Company by the independent directors of the Board who engaged an investment bank
to market the portfolio and to provide a valuation of the subject properties.
During the quarter ended March 31, 1999, the Company provided certain
development services for an affiliate of James M. Seneff, Jr., the Chairman of
the Board of Directors and Chief Executive Officer of the Company, and received
market-rate development fees of $990,000.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
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
S-24
<PAGE> 25
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 always has owned 100 percent
of the stock of the corporation.
The Act also changed the maximum tax rates on capital gains applicable to
noncorporate taxpayers. For capital gain taken into account after December 31,
1997, the maximum tax rate on long-term capital gains applicable to noncorporate
taxpayers is 20 percent for sales and exchanges of assets held for more than one
year. 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 or 25 percent rate.
TAXATION OF THE NOTES
Subject to the preliminary considerations set forth in the prospectus, the
following is a general discussion of the material U.S. federal income tax
considerations applicable to initial holders of the % Notes due 200 (the
"Notes"). Except as specifically provided below with respect to Non-U.S. Holders
(as defined below), the discussion is limited to holders of Notes that are U.S.
Holders. For purposes of this discussion, a "U.S. Holder" is generally any
person other than a nonresident alien individual, a foreign trust or estate or a
foreign partnership or corporation. A "Non-U.S. Holder" means any beneficial
owner of a Note that is not a U.S. Holder.
Interest on the Notes. A U.S. Holder of the Notes generally will be
required to report interest earned on the Notes as ordinary income in accordance
with such U.S. Holder's method of tax accounting.
Disposition of the Notes. Upon the sale, exchange, redemption, retirement
or other disposition of the Notes, a U.S. Holder will generally recognize
capital gain or loss equal to the difference (if any) between the amount
realized (other than amounts attributable to accrued but unpaid stated interest
which will be taxable as ordinary income) and such U.S. Holder's tax basis in
the Note. The U.S. Holder's tax basis for a Note generally will be the purchase
price for the Note. Such gain or loss shall be treated as long-term capital gain
or loss if the Note was held for more than one year.
Non-U.S. Holders. The rules governing the United States federal income
taxation of Non-U.S. Holders are complex and no attempt will be made herein to
provide more than a summary of such
S-25
<PAGE> 26
rules. Prospective Non-U.S. Holders should consult with their own tax advisors
to determine the impact of federal, state and local laws with regard to the
Notes.
Generally, a Non-U.S. Holder generally will not be subject to U.S. federal
income or withholding tax on payments of interest on a Note, provided that (i)
the Non-U.S. Holder is not (A) a direct or indirect owner of 10% or more of the
total voting power of all voting stock of the Company or (B) a controlled
foreign corporation related to the Company through stock ownership; (ii) such
interest payments are not effectively connected with the conduct by the Non-U.S.
Holder of a trade or business within the United States; (iii) the Company or its
paying agent receives certain information from the Non-U.S. Holder (or a
financial institution that holds the Notes in the ordinary course of its trade
or business) certifying that such holder is a Non-U.S. Holder; and (iv) the Non-
U.S. Holder is not subject to backup withholding (as described in the
prospectus). Generally a Non-U.S. Holder will not be subject to U.S. federal
income or withholding tax on gains from the sale or other disposition of a Note
provided that (i) such gains are not effectively connected with the conduct by
the Non-U.S. Holder of a trade or business within the United States; (ii) such
Non-U.S. Holder is not an individual who is present in the United States for 183
days or more in the taxable year of disposition and meets certain other
requirements; and (iii) the Non-U.S. Holder is not subject to backup withholding
(as described in the prospectus).
The Company will also report to its Noteholders and the IRS the amount of
interest paid during each calendar year, and the amount of tax withheld, if any.
A Noteholder may be subject to backup withholding at a 31 percent rate with
respect to interest paid if it fails to provide the Company with a Form W-8 and
if the requirements described in the prospectus are not met. The Backup
Withholding Final Regulations generally will be effective with respect to
payments made after December 31, 2000.
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 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 25, 1998 (the "Original Indenture"), as
supplemented by Supplemental Indenture No. 2 dated as of June , 1999 (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 Notes will be limited to an aggregate principal amount of $ .
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
S-26
<PAGE> 27
encumbered or indirectly-held properties. Holders of the Notes will not have
recourse against any shareholder of the Company for the repayment of the Notes.
As of March 31, 1999, on a pro forma basis after giving effect to the
offering, the Company would have had approximately $ million of
indebtedness, of which approximately $ million would have been secured
by 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.
PRINCIPAL AND INTEREST
The Notes will bear interest at % per annum and will mature on
, 200 . The Notes will bear interest from
, 1999 or from the immediately preceding Interest Payment Date (as
defined below) to which interest has been paid, payable semiannually in arrears
on and of each year, commencing
, 1999 (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 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 and the Notes
may be exchanged or surrendered at the corporate trust office of the agent of
the Trustee (the "Paying Agent") in the City of Charlotte, North Carolina,
initially located at 1525 West W.T. Harris Boulevard, 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 less than 30 days nor
more than 60 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.
S-27
<PAGE> 28
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 Note, 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 Notes
being redeemed or paid.
"Reinvestment Rate" means .25 percent (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.
S-28
<PAGE> 29
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% 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 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
S-29
<PAGE> 30
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 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
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.
"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
S-30
<PAGE> 31
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, extraordinary items and property
valuation losses and (ii) costs and expenses associated with the Advisor
Transaction, 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 (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
shareholders of CNL Realty Advisors, Inc. as a result of the Advisor
Transaction, reasonable attorney's and accountants' fees, and miscellaneous
other expenses incurred by the Company in connection therewith).
"Encumbrance" means any mortgage, lien, charge, pledge or security interest
of any kind.
"GAAP" means generally accepted accounting principles as used in the United
States applied on a consistent basis as in effect from time to time; provided
that solely for purposes of any calculation required by the financial covenants
contained in the Indenture, "GAAP" shall mean generally accepted accounting
principles as used in the United States on the date of the Indenture, applied on
a consistent basis.
"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, (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,
or (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 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).
"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.
S-31
<PAGE> 32
"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 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:
- 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;
- default in the payment of the principal of (or Make-Whole Amount, if any,
on) any Notes when due and payable;
- 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;
- 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;
- 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
- 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 last bullet above, relating to the
Company or any Significant Subsidiary occurs, the principal amount of and the
Make-Whole Amount on all outstanding Notes
S-32
<PAGE> 33
shall become due and payable without any declaration or other act on the part of
the Trustee or of the Holders.
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 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 interest in 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
S-33
<PAGE> 34
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 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 shareholder, 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
issue of the Notes.
S-34
<PAGE> 35
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and CNLR has agreed to sell to such underwriter, the principal amount
of notes set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME OF NOTES
---- ----------------
<S> <C>
J.P. Morgan Securities Inc. ................................
Salomon Smith Barney Inc. ..................................
First Union Capital Markets Corp. ..........................
Goldman, Sachs & Co. .......................................
------------
Total............................................. $ 00,000,000
============
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the notes included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the notes if they purchase any of
the notes.
The underwriters, for whom J.P. Morgan Securities Inc., Salomon Smith
Barney Inc., First Union Capital Markets Corp. and Goldman, Sachs & Co. are
acting as representatives, propose to offer some of the notes directly to the
public at the public offering price set forth on the cover page of this
prospectus supplement and some of the notes to certain dealers at the public
offering price less in concession not in excess of % of the principal
amount of the notes. The underwriters may allow, and such dealers may allow a
concession not in excess of % of the principal amount of the notes on sales
to certain other dealers. After the initial offering of the notes to the public,
the public offering price and such concessions may be changed by the
representatives.
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by CNLR in connection with this offering (expressed as
a percentage of the principal amount of the notes).
<TABLE>
<CAPTION>
PAID BY CNLR
------------
<S> <C>
Per Note.................................................... %
</TABLE>
In connection with the offering, J.P. Morgan Securities Inc. and Salomon
Smith Barney Inc., on behalf of the underwriters, may purchase and sell notes in
the open market. These transactions may include over-allotment, syndicate
covering transactions and stabilizing transactions. Over-allotment involves
syndicate sales of notes in excess of the principal amount of notes to be
purchased by the underwriters in the offering, which creates a syndicate short
position. Syndicate covering transactions involve purchases of the notes in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of notes made for the purpose of preventing or retarding a decline in
the market price of the notes while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when either
J.P. Morgan Securities Inc. or Salomon Smith Barney Inc., in covering syndicate
short positions or making stabilizing purchases, repurchases notes originally
sold by that syndicate member.
Any of these activities may cause the price of the notes to be higher than
the price that otherwise would exist in the open market in the absence of such
transactions. These transactions may be effected in the over-the-counter market
or otherwise and, if commenced, may be discontinued at any time.
S-35
<PAGE> 36
CNLR estimates that its total expenses of this offering will be $900,000.
The representatives have performed certain investment banking and advisory
services for CNLR from time to time for which they have received customary fees
and expenses. The representatives may from time to time, engage in transactions
with and perform services for CNLR in the ordinary course of their business.
First Union National Bank (an affiliate of First Union Capital Markets Corp.) is
a lender on CNLR's $200 million dollar unsecured credit facility. The net
proceeds from this offering will be used to reduce borrowings under the credit
facility, and First Union National Bank will receive its proportionate share of
such repayment. See "Use of Proceeds." In addition, First Union National Bank
will act as Trustee under the Indenture and will receive customary fees for its
services.
CNLR has agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
LEGAL MATTERS
Certain legal matters, including the legality of the Notes being offered
hereby, are being passed upon for the Company by Shaw Pittman, Washington, D.C.,
a partnership including professional corporations. Certain legal matters related
to the offering are being passed upon for the Underwriters by Willkie Farr &
Gallagher, New York, New York.
S-36
<PAGE> 37
[COMMERCIAL NET LEASE REALTY LOGO]
$300,000,000
COMMERCIAL NET LEASE REALTY, INC.
DEBT SECURITIES, PREFERRED STOCK, DEPOSITARY SHARES,
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)
Preferred Stock, par value $0.01 per share (the "Preferred Stock"), (iii)
Preferred Stock represented by depositary shares (the "Depositary Shares"), (iv)
Common Stock, par value $0.01 per share (the "Common Stock"), or (v) 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, Preferred Stock, Depositary Shares,
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 certificated 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 Preferred Stock, the designation
of any series, any dividend, liquidation, redemption, sinking fund, conversion,
voting and other rights, preferences and limitations, and the public offering
price; (iii) in the case of Depositary Shares, the number of whole or fractional
shares of Preferred Stock represented by each such Depositary Share; (iv) in the
case of Common Stock, any public offering price; and (v) 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 OCTOBER 22, 1998.
<PAGE> 38
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, that 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 documents listed below have been filed by the Company under the
Exchange Act (Exchange Act file number 0-12989) with the Commission and are
incorporated herein by reference:
a. Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
b. Current Report on Form 8-K dated February 18, 1998, filed by the
Company with the Commission on February 19, 1998.
c. Current Report on Form 8-K dated March 20, 1998, filed by the
Company with the Commission on March 20, 1998.
d. Current Report on Form 8-K dated March 24, 1998, filed by the
Company with the Commission on March 26, 1998.
e. Current Report on Form 8-K dated March 25, 1998, filed by the
Company with the Commission on March 26, 1998.
f. Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
g. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
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
2
<PAGE> 39
that a statement contained herein or in any subsequently filed document which
also is or is deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, on the written
request of any such person, a copy of any or all of the documents incorporated
herein by reference, except the exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). Requests for such
copies should be directed to Kevin B. Habicht, Commercial Net Lease Realty,
Inc., 455 South Orange Avenue, Suite 700, Orlando, Florida 32801 (telephone
number: (407)265-7348).
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
June 30, 1998, the Company owned 254 properties and a 20 percent ownership
interest in nine additional properties held in an unconsolidated partnership
(together, the "Properties"). The Properties were acquired for an aggregate
purchase price of approximately $605 million and having an annualized cash on
cost return (on an Inclusive Cost basis as defined below) of approximately
10.1%. 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 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
$10 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 returns 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 upon
expiration or early termination of the related leases.
Properties acquired by the Company are generally newly constructed or
re-developed 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 typically provide that the
tenant bears responsibility for substantially all property costs and expenses
associated with ongoing maintenance and operation, including utilities, property
taxes and insurance ("triple-net" leases), and generally also provide that the
tenant is responsible for roof and structural repairs. The Company's leases
typically do not limit the Company's recourse against the tenant and any
guarantor in the event of a default and for this reason are considered "full-
credit" leases. The Properties are leased on a long-term basis, generally 10 to
20 years, with renewal options for 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 455 South Orange Avenue,
Suite 700, Orlando, Florida 32801 and the Company's telephone number is
(407)265-7348.
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
3
<PAGE> 40
properties as suitable opportunities arise and the expansion and improvement of
certain properties in the Company's portfolio.
RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to fixed charges for the six months ended
June 30, 1998 was 3.00, and 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. Earnings from
operations for the six months ended June 30, 1998 includes a non-cash charge of
$4.7 million associated with the costs incurred in acquiring the Company's
advisor from an affiliate. Excluding this charge, the ratio of earnings to fixed
charges for the six months ended June 30, 1998 would be 3.70. There were no
shares of Preferred Stock outstanding for any of the periods shown above.
Accordingly, the ratio of earnings to combined fixed charges and Preferred Stock
dividends is identical to the ratio of earnings to fixed charges.
For the purposes of computing these ratios, earnings have been calculated
by adding fixed charges (excluding capitalized interest) to income before taxes.
Fixed charges consist of interest costs, whether expensed or capitalized, and
amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct obligations of the Company, which may be
secured or unsecured, and which may be senior or subordinated indebtedness of
the Company. The Debt Securities may be issued under one or more indentures,
each dated as of a date before the issuance of the Debt Securities to which it
relates and in the form that has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part, subject to such amendments or
supplements as may be adopted from time to time. Each such indenture
(collectively, the "Indenture") will be entered into between the Company and a
trustee (the "Trustee"), which may be the same Trustee. The Indenture will be
subject to, and governed by, the Trust Indenture Act of 1939, as amended. The
statements made hereunder relating to the Indenture and the Debt Securities are
summaries of the provisions thereof, do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all provisions
of the Indenture and such Debt Securities. Capitalized terms used but not
defined herein shall have the respective meanings set forth in the Indenture.
TERMS
The particular terms of the Debt Securities offered by a Prospectus
Supplement will be described in the particular Prospectus Supplement, along with
any applicable modifications of or additions to the general terms of the Debt
Securities as described herein and in the applicable Indenture and any
applicable federal income tax considerations. Accordingly, for a description of
the terms of any series of Debt Securities, reference must be made to both the
Prospectus Supplement relating thereto and the description of the Debt
Securities set forth in this Prospectus.
Except as set forth in any Prospectus Supplement, the Debt Securities may
be issued without limits as to aggregate principal amount, in one or more
series, in each case as established from time to time by the Company's Board of
Directors or as set forth in the applicable Indenture or one or more indentures
supplemental to the Indenture. All Debt Securities of one series need not be
issued at the same time and, unless otherwise provided, a series may be
reopened, without the consent of the holders of the Debt Securities of such
series, for issuance of additional Debt Securities of such series.
Each Indenture will provide that the Company may, but need not, designate
more than one Trustee thereunder, each with respect to one or more series of
Debt Securities. Any Trustee under an Indenture may resign or be removed with
respect to one or more series of Debt Securities, and a successor trustee may be
appointed to act with respect to such series. If two or more persons are acting
as Trustee with respect to
4
<PAGE> 41
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 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;
5
<PAGE> 42
(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.
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
6
<PAGE> 43
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.
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
7
<PAGE> 44
the Company and its subsidiaries will not be prevented from selling or otherwise
disposing for value its properties in the ordinary course of business.
Insurance. The Indenture will require the Company to, and to cause each of
its subsidiaries to, keep or cause to be kept in force upon all of its
properties and operations policies of insurance carried with responsible
companies in such amounts and covering all such risks as shall be customary in
the industry in accordance with prevailing market conditions and availability.
Payment of Taxes and Other Claims. The Indenture will require the Company
to pay or discharge or cause to be paid or discharged (or, if applicable, cause
to be transferred to bond or other security), before the same shall become
delinquent, (a) all taxes, assessments and governmental charges levied or
imposed upon it or any subsidiary or upon the income, profits or property of the
Company or any subsidiary, and (b) all lawful claims for labor, materials and
supplied which, if unpaid, might by law become a lien upon the property of the
Company or any subsidiary, provided, however, that the Company will not be
required to pay or discharge (or transfer to bond or other security) or cause to
be paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity it being contested in good faith by appropriate
proceedings.
Provision of Financial Information. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Indenture will require the
Company, within 15 days after each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
documents with the Commission if the Company were so subject, (a) to transmit by
mail to all holders of Debt Securities, as their names and addresses appear in
the applicable register for such Debt Securities, without cost to such holders,
copies of the annual reports, quarterly reports and other documents that the
Company would have been required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act if the Company were subject to such Sections,
(b) to file with the Trustee copies of the annual reports, quarterly and other
documents that the Company would have been required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act if the Company were subject
to such Sections, and (c) to supply promptly upon written request and payment of
the reasonable cost of duplication and delivery, copies of such documents to any
prospective holder of Debt Securities.
Additional Covenants. Any additional covenants of the Company with respect
to any of the series of Debt Securities will be set forth in the Prospectus
Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the applicable indenture, the Indenture will
provide that the following events are "Events of Default" with respect to any
series of Debt Securities issued thereunder: (a) default for 30 days in the
payment of any installment of interest on any Debt Security of such series; (b)
default in the payment of the principal of (or premium, if any, on) any Debt
Security of such series at its maturity; (c) default in making any sinking fund
payment as required for any Debt Security of such series; (d) default in the
performance of any other covenant of the Company contained in the applicable
Indenture (other than a covenant added to such Indenture solely for the benefit
of a series of Debt Securities issued thereunder other than such series),
continued for 60 days after written notice as provided in such Indenture; (e)
default under any evidence of indebtedness of the Company or any mortgage,
indenture or other instrument under which such indebtedness is issued or by
which such indebtedness is secured which results in the acceleration of
indebtedness in an aggregate principal amount exceeding $10,000,000, but only if
such indebtedness is not discharged or such acceleration is not rescinded or
annulled as provided in the applicable Indenture; (f) certain events of
bankruptcy, insolvency or reorganization, or court appointment of a receiver,
liquidator or trustee, of the Company or of any Significant Subsidiary or of the
respective property of either; and (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
8
<PAGE> 45
declare the principal amount (or, if the Debt Securities of that series are
Original Issue Discount Securities or indexed securities, such portion of the
principal amount as may be specified in the terms thereof) of all of the Debt
Securities of that series to be due and payable immediately by written notice
thereof to the Company (and to the applicable Trustee if given by the holders).
However, at any time after such a declaration of acceleration with respect to
Debt Securities of such series (or of all Debt Securities then outstanding under
such Indenture, as the case may be) has been made, the holders of not less than
a majority in principal amount of Debt Securities of such series (or of each
series of Debt Securities then outstanding under such Indenture, as the case may
be) may rescind and annul such declaration and its consequences if (a) the
Company shall have deposited with such Trustee all required payments of the
principal of (and premium, if any) and interest on the Debt Securities of such
series (or of all Debt Securities then outstanding under such Indenture, as the
case may be), plus certain fees, expenses, disbursements and advances of the
applicable Trustee and (b) all events of default, other than the nonpayment of
accelerated principal (or specified portion thereof) with respect to Debt
Securities of such series (or of all Debt Securities then outstanding under such
Indenture, as the case may be) have been cured or waived as provided in such
Indenture. The Indenture will also provide that the holders of not less than a
majority in principal amount of the Debt Securities of any series (or of each
series of Debt Securities then outstanding under the applicable Indenture, as
the case may be) may waive any past default with respect to such series and its
consequences, except a default (x) in the payment of the principal of (or
premium, if any) or interest on any Debt Security of such series or (y) in
respect of a covenant or provision contained in such Indenture that cannot be
modified or amended without the consent of the holder of each outstanding Debt
Security affected thereby.
The Indenture will provide that the Trustee thereunder is required to give
notice to the holders of Debt Securities issued thereunder within 90 days of a
default under the Indenture unless such default shall have been cured or waived;
provided, however, that such Trustee may withhold notice to the holders of any
such series of Debt Securities of any default with respect to such series
(except a default in the payment of the principal of (or premium, if any) or
interest on any Debt Security of such series or in the payment of any sinking
fund installment in respect of any Debt Security of such series) if specified
responsible officers of the Trustee consider such withholding to be in the
interest of such holders.
The Indenture will provide that no holder of Debt Securities of any series
issued thereunder may institute any proceeding, judicial or otherwise, with
respect to such Indenture or for any remedy thereunder, except in the case of
the failure of the applicable Trustee, for 60 days, to act after it has received
a written request to institute proceedings in respect of an event of default
from the holders of not less than 25% in principal amount of the outstanding
Debt Securities of such series, as well as an offer of reasonable indemnity.
This provision will not prevent, however, any holder of Debt Securities from
instituting suit for the enforcement of payment of the principal of (and
premium, if any) and interest on the Debt Securities held by that holder at the
respective due dates thereof.
Subject to provisions in the Indenture relating to its duties in case of
default, the Trustee thereunder is under no obligation to exercise any of its
rights or powers under such Indenture at the request or direction of any holders
of any series of Debt Securities then outstanding under such Indenture, unless
such holders shall have offered to such Trustee reasonable security or
indemnity. The holders of not less than a majority in principal amount of the
outstanding Debt Securities of any series (or of each series of Debt Securities
then outstanding under such Indenture, as the case may be) shall have the right
to direct the time, method and place of conducting any proceeding for any remedy
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
deliver 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.
9
<PAGE> 46
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 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
10
<PAGE> 47
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 25% 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.
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
11
<PAGE> 48
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.
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
12
<PAGE> 49
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 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 PREFERRED STOCK
The authorized capital stock of the Company consists of 90,000,000 shares
of Common Stock, par value $0.01 per share, 15,000,000 shares of Preferred
Stock, par value $0.01 per share (the Common Stock and the Preferred Stock
together are referred to as the "Capital Stock"), and 105,000,000 shares of
Excess Stock, par value $0.01 per share, issuable in exchange for Capital Stock
as described below under "Description of
13
<PAGE> 50
Common Stock -- Restrictions on Ownership." At September 28, 1998, the Company
had no shares of Preferred Stock outstanding.
GENERAL
Under the Company's articles of incorporation, the Board of Directors may
from time to time establish and issue one or more series of Preferred Stock
without shareholder approval. The Board of Directors may, subject to the express
provisions of any other series of Preferred Stock then outstanding, alter the
designation, classify or reclassify any unissued Preferred Stock by setting or
changing the number, designation, preference, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms or
conditions of redemption of such series. Because the Board of Directors has the
power to establish the preferences and rights of each series of Preferred Stock,
it may afford the holders of any series of Preferred Stock preferences, powers
and rights, voting or otherwise, senior to the rights of holders of Common
Stock. Preferred Stock will, when issued, be fully paid and nonassessable.
The following description of Preferred Stock sets forth certain general
terms and provisions of Preferred Stock to which any Prospectus Supplement may
relate. The statements below describing Preferred 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 the Company's bylaws.
The Prospectus Supplement relating to any Preferred Stock offered thereby
will contain the specific terms thereof, including, without limitation: (i) the
designation of the series, which may be by distinguishing number, letter or
title; (ii) the dividend rate on the shares of the series, if any, whether any
dividends shall be cumulative and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of the
series; (iii) the redemption rights, including conditions and the price or
prices, if any, for shares of the series; (iv) the terms and amounts of any
sinking fund for the purchase or redemption of shares of the series; (v) the
rights of the shares of the series in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company, and the
relative rights of priority, if any, of payment of shares of the series; (vi)
whether the shares of the series shall be convertible into shares of any other
class or series, or any other security, of the Company or any other corporation
or other entity, and, if so, the specification of such other class or series of
such other security, the conversion price or prices or dates on which such
shares shall be convertible and all other terms and conditions upon which such
conversion may be made; (vii) restrictions on the issuance of shares of the same
series or of any other class or series; (viii) the voting rights, if any, of the
holders of shares of the series; and (ix) any other relative rights, preferences
and limitations on that series.
RANK
Unless otherwise specified in the Prospectus Supplement, Preferred Stock
will, with respect to dividend rights and rights upon liquidation, dissolution
or winding up of the Company, rank (i) senior to all classes or series of Common
Stock of the Company, and to all equity securities ranking junior to Preferred
Stock, (ii) on a parity with all equity securities issued by the Company the
terms of which specifically provide that such equity securities rank on a parity
with Preferred Stock; and (iii) junior to all equity securities issued by the
Company the terms of which specifically provide that such equity securities rank
senior to Preferred Stock. The term "equity securities" does not include
convertible debt securities.
DIVIDENDS
Holders of Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors, out of assets of the Company
legally available for payment, cash dividends (or dividends in kind or in other
property if expressly permitted and described in the applicable Prospectus
Supplement) at such rates and on such dates as will be set forth in the
applicable Prospectus Supplement. Each such dividend shall be payable to holders
of record as they appear on the share transfer books of the Company on such
record dates as shall be fixed by the Board of Directors of the Company.
14
<PAGE> 51
Dividends on any series of Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors fails to declare a
dividend payable on a dividend payment date on any series of Preferred Stock for
which dividends are noncumulative, then the holders of such series of Preferred
Stock will have no right to receive a dividend in respect of the dividend period
ending on such dividend payment date, and the Company will have no obligation to
pay the dividend accrued for such period, whether or not dividends on such
series are declared payable on any future dividend payment date.
Unless otherwise specified in the Prospectus Supplement, if any shares of
Preferred Stock of any series are outstanding, no full dividends shall be
declared or paid or set apart for payment on any Capital Stock of the Company of
any other class or series ranking, as to dividends, on a parity with or junior
to the Preferred Stock of such series for any period unless (i) if such series
of Preferred Stock has a cumulative dividend, full cumulative dividends have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for such payment on the Preferred Stock of
such series for all past dividend periods and the then-current dividend period
or (ii) if such series of Preferred Stock does not have a cumulative dividend,
full dividends for the then-current dividend period have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for such payment on the Preferred Stock of such
series. When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon Preferred Stock of any series and the shares
of any other series of Preferred Stock ranking on a parity as to dividends with
the Preferred Stock of such series, all dividends declared upon Preferred Stock
of such series and any other series of Preferred Stock ranking on a parity as to
dividends with such Preferred Stock shall be declared pro rata so that the
amount of dividends declared per share of Preferred Stock of such series and
such other series of Preferred Stock shall in all cases bear to each other the
same ratio that accrued dividends per share on the Preferred Stock of such
series (which shall not include any accumulation in respect of unpaid dividends
for prior dividend periods if such shares of Preferred Stock do not have a
cumulative dividend) and such other series of Preferred Stock bear to each
other. No interest, or sum of money in lieu of interest, shall be payable in
respect of any dividend payment or payments on Preferred Stock of such series
which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for all past dividend periods and the then-current
dividend period, and (ii) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for the then-current dividend
period, no dividends (other than in Common Stock or other Capital Stock ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation) shall be declared or paid or set aside for payment or other
distribution upon the Common Stock, or any other Capital Stock of the Company
ranking junior to or on a parity with the Preferred Stock of such series as to
dividends or upon liquidation, nor shall any Common Stock, or any other
Preferred Stock of the Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or upon liquidation be redeemed,
purchased or otherwise acquired for any consideration (or any moneys be paid to
or made available for a sinking fund for the redemption of any such shares) by
the Company (except by conversion into or exchange for other Capital Stock of
the Company ranking junior to the Preferred Stock of such series as to dividends
and upon liquidation).
REDEMPTION
If so provided in the applicable Prospectus Supplement, any series of
Preferred Stock will be subject to mandatory redemption or redemption at the
option of the Company, in whole or in part, in each case upon the terms, at the
times and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company
15
<PAGE> 52
in each year commencing after a date to be specified, at a redemption price per
share to be specified, together with an amount equal to all accrued and unpaid
dividends thereon (which shall not, if such Preferred Stock does not have a
cumulative dividend, include any accumulation in respect of unpaid dividends for
prior dividend periods) to the date of redemption. The redemption price may be
payable in cash or other property, as specified in the applicable Prospectus
Supplement. If the redemption price for Preferred Stock of any series is payable
only from the net proceeds of the issuance of Capital Stock of the Company, the
terms of such Preferred Stock may provide that, if no such Capital Stock shall
have been issued or to the extent the net proceeds from any issuance are
insufficient to pay in full the aggregate redemption price then due, such
Preferred Stock shall automatically and mandatorily be converted into the
applicable class or series of Capital Stock of the Company pursuant to
conversion provisions specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all Preferred Stock of
any series shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the current dividend period and (ii) if such
series on Preferred Stock does not have a cumulative dividend, full dividends of
the Preferred Stock of any series have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then-current dividend period, no Preferred Stock of any series
shall be redeemed unless all outstanding Preferred Stock of such series are
simultaneously redeemed; provided, however, that the foregoing shall not prevent
the purchase or acquisition of Preferred Stock of such series to preserve the
REIT status of the Company or pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding Preferred Stock of such series. In
addition, unless (i) if such series of Preferred Stock has a cumulative
dividend, full cumulative dividends on all outstanding Preferred Stock of any
series have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for all past
dividends periods and the then-current dividend period, and (ii) if such series
of Preferred Stock does not have a cumulative dividend, full dividends on the
Preferred Stock of any series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then-current dividend period, the Company shall not purchase or
otherwise acquire directly or indirectly any Preferred Stock of such series
(except by conversion into or exchange for Capital Stock of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation); provided, however, that the foregoing shall not prevent the
purchase or acquisition of Preferred Stock of such series to preserve the REIT
status of the Company or pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding Preferred Stock of such series.
If fewer than all of the outstanding Preferred Stock of any series are to
be redeemed, the number of shares to be redeemed will be determined by the
Company, and such shares may be redeemed pro rata from the holders of record of
such shares in proportion to the number of such shares held or for which
redemption is requested by such holder (with adjustments to avoid redemption of
fractional shares) or by lot in a manner determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the share transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and the series of Preferred Stock to be redeemed; (iii) the redemption
price; (iv) the place or places where certificates for such shares are to be
surrendered for payment of the redemption price; (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date; and (vi) the
date upon which the holder's conversion rights, if any, as to such shares shall
terminate. If fewer than all of the Preferred Stock of any series are to be
redeemed, the notice mailed to each such holder thereof shall also specify the
number of shares of Preferred Stock to be redeemed from each such holder. If
notice of redemption of any Preferred Stock has been given and if the funds
necessary for such redemption have been set aside by the Company in trust for
the benefit of the holders of any Preferred Stock so called for redemption, then
from and after the redemption date dividends will cease to accrue on such
Preferred Stock, and all rights of the holders of such shares will terminate,
except the right to receive the redemption price.
16
<PAGE> 53
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Stock or any other class or series of Capital
Stock of the Company ranking junior to the Preferred Stock in the distribution
of assets upon any liquidation, dissolution or winding up of the Company, the
holders of each series of Preferred Stock shall be entitled to receive out of
assets of the Company legally available for distribution to shareholders
liquidating distributions in the amount of the liquidation preference per share
(set forth in the applicable Prospectus Supplement), plus an amount equal to all
dividends accrued and unpaid thereon (which shall not include any accumulation
in respect of unpaid dividends for prior dividend periods if such Preferred
Stock does not have a cumulative dividend). After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of
Preferred Stock will have no right or claim to any of the remaining assets of
the Company. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the available assets of the Company are
insufficient to pay the amount of the liquidating distributions on all
outstanding Preferred Stock and the corresponding amounts payable on all shares
of other classes or series of Capital Stock of the Company ranking on a parity
with the Preferred Stock in the distribution of assets, then the holders of the
Preferred Stock and all other such classes or series of Capital Stock shall
share ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of Capital Stock ranking junior to
the Preferred Stock upon liquidation, dissolution or winding up, according to
their respective rights and preferences and in each case according to their
respective number of shares. For such purposes, the consolidation or merger of
the Company with or into any other corporation, trust or entity, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
VOTING RIGHTS
Holders of Preferred Stock will not have any voting rights, except as set
forth below or as otherwise from time to time required by law or as indicated in
the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock remain outstanding, the Company will not, without the
affirmative vote or consent of the holders of at least two-thirds of each series
of Preferred Stock outstanding at the time, given in person or by proxy, either
in writing or at a meeting (such series voting separately as a class), (i)
authorize or create, or increase the authorized or issued amount of, any class
or series of Capital Stock ranking senior to such series of Preferred Stock with
respect to the payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up or reclassify any authorized capital
shares of the Company into such shares, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (ii) amend, alter or repeal the provisions of the Company's
articles of incorporation or the designating amendment for such series of
Preferred Stock, whether by merger, consolidation or otherwise (an "Event"), so
as to materially and adversely affect any right, preference, privilege or voting
power of such series of Preferred Stock or the holders thereof; provided,
however, with respect to the occurrence of any of the Events set forth in (ii)
above, so long as the Preferred Stock remain outstanding with the terms thereof
materially unchanged, taking into account that upon the occurrence of an Event,
the Company may not be the surviving entity, the occurrence of any such Event
shall not be deemed to materially and adversely affect such rights, preferences,
privileges or voting power of holders of Preferred Stock and provided further
that (x) any increase in the amount of the authorized Preferred Stock or the
creation or issuance of any other series of Preferred Stock, or (y) any increase
in the amount of authorized shares of such series or any other series of
Preferred Stock, in each case ranking on a parity with or junior to the
Preferred Stock of such series with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting powers.
17
<PAGE> 54
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Preferred Stock of such series shall have
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Stock
is convertible into Common Stock will be set forth in the applicable Prospectus
Supplement relating thereto. Such terms will include the number of shares of
Common Stock into which the shares of Preferred Stock are convertible, the
conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such series of Preferred Stock.
RESTRICTIONS ON OWNERSHIP
As discussed below under "Description of Common Stock -- Restrictions on
Ownership," for the Company to qualify as a REIT under the Code, not more than
50% in value of its outstanding equity securities of all classes 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. To assist the
Company in meeting this requirement, the Company may take certain actions to
limit the beneficial ownership, directly or indirectly, by a single person of
the Company's outstanding equity securities, including any Preferred Stock of
the Company. Therefore, the designating amendment for each series of Preferred
Stock may contain provisions restricting the ownership and transfer of Preferred
Stock.
BOOK-ENTRY PREFERRED STOCK
The Preferred Stock of a series may be issued in whole or in part in the
form of one or more Global Securities that will be deposited with, or on behalf
of, a depositary identified in the applicable Prospectus Supplement relating to
such series. Global Securities may be issued in either registered or bearer form
and in either temporary or permanent form. The specific terms of the depositary
arrangement with respect to a series of Preferred Stock will be described in the
applicable Prospectus Supplement relating to such series.
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may issue receipts ("Depositary Receipts") for Depositary
Shares, each of which will represent a fractional interest or a share of a
particular series of a class of Preferred Stock, as specified in the applicable
Prospectus Supplement. Shares of Preferred Stock of each series represented by
Depositary Shares will be deposited under a separate Deposit Agreement (each, a
"Deposit Agreement") among the Company, the depositary named therein (such
depositary or its successor, the "Preferred Stock Depositary") and the holders
from time to time of the Depositary Receipts. Subject to the terms of the
Deposit Agreement, each owner of a Depositary Receipt will be entitled, in
proportion to the fractional interest of a share of the particular series of
shares of Preferred Stock represented by the Depositary Shares evidenced by such
Depositary Receipt, to all the rights and preferences of the shares of Preferred
Stock represented by such Depositary Shares (including dividend, voting,
conversion, redemption and liquidation rights). At September 28, 1998, the
Company had no Depositary Shares issued or outstanding.
18
<PAGE> 55
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the issuance
and delivery of the Preferred Stock by the Company to the Preferred Stock
Depositary, the Company will cause the Preferred Stock Depositary to issue, on
behalf of the Company, the Depositary Receipts. Copies of the applicable form of
Deposit Agreement and Depositary Receipt may be obtained from the Company upon
request.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Preferred Stock Depositary will distribute all cash dividends or other
cash distributions received in respect of the Preferred Stock to the record
holders of the Depositary Receipts evidencing the related Depositary Shares in
proportion to the number of such Depositary Receipts owned by such holder,
subject, if set forth in the applicable Prospectus Supplement, to certain
obligations of holders to file proofs, certificates and other information and to
pay certain charges and expenses to the Preferred Stock Depositary.
In the event of a distribution other than in cash, the Preferred Stock
Depositary will distribute property received by it to the record holders of
Depositary Receipts entitled thereto, subject, if set forth in the applicable
Prospectus Supplement, to certain obligations of holders to file proofs,
certificates and other information and to pay certain charges and expenses to
the Preferred Stock Depositary, unless the Preferred Stock Depositary determines
that it is not feasible to make such distribution, in which case the Preferred
Stock Depositary may, with the approval of the Company, sell such property and
distribute the net proceeds from such sale to such holders.
WITHDRAWAL OF SHARES
Unless otherwise specified in the applicable Prospectus Supplement, upon
surrender of the Depositary Receipts at the corporate trust office of the
Preferred Stock Depositary (unless the related Depositary Shares have previously
been called for redemption), the holders thereof will be entitled to delivery at
such office, to or upon such holder's order, of the number of whole or
fractional shares of Preferred Stock and any money or other property represented
by the Depositary Shares evidenced by such Depositary Receipts. Holders of
Depositary Receipts will be entitled to receive whole or fractional shares of
the related Preferred Stock on the basis of the proportion of shares of
Preferred Stock represented by each Depositary Share as specified in the
applicable Prospectus Supplement, but holders of such Preferred Stock will not
thereafter be entitled to receive Depositary Shares therefor. If the Depositary
Receipts delivered by the holder evidence a number of Depositary Shares in
excess of the number of Depositary Shares representing the number of shares of
Preferred Stock to be withdrawn, the Preferred Stock Depositary will deliver to
such holder at the same time a new Depositary Receipt evidencing such excess
number of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems Preferred Stock held by the Preferred Stock
Depositary, the Preferred Stock Depositary will redeem as of the same redemption
date the number of Depositary Shares representing the shares of Preferred Stock
so redeemed, provided the Company shall have paid in full to the Preferred Stock
Depositary the redemption price of the Preferred Stock to be redeemed plus an
amount equal to any accrued and unpaid dividends (except, with respect to
noncumulative shares of Preferred Stock, dividends for the current dividend
period only) thereon to the date fixed for redemption. The redemption price per
Depositary Share will be equal to the fraction of the redemption price and any
other amounts per share payable with respect to the Preferred Stock specified in
the applicable Prospectus Supplement. If less than all the Depositary Shares are
to be redeemed, the Depositary Shares to be redeemed will be selected by the
Preferred Stock Depositary by lot.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be deemed to be outstanding and all rights of the
holders of the Depositary Receipts evidencing the Depositary Shares so called
for redemption will cease, except the right to receive any moneys payable upon
such redemption and any money or other property to which the holders of such
Depositary Receipts were entitled upon such redemption upon surrender thereof to
the Preferred Stock Depositary.
19
<PAGE> 56
VOTING OF THE UNDERLYING PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of shares of
Preferred Stock are entitled to vote, the Preferred Stock Depositary will mail
the information contained in such notice of meeting to the record holders of the
Depositary Receipts evidencing the Depositary Shares that represent such shares
of Preferred Stock. Each record holder of Depositary Receipts evidencing
Depositary Shares on the record date (which will be the same date as the record
date for the Preferred Stock) will be entitled to instruct the Preferred Stock
Depositary as to the exercise of the voting rights pertaining to the amount of
shares of Preferred Stock represented by such holder's Depositary Shares. The
Preferred Stock Depositary will vote the amount of shares of Preferred Stock
represented by such Depositary Shares in accordance with such instructions, and
the Company will agree to take all reasonable action that may be deemed
necessary by the Preferred Stock Depositary in order to enable the Preferred
Stock Depositary to do so. The Preferred Stock Depositary will abstain from
voting the amount of shares of Preferred Stock represented by such Depositary
Shares to the extent it does not receive specific instructions from the holders
of Depositary Receipts evidencing such Depositary Shares.
LIQUIDATION PREFERENCE
In the event of liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, each holder of a Depositary Receipt will be
entitled to the fraction of the liquidation preference accorded each share of
Preferred Stock represented by the Depositary Share evidenced by such Depositary
Receipt, as set forth in the applicable Prospectus Supplement.
CONVERSION OF PREFERRED STOCK
The Depositary Shares, as such, are not convertible into shares of Common
Stock or any other securities or property of the Company. Nevertheless, if so
specified in the applicable Prospectus Supplement relating to an offering of
Depositary Shares, the Depositary Receipts may be surrendered by holders thereof
to the Preferred Stock Depositary with written instructions to the Preferred
Stock Depositary to instruct the Company to cause conversion of the shares of
Preferred Stock represented by the Depositary Shares evidenced by such
Depositary Receipts into whole shares of Common Stock or other shares of Capital
Stock, as the case may be, and the Company will agree that upon receipt of such
instructions and any amounts payable in respect thereof, it will cause the
conversion thereof utilizing the same procedures as those provided for delivery
of shares of Preferred Stock to effect such conversion. If the Depositary Shares
evidenced by a Depositary Receipt are to be converted in part only, one or more
new Depositary Receipts will be issued for any Depositary Shares not to be
converted. No fractional shares of Common Stock will be issued upon conversion,
and if such conversion will result in a fractional share being issued, an amount
will be paid in cash by the Company equal to the value of the fractional
interest based upon the closing price of the Common Stock on the last business
day prior to the conversion.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares which
represent the shares of Preferred Stock and any provision of the Deposit
Agreement may at any time be amended by agreement between the Company and the
Preferred Stock Depositary. However, any amendment that materially and adversely
alters the rights of the holders of Depositary Receipts will not be effective
unless such amendment has been approved by the existing holders of at least a
majority of the Depositary Shares evidenced by the Depositary Receipts then
outstanding.
The Deposit Agreement may be terminated by the Company upon not less than
30 days' prior written notice to the Preferred Stock Depositary if (i) such
termination is to preserve the Company's status as a REIT or (ii) a majority of
each class of Preferred Stock affected by such termination consents to such
termination, whereupon the Preferred Stock Depositary shall deliver or make
available to each holder of Depositary Receipts, upon surrender of the
Depositary Receipts held by such holder, such number of whole or fractional
shares of Preferred Stock as are represented by the Depositary Shares evidenced
by such Depositary Receipts.
20
<PAGE> 57
In addition, the Deposit Agreement will automatically terminate if (i) all
outstanding Depositary Shares shall have been redeemed, (ii) there shall have
been a final distribution in respect of the related shares of Preferred Stock in
connection with any liquidation, dissolution or winding up of the Company and
such distribution shall have been distributed to the holders of Depositary
Receipts evidencing the Depositary Shares representing such shares of Preferred
Stock or (iii) each related share of Preferred Stock shall have been converted
into Capital Stock of the Company not so represented by Depositary Shares.
CHARGES OF PREFERRED STOCK DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Deposit Agreement. In addition, the
Company will pay the fees and expenses of the Preferred Stock Depositary in
connection with the performance of its duties under the Deposit Agreement.
However, unless otherwise specified in the applicable Prospectus Supplement,
holders of Depositary Receipts will pay the fees and expenses of the Preferred
Stock Depositary for any duties requested by such holders to be performed which
are outside of those expressly provided for in the Deposit Agreement.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Preferred Stock Depositary may resign at any time by delivering to the
Company notice of its election to do so, and the Company may at any time remove
the Preferred Stock Depositary, any such resignation or removal to take effect
upon the appointment of a successor Preferred Stock Depositary. A successor
Preferred Stock Depositary must be appointed within 60 days after delivery of
the notice of resignation or removal and must be a bank or trust company having
its principal office in the United States and having a combined capital and
surplus of at least $50,000,000.
MISCELLANEOUS
The Preferred Stock Depositary will forward to holders of Depositary
Receipts any reports and communications from the Company which are received by
the Preferred Stock Depositary with respect to the related shares of Preferred
Stock.
Neither the Preferred Stock Depositary nor the Company will be liable if it
is prevented from or delayed in, by law or any circumstances beyond its control,
performing its obligations under the Deposit Agreement. The obligations of the
Company and the Preferred Stock Depositary under the Deposit Agreement will be
limited to performing their duties thereunder in good faith and without
negligence, gross negligence or willful misconduct, and the Company and the
Preferred Stock Depositary will not be obligated to prosecute or defend any
legal proceeding in respect of any Depositary Receipts, Depositary Shares or
shares of Preferred Stock represented thereby unless satisfactory indemnity is
furnished. The Company and the Preferred Stock Depositary may rely on written
advice of counsel or accountants, or information provided by persons presenting
shares of Preferred Stock represented thereby for deposit, holders of Depositary
Receipts or other persons believed to be competent to give such information, and
on documents believed to be genuine and signed by a proper party.
If the Preferred Stock Depositary shall receive conflicting claims,
requests or instructions from any holders of Depositary Receipts, on the one
hand, and the Company, on the other hand, the Preferred Stock Depositary shall
be entitled to act on such claims, requests or instructions received from the
Company.
DESCRIPTION OF COMMON STOCK
The authorized Capital Stock of the Company consists of 90,000,000 shares
of Common Stock and 15,000,000 shares of Preferred Stock. There also is
authorized 105,000,000 shares of Excess Stock, issuable in exchange for Capital
Stock, as described below under "-- Restrictions on Ownership." At September 28,
1998, the Company had outstanding 29,363,143 shares of Common Stock. All issued
and outstanding shares of Common Stock are duly authorized, validly issued,
fully paid and nonassessable.
21
<PAGE> 58
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 Preferred Stock 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 Capital 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 Capital Stock. The Board of
Directors may waive the Ownership Limit if evidence satisfactory to the Company
and the Company's tax counsel is presented that such ownership will not then or
in the future jeopardize the Company's status as a REIT. As a condition of such
waiver, the Board of Directors may require opinions of counsel satisfactory to
it and/or an undertaking from the applicant with respect to preserving the
status of the company as a REIT.
The Ownership Limit will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. In addition to preserving the Company's status as a REIT, the
Ownership Limit may prevent any person or small group of persons from acquiring
unilateral control of the Company.
If the ownership, transfer or acquisition of shares of Common Stock, or
change in capital structure of the Company or other event or transaction would
result in (a) any Person (as defined below) owning (applying certain attribution
rules) Capital Stock in excess of the Ownership Limit, (b) fewer than 100
Persons owning the Capital Stock, (c) the Company being "closely held" within
the meaning of Section 856(h) of the Code, or (d) the Company 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 Capital Stock to the extent
required to avoid such a result. Capital Stock owned, transferred or proposed to
be
22
<PAGE> 59
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
Capital Stock for a period of sixty (60) days following the purchase by such
underwriter of Capital Stock therein, provided that the foregoing exclusions
shall apply only if the ownership of such Capital 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 Capital 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 Capital 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 Capital Stock owned by
such holder and (c) a description of how such shares are held. In addition, each
stockholder shall be required to disclose, upon demand, to the Company in
writing such information with respect to the direct indirect and constructive
ownership of shares as the directors deem necessary to comply with the
provisions of the Code as applicable to a REIT or to comply with the
requirements of any taxing authority or governmental agency.
The ownership limitations described above may have the effect of precluding
acquisitions of control of the Company by a third party.
TRANSFER AGENT
First Union National Bank 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
23
<PAGE> 60
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 Capital Stock of the Company, prepared by Shaw Pittman
Potts & Trowbridge, tax counsel to the Company ("Tax Counsel"). This discussion
is based upon the laws, regulations, and reported rulings and decisions in
effect as of the date of this Prospectus (or, in the case of certain
regulations, proposed as of such date), all of which are subject to change,
retroactively or prospectively, and to possibly differing interpretations. This
discussion does not purport to deal with the federal income tax consequences
applicable to all investors in light of their particular investment
circumstances, or to all categories of investors, some of whom may be subject to
special rules (including, for example, insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States). No ruling on
the federal, state or local tax considerations relevant to the operation of the
Company, or to the purchase, ownership or disposition of the Common Stock or the
Preferred 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 or the
Preferred Stock of the Company, the tax treatment of a REIT and the effect of
potential changes in applicable tax laws.
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
24
<PAGE> 61
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 or Preferred 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 or Preferred Stock would be reduced.
Distributions to holders of Common Stock or Preferred 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 1997, 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 1998. It must be
emphasized, however, that the Company's ability to qualify as a REIT is
dependent upon actual operating results and future actions and events by the
Company and others, and no assurance can be given that the actual results of the
Company's operations and the future actions and events will enable the Company
to satisfy in any given year the requirements for qualification and taxation as
a REIT.
Requirements for Qualification as a REIT. As discussed more fully below,
the Code defines a REIT as a corporation (a) which is managed by one or more
trustees or directors; (b) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest; (c)
which would be taxable, but for Sections 856 through 860 of the Code, as a
domestic corporation; (d) which is neither a financial institution nor an
insurance company; (e) the beneficial ownership of which is held by 100 or more
persons; (f) which is not closely held; and (g) which meets certain other tests
regarding the nature of its assets and income and the amount of its
distributions.
Ownership Tests. More specifically, the ownership requirements of a REIT
are that (a) during the last half of each taxable year not more than 50 percent
of the Company's outstanding shares may be owned, directly or indirectly, by
five or fewer individuals and (b) there must be at least 100 stockholders on at
least 335 days of such 12-month taxable year (or a proportionate number of days
of a short taxable year). In order to meet these requirements, or to otherwise
obtain, maintain or reestablish REIT status, and for no other purpose, the
Company's articles of incorporation empower 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 Capital 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
25
<PAGE> 62
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 currently must meet two separate tests with respect
to its sources of income for each taxable year. 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; 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."
However, a REIT is currently permitted to earn up to one percent of its gross
income from tenants, determined on a property-by-property basis, by furnishing
services that are noncustomary or provided directly to the tenants, without
causing the rental income to fail to quality as rents from real property. The
Company 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
26
<PAGE> 63
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).
In addition to the 75 percent and 95 percent tests, for each taxable year
before 1998, a REIT was required to 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, for each taxable year
before 1998, it has not recognized gross income of a type, in an amount or at a
time which would have caused 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 or Preferred
Stock.
If the Company were to fail to meet the 95 percent distribution requirement
as a result of an adjustment to the Company's tax returns by the Service, the
Company could maintain its qualification as a REIT by paying a "deficiency
dividend" (plus a penalty and interest) within a specified period which will be
permitted as a deduction in the taxable year with respect to which the
adjustment is made.
Distributions to Holders of Preferred Stock. Distributions with respect to
the Preferred Stock will be taxable as described below in "-- Taxation of
Taxable Domestic Stockholders," "-- Taxation of Tax-Exempt Stockholders" and
"-- Taxation of Foreign Stockholders."
Redemption or Conversion of Preferred Stock to Common Stock. Assuming that
Preferred Stock will not be redeemed or converted at a time when there are
distributions in arrears, in general, no gain or loss will be recognized for
federal income tax purposes upon the redemption or conversion of the Preferred
Stock at the option of the holder solely into Common Stock. The basis that a
holder will have for tax purposes in the Common Stock received will be equal to
the adjusted basis the holder had in the Preferred Stock so redeemed or
converted and, provided that the Preferred Stock was held as a capital asset,
the holding period for the Common Stock received will include the holding period
for the Preferred Stock redeemed or converted. A
27
<PAGE> 64
holder, however, will generally recognize gain or loss on the receipt of cash in
lieu of a fractional share of Common Stock in an amount equal to the difference
between the amount of cash received and the holder's adjusted basis in such
fractional share.
If a redemption or conversion occurs when there is a dividend arrearage on
the Preferred Stock and the fair market value of the Common Stock exceeds the
issue price of the Preferred Stock, a portion of the Common Stock received might
be treated as a dividend distribution taxable as ordinary income.
Adjustments to Conversion Price. Under section 305 of the Code, holders of
Preferred Stock may be deemed to have received a constructive distribution of
stock that is taxable as a dividend where the conversion ratio is adjusted to
reflect a cash or property distribution with respect to the common stock into
which it is convertible. An adjustment to the conversion price made pursuant to
a bona fide, reasonable adjustment formula that has the effect of preventing
dilution of the interest of the holders, however, will generally not be
considered to result in a constructive distribution of stock. Certain of the
possible adjustments provided in the Preferred Stock may not qualify as being
pursuant to a bona fide, reasonable adjustment formula. If a nonqualifying
adjustment were made, the holders of Preferred Stock might be deemed to have
received a taxable stock dividend.
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 or Preferred 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 or
Preferred Stock and then, to the extent the distribution exceeds each
stockholder's basis, a gain realized from the sale of Common Stock or Preferred
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 or
Preferred 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 or Preferred 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 or Preferred Stock will not be treated as passive activity income and,
therefore, stockholders will not be able to apply any "passive
28
<PAGE> 65
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 or Preferred 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 or Preferred Stock.
Backup Withholding. The Company will report to its stockholders and the
IRS the amount of distributions paid during each calendar year, and the amount
of tax withheld, if any. Under the backup withholding rules, a stockholder may
be subject to backup withholding at a rate of 31 percent with respect to
distributions paid unless such other holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A stockholder that does not
provide the Company with his correct taxpayer identification number also may be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the stockholder's income tax liability.
Taxation of Tax-Exempt Stockholders. Distributions by the Company to a
stockholder that is a tax-exempt entity generally will not constitute "unrelated
business taxable income" ("UBTI") as defined in Section 512(a) of the Code,
provided that the tax-exempt entity has not financed the acquisition of its
shares with "acquisition indebtedness" within the meaning of the Code and the
shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity. For taxable years beginning after December 31, 1993, however,
qualified trusts that hold more than 10 percent (by value) of the shares of
certain REITs may be required to treat a certain percentage of the distributions
of such REITs as UBTI. The conditions which trigger this requirement do not
currently exist, and the Company does not anticipate that they will ever exist.
This requirement will apply only if (a) the REIT would not qualify as such for
federal income tax purposes but for the application of a "look-through"
exception to the five or fewer requirement applicable to shares being held by
qualified trusts and (b) the REIT is "predominantly held" by qualified trusts. A
REIT is predominantly held if either (i) a single qualified trust holds more
than 25 percent by value of the REIT interests or (ii) one or more qualified
trusts, each owning more than 10 percent by value of the REIT interests, hold in
the aggregate more than 50 percent of the REIT interests. The percentage of any
REIT dividend treated as UBTI is equal to the ratio of (i) the UBTI earned by
the REIT (treating the REIT as if it were a qualified trust and therefore
subject to tax on UBTI) to (ii) the total gross income (less certain associated
expenses of the REIT). A de minimis exception applies where the ratio set forth
in the preceding sentence is less than 5 percent for any year. For these
purposes, a qualified trust is any trust 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.
Taxation of Foreign Stockholders. The rules governing United States
federal income taxation of nonresident alien individuals, foreign corporations,
foreign participants and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex, and no attempt will be made herein to provide more
than a summary of such rules. The following discussion assumes that the income
from investment in the Shares will not be effectively connected with the
Non-U.S. Stockholders' conduct of a United States trade or business. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the
29
<PAGE> 66
impact of federal, state and local laws with regard to an investment in Shares,
including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current and accumulated earnings
and profits of the Company. Such dividends ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the dividend, unless an
applicable tax treaty reduces or eliminates that tax. A number of U.S. tax
treaties that reduce the rate of withholding tax on corporate dividends do not
reduce, or reduce to a lesser extent, the rate of withholding applied to
dividends from a REIT. The Company expects to withhold U.S. income tax at the
rate of 30% on the gross amount of any such distributions paid to a Non-U.S.
Stockholder unless (i) a lower treaty rate applies (and, with regard to payments
on or after January 1, 2000, the Non-U.S. Stockholder files IRS Form W-8 with
the Company and, if the Shares are not traded on an established securities
market, acquires a taxpayer identification number from the IRS) or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 (or, with respect to payments on or
after January 1, 2000, files IRS Form W-8 with the Company) with the Company
claiming that the distribution is effectively connected income. Distributions in
excess of the Company's current and accumulated earnings and profits will not be
taxable to a stockholder to the extent that such distributions do not exceed the
adjusted basis of the stockholder's Shares, but rather will reduce the adjusted
basis of such Shares. To the extent that distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a Non-U.S.
Stockholders' Shares, such distributions will give rise to tax liability if the
Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale
or disposition of the Shares, as described below. If it cannot be determined at
the time a distribution is paid whether or not such distribution will be in
excess of current and accumulated earnings and profits, the distribution will be
subject to withholding at the rate of 30%. However, a Non-U.S. Stockholder may
seek a refund of such amounts from the IRS if it is subsequently determined that
such distribution was, in fact, in excess of the Company's current and
accumulated earnings and profits. Beginning with payments made on or after
January 1, 2000, the Company will be permitted, but not required, to make
reasonable estimates of the extent to which distributions exceed current or
accumulated earnings and profits. Such distributions will generally be subject
to a 10% withholding tax, which may be refunded to the extent it exceeds the
shareholder's actual U.S. tax liability, provided the required information is
furnished to the IRS.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales
of United States real property interests are taxed to a Non-U.S. Stockholder as
if such gain were effectively connected with a United States business. Non-U.S.
Stockholders would thus be taxed at the normal capital gain rates applicable to
U.S. Stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate stockholder not entitled to treaty exemption or
rate reduction. The Company is required by applicable Treasury Regulations to
withhold 35% of any distribution that could be designated by the Company as a
capital gain dividend. This amount is creditable against the Non-U.S.
Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of Shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by foreign persons. The Company currently believes that it is, and
expects to continue to be, a "domestically controlled REIT," and in such case
the sale of Shares would not be subject to taxation under FIRPTA. However, gain
not subject to FIRPTA nonetheless will be taxable to a Non-U.S. Stockholder if
(i) investment in the Shares is treated as "effectively connected" with the
Non-U.S. Stockholders' U.S. trade or business, or (ii) the Non-U.S. Stockholder
is a nonresident alien individual who was present in the United States for 183
days or more during the taxable year and certain other conditions are met.
Effectively connected gain realized by a foreign corporate shareholder may be
subject to an additional 30% branch profits tax,
30
<PAGE> 67
subject to possible exemption or rate reduction under an applicable tax treaty.
If the gain on the sale of Shares were to be subject to taxation under FIRPTA,
the Non-U.S. Stockholder would be subject to the same treatment as U.S.
Stockholders with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals), and the purchaser of the Shares would be required to
withhold and remit to the Service 10% of the purchase price.
ERISA CONSIDERATIONS
THE FOLLOWING IS A SUMMARY OF MATERIAL CONSIDERATIONS ARISING UNDER THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA") AND THE
PROHIBITED TRANSACTION PROVISIONS OF SECTION 4975 OF THE CODE THAT MAY BE
RELEVANT TO PROSPECTIVE INVESTORS. THIS DISCUSSION DOES NOT PURPORT TO DEAL WITH
ALL ASPECTS OF ERISA OR THE CODE THAT MAY BE RELEVANT TO PARTICULAR INVESTORS IN
LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. A PROSPECTIVE INVESTOR THAT IS AN
EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA, A TAX-QUALIFIED RETIREMENT PLAN, AN IRA,
OR A GOVERNMENTAL, CHURCH, OR OTHER PLAN THAT IS EXEMPT FROM ERISA IS ADVISED TO
CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING
UNDER APPLICABLE PROVISIONS OF ERISA, THE CODE, AND STATE LAW WITH RESPECT TO
THE PURCHASE, OWNERSHIP, OR SALE OF THE OFFERED SECURITIES BY SUCH PLAN OR IRA.
FIDUCIARY DUTIES AND PROHIBITED TRANSACTIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to ERISA (an "ERISA Plan") should consider the fiduciary
standards under ERISA in the context of the ERISA Plan's particular
circumstances before authorizing an investment of any portion of the ERISA
Plan's assets in the Offered Securities. Accordingly, such fiduciary should
consider (a) whether the investment satisfies the diversification requirements
of Section 404(a)(1)(C) of ERISA; (b) whether the investment is in accordance
with the documents and instruments governing the ERISA Plan as required by
Section 404(a)(1)(D) of ERISA; (c) whether the investment is prudent under
Section 404(a)(1)(B) of ERISA; and (d) whether the investment is solely in the
interests of the ERISA Plan participants and beneficiaries and for the exclusive
purpose of providing benefits to the ERISA Plan participants and beneficiaries
and defraying reasonable administrative expenses of the ERISA Plan as required
by Section 404(a)(1)(A) of ERISA.
In addition to the imposition of fiduciary standards, ERISA and Section
4975 of the Code prohibit a wide range of transactions between an ERISA Plan, an
IRA, or certain other plans (collectively, a "Plan") and persons who have
certain specified relationships to the Plan ("parties in interest" within the
meaning of ERISA and "disqualified persons" within the meaning of the Code).
Thus, a Plan fiduciary or person making an investment decision for a Plan also
should consider whether the acquisition or the continued holding of the Offered
Securities might constitute or give rise to a direct or indirect prohibited
transaction.
PLAN ASSETS
The prohibited transaction rules of ERISA and the Code apply to
transactions with a Plan and also to transactions with the "plan assets" of a
Plan. The "plan assets" of a Plan include the Plan's interest in an entity in
which the Plan invests and, in certain circumstances, the assets of the entity
in which the Plan holds such interest. The term "plan assets" is not
specifically defined in ERISA or the Code, nor, as of the date hereof, has it
been interpreted definitively by the courts in litigation. On November 13, 1986,
the United States Department of Labor, the governmental agency primarily
responsible for administering ERISA, adopted a final regulation (the "DOL
Regulation") setting out 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
31
<PAGE> 68
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). Any Common Stock sold pursuant to this Prospectus and the applicable
Prospectus Supplement would be sold in an offering registered under the
Securities Act and is registered 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 believes 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 may be the case with offerings of the Offered Securities, 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 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 is "widely held" and "freely transferable,"
the Company believes that the Common Stock constitutes 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, Preferred Stock,
Depositary Shares or Debt Securities that 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.
32
<PAGE> 69
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to delayed
delivery contracts ("Contracts") providing for payment and delivery on the date
or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the aggregate principal amount of Securities sold
pursuant to Contracts shall be not less or more than, the respective amounts
stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions, but will in all cases be
subject to the approval of the Company. Contracts will not be subject to any
conditions except (i) the purchase by an institution of the Offered Securities
covered by its Contracts shall not at the time of delivery be prohibited under
the laws of any jurisdiction in the United States to which such institution is
subject and (ii) if the Offered Securities are being sold to underwriters, the
Company shall have sold to such underwriters the total principal amount of the
Offered Securities less the principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1996,
and for each of the years in the three-year period ended December 31, 1997, 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.
33
<PAGE> 70
(INTENTIONALLY LEFT BLANK)
<PAGE> 71
(INTENTIONALLY LEFT BLANK)
<PAGE> 72
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ 00,000,000
COMMERCIAL NET LEASE REALTY, INC.
% Notes due 200
[COMMERCIAL NET LEASE REALTY LOGO]
------------------------
PROSPECTUS SUPPLEMENT
, 1999
------------------------
Joint Book-Running Managers
J.P. MORGAN & CO. SALOMON SMITH BARNEY
------------------------
FIRST UNION CAPITAL MARKETS CORP.
GOLDMAN, SACHS & CO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
