-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DSSWkDZ+dCZkf3JzMy0XTvdDJfTtmGD2vN5bvg51Jhaq62k7KCabiheUfCCpvT8e lFkmA2HyogfwuWNTlbs9fg== 0000751364-96-000017.txt : 19960401 0000751364-96-000017.hdr.sgml : 19960401 ACCESSION NUMBER: 0000751364-96-000017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCIAL NET LEASE REALTY INC CENTRAL INDEX KEY: 0000751364 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 561431377 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11290 FILM NUMBER: 96541969 BUSINESS ADDRESS: STREET 1: 400 E SOUTH ST STE 500 CITY: ORLANDO STATE: FL ZIP: 32801 BUSINESS PHONE: 4074221574 MAIL ADDRESS: STREET 1: 400 E SOUTH ST STE 500 STREET 2: 400 E SOUTH ST STE 500 CITY: ORLANDO STATE: FL ZIP: 32801 FORMER COMPANY: FORMER CONFORMED NAME: CNL REALTY INVESTORS INC /DE/ DATE OF NAME CHANGE: 19930429 FORMER COMPANY: FORMER CONFORMED NAME: GOLDEN CORRAL REALTY CORP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 -------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ----------- Commission file number 0-12989 COMMERCIAL NET LEASE REALTY, INC. (Exact name of registrant as specified in its charter) Maryland 56-1431377 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 East South Street, Suite 500 Orlando, Florida 32801 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (407) 422-1574 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of exchange on which registered: Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to section 12(g) of the Act: None (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No ----------- ----------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 22, 1996, was $198,624,602. The number of shares of common stock outstanding as of March 22, 1996, was 15,688,672. DOCUMENTS INCORPORATED BY REFERENCE: 1. Registrant incorporates by reference portions of the Commercial Net Lease Realty, Inc. Annual Report to Shareholders for the year ended December 31, 1995 (Items 5, 6, 7 and 8 of Part II). 2. Registrant incorporates by reference portions of the Commercial Net Lease Realty, Inc. Proxy Statement for the 1996 Annual Meeting of Shareholders (Items 10, 11, 12 and 13 of Part III). PART I ITEM 1. BUSINESS Commercial Net Lease Realty, Inc. (the "Registrant" or the "Company") is a real estate investment trust (a "REIT") which was incorporated in 1984 in the State of Delaware. In June 1994, the Company reincorporated in the State of Maryland. The Company acquires, owns and manages a diversified portfolio of high-quality, freestanding properties leased to major retail businesses under long-term commercial net leases. The Company's strategy is to invest in single-tenant, freestanding retail properties with purchase prices of generally up to $5 million, which typically are located along intensive commercial corridors near traffic generators, such as regional malls, business developments and major thoroughfares. Management believes that these types of properties when leased to high-quality tenants with significant market presence provide attractive opportunities for a stable current return and the potential for capital appreciation. In management's view, these types of properties also provide the Company with flexibility in use and tenant selection when the Properties are re-let upon lease expiration. The Company will hold its properties until it determines that the sale or other disposition of the properties is advantageous in view of the Company's investment objectives. In deciding whether to sell properties, the Company will consider factors such as potential capital appreciation, net cash flow and federal income tax considerations. Properties During the year ended December 31, 1995, the Company borrowed $67,400,000 of amounts it has available under its credit facility to acquire 29 properties and four buildings which were developed by the tenant on land parcels owned by the Company. As of December 31, 1995, the Company owned 157 properties (the "Properties") that are leased to major businesses, including Academy, Barnes & Noble, Best Buy, Blockbuster Music, Borders, Burger King, Checkers, CompUSA, Computer City, Denny's, Eckerd, Food 4 Less, Food Lion, Golden Corral, Good Guys, Hardee's, Hi-Lo Automotive, International House of Pancakes, Levitz, Linens 'n Things, Marshalls, Office Depot, OfficeMax, Oshmans, Pier 1 Imports, Pizza Hut, Scotty's, Sears, Waccamaw and Wendy's. The occupancy rate of the Company's Property portfolio was 100 percent at December 31, 1995. All of the Properties are leased under net leases pursuant to which the tenant typically will bear responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation. The lease of each of the Company's Properties require payment of annual base rent plus, generally, either percentage rent based on the tenant's gross sales or contractual increases in annual rent. During 1995, two of the Company's lessees (or group of affiliated lessees), (i) Barnes & Noble Superstores, Inc. and (ii) Denny's, Inc. and Flagstar Enterprises, Inc. (which are affiliated entities under common control) (hereinafter referred to as Flagstar), each accounted for more than ten percent of the Company's total rental income. As of December 31, 1995, Barnes & Noble Superstores, Inc. was the lessee under leases relating to nine Properties and Flagstar was the lessee under leases relating to 24 Properties. It is anticipated that, based on the minimum rental payments required by the leases and estimated contingent rental income, Barnes & Noble Superstores, Inc. will continue to account for more than ten percent of the Company's total rental income in 1996. Any failure of this lessee could materially affect the Company's income. Investment in Subsidiaries In November 1995, the Company purchased 100% of the common stock of two newly-formed entities, Net Lease Realty I, Inc. and Net Lease Realty II, Inc. to facilitate the acquisition of certain properties. Each of the wholly-owned subsidiaries is a qualified real estate investment trust subsidiary as defined under Internal Revenue Code Section 856(i)(2). Advisory Services The Company and CNL Realty Advisors, Inc. have entered into an advisory agreement (the "Advisory Agreement"), which provides for CNL Realty Advisors, Inc. to receive an annual fee, payable monthly, equal to seven percent of funds from operations, as defined in the Advisory Agreement, up to $10,000,000, six percent of funds from operations in excess of $10,000,000 but less than $20,000,000 and five percent of funds from operations in excess of $20,000,000. Under the Advisory Agreement, CNL Realty Advisors, Inc. generally is responsible for administering the day-to-day investment operations of the Company, including investment analysis and development, acquisitions, due diligence, and asset management and accounting services. These duties include collecting rental payments, inspecting and managing the Properties, assisting the Company in responding to tenant inquiries and notices, providing information to the Company about the status of the leases and the Properties, maintaining the Company's accounting books and records, and preparing and filing various reports, returns or statements with various regulatory agencies. In addition, CNL Realty Advisors, Inc. serves as the Company's consultant in connection with policy decisions to be made by the Board of Directors, manages the Company's Properties and renders other services as the Board of Directors deems appropriate. CNL Realty Advisors, Inc. is subject to the supervision of the Company's Board of Directors and has only such functions as are delegated to it. The Advisory Agreement was renewed January 1, 1996 and continues until January 1997, and thereafter may be extended annually upon mutual consent of a majority of the board of directors of CNL Realty Advisors, Inc. and a majority of the independent directors of the Company unless terminated at an earlier date upon 90 days' prior notice by either party. Competition The Company generally competes with other REITs, real estate limited partnerships and other investors, including but not limited to, insurance companies, pension funds and financial institutions, in the acquisition, leasing, financing and disposition of investments in net-leased retail properties. Employees Reference is made to Item 10. Directors and Executive Officers of the Registrant for a listing of the Company's Executive Officers. The Company has no other employees. ITEM 2. PROPERTIES As of December 31, 1995, the Company owned 157 Properties located in 26 states. Reference is made to the Schedule of Real Estate and Accumulated Depreciation filed with this Report for a listing of the Properties and their respective costs. Description of Properties Land. The Company's Property sites range from approximately 12,000 to 286,000 square feet depending upon building size and local demographic factors. Sites purchased by the Company are in locations zoned for commercial use which have been reviewed for traffic patterns and volume. Land costs range from approximately $36,500 to $3,570,000. Buildings. The buildings generally are rectangular and are constructed from various combinations of stucco, steel, wood, brick and tile. Building sizes range from approximately 1,000 to 56,000 square feet. Building costs range from approximately $195,000 to $6,062,000 for each Property, depending upon the size of the building and the site and the area in which the Property is located. Generally, the Properties owned by the Company are freestanding, with paved parking areas. Leases. Although there are variations in the specific terms of the leases, the following is a summarized description of the general structure of the Company's leases. Generally, the leases of the Properties owned by the Company provide for initial terms of 15 to 20 years. As of December 31, 1995, the average remaining lease term was approximately 14 years. All of the Properties are leased under net leases pursuant to which the tenant typically will bear responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. In addition, the majority of the Company's leases provide that the tenant is responsible for roof and structural repairs. The leases of the Properties provide for annual base rental payments (payable in monthly installments) ranging from $23,952 to $910,132. Generally, the leases provide for either percentage rent or contractual increases in annual rent. Leases which provide for contractual increases in annual rent generally have increases which range from six to 12 percent after every five years of the lease term. In addition, for those leases which provide for the payment of percentage rent, such rent is generally one to eight percent of the tenants' annual gross sales, less the amount of annual base rent payable in that lease year. As of December 31, 1995, leases representing approximately 68 percent of annual base rent include contractual increases, leases representing approximately 44 percent of annual base rent include percentage rent provisions and leases representing approximately 23 percent of annual base rent include both contractual and percentage rent provisions. Generally, the leases of the Properties provide for two, three or four five-year renewal options subject to the same terms and conditions as the initial lease. Some of the leases also provide that, in the event the Company wishes to sell the Property subject to that lease, the Company first must offer the lessee the right to purchase the Property on the same terms and conditions, and for the same price, as any offer which the Company has received for the sale of the Property. The Company is not aware of any environmental liability with respect to any of the Properties in the Company Portfolio that it believes would have a material adverse effect on the Company's assets or financial condition. The Company's principal executive offices are located at 400 E. South Street, Suite 500, Orlando, Florida 32801, where it occupies office space provided to it free of charge by CNL Realty Advisors, Inc., the Company's advisor. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in a law suit filed on October 26, 1994, in the Circuit Court, Hamilton County, Tennessee, whereby the plaintiff is alleging that a flooding problem on the property adjacent to the Company's Property in Chattanooga, Tennessee, is a result of the construction of the building and parking lot on the Company's Property and is seeking damages of $400,000. Management intends to vigorously contest these claims and believes that, if the Company were to be held liable for any damages, such damages would be covered by insurance. The Company is also a defendant in a law suit filed on December 20, 1994, in the Circuit Court, Knox County, Tennessee, and in the Circuit Court, Greene County, Tennessee, by the surviving spouse of a patron of the Company's Property in Tusculum, Tennessee. The plaintiff is alleging that the Company was negligent in the design and control of the parking lot on the Company's Property and is seeking damages of $2,500,000. Management intends to vigorously contest these claims and to seek full indemnification from the tenant. Management believes that, if the Company were to be held liable for any damages, such damages would be covered by insurance. The Company is not a party to any other pending legal proceedings which, in the opinion of the Company and its general counsel, is likely to have a material adverse effect upon the Company's business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information responsive to this Item is contained in the section captioned "Share Price and Dividend Data" on page 21 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1995; the information in such section is filed as an exhibit to this report and the cited portion of which is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Information responsive to this Item is contained in the section captioned "Historical Financial Highlights" on page one of the Registrant's Annual Report to Shareholders for the year ended December 31, 1995; the information in such section is filed as an exhibit to this report and the cited portion of which is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information responsive to this Item is contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages six through nine of the Registrant's Annual Report to Shareholders for the year ended December 31, 1995; the information in such section is filed as an exhibit to this report and the cited portion of which is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Certain information responsive to this Item is contained in the section captioned "Quarterly Financial Data" on page 21 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1995; the information in such section is filed as an exhibit to this report and the cited portion of which is incorporated herein by reference. The financial statements of the Registrant, together with the report thereon of KPMG Peat Marwick LLP, appearing in the Annual Report to Shareholders for the year ended December 31, 1995, are incorporated herein by reference. ITEM 9. DISAGREEMENTS OF ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the Registrant's definitive proxy statement which was filed with the Commission on March 28, 1996, pursuant to Regulation 14(a); information responsive to this Item is contained in the sections thereof captioned "Proposal I: Election of Directors - Nominees" and "Proposal I: Election of Directors - Executive Officers" and "Security Ownership," and the information in such sections is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the Registrant's definitive proxy statement which was filed with the Commission on March 28, 1996, pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned "Proposal I: Election of Directors - Compensation of Directors" and "Proposal I: Executive Compensation," and the information in such sections is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the Registrant's definitive proxy statement which was filed with the Commission on March 28, 1996, pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned "Security Ownership," and the information in such section is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the Registrant's definitive proxy statement which was filed with the Commission on March 28, 1996, pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned "Certain Transactions," and the information in such section is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report. 1. Financial Statements Report of Independent Auditors Consolidated Balance Sheets at December 31, 1995 and 1994 Consolidated Statements of Earnings for the years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements 2. Financial Statement Schedule Report of Independent Auditors Schedule III - Real Estate and Accumulated Depreciation at December 31, 1995 Notes to Schedule III - Real Estate and Accumulated Depreciation at December 31, 1995 All other schedules are omitted because they are not applicable or because the required information is shown in the financial statements or the notes thereto. 3. Exhibits 3.1 Articles of Incorporation of the Registrant (filed as Exhibit 3.3(i) to the Registrant's Registration Statement No. 1-11290 on Form 8-B, and incorporated herein by reference). 3.2 Bylaws of the Registrant, (filed as Exhibit 3(ii) to Amendment No. 2 to the Registrant's Registration No. 33-83110 on Form S-3, and incorporated herein by reference). 4 Specimen Certificate of Common Stock, par value $.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant's Registration Statement No. 1-11290 on Form 8-B and incorporated herein by reference). 10.1 Stock Purchase Agreement dated as of January 23, 1992 by and among the Registrant, CNL Group, Inc. and certain entities affiliated therewith (filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference). 10.2 Letter Agreement dated July 10, 1992, amending Stock Purchase Agreement dated January 23, 1992 (filed as Exhibit 10.34 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, and incorporated herein by reference). 10.3 Form of Advisory Agreement between the Registrant and CNL Realty Advisors, Inc. (filed as Exhibit 10.21 to the Registrant's Report on Form 8 dated April 29, 1992, amending its Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference). 10.4 Advisory Agreement between Registrant and CNL Realty Advisors, Inc. effective as of April 1, 1993 and renewed January 1, 1995 (filed as Exhibit 10.04 to Amendment No. 1 to the Registrant's Registration Statement No. 33-61214 on Form S-2, and incorporated herein by reference). 10.5 Revolving Line of Credit and Security Agreement, dated as of July 25, 1994, among Registrant, certain lenders listed therein and First Union National Bank of Florida, as the Agent, relating to a $100,000,000 loan (filed as Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, and incorporated herein by reference). 10.6 1992 Commercial Net Lease Realty, Inc. Stock Option Plan (filed as Exhibit No. 10(x) to the Registrant's Registration Statement No. 33-83110 on Form S-3, and incorporated herein by reference). 10.7 Interest Rate Cap Agreement dated February 28, 1994, by and between the Registrant and First Union National Bank of North Carolina (filed as Exhibit No. 10(xi) to the Registrant's Registration Statement No. 33-83110 on Form S-3, and incorporated herein by reference). 10.8 Interest Rate Cap Agreement dated December 23, 1994, by and between the Registrant and First Union National Bank of Florida (filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated by reference). 10.9 Second Amended and Restated Line of Credit and Security Agreement, dated December 7, 1995, among Registrant, certain lenders listed therein and First Union National Bank of Florida, as the Agent relating to a $100,000,000 loan (filed as Exhibit 10.14 to the Registrant's Current Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.10 Secured Promissory Note, dated December 14, 1995, among Registrant and Principal Mutual Life Insurance Company relating to a $13,150,000 loan (filed as Exhibit 10.15 to the Registrant's Current Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.11 Mortgage and Security Agreement, dated December 14, 1995, among Registrant and Principal Mutual Life Insurance Company relating to a $13,150,000 loan (filed as Exhibit 10.16 to the Registrant's Current Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.12 Loan Agreement, dated January 19, 1996, among Registrant and Principal Mutual Life Insurance Company relating to a $39,450,000 loan. Filed herewith. 10.13 Secured Promissory Note, dated January 19, 1996, among Registrant and Principal Mutual Life Insurance Company relating to a $39,450,000 loan. Filed herewith. 13 Annual Report to Shareholders for the year ended December 31, 1995 ("filed" only to the extent material therefrom is specifically incorporated herein by reference). 23 Consent of Independent Accountants dated March 22, 1996. Filed herewith. (b) The Registrant filed no reports on Form 8-K during the period from October 1, 1995 through December 31, 1995. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 29th day of March, 1996. COMMERCIAL NET LEASE REALTY, INC. By: /s/ James M. Seneff, Jr. ---------------------------------- JAMES M. SENEFF, JR. Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ James M. Seneff, Jr. Chairman of the Board of March 29, 1996 - ------------------------- Directors Chief James M. Seneff, Jr. Executive Officer (Principal Executive Officer) /s/ Robert A. Bourne Vice Chairman of the March 29, 1996 - ------------------------- Board of Directors, Robert A. Bourne Secretary and Treasurer /s/ Edward Clark Director March 29, 1996 - ------------------------- Edward Clark /s/ Willoughby T. Cox, Jr. Director March 29, 1996 - ------------------------- Willoughby T. Cox, Jr. /s/ Clifford R. Hinkle Director March 29, 1996 - ------------------------- Clifford R. Hinkle /s/ Ted B. Lanier Director March 29, 1996 - ------------------------- Ted B. Lanier /s/ Gary M. Ralston President March 29, 1996 - ------------------------- Gary M. Ralston /s/ Kevin B. Habicht Chief Financial Officer March 29, 1996 - ------------------------- (Principal Financial and Kevin B. Habicht Accounting Officer) REPORT OF INDEPENDENT AUDITOR'S ON SUPPLEMENTARY INFORMATION ---------------------------------------------------------------- The Board of Directors Commercial Net Lease Realty, Inc.: Under date of January 20, 1996, except for Note 13 for which the date is January 30, 1996, we reported on the balance sheets of Commercial Net Lease Realty, Inc. as of December 31, 1995 and 1994, and the related statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, as contained in Item 14(a)1 of Form 10-K and in the 1995 annual report to stockholders. These financial statements and our report thereon are both included in Item 14(a)1 of Form 10- K for the year 1995. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedule as of December 31, 1995. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth herein. /s/KPMG Peat Marwick LLP Orlando, Florida January 20, 1996, except for Note 13 for which the date is January 30, 1996 COMMERCIAL NET LEASE REALTY, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION ------------------------------------------------------- December 31, 1995 (A) (B) (C) (D) (E) Costs Capitalized Initial Cost Subsequent To Company To Acquisition ------------------------ ------------------ Buildings Encum- and Improve- Carrying brances Land Improvements ments Costs ------- ----------- ------------ -------- -------- Properties the Company has Invested in Under Operating Leases: Academy: Houston, TX - $ 1,074,232 $ - $ - $ - Houston, TX - 699,165 - - - N. Richland Hills, TX - 1,286,220 - - - Barnes & Noble: Lakeland, FL - 1,069,721 1,586,218 - - Brandon, FL - 1,474,921 1,605,896 - - Denver, CO - 3,242,338 2,720,034 - - Houston, TX - 3,307,562 2,396,024 - - Plantation, FL - 3,570,000 - - - Cary, NC - 2,754,000 - - - Lafayette, LA - 1,122,000 - - - Oklahoma City, OK - 1,662,090 - - - Daytona, FL - 2,540,511 - - - Best Buy: Corpus Christi, TX - 818,448 896,395 - - Blockbuster Music: Dallas, TX - 346,548 1,963,773 27,762 - Borders: Wilmington, DE - 3,030,769 6,061,538 - - Richmond, VA - 2,177,310 2,599,587 - - Burger King Restaurants: Asheboro, NC - 420,508 815,190 - - Galliano, LA - 249,001 1,130,506 - - John's Island, SC - 385,517 698,309 - - Lake Charles, LA - 272,381 965,713 - - Lancaster, OH - 220,846 582,815 - - Natchez, MS - 206,717 653,530 - - Tappahannock, VA - 289,840 572,779 - - Warren, MI - 298,817 785,031 - - Manchester, NH - 619,037 428,757 - - Rochester, NH - 216,652 779,450 - - St. Paul, MN - 225,297 542,847 - - Columbus, OH - 357,114 407,093 - - Opelousas, LA - 460,374 824,510 - - Coon Rapids, MI - 322,658 544,936 - - Checkers Restaurant: Orlando, FL - 256,568 - - - CompUSA: Mission Viejo, CA - 2,706,352 1,368,966 - - Computer City: Miami, FL - 2,713,192 1,866,676 - - Baton Rouge, LA - 606,715 910,072 - - Denny's Restaurants: Greenville, SC - 344,817 400,895 - - Landrum, SC - 155,429 - - - Mooresville, NC - 307,299 - - - Greensboro, NC - 265,915 493,407 - - Houston, TX - 289,036 572,985 - - Santee, SC - 244,284 312,045 - - Duncan, SC - 219,703 - - - Topeka, KS - 414,686 - - - Winter Springs, FL - 555,232 - - - Eckerd: San Antonio, TX - 440,985 - - - Dallas, TX - 541,493 - - - Garland, TX - 239,014 - - - Arlington, TX - 368,964 - - - Millville, NJ - 417,603 - - - Atlanta, GA - 445,593 - - - Mantua, NJ - 344,022 - - - Amarillo, TX - 641,439 - - - Amarillo, TX - 322,200 - - - Glassboro, NJ - 534,243 - - - Kissimmee, FL - 718,484 - - - Colleyville, TX - 755,647 - - - Tampa, FL - 604,682 - - - Food 4 Less: Lemon Grove, CA - 3,454,917 - - - Golden Corral Family Steakhouse Restaurants: Foley, AL (e) - 101,286 283,991 - - Edenton, NC - 36,578 318,481 - - Woodstock, GA - 200,680 328,450 - - Bonham, TX (e) - 128,451 344,170 - - Center, TX (e) - 103,187 308,859 - - Gilmer, TX (e) - 116,815 296,454 - - Leitchfield, KY (e) - 73,660 306,642 - - Marietta, GA (g) - 156,190 346,509 - - Rockledge, FL - 120,593 340,889 - - Silsbee, TX (e) - 132,802 302,052 - - Atlanta, TX - 88,457 368,317 - - Vernon, TX (e) - 105,798 328,943 - - Abbeville, LA - 98,577 362,416 - - Fredericksburg, TX - 169,984 321,189 - - Gonzales, TX (e) - 104,833 312,872 - - Bowie, TX (e) - 57,824 311,544 - - Clanton, AL (e) - 113,017 296,921 - - Jacksonville, TX - 115,276 318,196 - - Lake Placid, FL (e) - 115,113 305,074 - - Pleasanton, TX - 139,694 316,070 - - Marble Falls, TX (e) - 151,985 338,704 - - Ennis, TX - 153,700 366,639 - - Franklin, LA (e) - 105,839 396,831 - - Melbourne, FL - 193,447 341,351 - - Franklin, VA - 100,808 424,164 - - Minden, LA (e) - 86,120 402,364 - - Durant, OK - 140,862 411,135 - - Hardee's Restaurants: Chalkville, AL - 170,834 457,167 - - Gulf Shores, AL - 348,281 595,164 - - Mobile, AL - 336,696 - - - Warrior, AL - 177,659 - - - Horn Lake, MS - 302,787 - - - Petal, MS - 277,104 415,193 - - West Point, MS - 173,386 - - - Rock Hill, SC - 216,777 466,450 - - Columbia, TN - 226,300 - - - Johnson City, TN - 215,567 - - - Tusculum, TN - 182,349 507,293 - - Hi-Lo Automotive: Mesquite, TX - 233,420 513,523 - - Fort Worth, TX - 197,037 512,296 - - Houston, TX - 261,318 531,968 - - Arlington, TX - 295,331 571,609 - - Garland, TX - 239,570 512,023 - - Dallas, TX - 281,347 543,937 - - McAllen, TX - 265,177 605,397 - - Temple, TX - 177,451 587,755 - - San Antonio, TX - 200,510 643,741 - - Universal City, TX - 247,264 570,677 - - Bastrop, TX - 197,905 383,144 - - Lake Worth, TX - 252,141 539,510 - - Nacogdoches, TX - 190,324 522,232 - - Eagle Pass, TX - 256,745 455,841 - - International House of Pancakes Restaurants: Stafford, TX - 382,084 - - - Sunset Hills, MO - 271,853 - - - Las Vegas, NV - 519,947 - - - Fort Worth, TX - 430,896 - - - Arlington, TX - 404,512 - - - Matthews, NC - 380,043 - - - Phoenix, AZ - 483,374 - - - Linens 'n Things: Freehold, NJ - 1,753,766 2,208,651 - - Marshalls: Freehold, NJ - 2,052,946 2,585,432 - - Office Depot: Arlington, TX - 596,024 1,411,432 - - OfficeMax: Corpus Christi, TX - 893,270 978,344 76,664 - Dallas, TX - 1,118,500 1,709,891 - - Cincinnati, OH - 543,489 1,574,551 - - Evanston, IL - 1,867,831 1,757,618 - - Pier 1 Imports: Dallas, TX - 189,010 1,071,054 14,448 - Pizza Hut Restaurant: Orlando, FL - 220,632 258,483 - - Rally's Restaurant: Toledo, OH - 125,882 319,770 - - Scotty's: Orlando, FL - 1,064,260 2,049,431 - - Orlando, FL - 1,187,730 2,131,807 - - Sears Homelife Centers: Orlando, FL - 820,397 2,184,721 - - Clearwater, FL - 1,184,438 2,526,207 - - Oshmans: Dallas, TX - 1,311,440 - - - Waccamaw: Fairfax, VA - 2,156,801 - - - Wendy's Old Fashioned Hamburger Restau- rants: Fenton, MO - 307,068 496,410 - - Longwood, FL - 333,335 194,926 - - ----------- ----------- -------- -------- $83,363,492 $77,978,852 $118,874 $ - =========== =========== ======== ======== Properties the Company has Invested in Under Direct Financing Leases: Academy: Houston, TX - $ - $ 1,924,740 $ - $ - Houston, TX - - 1,867,519 - - Checkers Restaurant: Orlando, FL - - 286,910 - - Denny's Restaurants: Landrum, SC - - 374,684 - - Mooresville, NC - - 535,309 - - Akron, OH - 137,424 733,450 - - Duncan, SC - - 628,571 - - Topeka, KS - - 498,921 - - Winter Springs, FL - - 620,148 - - Eckerd: San Antonio, TX - - 783,974 - - Dallas, TX - - 638,684 - - Garland, TX - - 710,634 - - Arlington, TX - - 636,070 - - Millville, NJ - - 828,942 - - Atlanta, GA - - 668,390 - - Mantua, NJ - - 951,795 - - Vineland, NJ - 286,231 1,063,142 - - Amarillo, TX - - 857,250 - - Amarillo, TX - 153,406 826,030 - - Amarillo, TX - - 830,937 - - Glassboro, NJ - - 887,497 - - Kissimmee, FL - - 937,772 - - Alice, TX - 189,126 804,703 - - Colleyville, TX - - 1,074,893 - - Tampa, FL - - 1,090,532 - - Food Lion Super- markets: Keystone Heights, FL - 88,604 1,845,988 - - Chattanooga, TN - 336,488 1,701,072 - - Lynchburg, VA - 128,216 1,674,167 - - Martinsburg, WV - 448,648 1,543,573 - - Good Guys: Stockton, CA - 580,609 2,974,868 - - Hardee's Restaurants: Mobile, AL - - 479,107 - - Warrior, AL - - 470,556 - - Horn Lake, MS - - 555,975 - - Iuka, MS - 130,258 505,363 - - West Point, MS - - 517,424 - - Biscoe, NC - 60,301 479,984 - - Aynor, SC - 44,871 521,192 - - Columbia, TN - - 584,927 - - Johnson City, TN - - 570,690 - - Hi-Lo Automotive: Edinberg, TX - 97,056 418,926 - - Copperas Cove, TX - 116,637 476,331 - - Baton Rouge, LA - 89,954 508,146 - - Lake Jackson, TX - 120,313 609,300 - - Fort Worth, TX - 92,779 607,971 - - Pantego, TX - 154,368 505,323 - - Fort Worth, TX - 91,373 548,238 - - Pharr, TX - 94,576 472,880 - - Baton Rouge, LA - 122,349 527,930 - - Houston, TX - 37,508 596,069 - - International House of Pancakes Restaurants: Stafford, TX - - 571,832 - - Sunset Hills, MO - - 736,345 - - Las Vegas, NV - - 613,582 - - Fort Worth, TX - - 623,641 - - Arlington, TX - - 608,132 - - Matthews, NC - - 655,668 - - Phoenix, AZ - - 559,307 - - Levitz: Tempe, AZ - 634,444 2,225,991 - - Oshmans: Dallas, TX - - 2,658,976 - - Waccamaw: Fairfax, VA - - 3,356,493 - - ----------- ----------- -------- -------- $ 4,235,539 $53,367,464 $ - $ - =========== =========== ======== ======== COMMERCIAL NET LEASE REALTY, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED ------------------------------------------------------------------- December 31, 1995 (F) (G) (H) (I) Gross Amount at Which Carried at Close of Period (b) ------------------------------------- Buildings and Accumulated Land Improvements Total Depreciation ----------- ------------ ------------ ------------ Properties the Company has Invested in Under Operating Leases: Academy: Houston, TX $ 1,074,232 (c) $ 1,074,232 $ - Houston, TX 699,165 (c) 699,165 - N. Richland Hills, TX 1,286,220 (f) 1,286,220 - Barnes & Noble: Lakeland, FL 1,069,721 $ 1,586,218 2,655,939 36,884 Brandon, FL 1,474,921 1,605,896 3,080,817 37,341 Denver, CO 3,242,338 2,720,034 5,962,372 85,190 Houston, TX 3,307,562 2,396,024 5,703,586 14,983 Plantation, FL 3,570,000 (f) 3,570,000 - Cary, NC 2,754,000 (f) 2,754,000 - Lafayette, LA 1,122,000 (f) 1,122,000 - Oklahoma City, OK 1,662,090 (f) 1,662,090 - Daytona, FL 2,540,511 (f) 2,540,511 - Best Buy: Corpus Christi, TX 818,448 896,395 1,714,843 47,521 Blockbuster Music: Dallas, TX 346,548 1,991,535 2,338,083 86,358 Borders: Wilmington, DE 3,030,769 6,061,538 9,092,307 155,612 Richmond, VA 2,177,310 2,599,587 4,776,897 36,465 Burger King Restaurants: Asheboro, NC 420,508 815,190 1,235,698 71,329 Galliano, LA 249,001 1,130,506 1,379,507 98,919 John's Island, SC 385,517 698,309 1,083,826 61,102 Lake Charles, LA 272,381 965,713 1,238,094 84,500 Lancaster, OH 220,846 582,815 803,661 50,996 Natchez, MS 206,717 653,530 860,247 57,184 Tappahannock, VA 289,840 572,779 862,619 50,118 Warren, MI 298,817 785,031 1,083,848 68,690 Manchester, NH 619,037 428,757 1,047,794 27,796 Rochester, NH 216,652 779,450 996,102 50,531 St. Paul, MN 225,297 542,847 768,144 33,965 Columbus, OH 357,114 407,093 764,207 25,471 Opelousas, LA 460,374 824,510 1,284,884 51,588 Coon Rapids, MI 322,658 544,936 867,594 34,096 Checkers Restaurant: Orlando, FL 256,568 (c) 256,568 - CompUSA: Mission Viejo, CA 2,706,352 1,368,966 4,075,318 19,962 Computer City: Miami, FL 2,713,192 1,866,676 4,579,868 79,462 Baton Rouge, LA 606,715 910,072 1,516,787 61 Denny's Restaurants: Greenville, SC 344,817 400,895 745,712 25,990 Landrum, SC 155,429 (c) 155,429 - Mooresville, NC 307,299 (c) 307,299 - Greensboro, NC 265,915 493,407 759,322 31,987 Houston, TX 289,036 572,985 862,021 37,146 Santee, SC 244,284 312,045 556,329 20,229 Duncan, SC 219,703 (c) 219,703 - Topeka, KS 414,686 (c) 414,686 - Winter Springs, FL 555,232 (c) 555,232 - Eckerd: San Antonio, TX 440,985 (c) 440,985 - Dallas, TX 541,493 (c) 541,493 - Garland, TX 239,014 (c) 239,014 - Arlington, TX 368,964 (c) 368,964 - Millville, NJ 417,603 (c) 417,603 - Atlanta, GA 445,593 (c) 445,593 - Mantua, NJ 344,022 (c) 344,022 - Amarillo, TX 641,439 (c) 641,439 - Amarillo, TX 322,200 (c) 322,200 - Glassboro, NJ 534,243 (c) 534,243 - Kissimmee, FL 718,484 (c) 718,484 - Colleyville, TX 755,647 (c) 755,647 - Tampa, FL 604,682 (c) 604,682 - Food 4 Less: Lemon Grove, CA 3,454,917 (f) 3,454,917 - Golden Corral Family Steakhouse Restaurants: Foley, AL (e) 101,286 283,991 385,277 96,585 Edenton, NC 36,578 318,481 355,059 106,421 Woodstock, GA 200,680 328,450 529,130 109,703 Bonham, TX (e) 128,451 344,170 472,621 113,920 Center, TX (e) 103,187 308,859 412,046 102,244 Gilmer, TX (e) 116,815 296,454 413,269 98,137 Leitchfield, KY (e) 73,660 306,642 380,302 101,500 Marietta, GA (g) 156,190 346,509 502,699 114,696 Rockledge, FL 120,593 340,889 461,482 112,834 Silsbee, TX (e) 132,802 302,052 434,854 99,994 Atlanta, TX 88,457 368,317 456,774 121,545 Vernon, TX (e) 105,798 328,943 434,741 105,262 Abbeville, LA 98,577 362,416 460,993 115,973 Fredericksburg, TX 169,984 321,189 491,173 102,781 Gonzales, TX (e) 104,833 312,872 417,705 100,119 Bowie, TX (e) 57,824 311,544 369,368 99,694 Clanton, AL (e) 113,017 296,921 409,938 95,015 Jacksonville, TX 115,276 318,196 433,472 101,823 Lake Placid, FL (e) 115,113 305,074 420,187 97,624 Pleasanton, TX 139,694 316,070 455,764 101,142 Marble Falls, TX (e) 151,985 338,704 490,689 108,385 Ennis, TX 153,700 366,639 520,339 113,658 Franklin, LA (e) 105,839 396,831 502,670 123,017 Melbourne, FL 193,447 341,351 534,798 105,819 Franklin, VA 93,719 424,164 517,883 93,569 Minden, LA (e) 86,120 402,364 488,484 68,735 Durant, OK 140,862 411,135 551,997 66,017 Hardee's Restaurants: Chalkville, AL 170,834 457,167 628,001 24,862 Gulf Shores, AL 348,281 595,164 943,445 32,367 Mobile, AL 336,696 (c) 336,696 - Warrior, AL 177,659 (c) 177,659 - Horn Lake, MS 302,787 (c) 302,787 - Petal, MS 277,104 415,193 692,297 22,580 West Point, MS 173,386 (c) 173,386 - Rock Hill, SC 216,777 466,450 683,227 25,367 Columbia, TN 226,300 (c) 226,300 - Johnson City, TN 215,567 (c) 215,567 - Tusculum, TN 182,349 507,293 689,642 27,588 Hi-Lo Automotive: Mesquite, TX 233,420 513,523 746,943 15,461 Fort Worth, TX 197,037 512,296 709,333 13,906 Houston, TX 261,318 531,968 793,286 14,444 Arlington, TX 295,331 571,609 866,940 15,518 Garland, TX 239,570 512,023 751,593 13,897 Dallas, TX 281,347 543,937 825,284 13,745 McAllen, TX 265,177 605,397 870,574 3,952 Temple, TX 177,451 587,755 765,206 3,837 San Antonio, TX 200,510 643,741 844,251 4,202 Universal City, TX 247,264 570,677 817,941 3,725 Bastrop, TX 197,905 383,144 581,049 2,501 Lake Worth, TX 252,141 539,510 791,651 3,522 Nacogdoches, TX 190,324 522,232 712,556 3,409 Eagle Pass, TX 256,745 455,841 712,586 2,976 International House of Pancakes Restaurants: Stafford, TX 382,084 (c) 382,084 - Sunset Hills, MO 271,853 (c) 271,853 - Las Vegas, NV 519,947 (c) 519,947 - Fort Worth, TX 430,896 (c) 430,896 - Arlington, TX 404,512 (c) 404,512 - Matthews, NC 380,043 (c) 380,043 - Phoenix, AZ 483,374 (c) 483,374 - Linens 'n Things: Freehold, NJ 1,753,766 2,208,651 3,962,417 74,067 Marshalls: Freehold, NJ 2,052,946 2,585,432 4,638,378 86,702 Office Depot: Arlington, TX 596,024 1,411,432 2,007,456 67,551 OfficeMax: Corpus Christi, TX 893,270 1,055,008 1,948,278 55,503 Dallas, TX 1,118,500 1,709,891 2,828,391 85,612 Cincinnati, OH 543,489 1,574,551 2,118,040 58,372 Evanston, IL 1,867,831 1,757,618 3,625,449 24,655 Pier 1 Imports: Dallas, TX 189,010 1,085,502 1,274,512 47,078 Pizza Hut Restaurant: Orlando, FL 220,632 258,483 479,115 29,836 Rally's Restaurant: Toledo, OH 125,882 319,770 445,652 28,851 Scotty's: Orlando, FL 1,064,260 2,049,431 3,113,691 26,188 Orlando, FL 1,187,730 2,131,807 3,319,537 27,241 Sears Homelife Centers: Orlando, FL 820,397 2,184,721 3,005,118 141,782 Clearwater, FL 1,184,438 2,526,207 3,710,645 163,944 Oshmans: Dallas, TX 1,311,440 (c) 1,311,440 - Waccamaw: Fairfax, VA 2,156,801 (c) 2,156,801 - Wendy's Old Fashioned Hamburger Restau- rants: Fenton, MO 307,068 496,410 803,478 52,716 Longwood, FL 333,335 194,926 528,261 21,745 ----------- ----------- ------------ ---------- $83,356,403 $78,097,726 $161,454,129 $5,497,390 =========== =========== ============ ========== Properties the Company has Invested in Under Direct Financing Leases: Academy: Houston, TX - (c) (c) (c) Houston, TX - (c) (c) (c) Checkers Restaurant: Orlando, FL - (c) (c) (c) Denny's Restaurants: Landrum, SC - (c) (c) (c) Mooresville, NC - (c) (c) (c) Akron, OH (d) (d) (d) (d) Duncan, SC - (c) (c) (c) Topeka, KS - (c) (c) (c) Winter Springs, FL - (c) (c) (c) Eckerd: San Antonio, TX - (c) (c) (c) Dallas, TX - (c) (c) (c) Garland, TX - (c) (c) (c) Arlington, TX - (c) (c) (c) Millville, NJ - (c) (c) (c) Atlanta, GA - (c) (c) (c) Mantua, NJ - (c) (c) (c) Vineland, NJ (d) (d) (d) (d) Amarillo, TX - (c) (c) (c) Amarillo, TX (d) (d) (d) (d) Amarillo, TX - (c) (c) (c) Glassboro, NJ - (c) (c) (c) Kissimmee, FL - (c) (c) (c) Alice, TX (d) (d) (d) (d) Colleyville, TX - (c) (c) (c) Tampa, FL - (c) (c) (c) Food Lion Super- markets: Keystone Heights, FL (d) (d) (d) (d) Chattanooga, TN (d) (d) (d) (d) Lynchburg, VA (d) (d) (d) (d) Martinsburg, WV (d) (d) (d) (d) Good Guys: Stockton, CA (d) (d) (d) (d) Hardee's Restaurants: Mobile, AL - (c) (c) (c) Warrior, AL - (c) (c) (c) Horn Lake, MS - (c) (c) (c) Iuka, MS (d) (d) (d) (d) West Point, MS - (c) (c) (c) Biscoe, NC (d) (d) (d) (d) Aynor, SC (d) (d) (d) (d) Columbia, TN - (c) (c) (c) Johnson City, TN - (c) (c) (c) Hi-Lo Automotive: Edinberg, TX (d) (d) (d) (d) Copperas Cove, TX (d) (d) (d) (d) Baton Rouge, LA (d) (d) (d) (d) Lake Jackson, TX (d) (d) (d) (d) Fort Worth, TX (d) (d) (d) (d) Pantego, TX (d) (d) (d) (d) Fort Worth, TX (d) (d) (d) (d) Pharr, TX (d) (d) (d) (d) Baton Rouge, LA (d) (d) (d) (d) Houston, TX (d) (d) (d) (d) International House of Pancakes Restaurants: Stafford, TX - (c) (c) (c) Sunset Hills, MO - (c) (c) (c) Las Vegas, NV - (c) (c) (c) Fort Worth, TX - (c) (c) (c) Arlington, TX - (c) (c) (c) Matthews, NC - (c) (c) (c) Phoenix, AZ - (c) (c) (c) Levitz: Tempe, AZ (d) (d) (d) (d) Oshmans: Dallas, TX - (c) (c) (c) Waccamaw: Fairfax, VA - (c) (c) (c) COMMERCIAL NET LEASE REALTY, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED ------------------------------------------------------------------- December 31, 1995 (J) (K) (L) Life on Which Depreciation in Latest Income Date of Date Statement is Construction Acquired Computed ------------ -------- --------------- Properties the Company has Invested in Under Operating Leases: Academy: Houston, TX 1994 05/95 (c) Houston, TX 1995 06/95 (c) N. Richland Hills, TX (f) 08/95 (f) Barnes & Noble: Lakeland, FL 1995 07/94 (h) 40 years Brandon, FL 1995 08/94 (h) 40 years Denver, CO 1994 09/94 40 years Houston, TX 1995 10/94 (h) 40 years Plantation, FL (f) 05/95 (f) Cary, NC (f) 05/95 (f) Lafayette, LA (f) 06/95 (f) Oklahoma City, OK (f) 06/95 (f) Daytona, FL (f) 09/95 (f) Best Buy: Corpus Christi, TX 1967 11/93 40 years Blockbuster Music: Dallas, TX 1980 04/94 40 years Borders: Wilmington, DE 1994 12/94 40 years Richmond, VA 1995 06/95 40 years Burger King Restaurants: Asheboro, NC 1986 07/92 40 years Galliano, LA 1991 07/92 40 years John's Island, SC 1988 07/92 40 years Lake Charles, LA 1988 07/92 40 years Lancaster, OH 1987 07/92 40 years Natchez, MS 1986 07/92 40 years Tappahannock, VA 1987 07/92 40 years Warren, MI 1987 07/92 40 years Manchester, NH 1980 05/93 40 years Rochester, NH 1987 05/93 40 years St. Paul, MN 1986 06/93 40 years Columbus, OH 1982 06/93 40 years Opelousas, LA 1989 06/93 40 years Coon Rapids, MI 1990 06/93 40 years Checkers Restaurant: Orlando, FL 1988 07/92 (c) CompUSA: Mission Viejo, CA 1994 02/94 40 years Computer City: Miami, FL 1994 04/94 40 years Baton Rouge, LA 1995 12/95 40 years Denny's Restaurants: Greenville, SC 1985 05/93 40 years Landrum, SC 1992 05/93 (c) Mooresville, NC 1992 05/93 (c) Greensboro, NC 1992 05/93 40 years Houston, TX 1991 05/93 40 years Santee, SC 1992 05/93 40 years Duncan, SC 1992 05/93 (c) Topeka, KS 1990 06/93 (c) Winter Springs, FL 1994 01/94 (c) Eckerd: San Antonio, TX 1993 12/93 (c) Dallas, TX 1994 01/94 (c) Garland, TX 1994 02/94 (c) Arlington, TX 1994 02/94 (c) Millville, NJ 1994 03/94 (c) Atlanta, GA 1994 03/94 (c) Mantua, NJ 1994 06/94 (c) Amarillo, TX 1994 12/94 (c) Amarillo, TX 1994 12/94 (c) Glassboro, NJ 1994 12/94 (c) Kissimmee, FL 1995 04/95 (c) Colleyville, TX 1995 06/95 (c) Tampa, FL 1995 12/95 (c) Food 4 Less: Lemon Grove, CA (f) 07/95 (f) Golden Corral Family Steakhouse Restaurants: Foley, AL (e) 1984 10/84 35 years Edenton, NC 1984 11/84 35 years Woodstock, GA 1984 11/84 35 years Bonham, TX (e) 1984 12/84 35 years Center, TX (e) 1984 12/84 35 years Gilmer, TX (e) 1984 12/84 35 years Leitchfield, KY (e) 1984 12/84 35 years Marietta, GA (g) 1984 12/84 35 years Rockledge, FL 1984 12/84 35 years Silsbee, TX (e) 1984 12/84 35 years Atlanta, TX 1985 01/85 35 years Vernon, TX (e) 1985 03/85 35 years Abbeville, LA 1985 04/85 35 years Fredericksburg, TX 1985 04/85 35 years Gonzales, TX (e) 1985 04/85 35 years Bowie, TX (e) 1985 05/85 35 years Clanton, AL (e) 1985 05/85 35 years Jacksonville, TX 1985 05/85 35 years Lake Placid, FL (e) 1985 05/85 35 years Pleasanton, TX 1985 05/85 35 years Marble Falls, TX (e) 1985 06/85 35 years Ennis, TX 1985 07/85 35 years Franklin, LA (e) 1985 07/85 35 years Melbourne, FL 1985 07/85 35 years Franklin, VA 1987 02/87 40 years Minden, LA (e) 1989 03/89 40 years Durant, OK 1989 08/89 40 years Hardee's Restaurants: Chalkville, AL 1992 10/93 40 years Gulf Shores, AL 1992 10/93 40 years Mobile, AL 1993 10/93 (c) Warrior, AL 1992 10/93 (c) Horn Lake, MS 1993 10/93 (c) Petal, MS 1993 10/93 40 years West Point, MS 1993 10/93 (c) Rock Hill, SC 1993 10/93 40 years Columbia, TN 1993 10/93 (c) Johnson City, TN 1993 10/93 (c) Tusculum, TN 1993 10/93 40 years Hi-Lo Automotive: Mesquite, TX 1994 10/94 40 years Fort Worth, TX 1994 11/94 40 years Houston, TX 1994 11/94 40 years Arlington, TX 1993 11/94 40 years Garland, TX 1993 11/94 40 years Dallas, TX 1994 12/94 40 years McAllen, TX 1982 09/95 40 years Temple, TX 1989 09/95 40 years San Antonio, TX 1994 09/95 40 years Universal City, TX 1995 09/95 40 years Bastrop, TX 1994 09/95 40 years Lake Worth, TX 1995 09/95 40 years Nacogdoches, TX 1995 09/95 40 years Eagle Pass, TX 1994 09/95 40 years International House of Pancakes Restaurants: Stafford, TX 1992 10/93 (c) Sunset Hills, MO 1993 10/93 (c) Las Vegas, NV 1993 12/93 (c) Fort Worth, TX 1993 12/93 (c) Arlington, TX 1993 12/93 (c) Matthews, NC 1993 12/93 (c) Phoenix, AZ 1993 12/93 (c) Linens 'n Things: Freehold, NJ 1994 08/94 40 years Marshalls: Freehold, NJ 1994 08/94 40 years Office Depot: Arlington, TX 1991 01/94 40 years OfficeMax: Corpus Christi, TX 1967 11/93 40 years Dallas, TX 1993 12/93 40 years Cincinnati, OH 1994 07/94 40 years Evanston, IL 1995 06/95 40 years Pier 1 Imports: Dallas, TX 1980 04/94 40 years Pizza Hut Restaurant: Orlando, FL 1974 08/93 20.9 years Rally's Restaurant: Toledo, OH 1989 07/92 38.8 years Scotty's: Orlando, FL 1995 06/95 40 years Orlando, FL 1995 06/95 40 years Sears Homelife Centers: Orlando, FL 1992 05/93 40 years Clearwater, FL 1992 05/93 40 years Oshmans: Dallas, TX 1994 03/94 (c) Waccamaw: Fairfax, VA 1995 12/95 (c) Wendy's Old Fashioned Hamburger Restau- rants: Fenton, MO 1985 07/92 33 years Longwood, FL 1982 07/92 31.4 years Properties the Company has Invested in Under Direct Financing Leases: Academy: Houston, TX 1994 05/95 (c) Houston, TX 1995 06/95 (c) Checkers Restaurant: Orlando, FL 1988 07/92 (c) Denny's Restaurants: Landrum, SC 1992 05/93 (c) Mooresville, NC 1992 05/93 (c) Akron, OH 1992 05/93 (d) Duncan, SC 1992 05/93 (c) Topeka, KS 1990 06/93 (c) Winter Springs, FL 1994 01/94 (c) Eckerd: San Antonio, TX 1993 12/93 (c) Dallas, TX 1994 01/94 (c) Garland, TX 1994 02/94 (c) Arlington, TX 1994 02/94 (c) Millville, NJ 1994 03/94 (c) Atlanta, GA 1994 03/94 (c) Mantua, NJ 1994 06/94 (c) Vineland, NJ 1990 11/94 (d) Amarillo, TX 1994 12/94 (c) Amarillo, TX 1994 12/94 (d) Amarillo, TX 1994 12/94 (c) Glassboro, NJ 1994 12/94 (c) Kissimmee, FL 1995 04/95 (c) Alice, TX 1995 06/95 (d) Colleyville, TX 1995 06/95 (c) Tampa, FL 1995 12/95 (c) Food Lion Super- markets: Keystone Heights, FL 1993 05/93 (d) Chattanooga, TN 1993 10/93 (d) Lynchburg, VA 1994 01/94 (d) Martinsburg, WV 1994 08/94 (d) Good Guys: Stockton, CA 1991 07/94 (d) Hardee's Restaurants: Mobile, AL 1993 10/93 (c) Warrior, AL 1992 10/93 (c) Horn Lake, MS 1993 10/93 (c) Iuka, MS 1993 10/93 (d) West Point, MS 1993 10/93 (c) Biscoe, NC 1993 10/93 (d) Aynor, SC 1993 10/93 (d) Columbia, TN 1993 10/93 (c) Johnson City, TN 1993 10/93 (c) Hi-Lo Automotive: Edinberg, TX 1993 10/94 (d) Copperas Cove, TX 1994 10/94 (d) Baton Rouge, LA 1994 10/94 (d) Lake Jackson, TX 1994 10/94 (d) Fort Worth, TX 1993 10/94 (d) Pantego, TX 1993 10/94 (d) Fort Worth, TX 1993 11/94 (d) Pharr, TX 1993 11/94 (d) Baton Rouge, LA 1994 12/94 (d) Houston, TX 1982 09/95 (d) International House of Pancakes Restaurants: Stafford, TX 1992 10/93 (c) Sunset Hills, MO 1993 10/93 (c) Las Vegas, NV 1993 12/93 (c) Fort Worth, TX 1993 12/93 (c) Arlington, TX 1993 12/93 (c) Matthews, NC 1993 12/93 (c) Phoenix, AZ 1993 12/93 (c) Levitz: Tempe, AZ 1994 01/95 (d) Oshmans: Dallas, TX 1994 03/94 (c) Waccamaw: Fairfax, VA 1995 12/95 (c) COMMERCIAL NET LEASE REALTY, INC. NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION ---------------------------------------------------------------- December 31, 1995 (a) Transactions in real estate and accumulated depreciation during 1995, 1994 and 1993, are summarized as follows: Accumulated Cost Depreciation ------------ ------------ Properties the Company has Invested in Under Operating Leases: Balance, December 31, 1992 $ 24,110,390 $2,072,199 Acquisitions 31,748,181 - Sale of land and buildings (1,225,217) (11,764) Depreciation expense - 624,341 ------------ ---------- Balance, December 31, 1993 54,633,354 2,684,776 Acquisitions 55,219,077 - Depreciation expense - 1,076,593 ------------ ---------- Balance, December 31, 1994 109,852,431 3,761,369 Acquisitions 51,601,698 - Depreciation expense - 1,736,021 ------------ ---------- Balance, December 31, 1995 $161,454,129 $5,497,390 ============ ========== (b) As of December 31, 1995, all of the leases are treated as operating leases for federal income tax purposes. As of December 31, 1995, the aggregate cost of the Properties owned by the Company and its subsidiaries for federal income tax purposes was $219,057,229 and $152,715,644, respectively. (c) For financial reporting purposes, the portion of the lease relating to the building has been recorded as a direct financing lease. The cost of the building has been included in net investment in direct financing leases; therefore, depreciation is not applicable. (d) For financial reporting purposes, the lease for the land and building has been recorded as a direct financing lease. The cost of the land and building has been included in net investment in direct financing leases; therefore, depreciation is not applicable. (e) The tenant of this Property, Golden Corral Corporation, has subleased this Property to a separate operator. Golden Corral Corporation continues to be responsible for complying with all the terms of the lease agreement and is continuing to pay rent on this Property to the Company. (f) The Company owns only land for this Property. Pursuant to the lease agreement, the Company will purchase the building once construction is complete. (g) The tenant of this Property, Golden Corral Corporation, has subleased this Property to an operator of a Ragazzi's restaurant. Golden Corral Corporation continues to be responsible for complying with all of the terms of the lease agreement and is continuing to pay rent on this Property to the Company. (h) Date acquired represents acquisition date of land. Pursuant to the lease agreement, the Company purchased the buildings from the tenants upon completion of construction, generally within 12 months from the acquisition of the land. EXHIBITS -------- EXHIBIT INDEX ------------- Exhibit Page ------- ---- 3.1 Articles of Incorporation of the Registrant (filed as Exhibit 3.3(i) to the Registrant's Registration Statement No. 1-11290 on Form 8-B, and incorporated herein by reference). 3.2 Bylaws of the Registrant, (filed as Exhibit 3(ii) to Amendment No. 2 to the Registrant's Registration No. 33-83110 on Form S-3, and incorporated herein by reference). 4 Specimen Certificate of Common Stock, par value $.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant's Registration Statement No. 1-11290 on Form 8-B and incorporated herein by reference). 10.1 Stock Purchase Agreement dated as of January 23, 1992 by and among the Registrant, CNL Group, Inc. and certain entities affiliated therewith (filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference). 10.2 Letter Agreement dated July 10, 1992, amending Stock Purchase Agreement dated January 23, 1992 (filed as Exhibit 10.34 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, and incorporated herein by reference). 10.3 Form of Advisory Agreement between the Registrant and CNL Realty Advisors, Inc. (filed as Exhibit 10.21 to the Registrant's Report on Form 8 dated April 29, 1992, amending its Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference). 10.4 Advisory Agreement between Registrant and CNL Realty Advisors, Inc. effective as of April 1, 1993 and renewed January 1, 1995 (filed as Exhibit 10.04 to Amendment No. 1 to the Registrant's Registration Statement No. 33-61214 on Form S-2, and incorporated herein by reference). 10.5 Revolving Line of Credit and Security Agreement, dated as of July 25, 1994, among Registrant, certain lenders listed therein and First Union National Bank of Florida, as the Agent, relating to a $100,000,000 loan (filed as Exhibit 10.11 to the Registrant's Quarterly Report on Form 10- Q for the quarter ended June 30, 1994, and incorporated herein by reference). 10.6 1992 Commercial Net Lease Realty, Inc. Stock Option Plan (filed as Exhibit No. 10(x) to the Registrant's Registration Statement No. 33-83110 on Form S-3, and incorporated herein by reference). 10.7 Interest Rate Cap Agreement dated February 28, 1994, by and between the Registrant and First Union National Bank of North Carolina (filed as Exhibit No. 10(xi) to the Registrant's Registration Statement No. 33-83110 on Form S-3, and incorporated herein by reference). 10.8 Interest Rate Cap Agreement dated December 23, 1994, by and between the Registrant and First Union National Bank of Florida (filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated by reference). 10.9 Second Amended and Restated Line of Credit and Security Agreement, dated December 7, 1995, among Registrant, certain lenders listed therein and First Union National Bank of Florida, as the Agent relating to a $100,000,000 loan (filed as Exhibit 10.14 to the Registrant's Current Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.10 Secured Promissory Note, dated December 14, 1995, among Registrant and Principal Mutual Life Insurance Company relating to a $13,150,000 loan (filed as Exhibit 10.15 to the Registrant's Current Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.11 Mortgage and Security Agreement, dated December 14, 1995, among Registrant and Principal Mutual Life Insurance Company relating to a $13,150,000 loan (filed as Exhibit 10.16 to the Registrant's Current Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.12 Loan Agreement, dated January 19, 1996, among Registrant and Principal Mutual Life Insurance Company relating to a $39,450,000 loan. Filed herewith. 10.13 Secured Promissory Note, dated January 19, 1996, among Registrant and Principal Mutual Life Insurance Company relating to a $39,450,000 loan. Filed herewith. 13 Annual Report to Shareholders for the year ended December 31, 1995 ("filed" only to the extent material therefrom is specifically incorporated herein by reference). 23 Consent of Independent Accountants dated March 22, 1996. Filed herewith. EX-1 2 EXHIBIT 10.12 LOAN AGREEMENT EXHIBIT 10.12 LOAN AGREEMENT LOAN AGREEMENT ---------------- This Loan Agreement is made this 19th day of January, 1996, by and between COMMERCIAL NET LEASE REALTY, INC., a Maryland corporation ("Borrower") and PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, an Iowa corporation ("Lender"). RECITALS A. Borrower is the owner of certain real property, legally described in Exhibit "A" attached hereto and made a part hereof (the "Premises"). B. Borrower has requested and Lender has agreed to make a loan to Borrower in the maximum principal amount of Thirty-Nine Million Four Hundred Fifty Thousand and 00/100 Dollars ($39,450,000.00) ("Loan") pursuant to the terms and conditions of that certain Mortgage Loan Commitment Application (the "Commitment") dated October 10, 1995 as amended by Letter Agreement dated October 30, 1995. C. The Loan is evidenced by a Secured Promissory Note (the "Note") and is secured by those certain mortgages, deeds of trust, deeds to secure debt or other similar instruments (collectively, the "Mortgage") dated this date made by Borrower in favor of Lender encumbering the Premises, those certain Assignment of Leases and Rents dated this date made by Borrower in favor of Lender, and various other documents, each of which evidences or secures the Loan or evidences such security. D. The principal balance of the Loan has been allocated by Borrower and Lender to each of the parcels of real estate comprising the Premises as more particularly set forth in Exhibit B attached hereto and made a part hereof (the "Loan Allocation"). E. Notwithstanding certain provisions of the Note or Mortgage to the contrary, Lender has agreed that Borrower may obtain the release of certain portions of the Premises in return for the grant of substitute collateral, or the prepayment of a portion of the Loan in excess of the value of the portion of the Premises released, all as more particularly set forth below. NOW, THEREFORE, in consideration of the mutual covenants, conditions, promises and agreements herein contained, the sufficiency of which is hereby acknowledged, IT IS HEREBY AGREED AS FOLLOWS: ARTICLE ONE ----------- INCORPORATION OF RECITALS; DEFINITIONS Recitals A. through E., both inclusive, immediately above, are incorporated into this Article One as though fully set forth herein. Unless otherwise provided herein, all capitalized terms used shall have the same meaning as set forth in the Mortgage. ARTICLE TWO ------------- SUBSTITUTION OF REAL PROPERTY --------------------------------- 2.01 Notwithstanding anything contained in the Mortgage or the other Loan Documents to the contrary, so long as no Event of Default exists under the Note or Mortgage, Lender agrees, upon the request of Borrower, to release the lien of the Loan Documents from any property which comprises a portion of the Premises upon the following conditions: A. Borrower shall grant to Lender a valid, perfected first mortgage lien on a parcel of real property (a "Substitute Premises") whose value and net operating income is equal to or greater than the value and net operating income of the property for which a release is requested and the tenant of which Substitute Premises has a credit rating equal to or better than the tenant or guarantor, as applicable, of the property for which a release is requested, all as determined by Lender in its sole and absolute discretion. B. Borrower shall satisfy with respect to the Substitute Premises all of the conditions of closing for the Premises set forth in the Commitment, including, without limitation, approval by Lender of the leases and tenants of such property, plus any other conditions then being imposed by Lender for mortgage loans on real property with any underwriting criteria similar to the Substitute Premises. C. Borrower shall pay to Lender an underwriting fee equal to the sum of (i) $5,000.00 for each Substitute Premises included in the substitution transaction, plus (ii) $1,500.00 for each substitution transaction. In addition, Borrower shall pay for all of Lender s costs and reasonable fees incurred in connection with such substitution, including without limitation, appraisals, legal counsel, survey, title insurance, recording and escrow charges, environmental reports, documentary stamps or intangible taxes, and property inspection reports. 2.02 Upon the substitution of real property acceptable to Lender, the Loan Documents shall be amended to add the documents encumbering the Substitute Premises to the cross-default and cross-collateral provisions thereof, and Exhibit A hereto shall be automatically adjusted to add such Substitute Premises and delete any released portion of the Premises, without any further action by Borrower and Lender. 2.03 In the event Lender from time to time accepts any Substitute Premises, Lender may, in its sole discretion, reallocate the then outstanding principal balance of the Note among each property then comprising the Premises, including the Substitute Premises, and Exhibit B attached hereto and made a part hereof, shall be deemed to be automatically so adjusted without any further action by Borrower and Lender. ARTICLE THREE --------------- SUBSTITUTION OF U.S. TREASURY SECURITIES --------------------------------------------- 3.01 Notwithstanding anything contained in the Mortgage or the other Loan Documents to the contrary, so long as no Event of Default exists under the Note or Mortgage, Lender agrees, upon the request of Borrower, to release the lien of the Loan Documents from all of the Premises upon the following conditions: A. Borrower shall deliver to Lender, and grant a valid, perfected first security interest in, U.S. Treasury securities in form and principal amount reasonably satisfactory to Lender. The U.S. Treasury securities provided to Lender must have a cash flow at least equal to or greater than the required monthly payments of principal and interest and the balloon payment at maturity under the terms of the Note. B. In connection with a substitution of U.S. Treasury securities for the Premises, Borrower shall pay Lender a processing fee of $10,000.00. In addition, Borrower shall pay for all of Lender s costs and fees incurred in connection with such substitution of collateral, including without limitation, outside legal counsel fees. Further, Borrower shall cooperate with Lender in documenting such transaction, and shall take all actions reasonably required by Lender in furtherance of the requested substitution of collateral. ARTICLE FOUR -------------- PARTIAL PREPAYMENTS; ALLOCATION OF PRINCIPAL PAYMENTS ------------------------------------------------------------ 4.01 Notwithstanding anything contained in the Mortgage or the other Loan Documents to the contrary, so long as no Event of Default exists under the Note or Mortgage, Lender agrees upon the request of Borrower to release the lien of the Loan Documents from any property which comprises a portion of the Premises upon the following conditions: A. Borrower shall prepay to Lender 125% of the principal balance of the Loan allocated to such portion of the Premises, as such amount is originally set forth on Exhibit B as such amount may be increased or reduced from time to time as herein described, plus a Make Whole Premium calculated on the amount of such prepayment; and, upon such prepayment the monthly payment under the Note shall be reduced accordingly. B. So long as no Event of Default exists under the Note or the Mortgage, upon receipt by Lender of monthly installments of principal, the portion of such principal payment equal to the percentage of the principal balance of the Note allocated to each property comprising the Premises as set forth on Exhibit B, and as adjusted from time to time pursuant to the provision of Section 2.03 above, shall be applied pro rata to reduce such allocated principal amount of each property. Similarly, so long as no Event of Default exists under the Note or the Mortgage, upon receipt of a prepayment pursuant to Section 4.01A, only the portion of such prepayment in excess of the 100% allocated Loan amount (exclusive of the Make Whole Premium) shall be allocated pro rata to all remaining properties in accordance with the ratio of the percentages contained on Exhibit B, exclusive of the allocation to the property being released as a result of such prepayment, as the same may be adjusted from time to time pursuant to the provisions of Section 2.03 above. Upon the written request of Borrower from time to time, Lender shall confirm the allocated Loan amount of each property. ARTICLE FIVE -------------- CONDITIONAL RECOURSE; KMART LEASE GUARANTIES -------------------------------------------------- 5.01. The obligations of each Lessee of portions of the Premises described as Store Numbers 84 (OfficeMax, Dallas, Texas), 99 (OfficeMax, Cincinnati, Ohio). 126 (Borders, Wilmington, Delaware) and 134 (Borders, Richmond, Virginia) are guaranteed by Kmart Corporation ("Kmart"), each pursuant to the terms of a written Lease Guaranty (each a "Kmart Guaranty" and collectively, the "Kmart Guaranties"). 5.02 Lender required as a condition of funding the Loan that Borrower provide to Lender the written affirmation of Kmart s obligations pursuant to the Kmart Guaranties. Borrower has of yet been unable to obtain the written affirmation of Kmart. 5.03 Notwithstanding any exculpation of Borrower contained herein or in any of the Loan Documents to the contrary, until such time as Borrower provides a written affirmation of Kmart reasonably acceptable to Lender with respect to any of the Kmart Guaranties, at any time following an Event of Default by the Lessee under any of the leases which is the subject of any Kmart Guaranty, Kmart denies liability under such Kmart Guaranty on account of the lack of due execution or delivery thereof, or on account of the release of Kmart thereunder for any reason whatsoever other than strictly in accordance with the terms thereof, Borrower, but not its shareholders, officers, directors, employees or agents, shall be personally liable to Lender for 125% of the amount set forth on Exhibit B which is allocated to the respective portion of the Premises which is the subject of such Kmart Guaranty, plus the Make Whole Premium calculated on such amount had such amount been prepaid as of the date of the Event of Default. Borrower s liability hereunder shall continue notwithstanding any action or inaction by Borrower or the Lessee under the respective lease, whether or not Lender is deemed secure from other sources, and whether or not Borrower or Lender chooses to pursue any remedies against the respective Lessee for its default. The provisions of this Article 5 shall terminate as to each particular portion of the Premises subject hereto upon Lender s receipt of the aforesaid satisfactory evidence of the affirmation of the applicable Kmart Guaranty. ARTICLE SIX ------------- CONDITIONAL RECOURSE; SEARS LEASE ------------------------------------- 6.01 The portion of the Premises described as store Number 40 (Sears, Orlando, Florida) is occupied by Sears, Roebuck & Co. ("Sears") pursuant to the terms of a written lease dated December 10, 1990 (the "Sears Lease"). Lender required as a condition of funding the Loan that Borrower provide to Lender a written ratification of the Sears Lease by Sears. Borrower has of yet been unable to obtain such a written ratification. 6.02 Notwithstanding any exculpation of Borrower contained herein or in any of the other Loan Documents to the contrary, until such time as Borrower provides Lender with a written ratification of the Sears Lease by Sears reasonably acceptable to Lender, in the event Sears denies liability under the Sears Lease on account of lack of due execution by the Landlord thereunder, Borrower, but not its shareholders, officers, directors, employees or agents, shall be personally liable to Lender for 125% of the amount set forth on Exhibit B which is allocated to Store Number 40, as such amount may be modified from time to time, plus the Make Whole Premium calculated on such amount had such amount been prepaid as of the date Sears claims that the Sears Lease is unenforceable on account of lack of due execution by the Landlord thereunder. ARTICLE SEVEN --------------- CASUALTY DAMAGE TO WILMINGTON, DELAWARE PROPERTY; ------------------------------------------------------- RELEASE OF COLORADO SITE --------------------------- 7.01 Lender acknowledges that prior to the date of this Agreement, a portion of the roof of Store Number 126 (Borders, Wilmington, Delaware) was damaged as a result of excessive snow and ice build-up on the roof of the building. A portion of the roof over the rear of the building partially collapsed. The store is temporarily closed pending reconstruction by Border s Inc. ("Borders") pursuant to its Lease (the "Borders' Lease"). Borders remains obligated to pay rent during any period of reconstruction in accordance with the terms of the Borders Lease. 7.02 Notwithstanding the casualty damage to such portion of the Premises (the "Delaware Site"), Lender is willing to fund the Loan and include the Delaware Site as security therefor, provided that Borrower also grant to Lender as additional security for the Loan, a Deed of Trust or other security interest in Store Number 106 (Barnes & Noble, Denver, Colorado) (the "Colorado Site"). 7.03 Upon the written request of Borrower, provided Borrower is not then in default under any obligation of Borrower hereunder or under any of the Loan Documents, Lender agrees to release the lien of the Loan Documents from the Colorado Site upon the receipt of Lender of the following: A. The written certification of an architect reasonably acceptable to Lender licensed in the State of Delaware that the improvements on the Delaware Site have been reconstructed substantially in compliance with the plans and specifications therefor. B. A certificate of occupancy or other similar permit issued by each governmental authority having jurisdiction over the Delaware Site from which such a certificate is required for the operation by Borders of its store thereon. C. Written estoppel letter from Borders, in substantially the same form as was delivered to Lender in connection with the funding of the Loan, confirming that: 1. its store operated pursuant to the Borders' Lease is open for business with the public; 2. the reconstruction of the Store has been completed to Borders' satisfaction; and 3. the Borders Lease remains in full force and effect, without any amendment or modification and with no default thereunder by Borders or Borrower. D. Evidence that the cost of reconstruction of its store has been fully paid for in the form of either (i) an estoppel letter from Borders, (ii) title insurance against potential liens for any reconstruction related work, or (iii) a cash escrow or other reasonable assurance against mechanics liens reasonably satisfactory to Lender. E. An endorsement to Lender s title insurance policy updating the mechanic's lien coverage on the Delaware Site to include the date of the release of lien on the Colorado Site. F. A site inspection report of the Delaware Site and its improvements satisfactory to Lender made by any employee or employees of Lender, independent contractor or contractors, or any combination thereof confirming any or all of the foregoing. G. Payment of all reasonable out-of-pocket expenses incurred by Lender in connection with any of the foregoing, as well as an administrative release fee equal to $2,500.00. H. Such other items as Lender may reasonably request. ARTICLE EIGHT --------------- CROSS-COLLATERAL; USE OF PROCEEDS ------------------------------------- 8.01 Borrower intends that each obligation of Borrower pursuant to the Mortgage be secured by each parcel of real property comprising the Premises. Upon the occurrence of any Event of Default by Borrower hereunder or under the Loan Documents, all rents, income or other proceeds of any portion of the Premises may be applied by Lender, in its sole and absolute discretion, with respect to any expense incurred related to any portion of the Premises, regardless of the source thereof. ARTICLE NINE -------------- GENERAL -------- 9.01. This Agreement contains the entire agreement and understanding of the parties in respect to the subject matter hereof, and the same may not be amended, modified or discharged nor may any of its terms be waived, except by an instrument in writing signed by the party to be bound thereby. The waiver of any term or provision of this Agreement shall not constitute a waiver of any other term or provision of this Agreement, nor shall the right to require any enforcement of any term or provision of this Agreement be permanently waived, if a continuing breach of any such term or provision arises. The parties agree that upon execution of this Agreement the Commitment shall merge herein and the provisions of the Commitment shall automatically become null and void. 9.02. The parties each agree to do, execute, acknowledge and deliver all such further acts, instruments and assurances and to take all such further action before or after the closing as shall be necessary or desirable to perform this Agreement and consummate and effect the transactions contemplated hereby. 9.03. Terms. A. The terms "hereby," "hereof," "hereto," "herein," "hereunder" and any similar terms shall refer to this Agreement, and the term "hereafter" shall mean after, and the term "heretofore" shall mean before, the date of this Agreement. B. Words of the masculine, feminine or neuter gender shall mean and include the correlative words of other genders, and words importing the singular number shall mean and include the plural number and vice versa. C. Words importing persons shall include firms, associations, partnerships (including limited partnerships), trusts, corporations and other legal entities, including public bodies, as well as natural persons. D. The terms "include," "including" and similar terms shall be construed as if followed by the phrase "without being limited to." E. Whenever under the terms of this Agreement the time for performance of a covenant or condition falls upon a Saturday, Sunday or holiday, such time for performance shall be extended to the next business day. Otherwise, all references herein to "days" shall mean calendar days. F. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. G. Time is of the essence of this Agreement. 9.04 The following is added to this Agreement pursuant to the requirements of Missouri law, more particularly Section 432.045 R.S.Mo.; as used below "borrower(s)" shall mean Borrower and "creditor" shall mean Lender: ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU (BORROWER(S)) AND US (CREDITOR) FORM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT. 9.05 Nothing herein constitutes any admission by Borrower of any defect in, or unenforceability of, the Kmart Guarantees or the Sears Lease. 9.06 Notwithstanding any provisions in any Mortgage or other Loan Document to the contrary, Lender acknowledges and agrees that the matters disclosed in the Affidavit of President of Borrower of even date herewith are hereby accepted by Lender and shall not constitute the basis for a breach of any representation or warranty contained in any of the Loan Documents. ARTICLE TEN ------------- BORROWER EXCULPATION ----------------------- 10.01 Notwithstanding any provision to the contrary in the Note, the Mortgage, or any other Loan Document, and except as otherwise provided in this paragraph, the liability of Borrower under the Loan Documents shall be limited to the interest of Borrower in the Premises and the rents, issues, proceeds and profits thereof. In the event of foreclosure of the liens evidenced by the Loan Documents, no judgment for any deficiency upon the indebtedness evidenced by the Loan Documents shall be sought or obtained by Lender against Borrower. Nothing contained in this paragraph shall: (A) prevent the failure of Borrower to make any payment or to perform any obligation under any of the Loan Documents within the time periods provided therein from being an Event of Default thereunder; (B) be construed as limiting the obligations of Borrower to any lessee under any lease of the Premises; (C) in any way limit or impair the lien or enforcement of the Loan Documents pursuant to the terms thereof; or (D) limit the obligations of any indemnitor or guarantor, if any, of obligations of Borrower under the Loan Documents. 10.02 Notwithstanding the foregoing paragraph, Borrower, but not its shareholders, officers, directors, employees or agents, shall be personally liable to Lender for: (A) failure of Borrower to comply with paragraphs 2 (taxes and assessments) and 3 (insurance) of the Mortgage (or in connection with the Deed to Secure Debt paragraphs 1.02 (taxes, liens and other charges) and 1.03 (insurance)) with respect to amounts accruing prior to a Sale of the Premises, as defined below; (B) any event or circumstance for which Borrower indemnifies Lender under paragraph 1(m) (environmental indemnity) of the Mortgage (or in connection with the Deed to Secure Debt paragraph 1.06(m) (Environmental Indemnity)); (C) failure of Borrower to pay utilities accruing prior to a Sale of the Premises, as defined below, on or before the date such payments are due; (D) operation and maintenance of the Premises applicable to the time period prior to a Sale of the Premises, as defined below; (E) any sums expended by Lender in fulfilling the obligations of Borrower as lessor under any lease of the Premises prior to a sale of the Premises pursuant to foreclosure or power of sale, a bona fide sale (permitted by the terms of paragraph 1(l) of the Mortgage (or in connection with the Deed to Secure Debt paragraph 1.06(i))or consented to in writing by Lender) to an unrelated third party or upon conveyance to Lender of the Premises by a deed acceptable to Lender in form and content (each of which shall be referred to as a "Sale" for purposes of this paragraph) or expended by Lender after a Sale of the Premises for obligations of Borrower which arose prior to a Sale of the Premises; (F) any rents or other income regardless of type or source of payment (including, but not limited to, CAM charges, lease termination payments, refunds of any type, prepayment of rents, settlements of litigation, or settlements of past due rents) from the Premises which Borrower has received or has a right to receive after an Event of Default under the Loan Documents or an event which with the passage of time, the giving of notice or both would constitute an Event of Default, either or both of which has occurred and is continuing, and which are not applied to (A) expenses of operation and maintenance of the Premises and the taxes, assessments, utility charges and insurance of the Premises, taking into account sufficient reserves for the same and for replacements and recurring items, and (B) payment of principal, interest and other charges when due under the Loan Documents; provided that any payments to parties related to Borrower shall be considered expenses of operation only if they are at market rates or fees consistent with market rates or fees for the same or similar services; (G) any security deposits of tenants not turned over to Lender upon conveyance of the Premises to Lender pursuant to foreclosure or power of sale or by a deed acceptable to Lender in form and content; (H) misapplication or misappropriation of tax reserve accounts, tenant improvement reserve accounts, security deposits, prepaid rents or other similar sums paid to or held by Borrower or any other entity or person in connection with the operation of the Premises; (I) any waste committed or allowed by Borrower with respect to the Premises prior to a Sale of the Premises; (J) any insurance or condemnation proceeds or other similar funds or payments with respect to a casualty or condemnation occurring prior to a Sale of the Premises, applied by Borrower in a manner other than as expressly provided in the Loan Documents; (K) any breach or violation of paragraph 1(l) (due on sale or encumbrance) of the Mortgage (or in connection with the Deed to Secure Debt paragraph 1.06(i) (due on sale or encumbrance)), other than the filing of a nonmaterial mechanic's lien affecting the Premises, the granting of any utility or other nonmaterial easement or servitude burdening the Premises, or any other transfer or encumbrance not in the nature of a transfer, reduction or impairment of any material economic interest in the Premises; and (L) any fraud or willful misrepresentation by Borrower regarding the Premises, the making or delivery of any of the Loan Documents or in any materials or information provided by Borrower in connection with the loan. Notwithstanding anything herein contained to the contrary, Borrower, but not its shareholders, officers, directors, employees, or agents shall be personally liable to Lender for 125% of the amount set forth on Exhibit B, as adjusted from time to time pursuant to Section 2.03 above, which is allocated to the respective portion of the Premises (the "Applicable Portion of the Premises"), plus the Make Whole Premium calculated on such amount had such amount been prepaid as of the date of the occurrence set forth below: (a) in the event of any amendment, modification or termination by Borrower of the particular Lease (as defined in the Mortgage, Deed to Secure Debt or Deed of Trust with respect to the Applicable Portion of the Premises) for the Applicable Portion of the Premises without the prior written consent of Lender; (b) in the event the Lessee (as defined in the Mortgage, Deed to Secure Debt or Deed of Trust with respect to the Applicable Portion of the Premises) under the particular Lease for the Applicable Portion of the Premises is not obligated to notify Lender of a default by Borrower and Borrower defaults under said Lease and Lender does not receive notice of said default following the occurrence thereof within a reasonable period of time to effect cure of said default; or (c) in the event Borrower violates any exclusive use or non-compete provision granted to the Lessee under the particular Lease for the Applicable Portion of the Premises. IN WITNESS WHEREOF, the parties have caused this Loan Agreement to be duly executed and delivered as of the date first above written. COMMERCIAL NET LEASE REALTY, INC., a Maryland corporation By: /s/Gary M. Ralston ------------------------------ Its: Executive Vice President ------------------------------ PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, an Iowa corporation By: /s/JoEllen J. Watts ------------------------------ Its: Counsel ------------------------------ By: /s/Stephen G. Skrivanek ------------------------------ Its: Counsel ------------------------------ EXHIBIT B LOAN AGREEMENT Loan Allocation Amounts
% ALLOCATION LOAN TO TOTAL STORE PROPERTY STREET ADDRESS CITY STATE ALLOCATION AMOUNT - -------------------------------------------------------------------------------------------------------------------------------- 40 Sears 2000 Principal Row Orlando FL $ 1,676,900.00 4.251 52 Food Lion Route 2, Box 2500 Keystone Heights FL $ 1,079,531.00 2.736 59 Food Lion 3710 Brainard Rd. Chattanooga TN $ 1,136,988.00 2.882 74 Int'l House of Pancakes 12725 Southwest Freeway Stafford TX $ 532,299.00 1.349 75 Int'l House of Pancakes 10893 Sunset Hills Plaza Sunset Hills MO $ 562,589.00 1.426 78 Int'l House of Pancakes 6870 W. Cheyenne Ave. Las Vegas NV $ 632,526.00 1.603 79 Int'l House of Pancakes 8640 E. Hwy 30 Ft. Worth TX $ 588,447.00 1.492 80 Int'l House of Pancakes 5920 W. Interstate 20 West Arlington TX $ 565,070.00 1.432 81 Int'l House of Pancakes 9253 E. Independence Blvd. Matthews NC $ 577,942.00 1.465 82 Int'l House of Pancakes 1920 Bell Rd. Phoenix AZ $ 581,831.00 1.475 83 Eckerd Drug 2806 Nogalitos Ave. San Antonio TX $ 683,545.00 1.733 84 OfficeMax 15440 Dallas Parkway Dallas TX $ 1,578,284.00 4.001 87 Eckerd Drug 4610 Frankford Road Dallas TX $ 658,556.00 1.669 88 Office Depot Hwy 360 & Randol Mill Rd. Arlington TX $ 1,120,190.00 2.840 89 Eckerd Drug 3141 Broadway Blvd. Garland TX $ 529,918.00 1.343 90 Eckerd Drug 1800 Brown Blvd. Arlington TX $ 560,824.00 1.422 93 Eckerd Drug 47 High St. Millville NJ $ 695,590.00 1.763 94 Eckerd Drug Hicks and Floyd Road Atlanta GA $ 621,619.00 1.576 97 Computer City 7440 SW 88th St. Miami FL $ 2,555,634.00 6.478 98 Eckerd Drug Route 45 and Berkley Road Mantua NJ $ 723,142.00 1.833 99 OfficeMax 4504 Eastgage Blvd. Cincinnatti OH $ 1,181,897.00 2.996 100 Good Guys 646 W. Hammer Lane Stockton CA $ 1,984,009.00 5.029 102 Barnes & Noble Brandon Town Center Brandon FL $ 1,675,832.00 4.248 103 Food Lion 1140 Winchester Ave. Martinsburg WV $ 1,111,689.00 2.818 115 Eckerd Drug 970 N. Main St. Vineland NJ $ 752,970.00 1.909 122 Eckerd Drug 317 Amarillo Blvd. East Amarillo TX $ 643,467.00 1.631 123 Eckerd Drug 2102 W. Washington St. Amarillo TX $ 836,290.00 2.120 124 Eckerd Drug 815 S. Georgia St. Amarillo TX $ 546,540.00 1.385 125 Eckerd Drug 695 N. Delsea Drive Glassboro NJ $ 793,352.00 2.011 126 Borders Books 101 Geoffrey Drive Wilmington DE $ 5,073,641.00 12.861 130 Eckerd Drug 1999 Osceola Pkwy. Kissimmee FL $ 924,215.00 2.343 134 Borders West Broad St. Richmond VA $ 2,665,579.00 6.757 135 OfficeMax 2255 W. Howard Street Evanston IL $ 2,023,054.00 5.128 136 Eckerd Drug 4814 Colleyville Blvd. Colleyville TX $ 1,021,469.00 2.589 137 Eckerd Drug 215 N. Texas Blvd. Alice TX $ 554,571.00 1.406 -------------- ------- TOTALS $39,450,000.00 100.000 =============== ======= 106 Barnes & Noble 960-B S. Colorado Boulevard Denver CO $ 3,068,319.00
EX-2 3 EXHIBIT 10.13 SECURED PROMISSORY NOTE EXHIBIT 10.13 SECURED PROMISSORY NOTE SECURED PROMISSORY NOTE ----------------------- D-750906 $39,450,000.00 January 19, 1996 Chicago, Illinois FOR VALUE RECEIVED, the undersigned, COMMERCIAL NET LEASE REALTY, INC., a Maryland corporation, hereby promises to pay to the order of PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, an Iowa corporation, at the Home Office of Principal Mutual Life Insurance Company at 711 High Street, Des Moines, Iowa 50392, or at such other place as the holder of this Note may designate, the principal sum of Thirty-Nine Million Four Hundred Fifty Thousand and No/100 Dollars ($39,450,000.00) or so much thereof as shall from time to time have been advanced, together with interest on the unpaid balance of said sum from the date of disbursement at the rate of seven and four hundred thirty-five one thousandths percent (7.435%) per annum, computed on the basis of a 360 day year composed of twelve 30-day months, in installments as follows: Beginning on February 15, 1996, principal and interest shall be due and payable in installments of Three Hundred Forty-One Thousand Two Hundred Four and 88/100th Dollars ($341,204.88) with an installment in a like amount due and payable on the same day of each month thereafter except that all remaining principal and interest shall be due and payable on February 15, 2006 ("Maturity Date"). All such payments shall be made by wire transfer of immediately available funds to the registered holder hereof at Norwest Bank, Iowa, N.A., 7th and Walnut Streets, Des Moines, Iowa 50304, for credit to Principal Mutual Life Insurance Company, General Account No. 014752, RE: D-750906 with reference to the undersigned. If on the date of the first installment, interest is accrued for more or less than one installment period, the amount of said installment shall be increased or decreased by the amount that the interest accrued exceeds or is less than the interest for one installment period based on the actual number of days elapsed to the date of said installment. All principal and interest shall be paid in lawful money of the United States of America. No privilege is reserved by the undersigned to prepay any principal of this Note prior to the Maturity Date, except as expressly set forth in that certain Loan Agreement dated this date (the "Loan Agreement") made by and between the undersigned and Principal Mutual Life Insurance Company, and except that anytime after the date hereof, so long as no default or Event of Default exists under this Note or any instrument by which it is secured, privilege is reserved, after giving sixty (60) days' prior written notice to the holder of this Note, to prepay in full, but not in part, all principal and interest to the date of payment, along with all sums, amounts, advances, or charges due under any instrument or agreement by which this Note is secured, upon the payment of a "Make Whole Premium." From the date hereof up to and including February 15, 2000, the "Make Whole Premium" shall be the greater of (a) one percent (1%) of the principal amount to be prepaid, or (b) the excess, if any, of: (i) the aggregate present value as of the date of payment or prepayment noticed as set forth above (hereinafter, the "Payment Date") of each dollar of principal being paid or prepaid (taking into account the application of such prepayment as set forth herein) and the amount of interest (exclusive of interest accrued to the Payment Date) that would have been payable in respect of such dollar of principal being paid or prepaid if such payment or prepayment had not been made, determined by discounting such amounts monthly at a rate which is equal to the "Treasury Rate" from the due date of this Note, plus fifty (50) basis points, over (ii) 100% of the principal amount being paid or prepaid. From February 16, 2000 through the Maturity Date the Make Whole Premium shall be the amount, if any, calculated in the immediately preceding paragraph without regard to the 1% minimum. The "Treasury Rate" will be equal to the arithmetic mean of the yields to maturity converted to a monthly equivalent of United States Treasury obligations with a constant maturity (as compiled by and published in the United States Federal Reserve Bulletin [H.R. 15] (hereinafter "H.R. 15") or its successor publication for each of the two weeks immediately preceding the Payment Date) most nearly equal to the remaining "Weighted Average Life to Maturity" of this Note as of the Payment Date. If the yields referred to in the preceding sentence shall not have been so published, the yields corresponding to the Payment Date shall be calculated on the basis of the arithmetic mean of the arithmetic means of the secondary market ask rates, as of approximately 3:30 P.M., New York City time, on the last business days of each of the two weeks preceding the Payment Date, for the actively traded U.S. Treasury security or securities with a maturity or maturities most closely corresponding to the "Weighted Average Life to Maturity", as reported by three primary United States Government securities dealers in New York City of national standing selected in good faith by the holder of this Note. If no maturity exactly corresponding to such remaining "Weighted Average Life to Maturity" should appear therein, yields for the next longer and the next shorter published maturities shall be calculated pursuant to the foregoing sentence and the Treasury Rate shall be interpolated from such yields on a straight-line basis (rounding to the nearest month). The "Weighted Average Life to Maturity" with respect to this Note means, at the Payment Date, the number of years obtained by dividing the "Remaining Dollar-years" of this Note by the outstanding principal amount hereof. "Remaining Dollar-years" means the sum of the product obtained by multiplying (A) the amount of each then remaining required principal repayment (including repayment of any principal at the due date of this Note) by (B) the number of years (rounded to the nearest one-twelfth) which will elapse between the Payment Date and the date such required payment is due. The undersigned agrees that if the holder of this Note accelerates the whole or any part of the principal sum evidenced hereby, or applies any proceeds as if such application had been made as a result of such acceleration, pursuant to the provisions of those certain mortgages and/or deeds of trust of even date herewith between the undersigned and Principal Mutual Life Insurance Company (collectively, the "Mortgage"), the undersigned waives any right to prepay said principal sum in whole or in part without premium and agrees to pay, as yield maintenance protection and not as a penalty, the "Make Whole Premium" defined herein. Time is of the essence with respect to the payment of this Note. If any payment of principal, interest or premium is not made when due, damages will be incurred by the holder of this Note, including additional expense in handling overdue payments, the amount of which is difficult and impractical to ascertain. The undersigned therefore agrees to pay, upon demand, the sum of four cents ($.04) for each one dollar ($1.00) of each said payment which becomes overdue as a reasonable estimate of the amount of said damages, subject, however, to the limitations contained in the second immediately succeeding paragraph. If any payment of principal, interest or premium is not made for a period exceeding ten (10) days after due, or if any Event of Default has occurred or is continuing under any instrument by which this Note is, or may hereafter be, secured, the entire principal balance, interest then accrued, and premium, whether or not otherwise then due, shall at the option of the holder of this Note, become immediately due and payable without demand or notice, and whether or not the holder of this Note has exercised said option, interest shall accrue on the entire principal balance, interest then accrued, and any premium then due, at a rate equal to the lesser of (i) four percent (4%) per annum above the then applicable rate of interest payable under this Note or (ii) the maximum rate allowed by applicable law until fully paid or if the holder of this Note has not exercised said option, for the duration of such Event of Default. Notwithstanding anything herein or in any of the Loan Documents (hereinafter defined) to the contrary, no provision contained herein or therein which purports to obligate the undersigned to pay any amount of interest or any fees, costs or expenses which are in excess of the maximum permitted by applicable law, shall be effective to the extent it calls for the payment of any interest or other amount in excess of such maximum. Any such excess shall, if inadvertently collected, be credited as a reduction of principal, effective as of the date inadvertently collected. Any payment of principal in excess of the then outstanding principal balance resulting from the inadvertent collection of interest shall be refunded to the undersigned, effective as of the date inadvertently collected, together with interest at the rate specified in Subsection 687.04(2) of the Florida Statutes or any successor statute. All agreements between the undersigned and the holder hereof, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason of demand for payment or acceleration of the maturity hereof or otherwise, shall the interest contracted for, charged or received by the holder hereof exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, interest would otherwise be payable to the holder hereof in excess of the maximum lawful amount, the interest payable to the holder hereof shall be reduced to the maximum amount permitted under applicable law; and if from any circumstance the holder hereof shall ever receive anything of value deemed interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive interest shall, at the option of the holder hereof, be applied to the reduction of the principal hereof and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal hereof such excess shall be refunded to the undersigned. This paragraph shall control all agreements between the undersigned and the holder hereof. The undersigned and any endorsers or guarantors waive presentment, protest and demand, notice of protest, demand and dishonor and nonpayment and notice of acceleration and notice of intent to accelerate maturity, and agree the due date of this Note or any installment may be extended without affecting any liability hereunder, and further promise to pay all reasonable costs and expenses, including attorney's and paralegal s fees, incurred by the holder hereof in connection with any default or in any proceeding (whether incurred in any trial, appellate, bankruptcy, condemnation or any other proceeding) to interpret and/or enforce any provision of this Note or any instrument by which it is secured. No release of the undersigned from liability hereunder shall release any other maker, endorser or guarantor hereof. This Note is secured by instruments and agreements of even date herewith executed and delivered by the undersigned to Principal Mutual Life Insurance Company creating among other things legal and valid encumbrances on and an assignment of all of the undersigned's interest in any leases of certain Premises set forth on Exhibit A to the Loan Agreement, as such Exhibit may be adjusted from time to time in accordance with the terms of the Loan Agreement (collectively, the "Premises"). Terms used herein which are defined in such instruments or agreements and not otherwise defined herein have the same definition as in such instruments and agreements. In no event shall such documents be construed inconsistently with the terms of this Note, and in the event of any discrepancy between any such documents and this Note, the terms hereof shall govern. The proceeds of this Note are to be used for business, commercial, investment or other similar purposes, and no portion thereof will be used for any personal, family or household use. This Note shall be governed by and construed in accordance with the laws of the State of Florida. Notwithstanding any provision to the contrary in this Note, the Loan Agreement, the Mortgage, or any other instrument or agreement by which this Note is secured (collectively referred to herein as the "Loan Documents"), and except as otherwise provided in this paragraph, the liability of the undersigned under the Loan Documents shall be limited to the interest of the undersigned in the Premises and the rents, issues, proceeds and profits thereof. In the event of foreclosure of the liens evidenced by the Loan Documents, no judgment for any deficiency upon the indebtedness evidenced by the Loan Documents shall be sought or obtained by the holder of this Note against the undersigned . Nothing contained in this paragraph shall: (a) prevent the failure of the undersigned to make any payment or to perform any obligation under any of the Loan Documents within the time periods provided therein from being an Event of Default thereunder; (b) be construed as limiting the obligations of the undersigned to any lessee under any lease of the Premises; (c) in any way limit or impair the lien or enforcement of the Loan Documents pursuant to the terms thereof; or (d) limit the obligations of any indemnitor or guarantor, if any, of obligations of the undersigned under the Loan Documents. Notwithstanding the foregoing paragraph, the undersigned, but not its shareholders, officers, directors, employees or agents, shall be personally liable to the holder of this Note for: (a) failure of the undersigned to comply with paragraphs 2 (taxes and assessments) and 3 (insurance) of the Mortgage [or in connection with the Georgia Deed to Secure Debt, paragraphs 1.02 (taxes, liens and other charges) and 1.03 (insurance)] with respect to amounts accruing prior to a Sale of the Premises, as defined below; (b) any event or circumstance for which the undersigned indemnifies the holder of this Note under paragraph 1(m) (environmental indemnity) of the Mortgage [or in connection with the Georgia Deed to Secure Debt, paragraph 1.06(m) (environmental indemnity)]; (c) failure of the undersigned to pay utilities accruing prior to a Sale of the Premises, as defined below, on or before the date such payments are due; (d) operation and maintenance of the Premises applicable to the time period prior to a Sale of the Premises, as defined below; (e) any sums expended by the holder of this Note in fulfilling the obligations of the undersigned as lessor under any lease of the Premises prior to a sale of the Premises pursuant to foreclosure or power of sale, a bona fide sale (permitted by the terms of paragraph 1(l) of the Mortgage [or in connection with the Georgia Deed to Secure Debt, paragraph 1.06(i)] or consented to in writing by the holder of this Note) to an unrelated third party or upon conveyance to the holder of this Note of the Premises by a deed acceptable to the holder of this Note in form and content (each of which shall be referred to as a "Sale" for purposes of this paragraph) or expended by the holder of this Note after a Sale of the Premises for obligations of the undersigned which arose prior to a Sale of the Premises; (f) any rents or other income regardless of type or source of payment (including, but not limited to, CAM charges, lease termination payments, refunds of any type, prepayment of rents, settlements of litigation, or settlements of past due rents) from the Premises which the undersigned has received or has a right to receive after an Event of Default under the Loan Documents or an event which with the passage of time, the giving of notice or both would constitute an Event of Default, either or both of which has occurred and is continuing, and which are not applied to (A) expenses of operation and maintenance of the Premises and the taxes, assessments, utility charges and insurance of the Premises, taking into account sufficient reserves for the same and for replacements and recurring items, and (B) payment of principal, interest and other charges when due under the Loan Documents; provided that any payments to parties related to the undersigned shall be considered expenses of operation only if they are at market rates or fees consistent with market rates or fees for the same or similar services; (g) any security deposits of tenants not turned over to the holder of this Note upon conveyance of the Premises to the holder of this Note pursuant to foreclosure or power of sale or by a deed acceptable to the holder of this Note in form and content; (h) misapplication or misappropriation of tax reserve accounts, tenant improvement reserve accounts, security deposits, prepaid rents or other similar sums paid to or held by the undersigned or any other entity or person in connection with the operation of the Premises; (i) any waste committed or allowed by the undersigned with respect to the Premises prior to a Sale of the Premises,; (j) any insurance or condemnation proceeds or other similar funds or payments with respect to a casualty or condemnation occurring prior to a Sale of the Premises, applied by the undersigned in a manner other than as expressly provided in the Loan Documents; (k) any breach or violation of paragraph 1(l) (due on sale or encumbrance) of the Mortgage [or in connection with the Georgia Deed to Secure Debt, paragraph 1.06(i) (due on sale or encumbrance)], other than the filing of a nonmaterial mechanic's lien affecting the Premises, the granting of any utility or other nonmaterial easement or servitude burdening the Premises, or any other transfer or encumbrance not in the nature of a transfer, reduction or impairment of any material economic interest in the Premises; and (l) any fraud or willful misrepresentation by the undersigned regarding the Premises, the making or delivery of any of the Loan Documents or in any materials or information provided by the undersigned in connection with the loan. Notwithstanding anything herein contained to the contrary, the undersigned, but not its shareholders, officers, directors, employees, or agents shall be personally liable to the holder of the Note for 125% of the amount set forth on Exhibit B to the Loan Agreement, as may be adjusted from time to time, which is allocated to the respective portion of the Premises (the Applicable Portion of the Premises ), plus the Make Whole Premium calculated on such amount had such amount been prepaid as of the date of the occurrence set forth below: (a) in the event of any amendment, modification or termination by the undersigned of the particular Lease (as defined in the Mortgage, Deed to Secure Debt or Deed of Trust with respect to the Applicable Portion of the Premises) for the Applicable Portion of the Premises without the prior written consent of the holder of the Note; (b) in the event the Lessee (as defined in the Mortgage, Deed to Secure Debt or Deed of Trust with respect to the Applicable Portion of the Premises) under the particular Lease for the Applicable Portion of the Premises is not obligated to notify the holder of the Note of a default by the undersigned and the undersigned defaults under said Lease and the holder of the Note does not receive notice of said default following the occurrence thereof within a reasonable period of time to effect cure of said default; or (c) in the event the undersigned violates any exclusive use or non- compete provision granted to the Lessee under the particular Lease for the Applicable Portion of the Premises. If more than one, all obligations and agreements of the undersigned are joint and several. This Note may not be changed or terminated orally, but only by an agreement in writing and signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. All of the rights privileges and obligations hereunder shall inure to the benefit of the heirs, successors and assigns of the holder hereof and shall bind the heirs, successors and assigns of the undersigned. The parties hereto intend and believe that each provision of this Note comports with all applicable law. However, if any provision in this Note is found by a court of law to be in violation of any applicable law, and if such court should declare such provision of this note to be unlawful, void or unenforceable as written, then it is the intent of all parties hereto that such provision shall be given full force and effect to the fullest possible extent that it is legal, valid and enforceable, that the remainder of this Note shall be construed as if such unlawful, void or unenforceable provision were not contained herein, and that the rights, obligations and interests of the undersigned and the holder hereof under the remainder of this Note shall continue in full force and effect. AFTER CONSULTING WITH COUNSEL AND CAREFUL CONSIDERATION, THE UNDERSIGNED AND THE HOLDER (BY ITS ACCEPTANCE HEREOF) KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE THE RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION ARISING OUT OF THIS NOTE OR ANY OTHER INSTRUMENT OR AGREEMENT BY WHICH THIS NOTE IS, OR MAY HEREAFTER BE, SECURED, OR OUT OF ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (ORAL OR WRITTEN), OR ACTIONS OF THE UNDERSIGNED OR THE HOLDER. THIS WAIVER IS A MATERIAL INDUCEMENT TO THE HOLDER'S ACCEPTANCE OF THIS NOTE. COMMERCIAL NET LEASE REALTY, INC., a Maryland corporation By: /s/Robert A. Bourne ------------------------------- Name: Robert A. Bourne Title: President [SEAL] EX-3 4 EXHIBIT 13 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 ANNUAL REPORT TO SHAREHOLDERS TABLE OF CONTENTS - ----------------- Historical Financial Highlights 1 Company Profile 2 1995 Highlights and Recent Developments 3 To Our Stockholders 4-5 Management's Discussion and Analysis of Financial Condition and Results of Operations 6-9 Report of Independent Auditors 10 Consolidated Balance Sheets 11 Consolidated Statements of Earnings 12 Consolidated Statements of Stockholders' Equity 13 Consolidated Statements of Cash Flows 14-15 Consolidated Notes to Financial Statements 16-20 Quarterly Financial Data 21 Share Price and Dividend Data 21 Stockholder Information 22 Directors and Executive Officers 23 1995 ANNUAL REPORT - PAGE 1 HISTORICAL FINANCIAL HIGHLIGHTS -------------------------------
1995 1994 1993 1992 1991 ------------ ------------ ------------ ------------ ------------ Gross Revenues $ 20,580,380 $ 12,289,367 $ 5,069,365 $ 2,604,261 $ 1,887,721 Net Earnings (1) $ 12,707,271 $ 8,915,373 $ 3,521,914 $ 1,561,682 $ 1,407,199 Total Assets $219,256,676 $152,210,708 $ 91,618,758 $ 23,134,239 $ 12,223,262 Total Long-Term Debt $ 82,600,000 $ 14,800,000 $ - $ 8,500,000 $ - Total Equity $135,842,113 $136,664,702 $ 91,144,736 $ 14,387,672 $ 12,126,462 Cash Dividends Paid to Stockholders $ 13,529,860 $ 9,896,586 $ 3,155,701 $ 1,766,177 $ 1,568,800 Funds from Operations (2) $ 14,443,293 $ 9,991,966 $ 3,883,690 $ 1,878,716 $ 1,682,478 Weighted Average Shares 11,663,672 8,606,138 3,711,807 1,635,350 1,480,000 Per Share Information: Net Earnings (1) $ 1.09 $ 1.04 $ 0.95 $ 0.95 $ 0.95 Funds from Operations (2) $ 1.24 $ 1.16 $ 1.05 $ 1.15 $ 1.14 Dividends $ 1.16 $ 1.14 $ 1.10 $ 1.08 $ 1.06 Equity Market Capitali- zation ($ mil) $148.7 $142.9 $105.4 $ 21.7 $ 14.4
- ----------------------------------------------------------------------------- (1) Excludes $152,622 of special nonrecurring expenses in 1991 relating to the exploration of strategic alternatives for the Company. (2) The Company has recently adopted the NAREIT definition of funds from operations and has restated funds from operations for prior years in accordance with this definition. Funds from operations are net earnings excluding depreciation, gains and losses on the sale of real estate and nonrecurring items of income and expense. For purposes of this table, funds from operations exclude nonrecurring NYSE initial listing expenses of $111,638 in 1993 and AMEX initial listing expenses of $15,000 in 1992. Additionally, $55,926 of "other" income representing partial repayment of third quarter 1992 dividends is excluded from funds from operations. Funds from operations for 1991 exclude $152,622 of special nonrecurring expenses as discussed in the preceding footnote. Funds from operations are generally considered by industry analysts to be the most appropriate measure of performance and do not necessarily represent cash provided by operating activities in accordance with generally accepted accounting principles and are not necessarily indicative of cash available to meet cash needs. 1995 ANNUAL REPORT - PAGE 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Commercial Net Lease Realty, Inc., a Maryland corporation (the "Company"), is a real estate investment trust ("REIT") formed in 1984 that acquires, owns and manages high-quality, freestanding properties leased to major retail businesses under long-term commercial net leases. As of December 31, 1995, the Company owned 157 properties (the "Properties") that are leased to major retail businesses, including Academy, Barnes & Noble, Best Buy, Blockbuster Music, Borders, Burger King, CompUSA, Computer City, Denny's, Eckerd, Food 4 Less, Food Lion, Golden Corral restaurants, Good Guys, Hardee's, Hi-Lo Automotive, International House of Pancakes, Levitz, Linens 'n Things, Marshalls, Office Depot, OfficeMax, Oshmans, Pier 1 Imports, Sears Homelife Centers, Scotty's and Waccamaw. LIQUIDITY AND CAPITAL RESOURCES General. Historically, the Company's only demand for funds has been for the payment of operating expenses and dividends, for property acquisitions and for the payment of interest on its outstanding indebtedness. Generally, cash needs for items other than property acquisitions have been met from operations and property acquisitions have been funded by equity offerings, bank borrowings and, to a lesser extent, from internally generated funds. Potential future sources of capital include proceeds from the public or private offering of the Company's debt or equity securities, secured or unsecured borrowings from banks or other lenders, or the sale of Properties, as well as undistributed funds from operations. For the years ended December 31, 1995, 1994 and 1993, the Company generated $14,139,777, $9,504,596 and $3,750,042, respectively, in net cash provided by operating activities. The increase in cash from operations for the year ended December 31, 1995, is primarily a result of changes in revenues and expenses as discussed in "Results of Operations." [PICTURE 1] Eckerd - Colleyville, Texas [PICTURE 2] Marshalls - Freehold, New Jersey Properties acquired by the Company are generally newly constructed as of the time of acquisition. Accordingly, the average age of the buildings in the Company portfolio (the "Company Portfolio") is approximately three years. In addition, the Company acquires only properties that are subject to a lease in order to avoid the risks inherent in initial leasing. The Company's leases typically provide that the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance ("triple-net" leases), and generally also provide that the tenant is responsible for roof and structural repairs. The Company's leases typically do not limit the Company's recourse against the tenant and any guarantor in the event of a default, and for this reason are considered "full-credit" leases. Management of the Company believes that the Properties are adequately insured. Indebtedness. In June 1994, the Company entered into an agreement establishing a $30,000,000 credit facility, which consolidated the Company's previous $10,000,000 credit facility and $20,000,000 credit facility. In July 1994, the Company entered into an agreement establishing a $100,000,000 revolving credit facility (the "Credit Facility"). The Credit Facility, which replaced the Company's previous $30,000,000 credit facility, provided for $60,000,000 of credit initially, increasing to $100,000,000 subject to the completion of the Company raising additional equity (which condition was met on October 7, 1994, upon completion of the Company's equity offering) and expansion of the lending syndicate (which condition was met on April 13, 1995, upon execution of an amended and restated revolving line of credit loan agreement). In addition, the Credit Facility was amended on December 7, 1995, which included the Company's two wholly-owned subsidiaries as qualified borrowers of the Credit Facility. The Credit Facility allows the Company and its subsidiaries to borrow at an interest rate equal to 170 basis points above LIBOR or the lender's prime rate, whichever the Company selects. In addition, in connection with the Credit Facility, the Company is required to pay a commitment fee of 20 basis points per annum on the unused commitment. Advances under the Credit Facility are collateralized by an assignment of the rents and leases of certain of the Company's properties. As of December 31, 1995, $69,450,000 was outstanding under the Credit Facility. To maintain the Credit Facility, the Company must pay a commitment fee, payable quarterly in arrears, equal to 20 basis points per annum on the unused commitment. The Credit Facility will be used primarily to invest in freestanding, retail properties, although up to $10,000,000 of the available credit may be used for the issuance of standby letters of credit or working capital. Payments of principal on advances outstanding under the Credit Facility are expected to be met from the proceeds of renewing or refinancing the Credit Facility, proceeds from the 1995 ANNUAL REPORT - PAGE 7 public or private offering of the Company's debt or equity securities, secured or unsecured borrowings from banks or other lenders or proceeds from the sale of one or more of its Properties. As a means to reduce its exposure to rising interest rates on the Company's variable rate Credit Facility, the Company entered into an interest rate cap agreement which provides for a fixed LIBOR rate of 7.25% per annum on a notional amount of $25,000,000. This agreement is effective through June 1996. In December 1995, the Company entered into a long-term, fixed rate mortgage and security agreement for $13,150,000 (the "Permanent Debt Financing"). The Permanent Debt Financing provides for a four-year mortgage with interest payable monthly and principal payable at maturity on December 15, 1999, and bears interest at a rate of 6.75% per annum. The Permanent Debt Financing is secured by a first lien on and assignment of rents and leases of certain of the Company's Properties. As of December 31, 1995, the outstanding principal balance was $13,150,000. On January 30, 1996, the Company entered into a long-term, fixed rate mortgage and security agreement for $39,450,000. The loan is a ten-year mortgage with principal and interest payable monthly, based on a 17-year amortization, with the balance due on the tenth anniversary of the loan and bears interest at a rate of 7.435% per annum. The mortgage is secured by a first lien on and an assignment of rents and leases of certain of the Company's properties. Debt and Equity Securities. In July 1995, the Company filed a shelf registration statement with the Securities and Exchange Commission that permits the issuance of debt and equity securities of up to $200,000,000. Any securities issued under the registration statement may be offered from time to time in amounts, at prices, and on terms to be determined at the time of the offering. Proceeds from any offering of these securities would be used for general corporate purposes, which may include the repayment of certain indebtedness or the acquisition, expansion or improvement of properties. On January 24, 1996, the Company filed a final prospectus supplement to the shelf registration which offered 3,500,000 shares of common stock at $13.00 per share. The net proceeds of the offering were approximately $42,400,000, after deducting offering expenses and underwriting discounts. Proceeds from the offering were used to pay down the Company's Credit Facility. Qualified REIT Subsidiaries. In November 1995, the Company purchased 100% of the common stock of two newly- formed entities, Net Lease Realty I, Inc. and Net Lease Realty II, Inc., to facilitate the acquisition of certain Properties. Each of the wholly-owned subsidiaries is a qualified REIT subsidiary as defined in the Internal Revenue Code Section 856(i)(2). [PICTURE 3] Barnes & Noble - Houston, Texas [PICTURE 4] Best Buy - Corpus Christi, Texas Property Acquisitions and Commitments. During the year ended December 31, 1995, the Company borrowed $67,400,000 under its Credit Facility to acquire 29 Properties and four buildings which were developed by the tenant on land parcels owned by the Company. The 29 Properties include nine Hi-Lo Automotive Stores, five Barnes & Noble bookstores, four Eckerd drugstores, three Academy sporting goods stores, two Scotty's home improvement stores, one Levitz furniture store, one Borders bookstore, one OfficeMax office supply store, one Food 4 Less grocery store, one Computer City computer store and one Waccamaw home decorating store. The four buildings included three Barnes & Nobles bookstores and one CompUSA computer store. In addition, the Company borrowed $1,400,000 to fund the acquisition of two Properties acquired during December 1994. In connection with the acquisition and lease relating to the land parcels of the Food 4 Less Property, one of the Academy Properties and five of the Barnes & Noble Properties, the tenants are obligated to develop building on the respective land parcels. Pursuant to each lease, the Company has agreed to purchase the buildings upon completion and occupancy. The Company has agreed to pay an aggregate amount of up to $17,267,137 for the buildings upon their completion. As of December 31, 1995, the Company had entered into agreements to purchase 14 additional properties for an estimated aggregate amount of $48,325,323. The purchase of these properties is subject to conditions relating to completion of development activities, review of title and obtaining title insurance, engineering and environmental inspections and other matters. 1995 ANNUAL REPORT - PAGE 8 In addition to the 14 properties under contract as of December 31, 1995, the Company may elect to acquire additional properties or interests therein in the future. Such property acquisitions are expected to be the primary demand for additional capital in the future. The Company anticipates that it may engage in equity or debt financing, through either public or private offerings of its securities for cash, issuance of such securities in exchange for assets, or a combination of the foregoing. Subject to the constraints imposed by the Credit Facility and the Permanent Debt Financing, the Company may enter into additional financing arrangements. In January 1996, the Company acquired four of the Properties and four of the buildings described above that were under contract at December 31, 1995. In addition, the Company acquired one additional Property during January 1996. In connection with the acquisition of these Properties and buildings, the Company borrowed $24,900,000 under its Credit Facility. During the year ended December 31, 1993, the Company also generated net sales proceeds of $1,587,657 as a result of the sale of two Properties in Orlando, Florida. No such sales occurred during 1994 or 1995. Management believes that the Company's current capital resources (including cash on hand), coupled with the Company's borrowing capacity, are sufficient to meet its liquidity needs for the foreseeable future. Dividends. One of the Company's primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes, is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends. During the years ended December 31, 1995, 1994 and 1993, the Company declared and paid dividends to its stockholders of $13,529,860, $9,896,586 and $3,155,701, respectively, or $1.16, $1.14 and $1.10 per share of common stock, respectively. In January 1996, the Company declared dividends to its stockholders of $3,382,465 or $.29 per share of common stock, payable in February 1996. RESULTS OF OPERATIONS During the years ended December 31, 1995, 1994 and 1993, the Company and its consolidated subsidiaries owned and leased 157, 128, and 84 Properties, respectively, to operators of major retail businesses. All of the Company's Properties have been 100 percent leased since the Company's formation in 1984. The Properties are leased on a long-term basis, generally 15 to 20 years, with renewal options for an additional 10 to 20 years. As of December 31, 1995, the average remaining initial lease term of the Properties was approximately 14 years. During the years ended December 31, 1995, 1994 and 1993, the Company and its consolidated subsidiaries earned $19,722,398, $11,239,466 and $4,052,521, respectively, in rental income from operating leases and earned income from direct financing leases. The 75% increase in rental and earned income during 1995, as compared to 1994, is primarily attributable to income earned on the 29 Properties acquired and the four buildings upon which construction was completed during 1995. In addition, rental and earned income increased during 1995 as a result of the fact that the 44 Properties acquired in 1994 were operational for a full fiscal year in 1995. The 177% increase in rental and earned income during 1994, as compared to 1993, is primarily attributable to the income earned on the 44 Properties acquired during 1994 and the fact that a full year of income was earned on the 45 Properties that the Company acquired during 1993. Rental and earned income is expected to increase in 1996 as the Company acquires additional properties and due to the fact that the 29 Properties acquired and four buildings upon which construction was completed in 1995 will contribute to the Company's income for a full fiscal year in 1996. For the years ended December 31, 1995, 1994 and 1993, the Company also earned $745,545, $828,780 and $853,904, respectively, in contingent rental income. Contingent rental income decreased primarily as a result of a decrease in the aggregate net sales of restaurants currently paying contingent rent during 1995, as compared to 1994. Contingent rental income for the year ended December 31, 1994 decreased primarily as a result of a decrease in the aggregate net sales from the Golden Corral restaurants during 1994. During 1995, two of the Company's lessees (or group of affiliated lessees), (i) Barnes & Noble Superstores, Inc. and (ii) Denny's, Inc. and Flagstar Enterprises, Inc. (which are affiliated entities under common control)(hereinafter referred to as Flagstar), each accounted for more than ten percent of the Company's total rental income. As of December 31, 1995, Barnes & Noble Superstores, Inc. was the lessee under leases relating to nine Properties and Flagstar was the lessee under leases relating to 24 Properties. It is anticipated that, based on the minimum rental payments required by the leases and estimated contingent rental income, Barnes & Noble Superstores, Inc. will continue to account for more than ten percent of the Company's total rental income in 1996. Any failure of this lessee could materially affect the Company's income. Rental income from the Properties is invested in money market accounts or other short-term, highly liquid investments pending the Company's use of such funds to acquire properties, to pay Company expenses or to pay dividends to the stockholders. During the years ended December 31, 1995, 1994 and 1993, the Company earned $102,559, $217,039 and $161,602, respectively, in interest income from such investments. The decrease in interest income during 1995, as compared to 1994, is primarily attributable to less net cash invested in 1995, as compared to 1994, due to the net offering proceeds invested in 1994 pending the acquisition of Properties. The increase in interest income during 1994, as compared to 1993, is primarily attributable to higher invested balances during the year as a result of uninvested net offering proceeds from the Company's October 1993 equity offering pending the acquisition of additional Properties and increased rental income. The Company incurred $3,834,388, $497,670 and $381,075 in interest expense for the years ended December 31, 1995, 1994 and 1993, respectively. Interest expense increased for the years ended December 31, 1995 and 1994, as a result of higher average borrowing levels. However, the increase in interest expense in 1995 and 1994 was partially offset by a decrease in the Company's interest rate under the new Credit Facility. As a means to reduce its exposure to variable rate debt, the Company had entered into an interest rate cap agreement as described above in "Liquidity and Capital Resources." 1995 ANNUAL REPORT - PAGE 9 During the years ended December 31, 1995, 1994 and 1993, the Company's operating expenses, including depreciation and amortization, were $4,038,721, $2,876,324 and $1,540,579, respectively (19.6%, 23.4% and 30.4%, respectively, of gross operating revenues). The increase in the dollar amount of operating expenses for the year ended December 31, 1995, is primarily attributable to the increase in depreciation as a result of the depreciation of additional Properties acquired during 1995 and a full year of depreciation during 1995 on the properties acquired during 1994. The increase is also attributable to increased advisory fees as a result of increased funds from operations for the year ended December 31, 1995. However, the increase was partially offset by a decrease in legal fees during 1995, as compared to 1994, as a result of the legal fees and expenses incurred during the year ended December 31, 1994, in connection with the Company's reorganization in the State of Maryland. The increase in the dollar amount of operating expenses for the year ended December 31, 1994, is primarily attributable to the increase in depreciation as a result of the depreciation of additional Properties acquired during 1994. The increase is also attributable to (i) an increase in advisory fees as a result of an increase in funds from operations for the year ended December 31, 1994, (ii) an increase in state tax expense primarily as a result of the acquisition of additional Properties and an increase in capital resulting from the equity offerings during the year ended December 31, 1994, (iii) an increase in professional fees related to fees and expenses incurred in connection with the Company's reorganization in the State of Maryland during 1994 and (iv) the number of outstanding shares of common stock, which increased expenses associated with stockholder communications and other costs. In December 1993, the Company sold two of its Properties to an unrelated, third party for $1,587,657, resulting in an aggregate gain of $374,203. No such sales occurred during the years ended December 31, 1995 and 1994. Inflation has had a minimal effect on income from operations. Management expects that increases in retail sales volumes due to inflation and real sales growth should result in an increase in rental income over time. Continued inflation also may cause capital appreciation of the Company's Properties. Inflation and changing prices, however, also may have an adverse impact on the operating margins of retail businesses and on potential capital appreciation of the Properties. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of. The Statement, which is effective for fiscal years beginning after December 15, 1995, provides that an entity review long-lived assets and certain identifiable intangibles, to be held and used, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company will adopt this standard in 1996 and does not expect compliance with such standard to have a material effect, if any, on the Company's financial position or results of operations. [PIE CHART 1] Line of Trade Diversification [PIE CHART 2] Tenant Diversification by Name [MAP 1] Tenant Diversification by Geographic Location In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. The Statement, which is effective for fiscal years beginning after December 15, 1995, provides that companies must either charge the value of stock options granted to their income statement or provide pro forma equivalent information in a footnote disclosure. The Company will adopt this standard in 1996 by providing pro forma equivalent information in a footnote disclosure. 1995 ANNUAL REPORT - PAGE 10 FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT The Board of Directors Commercial Net Lease Realty, Inc. We have audited the accompanying consolidated balance sheets of Commercial Net Lease Realty, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commercial Net Lease Realty, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Orlando, Florida January 20, 1996, except for Note 13 for which the date is January 30, 1996 1995 ANNUAL REPORT - PAGE 11 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, ASSETS 1995 1994 ------------ ------------ Land and buildings on operating leases, net of accumulated depreciation $155,956,739 $106,091,062 Net investment in direct financing leases 56,829,126 42,551,848 Cash and cash equivalents 300,714 1,069,900 Receivables 394,154 389,238 Prepaid expenses 154,538 361,567 Loan costs, net of accumulated amorti- zation of $405,179 and $83,058 1,065,149 441,690 Accrued rental income 2,194,221 960,832 Other assets 2,362,035 344,571 ------------ ------------ $219,256,676 $152,210,708 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable $ 82,600,000 $ 14,800,000 Accrued interest payable 128,475 35,851 Accounts payable and accrued expenses 350,632 298,763 Real estate taxes payable 82,932 33,649 Due to related parties 69,038 81,962 Rents paid in advance and tenant deposits 183,486 295,781 ------------ ------------ Total liabilities 83,414,563 15,546,006 ------------ ------------ Commitments and contingencies (Note 12 and 13) Stockholders' equity: Common stock, $.01 par value. Authorized 30,000,000 shares; issued and outstand- ing 11,663,672 shares 116,637 116,637 Excess stock, $0.01 par value, authorized 30,000,000 shares, none issued and outstanding - - Capital in excess of par value 138,629,751 138,629,751 Accumulated dividends in excess of net earnings (2,904,275) (2,081,686) ------------ ------------ Total stockholders' equity 135,842,113 136,664,702 ------------ ------------ $219,256,676 $152,210,708 ============ ============ See accompanying notes to consolidated financial statements. 1995 ANNUAL REPORT - PAGE 12 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Year Ended December 31, 1995 1994 1993 ----------- ----------- ----------- Revenues: Rental income from operating leases $14,454,831 $ 8,116,655 $ 3,542,323 Earned income from direct financing leases 5,267,567 3,122,811 510,198 Contingent rental income 745,545 828,780 853,904 Interest and other 112,437 221,121 162,940 ----------- ----------- ----------- 20,580,380 12,289,367 5,069,365 ----------- ----------- ----------- Expenses: General operating and administrative 721,850 605,375 478,617 Management and advisory fees to related party 1,001,225 727,513 307,130 Interest 3,834,388 497,670 381,075 State taxes 257,449 212,763 110,070 Depreciation and amortization 2,058,197 1,330,673 644,762 ----------- ----------- ----------- 7,873,109 3,373,994 1,921,654 ----------- ----------- ----------- Net earnings before gain on sale of land and buildings 12,707,271 8,915,373 3,147,711 Gain on sale of land and buildings - - 374,203 ----------- ----------- ----------- Net earnings $12,707,271 $ 8,915,373 $ 3,521,914 =========== =========== =========== Earnings per share of common stock $ 1.09 $ 1.04 $ .95 =========== =========== =========== Weighted average number of shares outstanding 11,663,672 8,606,138 3,711,807 =========== =========== =========== [PICTURE 5] CHENON CEAUX LORIE, FRANCE See accompanying notes to consolidated financial statements. 1995 ANNUAL REPORT - PAGE 13 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1995, 1994 and 1993 Number of Accumulated shares Capital in dividends of common Common excess of in excess of stock stock par value net earnings Total ---------- -------- ------------ ------------ ------------ Balance at December 31, 1992 1,790,699 $ 17,907 $ 15,836,451 $ (1,466,686) $ 14,387,672 Net earnings - - - 3,521,914 3,521,914 Dividends declared and paid($1.10 per share of common stock) - - - (3,155,701) (3,155,701) Issuance of common stock 5,837,500 58,375 81,551,000 - 81,609,375 Stock issuance costs - - (5,697,410) - (5,697,410) Issuance of common stock in exchange for property 35,473 355 478,531 - 478,886 ---------- -------- ------------ ------------ ------------ Balance at December 31, 1993 7,663,672 76,637 92,168,572 (1,100,473) 91,144,736 Net earnings - - - 8,915,373 8,915,373 Dividends declared and paid ($1.14 per share of common stock) - - - (9,896,586) (9,896,586) Issuance of common stock 4,000,000 40,000 49,960,000 - 50,000,000 Stock issuance costs - - (3,498,821) - (3,498,821) ---------- -------- ------------ ------------ ------------ Balance at December 31, 1994 11,663,672 116,637 138,629,751 (2,081,686) 136,664,702 Net earnings - - - 12,707,271 12,707,271 Dividends declared and paid ($1.16 per share of common stock) - - - (13,529,860) (13,529,860) ---------- -------- ------------ ------------ ------------ Balance at December 31, 1995 11,663,672 $116,637 $138,629,751 $ (2,904,275) $135,842,113 ========== ======== ============ ============ ============ See accompanying notes to consolidated financial statements. 1995 ANNUAL REPORT - PAGE 14 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 1995 1994 1993 ------------ ------------ ------------ Cash flows from operating activities: Net earnings $ 12,707,271 $ 8,915,373 $ 3,521,914 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 1,736,021 1,076,593 624,341 Amortization 322,176 254,080 20,421 Gain on sale of land and buildings - - (374,203) Decrease in net investment in direct financing leases 462,512 267,832 42,594 Increase in accrued rental income (1,233,389) (782,843) (167,807) Increase in receivables (49,916) (11,222) (152,027) Decrease (increase) in prepaid expenses 207,029 (313,578) (23,422) Increase in other assets (6,813) (9,753) - Increase (decrease) in accrued interest payable 92,624 35,851 (138,562) Increase in accounts payable and accrued expenses 11,672 74,446 58,242 Increase (decrease) in real estate taxes payable 49,283 (26,943) 60,592 Increase (decrease) in due to related parties (46,398) (61,970) 73,179 Increase (decrease) in rents paid in advance and tenant deposits (112,295) 86,730 204,780 ------------ ------------ ------------ Net cash provided by operating activities 14,139,777 9,504,596 3,750,042 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sale of land and buildings - - 1,587,657 Additions to land and buildings on operating leases (51,401,946) (53,174,715) (31,269,296) Investment in direct financing leases (14,710,290) (25,570,232) (16,943,113) Increase in other assets (1,451,220) (332,377) (1,949,337) Other 45,000 (4,046) (34,669) ------------ ------------ ------------ Net cash used in investing activities (67,518,456) (79,081,370) (48,608,758) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from loans 81,950,000 46,905,000 - Repayment of loans (14,150,000) (32,105,000) (8,500,000) Payment of loan costs (898,243) (605,788) (110,403) Proceeds from issuance of common stock - 50,000,000 81,609,375 Payment of stock issuance costs (4,069) (3,498,072) (5,607,579) Payment of dividends (13,529,860) (9,896,586) (3,155,701) Other (758,335) - - ------------ ------------ ------------ Net cash provided by financing activities 52,609,493 50,799,554 64,235,692 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (769,186) (18,777,220) 19,376,976 Cash and cash equivalents at beginning of year 1,069,900 19,847,120 470,144 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 300,714 $ 1,069,900 $ 19,847,120 ============ ============ ============ See accompanying notes to consolidated financial statements. 1995 ANNUAL REPORT - PAGE 15 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year Ended December 31, 1995 1994 1993 ------------ ------------ ------------ Supplemental disclosure of cash flow information: Interest paid $ 3,544,567 $ 489,245 $ 519,637 ============ ============ ============ Supplemental disclosure of non-cash investing and financing activities: Property acquired in exchange for the issuance of 35,473 shares of common stock $ - $ - $ 478,886 ============ ============ ============ Land, building and direct financing lease costs incurred and unpaid at December 31 $ 182,111 $ 165,230 $ - ============ ============ ============ Loan costs incurred and unpaid at December 31 $ 47,337 $ - $ - ============ ============ ============ Stock issuance costs incurred and unpaid at December 31 $ - $ 4,069 $ 3,327 ============ ============ ============ [PICTURE 6] CORRE DE BELINE LISBON, PORTUGAL See accompanying notes to condensed financial statements. 1995 ANNUAL REPORT - PAGE 16 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1995, 1994 and 1993 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND NATURE OF BUSINESS - Commercial Net Lease Realty, Inc. (the "Company") is a real estate investment trust which was incorporated in 1984 in the State of Delaware. In June 1994, the Company reincorporated in the State of Maryland, as described in Note 2. The Company owns and manages high- quality, freestanding properties leased to major retail businesses under long- term commercial net leases. PRINCIPLES OF CONSOLIDATION - In November 1995, the Company acquired 100% of the common stock of two newly-formed entities, Net Lease Realty I, Inc. and Net Lease Realty II, Inc., to facilitate the acquisition of certain properties. Each of the subsidiaries is a qualified real estate investment trust subsidiary as defined in the Internal Revenue Code Section 856(i)(2). The consolidated financial statements include the accounts of the Company and these wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. LAND AND BUILDINGS ON OPERATING LEASES - Land and buildings on operating leases are stated at cost. Buildings are depreciated on the straight-line method over their estimated useful lives (generally 35 to 40 years). LEASE ACCOUNTING - Land and buildings are leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance and repairs. The leases are accounted for under either the direct financing or the operating methods. Such methods are described below: DIRECT FINANCING METHOD - Leases accounted for under the direct financing method are recorded at their net investment (Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Company's net investment in the lease. OPERATING METHOD - Land and buildings are recorded at cost, revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis. CASH AND CASH EQUIVALENTS - For the purposes of the statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash, money market accounts and overnight investments. Cash equivalents are stated at cost plus accrued interest, which approximates market value. LOAN COSTS - Loan costs have been capitalized and are being amortized over the terms of the loan commitments using the straight-line method which approximates the effective interest method. The premium paid for the interest rate cap agreement has been recorded as a prepaid expense and is being amortized as interest expense over the term of the agreement using the straight-line method which approximates the effective interest method. NOTES PAYABLE - Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of the year end fair value of significant financial instruments, including long- term debt. The Company believes, based upon current terms, that the carrying value of its notes payable and interest rate cap agreement at December 31, 1995, approximate fair value. INCOME TAXES - The Company has made an election to be taxed as a real estate investment trust under Sections 856-860 of the Internal Revenue Code of 1986, as amended, and related regulations. The Company will not be subject to federal income taxes on amounts distributed to stockholders, providing it distributes at least 95 percent of its real estate investment trust taxable income and meets certain other requirements for qualifying as a real estate investment trust. For each of the years in the three-year period ended December 31, 1995, the Company believes it has qualified as a real estate investment trust; accordingly, no provisions have been made for federal income taxes in the accompanying financial statements. Not withstanding the Company's qualification for taxation as a real estate investment trust, the Company is subject to certain state taxes on its income and property. EARNINGS PER SHARE - Earnings per share are calculated based upon the weighted average number of shares outstanding during each year. Stock options outstanding are not included since their inclusion would not result in a material dilution of earnings per share. USE OF ESTIMATES - Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. NEW ACCOUNTING STANDARDS - In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Statement, which is effective for fiscal years beginning after December 15, 1995, provides that an entity review long-lived assets and certain identifiable intangibles, to be held and used, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company will adopt this standard in 1996 and does not expect compliance with such standard to have a material effect, if any, on the Company's financial position or results of operations. 1995 ANNUAL REPORT - PAGE 17 In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. The Statement, which is effective for fiscal years beginning after December 15, 1995, provides that companies must either charge the value of stock options granted to their income statement or provide pro forma equivalent information in a footnote disclosure. The Company will adopt this standard in 1996 by providing pro forma equivalent information in a footnote disclosure. 2. REINCORPORATION: The Company entered into an agreement of merger, effective June 3, 1994, which provided for the Company's change of domicile from Delaware to Maryland (the "Reincorporation") following the approval by the stockholders at the Company's 1994 Annual Meeting on April 22, 1994. The Reincorporation did not result in a change in the Company's name, business, management, location of the principal executive office, capitalization of assets, liabilities or net worth (other than due to the costs of the Reincorporation). 3. LEASES: The Company generally leases its land and buildings to operators of major retail businesses. The leases are accounted for under the provisions of Statement of Financial Accounting Standards No. 13, Accounting for Leases. As of December 31, 1995, 98 of the leases have been classified as operating leases and 59 leases have been classified as direct financing leases. For the leases classified as direct financing leases, the building portions of the property leases are accounted for as direct financing leases while the land portions of 30 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 15 to 20 years (expiring between 1997 and 2018) and provide for minimum rentals. In addition, the majority of the leases provide for contingent rentals and/or scheduled rent increases over the terms of the leases. The tenant is also generally required to pay all property taxes and assessments, fully maintain the interior and exterior of the building and carry insurance coverage for public liability, property damage, fire and extended coverage. The lease options generally allow tenants to renew the leases for two to four successive five-year periods subject to substantially the same terms and conditions as the initial lease. 4. LAND AND BUILDINGS ON OPERATING LEASES: Land and buildings on operating leases consisted of the following at December 31: 1995 1994 ------------ ------------ Land $ 83,356,403 $ 52,476,960 Buildings and improvements 78,097,726 57,375,471 ------------ ------------ 161,454,129 109,852,431 Accumulated depreciation (5,497,390) (3,761,369) ------------ ------------ $155,956,739 $106,091,062 ============ ============ In December 1993, the Company sold two of its properties for a total of $1,587,657 and recognized a gain of $374,203. Some leases provide for escalating guaranteed minimum rent throughout the lease term. Income from these scheduled rent increases is recognized on a straight-line basis over the terms of the leases. For the years ended December 31, 1995, 1994 and 1993, the Company recognized $1,233,389, $782,843 and $167,807, respectively, of such income. The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 1995: 1996 $ 16,050,567 1997 16,131,479 1998 16,151,795 1999 16,360,559 2000 16,710,047 Thereafter 185,299,459 ------------ $266,703,906 ============ 5. NET INVESTMENT IN DIRECT FINANCING LEASES: The following lists the components of net investment in direct financing leases at December 31: 1995 1994 ------------ ------------ Future minimum lease payments to be received $126,314,337 $ 96,231,285 Estimated residual values 17,354,140 12,721,338 Less unearned income (86,839,351) (66,400,775) ------------ ------------ Net investment in direct financing leases $ 56,829,126 $ 42,551,848 ============ ============ 1995 ANNUAL REPORT - PAGE 18 The following is a schedule of future minimum lease payments to be received on direct financing leases at December 31, 1995: 1996 $ 6,704,466 1997 6,704,466 1998 6,707,916 1999 6,754,468 2000 6,872,235 Thereafter 92,570,786 ------------ $126,314,337 ============ 6. OTHER ASSETS: Other assets consisted of the following at December 31: 1995 1994 ---------- ---------- Deposits and miscellaneous acquisition costs $1,573,668 $ 334,818 Deposits for loan commitments 526,000 - Deferred offering costs 222,671 - Other 39,696 9,753 ---------- ---------- $2,362,035 $ 344,571 ========== ========== 7. NOTES PAYABLE: In June 1994, the Company entered into an agreement establishing a new $30,000,000 credit facility which consolidated the Company's previous $10,000,000 and $20,000,000 credit facilities. Advances under the $30,000,000 credit facility were secured by an assignment of rent from all of the Company's properties and bore interest at an annual rate equal to the lender's prime rate. In July 1994, the Company entered into a loan agreement for a three-year $100,000,000 revolving credit facility (the "Credit Facility"). The Credit Facility, which replaced the Company's previous $30,000,000 credit facility, provided for $60,000,000 of credit initially, increasing to $100,000,000 subject to the Company raising additional equity (which condition was met on October 7, 1994, upon completion of the Company's common stock offering) and expansion of the lending syndicate (which condition was met on April 13, 1995, upon execution of an amended and restated revolving line of credit loan agreement). In addition, the Credit Facility was amended on December 7, 1995, which included the Company's two wholly-owned subsidiaries as qualified borrowers of the Credit Facility. The Credit Facility allows the Company and its subsidiaries to borrow at an interest rate equal to 170 basis points above LIBOR or the lender's prime rate, whichever the Company selects. In addition, in connection with the Credit Facility, the Company is required to pay a commitment fee of 20 basis points per annum on the unused commitment. Advances under the Credit Facility are collateralized by an assignment of the rents and leases of certain of the Company's properties. The principal balance is due in full upon termination of the Credit Facility on June 30, 1997, and interest is payable quarterly. As of December 31, 1995 and 1994, the outstanding principal balance was $69,450,000 and $14,800,000, respectively, plus accrued interest of $84,094 and $35,851, respectively. In addition, as of December 31, 1995, the Company had incurred $850,887 in loan costs relating to this loan. The terms of the Credit Facility include financial covenants which provide for the maintenance of certain financial ratios. The Company was in compliance with such covenants as of December 31, 1995. In December 1994, the Company entered into an interest rate cap agreement as a means to reduce its exposure to rising interest rates on the Company's variable rate Credit Facility. The interest rate cap agreement provides for a fixed LIBOR rate of 7.25% per annum on a notional amount of $25,000,000 and is effective through June 1996. On December 14, 1995, the Company entered into a long-term, fixed rate mortgage and security agreement for $13,150,000 (the "Permanent Debt Financing"). The Permanent Debt Financing provides for a four-year mortgage with interest payable monthly and principal payable at maturity on December 15, 1999, and bears interest at a rate of 6.75% per annum. The Permanent Debt Financing is secured by a first lien on and assignment of rents and leases of certain of the Company's properties. As of December 31, 1995, the outstanding principal balance was $13,150,000, plus accrued interest of $44,381. In addition, as of December 31, 1995, the Company had incurred $223,530 in loan costs relating to this mortgage. 8. DIVIDENDS: The following presents the characterization for tax purposes of dividends paid to stockholders for the years ended December 31: 1995 1994 1993 ----- ----- ----- Ordinary income $ .92 $ .95 $ .97 Capital gain - - .13 Return of capital .24 .19 - ----- ----- ----- $1.16 $1.14 $1.10 ===== ===== ===== 1995 ANNUAL REPORT - PAGE 19 On January 2, 1996, the Company declared dividends of $3,382,465 or 29 cents per share of common stock, payable on February 15, 1996, to stockholders of record on January 15, 1996. 9. STOCK OPTION PLAN: The Company's stock option plan (the "Plan") provides compensation and incentive to persons ("Key Employees") or entities whose services are considered essential to the Company's continued growth and success. During the year ended December 31, 1994, the Company amended the Plan to increase the number of shares reserved for issuance from 88,100 shares of common stock to 600,000 shares of common stock and to permit an automatic increase in the number of shares issuable pursuant to options granted under the Plan to 1,200,000 and 2,000,000 shares at such time as the Company has 15,000,000 and 25,000,000 shares, respectively, of common stock issued and outstanding. The following summarizes transactions in the Plan for the years ended December 31, 1995, 1994 and 1993: Number of Shares ----------------------------- 1995 1994 1993 ------- ------- ------- Outstanding, January 1 568,100 87,400 45,000 Granted at $11.25 to $14.125 per share 10,000 480,700 42,400 Exercised - - - Surrendered - - - ------- ------- ------- Outstanding, December 31 578,100 568,100 87,400 ======= ======= ======= Exercisable, December 31 232,000 44,135 14,996 ======= ======= ======= Available for grant, December 31 21,900 31,900 700 ======= ======= ======= The Plan requires that the exercise price of the options equals the market value of the stock on the grant date; therefore, no compensation expense has been recorded with respect to the options in the accompanying financial statements. One-third of the grant to each individual becomes exercisable at the end of each of the first three years of service following the date of the grant. 10. RELATED PARTY TRANSACTIONS: Certain directors and officers of the Company hold similar positions with CNL Realty Advisors, Inc., the Company's advisor. During the year ended December 31, 1993, the Company acquired 26 properties for purchase prices totalling $20,188,586 from affiliates of CNL Realty Advisors, Inc. at their cost. In addition, during the year ended December 31, 1994, the Company acquired one property for a purchase price of $548,487 from an affiliate that had purchased and temporarily held title to the land portion of this property pending the tenant's completion of construction of the building located on the property. In connection with the acquisition of these 27 properties, plus the acquisition of 15 other properties in 1993, 37 other properties in 1994 and 22 properties and four buildings which were developed by the tenant on land parcels owned by the Company in 1995 from unrelated, third parties, the Company paid CNL Realty Advisors, Inc. $783,661, $1,436,073 and $937,363, respectively, in acquisition fees and expense reimbursement fees (representing 1.5% and 0.5%, respectively, of the cost of the properties). In addition, during the years ended December 31, 1995, 1994 and 1993, the Company acquired five properties for purchase prices totalling $17,968,518, six properties for purchase prices totalling $6,712,967 and three properties for purchase prices totalling $7,867,517, respectively, from affiliates of CNL Realty Advisors, Inc. who had developed the properties. The purchase prices paid by the Company for these properties equalled the affiliates' costs including development costs. The affiliates' costs consisted of the land purchase prices, construction costs, various soft costs including legal costs, survey fees and architect fees, and developers fees aggregating $1,105,689 in 1995, $573,753 in 1994 and $782,164 in 1993 paid to an affiliate of CNL Realty Advisors, Inc. No acquisition fees or expense reimbursement fees were paid to CNL Realty Advisors, Inc. in connection with the acquisition of these 14 properties. On August 2, 1993, the Company acquired a property from an affiliate of CNL Realty Advisors, Inc. under the terms previously agreed to in a stock purchase agreement dated January 23, 1992, including subsequent modifications. In connection with the acquisition of this property, the Company issued 35,473 shares of its common stock to the affiliate. The market price of the stock on August 2, 1993, was $13.50 per share. During 1993, the Company paid real estate brokerage commissions totalling $32,811 to an affiliate of CNL Realty Advisors, Inc. in connection with the sale of two of the Company's properties. During 1992, the Company and CNL Realty Advisors, Inc. entered into an advisory agreement pursuant to which CNL Realty Advisors, Inc. received a monthly management fee equal to one percent of the gross revenues (as defined in the advisory agreement) and, on a quarterly basis, an advisory fee equal to six percent of adjusted funds from operations (as defined in the advisory agreement). Under this agreement with CNL Realty Advisors, Inc., the Company incurred management and advisory fees in the aggregate amount of $41,384 for the period January 1, 1993 through March 31, 1993. 1995 ANNUAL REPORT - PAGE 20 Effective April 1, 1993, the Company entered into the current advisory agreement (the "Advisory Agreement"), which provides for CNL Realty Advisors, Inc. to receive an annual fee, payable monthly, equal to seven percent of funds from operations, as defined in the Advisory Agreement, up to $10,000,000, six percent of funds from operations in excess of $10,000,000 but less than $20,000,000 and five percent of funds from operations in excess of $20,000,000. For purposes of the Advisory Agreement, funds from operations generally include the Company's net earnings excluding the advisory fee, depreciation and amortization expenses, extraordinary gains and losses and non-cash lease accounting adjustments. Under the Advisory Agreement, the Company incurred $1,001,225, $727,513 and $265,746 in advisory fees for the year ended December 31, 1995, 1994 and the period April 1, 1993 through December 31, 1993, respectively. The amounts due to related parties consisted of the following at December 31: 1995 1994 ------- ------- Due to CNL Realty Advisors, Inc.: Advisory fee $20,098 $71,970 Acquisition and expense reimbursement fees 27,458 5,500 Expenditures incurred on behalf of the Company 21,482 4,492 ------- ------- $69,038 $81,962 ======= ======= 11. MAJOR TENANTS: The following schedule presents rental and earned income, including contingent rent, from operators and affiliated operators representing more than ten percent of the Company's total rental and earned income for the years ended December 31: 1995 1994 1993 ---------- ---------- ---------- Barnes & Noble Superstores, Inc. $2,370,560 $ - $ - Denny's, Inc. and Flagstar Enterprises, Inc. 2,074,572 2,082,271 683,421 Golden Corral Corporation - 1,833,469 1,857,872 Burger King Corporation - 1,463,218 1,197,949 12. COMMITMENTS AND CONTINGENCIES: As of December 31, 1995, the Company had entered into agreements to purchase 14 additional properties for an estimated aggregate amount of $48,325,323. In addition, in connection with the acquisition of these 14 properties, at December 31, 1995, the Company was contingently liable for $4,555,013 related to 14 separate bank letters of credit which guarantee the Company's obligation under the purchase agreements to acquire ten of these properties from an affiliate of CNL Realty Advisors, Inc. and four of these properties from an unrelated third party upon completion of the development of the properties. The Company acquired seven land parcels during the year ended December 31, 1995, and leased those land parcels to tenants which were obligated to develop buildings on the respective land parcels. Pursuant to each lease, the Company has agreed to purchase the buildings upon completion and occupancy. The Company has agreed to pay an aggregate amount of up to $17,267,137 upon completion of the buildings. 13. SUBSEQUENT EVENTS: On January 24, 1996, the Company filed a final prospectus supplement with the Securities and Exchange Commission dated January 23, 1996, which offered 3,500,000 shares of common stock at $13.00 per share from the shelf registration. Proceeds from the offering were used to pay down the Company's Credit Facility. On January 30, 1996, the Company entered into a long-term, fixed rate mortgage and security agreement for $39,450,000. The mortgage provides for a ten-year loan with principal and interest payable monthly, based on a 17-year amortization, with the balance due on the tenth anniversary of the loan and bears interest at a rate of 7.435% per annum. Proceeds from the loan were used to pay down the Company's Credit Facility. In January 1996, the Company acquired four of the buildings described in Note 12 for an aggregate amount of $10,097,284 from unrelated third parties. The Company also acquired four of the properties described in Note 12 for an aggregate amount of $9,352,624 during January 1996 from a related party. In addition, in January 1996, the Company acquired one property for $5,000,000 from an unrelated party. In connection with the acquisition of these five properties and four buildings, the Company borrowed $24,900,000 of amounts it has available under its Credit Facility. 1995 ANNUAL REPORT - PAGE 21 QUARTERLY FINANCIAL DATA 1995 Quarter First Second Third Fourth Year - ------------ ---------- ---------- ---------- ---------- ----------- Rent and other revenue $4,415,446 $4,745,816 $5,534,043 $5,885,075 $20,580,380 Depreciation and amorti- zation expense 435,883 490,023 536,726 595,565 2,058,197 Interest expense 415,645 675,025 1,244,801 1,498,917 3,834,388 Other expenses 505,065 447,177 526,745 501,537 1,980,524 Net earnings 3,058,853 3,133,591 3,225,771 3,289,056 12,707,271 Net earnings per share (1) 0.26 0.27 0.28 0.28 1.09 1994 Quarter - ------------ Rent and other revenue $2,416,363 $2,847,614 $3,167,283 $3,858,107 $12,289,367 Depreciation and amorti- zation expense 243,939 352,639 344,350 389,745 1,330,673 Interest expense - 97,958 314,245 85,467 497,670 Other expenses 460,613 362,004 307,348 415,686 1,545,651 Net earnings 1,711,811 2,035,013 2,201,340 2,967,209 8,915,373 Net earnings per share (1) 0.22 0.27 0.29 0.26 1.04 (1) Calculated independently for each period, and consequently, the sum of the quarters may differ from the annual amount. SHARE PRICE AND DIVIDEND DATA The common stock of the Company currently if traded on the New York Stock Exchange under the symbol "NNN." Prior to January 7, 1994, the common stock was traded on the American Stock Exchange. For each calendar quarter indicated, the following table reflects the respective high, low and closing sales prices for the common stock in the relevant market and the dividends paid per share in each such period. 1995 Quarter First Second Third Fourth Year - ------------ ---------- ---------- ---------- ---------- ---------- High $12.500 $13.750 $13.625 $13.375 $13.750 Low 11.750 11.875 12.125 12.500 11.750 Close 12.125 13.125 13.250 12.750 12.750 Dividends paid per share 0.29 0.29 0.29 0.29 1.16 1994 Quarter - ------------ High $14.375 $14.500 $14.000 $12.625 $14.500 Low 13.250 13.250 12.250 11.875 11.875 Close 13.875 13.625 12.250 12.250 12.250 Dividends paid per share 0.28 0.28 0.29 0.29 1.14 The portion of dividends paid in 1995 and 1994, which was treated as a non- taxable return of capital, was 20.8% and 16.9%, respectively. On February 15, 1996, there were approximately 1,500 shareholders of record of common stock. APPENDIX PICTURE 1 1995 ANNUAL REPORT - PAGE 6 PICTURE 2 1995 ANNUAL REPORT - PAGE 6 PICTURE 3 1995 ANNUAL REPORT - PAGE 7 PICTURE 4 1995 ANNUAL REPORT - PAGE 7 PIE CHART 1 1995 ANNUAL REPORT - PAGE 9 PIE CHART 2 1995 ANNUAL REPORT - PAGE 9 MAP 1 1995 ANNUAL REPORT - PAGE 9 PICTURE 5 1995 ANNUAL REPORT - PAGE 13 PICTURE 6 1995 ANNUAL REPORT - PAGE 15 EX-4 5 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS DATED MARCH 22, 1996 The Board of Directors Commercial Net Lease Realty, Inc.: We consent to the use of our reports dated January 20, 1996, except for Note 13 for which the date is January 30, 1996, incorporated herein by reference. /s/ KPMG Peat Marwick LLP Orlando, Florida March 22, 1996 EX-27 6 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the balance sheet of Commercial Net Lease Realty, Inc. at December 31, 1995 and its statement of income for the year then ended and is qualified in its entirety by reference to the Form 10-K of Commercial Net Lease Realty, Inc. for the year ended December 31, 1995. YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 300,714 0 394,154 0 0 849,406 161,454,129 5,497,390 219,256,676 814,563 0 116,637 0 0 135,725,476 219,256,676 0 20,580,380 0 4,038,721 0 0 3,834,388 12,707,271 0 12,707,271 0 0 0 12,707,271 1.09 1.09
-----END PRIVACY-ENHANCED MESSAGE-----