-----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, RrXssyVaTOWBeEgUTIpINHGbEgcQsaTzq0h5guS7gzKECYKoWY9GQUNPrP3ZklPH Aoc/G5V4DDSmqsZ6cd1IpA== 0000751364-97-000010.txt : 19970819 0000751364-97-000010.hdr.sgml : 19970819 ACCESSION NUMBER: 0000751364-97-000010 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970815 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11290 FILM NUMBER: 97665489 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/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K/A AMENDMENT NO. 2 (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, 1996 ------------------------------------ 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 valueNew 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. [X] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 19, 1997, was $336,619,823. The number of shares of common stock outstanding as of March 19, 1997, was 23,393,672. The Form 10-K of Commercial Net Lease Realty, Inc. for the year ended December 31, 1996, is being amended to include expanded disclosures in items 1,2 and 13 and Exhibit 13. 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, 1996 (Items 5, 6, 7 and 8 of Part II). PART I ITEM 1. BUSINESS Commercial Net Lease Realty, Inc., a Maryland corporation (the "Registrant" or the "Company"), is a real estate investment trust (a "REIT") formed in 1984 that acquires, owns and manages a diversified portfolio of high-quality, freestanding properties leased to major retail businesses generally under full-credit, 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 $7.5 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, 1996, the Company borrowed $144,600,000 of amounts it has available under its credit facility and assumed mortgages totalling $6,864,000 to acquire 40 properties and nine buildings which were developed by the tenant on land parcels owned by the Company. As of December 31, 1996, the Company owned 195 properties (the "Properties") that are leased to major businesses, including Academy, Baby Superstore, Barnes & Noble, Best Buy, Blockbuster Music, Borders, Burger King, Checkers, CompUSA, Computer City, Denny's, Dick's Clothing & Sporting Goods, Eckerd, Food 4 Less, Food Lion, Golden Corral, Good Guys, Hardee's, Hi-Lo Automotive, HomePlace, International House of Pancakes, Kash N' Karry, Levitz, Linens 'n Things, Luria's, Marshalls, Office Depot, OfficeMax, Oshman's, Pier 1 Imports, Pizza Hut, Scotty's, Sears, Sports Authority, Waccamaw and Wendy's. The occupancy rate of the Company's Property portfolio was 100 percent at December 31, 1996. 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 1996, one of the Company's lessees, Barnes & Noble Superstores, Inc., accounted for more than ten percent of the Company's total rental income. As of December 31, 1996, Barnes & Noble Superstores, Inc. was the lessee under leases relating to 11 Properties. It is anticipated that, based on the minimum rental payments required by the leases, Barnes & Noble Superstores, Inc. will continue to account for more than ten percent of the Company's total rental income in 1997. 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). 1 Advisory Services The Company and CNL Realty Advisors, Inc. (the "Advisor") have entered into an advisory agreement (the "Advisory Agreement"), which provides for the Advisor to perform to receive an annual fee, payable monthly, equal to (i) seven percent of funds from operations, as defined below, up to $10,000,000, (ii) six percent of funds from operations in excess of $10,000,000 but less than $20,000,000 and (iii) five percent of funds from operations in excess of $20,000,000. For the purposes of the Advisory Agreement, funds from operations means net income of the Company before advisory fee excluding depreciation and amortization expense, extraordinary gains and losses, nonrecurring items of income and expense and non-cash lease accounting adjustments. Under the Advisory Agreement, the Advisor 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, the Advisor 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. The Advisor 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, 1997 and continues until January 1998, and thereafter may be extended annually upon mutual consent of a majority of the board of directors of the Advisor and a majority of the independent directors of the Company unless terminated at an earlier date upon 90 days' prior notice by either party. Historically, the Company has not had a large enough asset base to provide the economies of scale needed to support efficiently the extensive general and administrative expenses of an in-house management team. As a result, the Advisor had incurred the full expense of a management and acquisition team while receiving advisory and acquisition fees that have offset this expense. However, management believes that the efficiencies currently experienced by employing a third-party advisor will diminish as the Company grows and expects that as the Company continues to grow it will be more cost effective to become self-administered. Management is currently considering whether it may be appropriate at this time to recommend to the Board of Directors that the Company become self-administered. Any recommendation would be evaluated by the Independent Directors, and any transaction by which the Company would become self-administered would be submitted to the stockholders for their approval. Competition The Company generally competes with other REIT's, 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, 1996, the Company owned 195 Properties located in 31 states that are leased to 45 major retail tenants. 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. 2 Description of Properties Land. The Company's Property sites range from approximately 12,000 to 583,000 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 $4,600,000. 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 60,000 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, 1996, 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 $21,000 to $910,000. 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, 1996, leases representing approximately 74 percent of annual base rent include contractual increases, leases representing approximately 33 percent of annual base rent include percentage rent provisions and leases representing approximately 19 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. During 1996, one of the Company's lessees, Barnes & Noble Superstores, Inc. (bookstore) accounted for more than ten percent of the Company's total rental income. As of December 31, 1996, Barnes & Noble Superstores, Inc. was the lessee under leases relating to 11 Properties. As of December 31, 1996, two of the Company's lessees, Barnes & Noble Superstores, Inc. and Eckerd Corporation, leased properties representing 13.2% and 10.2%, respectively, of total assets. For information regarding the results of operations and financial condition of these two entities, refer to their Annual Reports on Forms 10-K as filed with the Securities and Exchange Commission for the year ended February 1, 1997. The Company generally competes with other REIT's, 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. The Company is not aware of any environmental liability with respect to any of its Properties 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. 3 ITEM 3. LEGAL PROCEEDINGS The Company is 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. 4 PART II ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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, 1996; 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, 1996; 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, 1996; 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 "Condensed Quarterly Financial Data" on page 21 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1996; 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, 1996, are incorporated herein by reference. ITEM 9. DISAGREEMENTS OF ACCOUNTING AND FINANCIAL DISCLOSURE None. 5 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the executive officers and directors of the Registrant: NAME AGE P O SITION WITH THE COMPANY ---- --- ------------------------------------ James M. Seneff, Jr.* 50 Chairman of the Board and Chief Executive Officer Robert A. Bourne* 50 V i ce Chairman, Secretary and Treasurer and Director Gary M. Ralston* 45 President and Chief Operating Officer Kevin B. Habicht* 38 E x ecutive Vice President, Chief Financial Officer and Assistant Secretary Edward Clark 77 Director Willoughby T. Cox, Jr. 70 Director Clifford R. Hinkle 48 Director Ted B. Lanier 62 Director * Affiliated with the CNL Realty Advisors, Inc. James M. Seneff, Jr. Mr. Seneff has been Chief Executive Officer of the Company since July 1992 and Chairman of the Board of the Company since June 1992, as well as Chief Executive Officer and Chairman of the Board of the Advisor since its inception in 1991. Mr. Seneff has served as Chief Executive Officer, director, and a principal stockholder of CNL Group since its formation in 1973. From 1986 to 1994, Mr. Seneff served on the Florida Investment Advisory Council, which oversees the $40 billion Florida state retirement plan, and was Chairman of the Council from 1991 to 1992. Since 1971, Mr. Seneff has been active in the acquisition, development and management of real estate projects throughout the United States. Mr. Seneff is the brother-in-law of Kevin B. Habicht, Chief Financial Officer of the Company. Robert A. Bourne. Mr. Bourne has served as Vice Chairman of the Board, Secretary and Treasurer of the Company and CNL Realty Advisors, Inc. (the "Advisor") since February 1996. Additionally, he has served as a director of the Company since June 1992 and a Director of the Advisor since its inception in 1991. Previously, he served as President of the Company from July 1992 until February 1996 and as President of the Advisor from 1991 until February 1996. The Advisor is responsible for the day-to-day operation of the Company and performs certain other administrative services for the Company. See "Certain Transactions." Mr. Bourne also serves as President of CNL Group, Inc. In addition, Mr. Bourne is President, a director and a registered principal of CNL Securities Corp., President and a director of CNL Investment Company, President of CNL Realty Corp. and President and a director of CNL Institutional Advisors, Inc., a registered investment advisor. All of such entities are affiliates of CNL Group, Inc., a privately held, diversified real estate company of which the Advisor is a wholly owned subsidiary ("CNL Group"). Since joining CNL Group in 1979, Mr. Bourne has been active in the acquisition, development and management of real estate projects throughout the United States. Mr. Bourne formerly was a Certified Public Accountant with Coopers & Lybrand. 6 Gary M. Ralston. Mr. Ralston has served as President of the Company and the Advisor since February 1996. From December 1993 until February 1996 he served as Executive Vice President and Chief Operating Officer of the Company and the Advisor. Mr. Ralston previously served as Vice President of the Company from July 1992 through December 1993 and as Vice President of the Advisor from its inception in 1991 through December 1993. From 1988 to 1992, he also served as a Senior Vice President of CNL Properties, Inc., a real estate investment and asset/property management company affiliated with CNL Group. From 1983 until 1988, Mr. Ralston was Vice President of ENCO, a real estate investment and asset/property management firm located in Lakeland, Florida. Mr. Ralston holds the Certified Commercial Investment Member and Society of Industrial and Office Realtors designations and is also a Florida l i c ensed Real Estate Broker, Mortgage Broker and Certified Building Contractor. Mr. Ralston is a member of the Board of Directors of the National Association of Realtors, Vice Chairman of its Commercial Investment Committee and a member of the Capital Consortium. Kevin B. Habicht. Mr. Habicht has been Executive Vice President, Chief Financial Officer and Assistant Secretary of the Company and the Advisor since December 1993. Mr. Habicht previously served as Vice President of the Company from July 1992 through December 1993 and as Vice President of the Advisor from its inception in 1991 through December 1993. Since 1990, Mr. Habicht has served as a Senior Vice President of CNL Institutional Advisors, Inc. and for the last five years he also has served as Treasurer of CNL Investment Company, Senior Vice President of CNL Management Company and Treasurer of CNL Securities Corp. From 1981 to 1983, Mr. Habicht, a Certified Public Accountant and a Chartered Financial Analyst, was employed by Coopers & Lybrand, Certified Public Accountants. Mr. Habicht is the brother-in-law of James M. Seneff, Jr., Chief Executive Officer and Chairman of the Board of the Company. Edward Clark. Mr. Clark served as President of the Company from 1984 until July 1992. He has been a consultant to Golden Corral Corporation and to its parent corporation, Investors Management Corporation, a privately held corporation, on tax and financial matters since 1982. From 1966 to 1980, Mr. Clark, a certified public accountant, was a partner in the public accounting firm of Peat Marwick Mitchell & Co. Willoughby T. Cox, Jr. Mr. Cox currently is a private real estate investor. From 1960 to 1985, Mr. Cox was a Mortgage Loan Correspondent for the State of Florida for Connecticut Mutual Life Insurance Company. From 1978 through 1981, Mr. Cox also was employed as a Florida Agriculture Mortgage Loan Correspondent for Aetna Life and Casualty Insurance Company. He currently serves as the agricultural Loan Correspondent for the State of Florida for Batterymach-AgriVest, the successor to the Agricultural Loan Department of Connecticut Mutual Life Insurance Company. Mr. Cox is a former director of Orange State Bank, Landmark Bank of Orlando and Atico Savings Bank and a former Vice Chairman of Pan American Bank of Orlando. Mr. Cox has been involved in real estate related activities in Florida since 1950, including r e a l estate brokerage, management, mortgage lending, appraisal and construction. Clifford R. Hinkle. Mr. Hinkle has served as a director of the Company since 1993. Since 1991, Mr. Hinkle has been a director and executive officer of the Flagler companies, including Flagler Capital Corporation, which provides financial advisory and investment consulting services, where he has been the President since 1991, and Flagler Holdings, Inc., a merchant banking company, where he has been the Chairman and Chief Executive Officer since 1996. Additionally, Mr. Hinkle was a director of MHI Group, Inc., a New York Stock Exchange company, which owned and operated funeral homes and cemeteries from November 1993 until November 1995, and was the Chief Executive Officer of MHI Group, Inc. from April 1995 until November 1995 when it was acquired by a subsidiary of The Loewen Group. Since 1996, Mr. Hinkle has been a director of Integrated Orthopaedics, Inc., an American Stock Exchange company, which owns and operates orthopaedic physician management practices. From 1987 to 1991, Mr. Hinkle was the Executive Director and Chief Investment Officer of the State Board of Administration of Florida and managed over $40 billion in various trust funds. Ted B. Lanier. Mr. Lanier was the Chief Executive Officer of the Triangle Bank and Trust Company, Raleigh, North Carolina ("Triangle"), from January 1988 until March 1991. Mr. Lanier also was the Chairman of Triangle from January 1989 until March 1991 and its President from January 1988 until January 1989. Since his retirement in 1991 as Chairman and Chief Executive Officer of Triangle, Mr. Lanier has managed his personal investments and managed investment accounts for various individuals and trusts. 7 COMPENSATION OF DIRECTORS During the year ended December 31, 1996, each director who was a director for the entire year was paid $12,000 for serving on the Board of Directors. Each director received $1,000 per quarterly Board of Directors meeting attended and $750 per committee meeting attended. Since May 1993, however, Messrs. Seneff and Bourne have waived their directors' fees. The Board of Directors believes this compensation level is comparable to that provided by many other companies in the real estate investment trust ("REIT") industry. The Board of Directors met 12 times during the year ended December 31, 1 9 96 and the average attendance by directors at Board meetings was approximately 95%. Each current member attended at least 83% of the total meetings of the Board of Directors and of any committee on which he served. COMMITTEES OF THE BOARD OF DIRECTORS The Company has a standing Audit Committee, the members of which are selected by the full Board of Directors each year. The current members of the Audit Committee, who have served since June 1992, are Messrs. Clark, Cox and Lanier. The Audit Committee makes recommendations to the Board of Directors as to the independent accountants of the Company and reviews with such accounting firm the scope of the audit and the results of the audit upon its completion. The Audit Committee met once during the year ended December 31, 1996. The Company has a standing Compensation Committee, the members of which are selected by the full Board of Directors each year. The current members of the Compensation Committee are Messrs. Clark, Hinkle and Lanier. The principal function of the Compensation Committee is to make awards of stock options under the 1992 Commercial Net Lease Realty, Inc. Stock Option Plan (the "1992 Plan") and to set the terms of such stock options in accordance with the terms of the 1992 Plan. The Compensation Committee met twice during the year ended December 31, 1996. The Company does not have a nominating committee. ITEM 11. EXECUTIVE COMPENSATION ANNUAL COMPENSATION The following Summary Compensation Table shows the annual and long-term compensation paid by the Company to the Chief Executive Officer for services rendered in all capacities to the Company during the fiscal years ended December 31, 1996, 1995, and 1994. No executive officer of the Company received a total annual salary bonus in excess of $100,000 from the Company during the fiscal year ended December 31, 1996. The Company's employees and executive officers also are employees and executive officers of the Advisor and receive compensation from CNL Group in part for services in such capacities. See "Certain Transactions" for a description of the fees payable and expenses reimbursed to the Advisor. SUMMARY COMPENSATION TABLE -------------------------- ANNUAL COMPENSATION(1) LONG TERM COMPENSATION ----------------------- ---------------------- Stock Option Name and Awards Principle Position Year Salary Bonus (Shares) - ----------------- ----- ------ ----- ----------- James M. Seneff, Jr. 1996 $0 $0 120,000 Chief Executive Officer1995 $0 $0 -0- & Chairman of the Board 1994 $0 $0 145,500 8 ___________________ (1) Mr. Seneff became the Chief Executive Officer of the Company in July 1992. No executive officer received a salary or bonus from the Company during 1996. STOCK OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information with respect to stock option grants, pursuant to the 1992 Plan, made to the Chief Executive Officer during the fiscal year ended December 31, 1996: Grant Date Options % of Total Exercise Price Expiration Present Name Granted(1) Granted in 1996 (Per Share) Date Value (2) - ---- --------- --------------- -------------- ---------- ---------- James M. 120,000 31.65% $13.00 03/04/06 $165,573 Seneff, Jr. (1) Options vest in one-third increments on each of the first three consecutive anniversaries of the date of grant and may be exercised, if at all, only with respect to those options which have vested. (2) Based on the Black-Scholes options pricing model adapted for use in valuing stock options granted to executives. The following assumptions were used in determining the values set forth in the table: (a) expected volatilities of 13.0%, (b) risk-free rates of return of 6.17% (which percentage represents the yield on a United States Government Zero Coupon bond with a 10-year maturity prevailing on the date on which the respective options were granted), (c) dividend yields of 8.6%, and (d) the exercise of the options at the end of their respective 10-year term. No adjustments were made for nontransferability or risk of forfeiture of the options. The calculations were made using prices per share of the Common Stock and option exercise prices of $13.00 (which represented the closing sale price of the Common Stock on the New York Stock Exchange on the date prior to the date on which the options were granted). The estimated present values in the table are not intended to provide, nor should they be interpreted as providing, any indication or assurance concerning future values of the Common Stock. OPTIONS EXERCISED AND FISCAL YEAR-END VALUES The following table sets forth certain information with respect to unexercised stock options held by the Chief Executive Officer at December 31, 1996. The Chief Executive Officer did not exercise any stock options during the fiscal year ended December 31, 1996. Value of Unexercised Number of Unexercised In-the-Money Options Options at December 31, 1996 at December 31, 1996 (1) ---------------------------- ------------------------ Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- James M. 159,000 128,000 $415,000 342,625 Seneff, Jr. ___________________ (1) Based on the closing price of $15.875 on the New York Stock Exchange on December 31, 1996. The Company's only employee compensation plan is the 1992 Plan. The Company does not have any other compensation or pension plans. 9 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of April 14, 1997, the number and percentage of outstanding shares beneficially owned by all persons known by the Company to own beneficially more than five percent of the Company's Common Stock, by each director and nominee, by each of the executive officers named in "Executive Compensation," above, and by all officers and directors as a group, based upon information furnished to the Company by such stockholders, officers and directors. Unless otherwise noted below, the persons named in the table have sole voting and sole investment power with respect to each of the shares beneficially owned by such person. Name and Address Number of Shares Percent of Beneficial Owner Beneficially Owned of Shares - ------------------- ------------------ --------- Robert A. Bourne (1) 400 East South Street, Suite 500 Orlando, Florida 32801 422,096 (2)(3) 1.8 % Edward Clark (4) 5204 Shamrock Drive Raleigh, North Carolina 27612 5,877 (5) (6) Willoughby T. Cox, Jr. (4) 200 Pasadena Place Orlando, Florida 32802 4,942 (7) (6) Kevin B. Habicht 400 East South Street, Suite 500 Orlando, Florida 32801 61,667 (12) (6) Clifford R. Hinkle (4) 215 S. Monroe Street, Suite 500 Tallahassee, Florida 32301 20,592 (8) (6) Ted B. Lanier (4) 1818 Windmill Drive Sanford, North Carolina 27330 13,442 (9) (6) Gary M. Ralston 400 East South Street, Suite 500 Orlando, Florida 32801 82,333 (11) (6) James M. Seneff, Jr. (1) 400 East South Street, Suite 500 Orlando, Florida 32801 509,368 (2)(10) 2.2% Public Employees Retirement System of Ohio 277 East Town Street Columbus, Ohio 43215 1,643,000 7.0% All directors and executive officers as a group (8 persons) 809,618 (2) (3) (5) (7) (8) (9) (10) (11)(12) 3.5% 10 _______________________ (1) A director and executive officer of the Company. (2) Of these shares, 310,699 shares are held by six limited partnerships, of which Messrs. Bourne and Seneff are general partners. In addition, 35,473 of these shares are held by a trust of which Mr. Seneff serves as trustee. Messrs. Bourne and Seneff disclaim beneficial ownership of these shares, except to the extent of their respective percentage interests in each of these entities. A director and executive officer of the Company. (3) Includes 1,730 shares held by Mr. Bourne as custodian for his minor children and 109,667 shares subject to currently exercisable options. (4) A director of the Company. (5) Includes 635 shares held by Mr. Clark's spouse and 4,942 shares subject to currently exercisable options. (6) Less than 1 percent. (7) Includes 4,942 shares subject to currently exercisable options. (8) Includes 800 vested shares held by Flagler Capital Corporation Profit Sharing Plan on behalf of Mr. Hinkle, who is the sole participant, 4,942 shares subject to currently exercisable options, 250 shares held by Mr. Hinkle as custodian for his son under the Uniform Gift to Minors Act, 1,000 shares held by Mr. Hinkle's spouse, and 10,000 shares owned by Flagler Holdings, Inc., in which Mr. Hinkle has a 26 percent interest and dispository and voting authority. (9) Includes 5,000 shares held by Mr. Lanier's spouse, and 4,942 shares subject to currently exercisable options. (10) Includes 159,000 shares subject to currently exercisable options. (11) Includes 77,333 shares subject to currently exercisable options. (12) Includes 61,667 shares subject to currently exercisable options. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission (the "SEC") and the New York Stock Exchange. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Forms 3, 4 and 5 they file. Based solely on the Company's review of the copies of such forms it has received and written representations from certain reporting persons that they were not required to file Forms 5 for the last fiscal year, the Company believes that all its officers, directors, and greater than ten percent beneficial owners complied with all filing requirements applicable to them with respect to transactions during fiscal 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Administration of the day-to-day operations of the Company is provided by the Advisor, a subsidiary of CNL Group, of which Messrs. Seneff and Bourne are affiliates, pursuant to the terms of the Advisory Agreement. All of the officers of the Advisor also are officers of the Company. The Advisor also serves as the Company's consultant in connection with policy decisions to be made by the Company's Board of Directors, manages the Company's properties and renders such other services as the Board of Directors deems appropriate. The Advisor 11 also bears the expense of providing the executive and administrative personnel, office space and services required in rendering such services to the Company. The Advisor is at all times subject to the supervision of the Board of Directors of the Company and has only such functions and authority as the Company may delegate to it as the Company's agent. The Advisory Agreement provides that the Advisor is entitled to receive an annual Advisor Fee, paid monthly, equal to seven percent (7%) of Funds From Operations (as defined below) up to $10,000,000, six percent (6%) of Funds From Operations in excess of $10,000,000 but less than $20,000,000, and five percent (5%) of Funds From Operations in excess of $20,000,000. For the purposes of the Advisory Agreement, Funds From Operations means net income of the Company before advisory fees excluding depreciation and amortization expense, extraordinary gains and losses, nonrecurring items of income and expense and non-cash lease accounting adjustments. In addition, the Advisory Agreement provides that, to the extent that the Board of Directors requests that the Advisor render services other than those otherwise required to be performed, such additional services shall be compensated separately on terms to be agreed upon. The aggregate Advisor Fee incurred by the Company to the Advisor during the year ended December 31, 1996 was $1,466,000. T h e Company's Board of Directors (including a majority of its independent directors) approved the payment to the Advisor of an acquisition fee equal to 1.5 percent of the cost of 27 properties and nine buildings acquired by the Company in 1996 that were not developed by or purchased from affiliates of CNL Group and an expense reimbursement equal to 0.5 percent of such costs to cover costs incurred on behalf of the Company in site selection and acquisition activities (including travel and related items) of the Advisor. During 1996, the Company incurred $1,709,000 in acquisition fees and $569,000 in expense reimbursements payable to the Advisor with respect to these properties. The term of the Advisory Agreement expired January 1, 1997, subject to successive one-year renewals upon mutual consent of the parties. The Company has renewed the Advisory Agreement for 1997 by a unanimous vote of directors. The Advisory Agreement may be terminated for cause by either party thereto, or by the mutual consent of the parties (by a majority of the independent directors of the Company or a majority of the Board of Directors of the Advisor, as the case may be), upon 90 days written notice. During 1996, the Company acquired thirteen properties for purchase prices totaling $34,313,000 from affiliates of CNL Group who had developed the properties. The purchase prices paid by the Company for these properties include development fees totaling $1,453,000. No acquisition fees or expense reimbursement fees were paid to the Advisor in connection with acquisition of these properties. 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 Independent Auditors' Report Consolidated Balance Sheets at December 31, 1996 and 1995 Consolidated Statements of Earnings for the years ended December 31, 1996, 1995 and 1994 12 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements 2. Financial Statement Schedule Report of Independent Auditors' on Supplementary Information Schedule III - Real Estate and Accumulated Depreciation at December 31, 1996 Notes to Schedule III - Real Estate and Accumulated Depreciation at December 31, 1996 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). 3.3 Articles of Amendment to the Articles of Incorporation of the Registrant (filed as Exhibit 3.3 to the Registrant's Form 10-Q for the quarter ended June 30, 1996, 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 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). 10.2 Advisory Agreement between Registrant and CNL Realty Advisors, Inc. effective as of April 1, 1993 and renewed January 1, 1997 (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). 10.3 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). 10.4 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). 10.5 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). 13 10.6 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 C u r rent Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.7 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 C u r rent Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.8 Loan Agreement, dated January 19, 1996, among Registrant and Principal Mutual Life Insurance Company relating to a $39,450,000 loan (filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). 10.9 Secured Promissory Note, dated January 19, 1996, among Registrant and Principal Mutual Life Insurance Company relating to a $39,450,000 loan (filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). 10.10 Third Amended and Restated Line of Credit and Security Agreement, dated September 3, 1996, by and among Registrant, certain lenders and First Union National Bank of Florida, as the Agent, relating to a $150,000,000 loan (filed as Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference). 10.11 Second Renewal and Modification Promissory Note, dated September 3, 1996, by and among Registrant and First Union National Bank of Florida, as the Agent, relating to $150,000,000 loan (filed as Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference). 13 Annual Report to Shareholders for the year ended December 31, 1996 (previously filed). 23 C o n s ent of Independent Accountants dated March 19, 1997 (previously filed). (b) The Registrant filed no reports on Form 8-K during the period from October 1, 1996 through December 31, 1996. 14 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 14th day of August, 1997. COMMERCIAL NET LEASE REALTY, INC. By: /s/ Robert A. Bourne ---------------------- ROBERT A. BOURNE Vice 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/ Robert A. Bourne Vice Chairman of the August 14, 1997 Robert A. Bourne Board of Directors, Secretary and Treasurer. Report of Independent Auditors' on Supplementary Information ------------------------------------------------------------- The Board of Directors Commercial Net Lease Realty, Inc.: Under date of January 20, 1997, except for Note 12 for which the date is February 13, 1997, we reported on the consolidated balance sheets of Commercial Net Lease Realty, Inc. as of December 31, 1996 and 1995, 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, 1996, as contained in Item 14(a)1 of Form 10-K and in the 1996 annual report to stockholders. These consolidated financial statements and our report thereon are both included in Item 14(a)1 of Form 10-K and incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule at December 31, 1996. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated 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, 1997, except for Note 12 for which the date is February 13, 1997 COMMERCIAL NET LEASE REALTY, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION ------------------------------------------------------- December 31, 1996
Costs Capitalized Initial Cost Subsequent To Company To Acquisition ------------------------ ------------------ Buildings Encum- and Improve- Carrying brances(l) Land Improvements ments Costs -------------- ----------- ------------ --------- -------- Properties the Company has Invested in Under Operating Leases: Academy: Houston, Texas $ - $ 1,074,232 $ - $ - $ - Houston, Texas - 699,165 - - - N. Richland Hills, Texas - 1,307,655 - - - Houston, Texas - 3,086,610 - - - Houston, Texas - 795,005 - - - San Antonio, Texas - 931,478 - - - Baton Rouge, Louisiana - 1,552,041 - - - Baby Superstore: Arlington, Texas - 830,689 2,611,867 - - Barnes & Noble: Lakeland, Florida - 1,070,902 1,516,983 - - Brandon, Florida 1,629,182(k) 1,476,407 1,527,150 - - Denver, Colorado - 3,244,785 2,722,087 - - Houston, Texas - 3,307,562 2,396,024 - - Plantation, Florida - 3,616,357 - - - Cary, North Carolina - 2,778,458 2,650,008 - - Lafayette, Louisiana - 1,204,279 2,301,983 - - Oklahoma City, Oklahoma - 1,688,556 2,311,487 - - Daytona, Florida - 2,587,451 2,052,643 - - Freehold, New Jersey - 2,917,219 2,260,663 - - Memphis, Tennessee - 1,785,157 - - - Best Buy: Corpus Christi, Texas 1,268,679(j) 818,448 896,395 12,222 - Blockbuster Music: Dallas, Texas - 346,548 1,963,773 39,243 - Borders: Wilmington, Delaware 4,932,406(k) 3,030,769 6,061,538 - - Richmond, Virginia 2,591,377(k) 2,177,310 2,599,587 - - Ft. Lauderdale, Florida - 3,164,984 3,934,577 - - Bangor, Maine - 1,546,915 2,486,761 - - Burger King: Asheboro, North Carolina - 420,508 815,190 - - Galliano, Louisiana - 249,001 1,130,506 - - John's Island, S. Carolina - 385,517 698,309 - - Lake Charles, Louisiana - 272,381 965,713 - - Lancaster, Ohio - 220,846 582,815 - - Natchez, Mississippi - 206,717 653,530 - - Tappahannock, Virginia - 289,840 572,779 - - Warren, Michigan - 298,817 785,031 - - Manchester, New Hampshire - 619,037 428,757 - - Life on Which Gross Amount at Which Carried Depreciation at Close of Period (b) in Latest Buildings Date Income and Accumulated of Con- Date Statement is Land Improvements Total Depreciation struction Acquired Computed ----------- ------------- ------------ ------------ --------- -------- ------------ $ 1,074,232 (c) $ 1,074,232 $ - 1994 05/95 (c) 699,165 (c) 699,165 - 1995 06/95 (c) 1,307,655 (c) 1,307,655 - 1996 08/95(h) (c) 3,086,610 (c) 3,086,610 - 1996 02/96(h) (c) 795,005 (c) 795,005 - 1996 06/96(h) (c) 931,478 (c) 931,478 - 1996 06/96 (c) 1,552,041 (f) 1,552,041 - (f) 08/96 (f) 830,689 2,611,867 3,442,556 33,192 1996 06/96 40 years 1,070,902 1,516,983 2,587,885 74,808 1995 07/94(h) 40 years 1,476,407 1,527,150 3,003,557 75,520 1995 08/94(h) 40 years 3,244,785 2,722,087 5,966,872 153,229 1994 09/94 40 years 3,307,562 2,396,024 5,703,586 74,884 1995 10/94(h) 40 years 3,616,357 (c) 3,616,357 - 1996 05/95(h) (c) 2,778,458 2,650,008 5,428,466 61,798 1996 05/95(h) 40 years 1,204,279 2,301,983 3,506,262 40,285 1996 06/95(h) 40 years 1,688,556 2,311,487 4,000,043 56,234 1996 06/95(h) 40 years 2,587,451 2,052,643 4,640,094 47,867 1996 09/95(h) 40 years 2,917,219 2,260,663 5,177,882 52,121 1995 01/96 40 years 1,785,157 (f) 1,785,157 - (f) 09/96 (f) 818,448 908,617 1,727,065 70,254 1967 11/93 40 years 346,548 2,003,016 2,349,564 136,345 1985 04/94 40 years 3,030,769 6,061,538 9,092,307 307,151 1994 12/94 40 years 2,177,310 2,599,587 4,776,897 101,456 1995 06/95 40 years 3,164,984 3,934,577 7,099,561 82,536 1995 02/96 40 years 1,546,915 2,486,761 4,033,676 32,811 1996 06/96 40 years 420,508 815,190 1,235,698 91,709 1986 07/92 40 years 249,001 1,130,506 1,379,507 127,182 1991 07/92 40 years 385,517 698,309 1,083,826 78,560 1988 07/92 40 years 272,381 965,713 1,238,094 108,643 1988 07/92 40 years 220,846 582,815 803,661 65,567 1987 07/92 40 years 206,717 653,530 860,247 73,522 1986 07/92 40 years 289,840 572,779 862,619 64,438 1987 07/92 40 years 298,817 785,031 1,083,848 88,316 1987 07/92 40 years 619,037 428,757 1,047,794 38,515 1980 05/93 40 years F-1 COMMERCIAL NET LEASE REALTY, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED ------------------------------------------------------------------- December 31, 1996 Costs Capitalized Initial Cost Subsequent To Company To Acquisition ------------------------ ----------------- Buildings Encum- and Improve- Carrying brances (l) Land Improvements ments Costs ------------ ---------- ------------ -------- -------- Rochester, New Hampshire - 216,652 779,450 - - St. Paul, Minnesota - 225,297 542,847 - - Columbus, Ohio - 357,114 407,093 - - Opelousas, Louisiana - 460,374 824,510 - - Coon Rapids, Minnesota - 322,658 544,936 - - Checkers: Orlando, Florida - 256,568 - - - CompUSA: Mission Viejo, California - 2,706,352 1,368,966 - - Computer City: Miami, Florida 2,484,493(k) 2,713,192 1,866,676 - - Baton Rouge, Louisiana - 609,069 913,603 - - Anchorage, Alaska - 928,321 1,662,584 - - Richmond, Virginia - 888,772 1,948,036 - - Hartsdale, New York - 4,599,134 2,497,199 - - Denny's: Greenville, South Carolina - 344,817 400,895 - - Landrum, South Carolina - 155,429 - - - Mooresville, North Carolina - 307,299 - - - Greensboro, North Carolina - 265,915 493,407 - - Houston, Texas - 289,036 572,985 - - Santee, South Carolina - 244,284 312,045 - - Duncan, South Carolina - 219,703 - - - Topeka, Kansas - 414,686 - - - Winter Springs, Florida - 555,232 - - - Dick's Clothing: Taylor, Michigan - 1,920,032 3,526,868 - - White Marsh, Maryland - 2,680,532 3,916,889 - - Eckerd: San Antonio, Texas 664,517(k) 440,985 - - - Dallas, Texas 640,224(k) 541,493 - - - Garland, Texas 515,167(k) 239,014 - - - Arlington, Texas 545,212(k) 368,964 - - - Millville, New Jersey 676,227(k) 417,603 - - - Atlanta, Georgia 604,315(k) 445,593 - - - Mantua, New Jersey 703,012(k) 344,022 - - - Amarillo, Texas 813,010(k) 650,864 - - - Amarillo, Texas 625,555(k) 329,231 - - - Glassboro, New Jersey 771,267(k) 534,243 - - - Kissimmee, Florida 898,488(k) 715,480 - - - Colleyville, Texas 993,034(k) 756,472 - - - Tampa, Florida - 604,682 - - - Lafayette, Louisiana - 967,528 - - - Moore, Oklahoma - 414,738 - - - Douglasville, Georgia - 413,439 995,209 - - Life on Which Gross Amount at Which Carried Depreciation at Close of Period (b) in Latest Buildings Date Income and Accumulated of Con- Date Statement is Land Improvements Total Depreciation struction Acquired Computed ---------- ------------- ------------ ------------ --------- -------- ------------ 216,652 779,450 996,102 70,017 1987 05/93 40 years 225,297 542,847 768,144 47,536 1986 06/93 40 years 357,114 407,093 764,207 35,649 1982 06/93 40 years 460,374 824,510 1,284,884 72,201 1989 06/93 40 years 322,658 544,936 867,594 47,719 1990 06/93 40 years 256,568 (c) 256,568 - 1988 07/92 (c) 2,706,352 1,368,966 4,075,318 54,186 1994 02/94(h) 40 years 2,713,192 1,866,676 4,579,868 126,129 1994 04/94 40 years 609,069 913,603 1,522,672 22,901 1995 12/95 40 years 928,321 1,662,584 2,590,905 34,876 1995 02/96 40 years 888,772 1,948,036 2,836,808 28,671 1996 05/96 40 years 4,599,134 2,497,199 7,096,333 19,467 1996 08/96 40 years 344,817 400,895 745,712 36,012 1985 05/93 40 years 155,429 (c) 155,429 - 1992 05/93 (c) 307,299 (c) 307,299 - 1992 05/93 (c) 265,915 493,407 759,322 44,322 1992 05/93 40 years 289,036 572,985 862,021 51,471 1985 05/93 40 years 244,284 312,045 556,329 28,031 1992 05/93 40 years 219,703 (c) 219,703 - 1992 05/93 (c) 414,686 (c) 414,686 - 1989 06/93 (c) 555,232 (c) 555,232 - 1994 01/94 (c) 1,920,032 3,526,868 5,446,900 26,072 1996 08/96 40 years 2,680,532 3,916,889 6,597,421 28,956 1996 08/96 40 years 440,985 (c) 440,985 - 1993 12/93 (c) 541,493 (c) 541,493 - 1994 01/94 (c) 239,014 (c) 239,014 - 1994 02/94 (c) 368,964 (c) 368,964 - 1994 02/94 (c) 417,603 (c) 417,603 - 1994 03/94 (c) 445,593 (c) 445,593 - 1994 03/94 (c) 344,022 (c) 344,022 - 1994 06/94 (c) 650,864 (c) 650,864 - 1994 12/94 (c) 329,231 (c) 329,231 - 1994 12/94 (c) 534,243 (c) 534,243 - 1994 12/94 (c) 715,480 (c) 715,480 - 1995 04/95 (c) 756,472 (c) 756,472 - 1995 06/95 (c) 604,682 (c) 604,682 - 1995 12/95 (c) 967,528 (c) 967,528 - 1995 01/96 (c) 414,738 (c) 414,738 - 1995 01/96 (c) 413,439 995,209 1,408,648 22,945 1996 01/96 40 years F-2 COMMERCIAL NET LEASE REALTY, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED ------------------------------------------------------------------- December 31, 1996 Costs Capitalized Initial Cost Subsequent To Company To Acquisition ------------------------ ----------------- Buildings Encum- and Improve- Carrying brances (l) Land Improvements ments Costs ------------ ---------- ------------ -------- -------- Midwest City, Oklahoma - 1,080,637 1,103,351 - - Tallahassee, Florida - 691,523 - - - Irving, Texas - 1,000,222 - - - Snellville, Georgia - 486,272 1,320,087 - - Food 4 Less: Lemon Grove, California - 3,695,816 - - - Golden Corral Family Steakhouse: Foley, Alabama - 101,286 283,991 - - Edenton, North Carolina - 36,578 318,481 - - Woodstock, Georgia - 200,680 328,450 - - Bonham, Texas - 128,451 344,170 - - Center, Texas (e) - 103,187 308,859 - - Gilmer, Texas (e) - 116,815 296,454 - - Leitchfield, Kentucky (e) - 73,660 306,642 - - Marietta, Georgia (g) - 156,190 346,509 - - Rockledge, Florida - 120,593 340,889 - - Silsbee, Texas (e) - 132,802 302,052 - - Atlanta, Texas (e) - 88,457 368,317 - - Vernon, Texas (e) - 105,798 328,943 - - Abbeville, Louisiana (e) - 98,577 362,416 - - Fredericksburg, Texas - 169,984 321,189 - - Bowie, Texas (e) - 57,824 311,544 - - Clanton, Alabama (e) - 113,017 296,921 - - Jacksonville, Texas - 115,276 318,196 - - Lake Placid, Florida (e) - 115,113 305,074 - - Pleasanton, Texas (e) - 139,694 316,070 - - Ennis, Texas - 153,701 366,639 - - Franklin, Louisiana (e) - 105,840 396,831 - - Melbourne, Florida (e) - 193,447 341,351 - - Franklin, Virginia - 100,808 424,164 - - Minden, Louisiana (e) - 86,120 402,364 - - Durant, Oklahoma - 140,862 411,135 - - Good Guys: Foothill Ranch, California - 1,456,113 2,505,022 - - Hardee's: Chalkville, Alabama - 170,834 457,167 - - Gulf Shores, Alabama - 348,281 595,164 - - Mobile, Alabama - 336,696 - - - Warrior, Alabama - 177,659 - - - Horn Lake, Mississippi - 302,787 - - - Petal, Mississippi - 277,104 415,193 - - West Point, Mississippi - 173,386 - - - Rock Hill, South Carolina - 216,777 466,450 - - Columbia, Tennessee - 226,300 - - - Johnson City, Tennessee - 215,567 - - - Tusculum, Tennessee - 182,349 507,293 - - Life on Which Gross Amount at Which Carried Depreciation at Close of Period (b) in Latest Buildings Date Income and Accumulated of Con- Date Statement is Land Improvements Total Depreciation struction Acquired Computed ---------- ------------ ---------- ------------ --------- -------- ------------ 1,080,637 1,103,351 2,183,988 22,764 1996 03/96 40 years 691,523 (c) 691,523 - 1996 06/96 (c) 1,000,222 (c) 1,000,222 - 1996 12/96 (c) 486,272 1,320,087 1,806,359 177 1996 12/96 40 years 3,695,816 (c) 3,695,816 - 1996 07/95(h) (c) 101,286 283,991 385,277 105,105 1984 10/84 35 years 36,578 318,481 355,059 115,975 1984 11/84 35 years 200,680 328,450 529,130 119,556 1984 11/84 35 years 128,451 344,170 472,621 124,245 1984 12/84 35 years 103,187 308,859 412,046 111,509 1984 12/84 35 years 116,815 296,454 413,269 107,030 1984 12/84 35 years 73,660 306,642 380,302 110,699 1984 12/84 35 years 156,190 346,509 502,699 125,091 1984 12/84 35 years 120,593 340,889 461,482 123,060 1984 12/84 35 years 132,802 302,052 434,854 109,056 1984 12/84 35 years 88,457 368,317 456,774 132,594 1985 01/85 35 years 105,798 328,943 434,741 115,130 1985 03/85 35 years 98,577 362,416 460,993 126,846 1985 04/85 35 years 169,984 321,189 491,173 112,416 1985 04/85 35 years 57,824 311,544 369,368 109,040 1985 05/85 35 years 113,017 296,921 409,938 103,922 1985 05/85 35 years 115,276 318,196 433,472 111,368 1985 05/85 35 years 115,113 305,074 420,187 106,776 1985 05/85 35 years 139,694 316,070 455,764 110,625 1985 05/85 35 years 153,701 366,639 520,340 124,657 1985 07/85 35 years 105,840 396,831 502,671 134,922 1985 07/85 35 years 193,447 341,351 534,798 116,059 1985 07/85 35 years 93,719 424,164 517,883 104,173 1987 02/87 40 years 86,120 402,364 488,484 78,794 1989 03/89 40 years 140,862 411,135 551,997 76,295 1989 08/89 40 years 1,456,113 2,505,022 3,961,135 337 1995 12/96 40 years 170,834 457,167 628,001 36,292 1992 10/93 40 years 348,281 595,164 943,445 47,246 1993 10/93 40 years 336,696 (c) 336,696 - 1993 10/93 (c) 177,659 (c) 177,659 - 1992 10/93 (c) 302,787 (c) 302,787 - 1993 10/93 (c) 277,104 415,193 692,297 32,959 1993 10/93 40 years 173,386 (c) 173,386 - 1993 10/93 (c) 216,777 466,450 683,227 37,028 1993 10/93 40 years 226,300 (c) 226,300 - 1993 10/93 (c) 215,567 (c) 215,567 - 1993 10/93 (c) 182,349 507,293 689,642 40,271 1993 10/93 40 years F-3 COMMERCIAL NET LEASE REALTY, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED ------------------------------------------------------------------- December 31, 1996 Costs Capitalized Initial Cost Subsequent To Company To Acquisition ------------------------ ----------------- Buildings Encum- and Improve- Carrying brances (l) Land Improvements ments Costs ------------ ---------- ------------ -------- -------- Hi-Lo Automotive: Mesquite, Texas - 233,420 513,523 - - Fort Worth, Texas - 197,037 512,296 - - Houston, Texas - 261,318 531,968 - - Arlington, Texas - 295,331 571,609 - - Garland, Texas - 239,570 512,023 - - Dallas, Texas - 281,347 543,937 - - McAllen, Texas - 265,177 605,397 - - Temple, Texas - 177,451 587,755 - - San Antonio, Texas - 200,510 643,741 - - Universal City, Texas - 247,264 570,677 - - Bastrop, Texas - 197,905 383,144 - - Lake Worth, Texas - 252,141 539,510 - - Nacogdoches, Texas - 190,324 522,232 - - Eagle Pass, Texas - 256,745 455,841 - - International House of Pancakes: Stafford, Texas 517,481(k) 382,084 - - - Sunset Hills, Missouri 546,928(k) 271,853 - - - Las Vegas, Nevada 614,918(k) 519,947 - - - Fort Worth, Texas 572,066(k) 430,896 - - - Arlington, Texas 549,340(k) 404,512 - - - Matthews, North Carolina 561,854(k) 380,043 - - - Phoenix, Arizona 565,635(k) 483,374 - - - Kash N Karry: Brandon, Florida - 1,234,480 - - - Linens 'n Things: Freehold, New Jersey 2,931,484(j) 1,753,766 2,208,651 - - Luria's: South Miami, Florida - 1,379,229 - - - Tampa, Florida - 2,127,503 1,521,730 - - Coral Gables, Florida - 1,782,346 - - - Marshalls: Freehold, New Jersey 3,431,576(j) 2,052,946 2,585,432 - - Office Depot: Arlington, Texas 1,089,007(k) 596,024 1,411,432 - - OfficeMax: Corpus Christi, Texas 1,439,600(j) 893,270 978,344 76,664 - Dallas, Texas 1,534,349(k) 1,118,500 1,709,891 - - Cincinnati, Ohio 1,148,996(k) 543,489 1,574,551 - - Evanston, Illinois 1,966,738(k) 1,867,831 1,757,618 - - Altamonte Springs, Florida - 1,650,419 2,979,087 - - Pompano Beach, Florida - 2,266,908 1,904,803 - - Cutler Ridge, Florida - 989,370 1,479,119 - - Sacramento, California - 1,129,077 2,922,150 - - Life on Which Gross Amount at Which Carried Depreciation at Close of Period (b) in Latest Buildings Date Income and Accumulated of Con- Date Statement is Land Improvements Total Depreciation struction Acquired Computed ---------- ------------- ----------- ------------ --------- -------- ------------ 233,420 513,523 746,943 28,299 1994 10/94 40 years 197,037 512,296 709,333 26,713 1993 11/94 40 years 261,318 531,968 793,286 27,744 1994 11/94 40 years 295,331 571,609 866,940 29,808 1993 11/94 40 years 239,570 512,023 751,593 26,698 1993 11/94 40 years 281,347 543,937 825,284 27,343 1994 12/94 40 years 265,177 605,397 870,574 19,087 1995 09/95 40 years 177,451 587,755 765,206 18,531 1989 09/95 40 years 200,510 643,741 844,251 20,296 1994 09/95 40 years 247,264 570,677 817,941 17,992 1995 09/95 40 years 197,905 383,144 581,049 12,080 1994 09/95 40 years 252,141 539,510 791,651 17,010 1995 09/95 40 years 190,324 522,232 712,556 16,465 1995 09/95 40 years 256,745 455,841 712,586 14,372 1994 09/95 40 years 382,084 (c) 382,084 - 1992 10/93 (c) 271,853 (c) 271,853 - 1993 10/93 (c) 519,947 (c) 519,947 - 1993 12/93 (c) 430,896 (c) 430,896 - 1993 12/93 (c) 404,512 (c) 404,512 - 1993 12/93 (c) 380,043 (c) 380,043 - 1993 12/93 (c) 483,374 (c) 483,374 - 1993 12/93 (c) 1,234,480 (f) 1,234,480 - (f) 10/96 (f) 1,753,766 2,208,651 3,962,417 129,283 1994 08/94 40 years 1,379,229 (c) 1,379,229 - 1988 06/96 (c) 2,127,503 1,521,730 3,649,233 19,339 1994 06/96 40 years 1,782,346 (c) 1,782,346 - 1994 06/96 (c) 2,052,946 2,585,432 4,638,378 151,338 1994 08/94 40 years 596,024 1,411,432 2,007,456 102,836 1991 01/94 40 years 893,270 1,055,008 1,948,278 81,889 1967 11/93 40 years 1,118,500 1,709,891 2,828,391 128,359 1993 12/93 40 years 543,489 1,574,551 2,118,040 97,735 1994 07/94 40 years 1,867,831 1,757,618 3,625,449 68,596 1995 06/95 40 years 1,650,419 2,979,087 4,629,506 68,685 1995 01/96 40 years 2,266,908 1,904,803 4,171,711 43,104 1972 02/96 40 years 989,370 1,479,119 2,468,489 18,797 1995 06/96 40 years 1,129,077 2,922,150 4,051,227 196 1996 12/96 40 years F-4 COMMERCIAL NET LEASE REALTY, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED ------------------------------------------------------------------- December 31, 1996 Costs Capitalized Initial Cost Subsequent To Company To Acquisition ------------------------ ----------------- Buildings Encum- and Improve- Carrying brances (l) Land Improvements ments Costs ------------ ---------- ------------ -------- ------- Oshman's Sporting Goods: Dallas, Texas - 1,311,440 - - - Pier 1 Imports: Dallas, Texas - 189,010 1,071,054 20,710 - Memphis, Tennessee - 716,332 - - - Pizza Hut: Orlando, Florida - 220,632 258,483 - - Rally's: Toledo, Ohio - 125,882 319,770 - - Scotty's: Orlando, Florida - 1,044,796 2,011,952 - - Orlando, Florida - 1,157,268 2,077,131 - - Sears Homelife Centers: Orlando, Florida 1,630,220(k) 820,397 2,184,721 - - Clearwater, Florida 2,745,218(j) 1,184,438 2,526,207 10,555 - Tampa, Florida 2,511,525 1,454,908 2,045,833 - - Pensacola, Florida 1,885,394 633,125 1,595,405 - - Raleigh, North Carolina 2,357,255 1,848,026 1,753,635 - - Sports Authority: Sarasota, Florida - 1,403,494 1,963,006 - - Waccamaw: Fairfax, Virginia - 2,156,801 - - - Sarasota, Florida - 2,207,244 3,087,176 - - Wendy's Old Fashioned Hamburger: Fenton, Missouri - 307,068 496,410 - - Longwood, Florida - 333,335 194,926 - - ----------- ------------ ------------ -------- ------- $49,955,749 $138,527,151 $138,429,902 $159,394 $ - =========== ============ ============ ======== ======= Properties the Company has Invested in Under Direct Financing Leases: Academy: Houston, Texas - $ - $ 1,924,740 $ - $ - Houston, Texas - - 1,867,519 - - N. Richland Hills, Texas - - 2,253,408 - - Houston, Texas - - 2,112,335 - - Houston, Texas - - 1,910,697 - - San Antonio, Texas - - 1,963,109 - - Barnes & Noble: Plantation, Florida - - 3,498,559 - - Life on Which Gross Amount at Which Carried Depreciation at Close of Period (b) in Latest Buildings Date Income and Accumulated of Con- Date Statement is Land Improvements Total Depreciation struction Acquired Computed ---------- ------------ ---------- ------------- --------- -------- ------------ 1,311,440 (c) 1,311,440 - 1994 03/94 (c) 189,010 1,091,764 1,280,774 74,324 1980 04/94 40 years 716,332 (f) 716,332 - (f) 09/96 (f) 220,632 258,483 479,115 42,194 1974 08/93 20.9 years 125,882 319,770 445,652 37,095 1989 07/92 38.8 years 1,044,796 2,011,952 3,056,748 78,296 1995 06/95 40 years 1,157,268 2,077,131 3,234,399 79,168 1995 06/95 40 years 820,397 2,184,721 3,005,118 196,400 1992 05/93 40 years 1,184,438 2,536,762 3,721,200 227,358 1992 05/93 40 years 1,454,908 2,045,833 3,500,741 26,141 1992 06/96 40 years 633,125 1,595,405 2,228,530 20,386 1994 06/96 40 years 1,848,026 1,753,635 3,601,661 22,408 1995 06/96 40 years 1,403,494 1,963,006 3,366,500 132 1988 12/96 40 years 2,156,801 (c) 2,156,801 - 1995 12/95 (c) 2,207,244 3,087,176 5,294,420 207 1988 12/96 40 years 307,068 496,410 803,478 67,778 1985 07/92 33 years 333,335 194,926 528,261 27,959 1982 07/92 31.4 years - ------------ ------------ ------------ ---------- $138,520,062 $138,589,296 $277,109,358 $8,078,562 ============ ============ ============ ========== - (c) (c) (c) 1994 05/95 (c) - (c) (c) (c) 1995 06/95 (c) - (c) (c) (c) 1996 08/95(h) (c) - (c) (c) (c) 1996 02/96(h) (c) - (c) (c) (c) 1996 06/96(h) (c) - (c) (c) (c) 1996 06/96 (c) - (c) (c) (c) 1996 05/95(h) F-5 COMMERCIAL NET LEASE REALTY, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED ------------------------------------------------------------------- December 31, 1996 Costs Capitalized Initial Cost Subsequent To Company To Acquisition ------------------------ ----------------- Buildings Encum- and Improve- Carrying brances (l) Land Improvements ments Costs ------------ ---------- ------------ -------- -------- Checkers: Orlando, Florida - - 286,910 - - Denny's: Landrum, South Carolina - - 374,684 - - Mooresville,North Carolina - - 535,309 - - Akron, Ohio - 137,424 733,450 - - Duncan, South Carolina - - 628,571 - - Topeka, Kansas - - 498,921 - - Winter Springs, Florida - - 620,148 - - Eckerd: San Antonio, Texas - - 783,974 - - Dallas, Texas - - 638,684 - - Garland, Texas - - 710,634 - - Arlington, Texas - - 636,070 - - Millville, New Jersey - - 828,942 - - Atlanta, Georgia - - 668,390 - - Mantua, New Jersey - - 951,795 - - Vineland, New Jersey 732,010(k) 286,231 1,063,142 - - Amarillo, Texas - - 869,846 - - Amarillo, Texas 531,326(k) 158,851 855,348 - - Amarillo, Texas - - 849,071 - - Glassboro, New Jersey - - 887,497 - - Kissimmee, Florida - - 933,852 - - Alice, Texas 539,133(k) 189,187 804,963 - - Colleyville, Texas - - 1,076,066 - - Tampa, Florida - - 1,090,532 - - Lafayette, Louisiana - - 949,128 - - Moore, Oklahoma - - 879,296 - - Tallahassee, Florida - - 1,274,147 - - East Point, Georgia - 336,610 1,173,529 - - Irving, Texas - - 1,228,436 - - Ft. Worth, Texas - 399,592 2,529,969 - - Food 4 Less Lemon Grove, California - - 4,068,179 - - Food Lion: Keystone Heights, Florida 1,049,480(k) 88,604 1,845,988 - - Chattanooga, Tennessee 1,105,338(k) 336,488 1,701,072 - - Lynchburg, Virginia 1,333,443(j) 128,216 1,674,167 - - Martinsburg, West Virginia 1,080,743(k) 448,648 1,543,573 - - Good Guys: Stockton, California 1,928,780(k) 580,609 2,974,868 - - Portland, Oregon - 817,574 2,630,652 - - Hardee's: Mobile, Alabama - - 479,107 - - Warrior, Alabama - - 470,556 - - Horn Lake, Mississippi - - 555,975 - - Life on Which Gross Amount at Which Carried Depreciation at Close of Period (b) in Latest Buildings Date Income and Accumulated of Con- Date Statement is Land Improvements Total Depreciation struction Acquired Computed ---------- ------------- ------------ ------------- --------- -------- ------------ - (c) (c) (c) 1988 07/92 (c) - (c) (c) (c) 1992 05/93 (c) - (c) (c) (c) 1992 05/93 (c) (d) (d) (d) (d) 1992 05/93 (d) - (c) (c) (c) 1992 05/93 (c) - (c) (c) (c) 1989 06/93 (c) - (c) (c) (c) 1994 01/94 (c) - (c) (c) (c) 1993 12/93 (c) - (c) (c) (c) 1994 01/94 (c) - (c) (c) (c) 1994 02/94 (c) - (c) (c) (c) 1994 02/94 (c) - (c) (c) (c) 1994 03/94 (c) - (c) (c) (c) 1994 03/94 (c) - (c) (c) (c) 1994 06/94 (c) (d) (d) (d) (d) 1994 11/94 (d) - (c) (c) (c) 1994 12/94 (c) (d) (d) (d) (d) 1994 12/94 (d) - (c) (c) (c) 1994 12/94 (c) - (c) (c) (c) 1994 12/94 (c) - (c) (c) (c) 1995 04/95 (c) (d) (d) (d) (d) 1995 06/95 (d) - (c) (c) (c) 1995 06/95 (c) - (c) (c) (c) 1995 12/95 (c) - (c) (c) (c) 1995 01/96 (c) - (c) (c) (c) 1995 01/96 (c) - (c) (c) (c) 1996 06/96 (c) (d) (d) (d) (d) 1996 12/96 (d) - (c) (c) (c) 1996 12/96 (c) (d) (d) (d) (d) 1996 12/96 (d) - (c) (c) (c) 1996 07/95(h) (c) (d) (d) (d) (d) 1993 05/93 (d) (d) (d) (d) (d) 1993 10/93 (d) (d) (d) (d) (d) 1994 01/94 (d) (d) (d) (d) (d) 1994 08/94 (d) (d) (d) (d) (d) 1991 07/94 (d) (d) (d) (d) (d) 1996 05/96 (d) - (c) (c) (c) 1993 10/93 (c) - (c) (c) (c) 1992 10/93 (c) - (c) (c) (c) 1993 10/93 (c) F-6 COMMERCIAL NET LEASE REALTY, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED ------------------------------------------------------------------- December 31, 1996 Costs Capitalized Initial Cost Subsequent To Company To Acquisition ------------------------ ----------------- Buildings Encum- and Improve- Carrying brances (l) Land Improvements ments Costs ----------- ---------- ------------ -------- -------- Iuka, Mississippi - 130,258 505,363 - - West Point, Mississippi - - 517,424 - - Biscoe, North Carolina - 60,301 479,984 - - Aynor, South Carolina - 44,871 521,192 - - Columbia, Tennessee - - 584,927 - - Johnson City, Tennessee - - 570,690 - - Hi-Lo Automotive: Edinberg, Texas - 97,056 418,926 - - Copperas Cove, Texas - 116,637 476,331 - - Baton Rouge, Louisiana - 89,954 508,146 - - Lake Jackson, Texas - 120,313 609,300 - - Fort Worth, Texas - 92,779 607,971 - - Pantego, Texas - 154,368 505,323 - - Fort Worth, Texas - 91,373 548,238 - - Pharr, Texas - 94,576 472,880 - - Baton Rouge, Louisiana - 122,349 527,930 - - Houston, Texas - 37,508 596,069 - - Homeplace: Arlington, Texas - 752,840 4,045,374 - - International House of Pancakes: Stafford, Texas - - 571,832 - - Sunset Hills, Missouri - - 736,345 - - Las Vegas, Nevada - - 613,582 - - Fort Worth, Texas - - 623,641 - - Arlington, Texas - - 608,132 - - Matthews, North Carolina - - 655,668 - - Phoenix, Arizona - - 559,307 - - Levitz: Tempe, Arizona - 634,444 2,225,991 - - Luria's: South Miami, Florida - - 1,756,808 - - Coral Gables, Florida - - 1,692,012 - - Oshman's Sporting Goods: Dallas, Texas - - 2,658,976 - - Waccamaw: Fairfax, Virginia - - 3,356,493 - - ------------ ----------- ----------- -------- ------- $ 8,300,253 $ 6,547,661 $87,390,663 $ - $ - ============ =========== =========== ======== ======= Life on Which Gross Amount at Which Carried Depreciation at Close of Period (b) in Latest Buildings Date Income and Accumulated of Con- Date Statement is Land Improvements Total Depreciation struction Acquired Computed ---------- ------------- ------------ ------------ --------- -------- ------------ (d) (d) (d) (d) 1993 10/93 (d) - (c) (c) (c) 1993 10/93 (c) (d) (d) (d) (d) 1993 10/93 (d) (d) (d) (d) (d) 1993 10/93 (d) - (c) (c) (c) 1993 10/93 (c) - (c) (c) (c) 1993 10/93 (c) (d) (d) (d) (d) 1993 10/94 (d) (d) (d) (d) (d) 1994 10/94 (d) (d) (d) (d) (d) 1994 10/94 (d) (d) (d) (d) (d) 1994 10/94 (d) (d) (d) (d) (d) 1993 10/94 (d) (d) (d) (d) (d) 1993 10/94 (d) (d) (d) (d) (d) 1993 11/94 (d) (d) (d) (d) (d) 1993 11/94 (d) (d) (d) (d) (d) 1994 12/94 (d) (d) (d) (d) (d) 1982 09/95 (d) (d) (d) (d) (d) 1996 06/96 (d) - (c) (c) (c) 1992 10/93 (c) - (c) (c) (c) 1993 10/93 (c) - (c) (c) (c) 1993 12/93 (c) - (c) (c) (c) 1993 12/93 (c) - (c) (c) (c) 1993 12/93 (c) - (c) (c) (c) 1993 12/93 (c) - (c) (c) (c) 1993 12/93 (c) (d) (d) (d) (d) 1994 01/95 (d) - (c) (c) (c) 1988 06/96 (c) - (c) (c) (c) 1994 06/96 (c) - (c) (c) (c) 1994 03/94 (c) - (c) (c) (c) 1995 12/95 (c) F-7
COMMERCIAL NET LEASE REALTY, INC. NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION ---------------------------------------------------------------- December 31, 1996 (a) Transactions in real estate and accumulated depreciation during 1996, 1995 and 1994, are summarized as follows: Accumulated Cost Depreciation ------------ ------------ Land and Buildings: 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 Acquisitions 116,563,622 - Sale of land and buildings (908,393) (222,940) Depreciation expense - 2,804,112 ------------ ---------- Balance, December 31, 1996 $277,109,358 $8,078,562 ============ ========== (b) As of December 31, 1996, all of the leases are treated as operating leases for federal income tax purposes. As of December 31, 1996 and 1995, the aggregate cost of the Properties owned by the Company and its subsidiaries for federal income tax purposes was $371,047,781 and $219,057,229, respectively. (c) For financial reporting purposes, the portion of the lease relating to the building has been recorded as a direct financing lease; 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; 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. F-8 COMMERCIAL NET LEASE REALTY, INC. NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED ---------------------------------------------------------------------------- December 31, 1996 (i) During the years ended December 31, 1996, 1995 and 1994, the Company (i) incurred acquisition fees and expense reimbursement fees totalling $2,278,306, $937,363 and $1,436,073, respectively, paid to CNL Realty Advisors, Inc. and (ii) acquired land and buildings purchased from affiliates of CNL Realty Advisors, Inc. for an aggregate cost of $37,712,514, $17,968,518 and $7,261,454, respectively. Such amounts are included in land and buildings on operating leases and net investments in direct financing leases. (j) Property is encumbered as a part of the Company's $13,150,000 long term, fixed rate mortgage and security agreement. (k) Property is encumbered as a part of the Company's $39,450,000 long term, fixed rate mortgage and security agreement. (l) Encumbered properties for which the portion of the lease relating to the land is accounted for as an operating lease and the portion of the lease relating to the building is accounted for as a direct financing lease, the total amount of the encumbrance is listed with the land portion of the property. F-9 EXHIBIT 13 ANNUAL REPORT TO SHAREHOLDERS TABLE OF CONTENTS - ----------------- Historical Financial Highlights 1 1996 Highlights and Recent Developments 2 Company Profile 3 To Our Stockholders 4 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Independent Auditors' Report 10 Consolidated Balance Sheets 11 Consolidated Statements of Earnings 12 Consolidated Statements of Stockholders' Equity 13 Consolidated Statements of Cash Flows 14 Consolidated Notes to Financial Statements 15 Consolidated Quarterly Financial Data 21 Share Price and Dividend Data 21 Stockholder Information 22 Directors and Executive Officers 23 1996 ANNUAL REPORT - PAGE 1 HISTORICAL FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) -------------------------------
1996 1995 1994 1993 1992 ---------- ---------- --------- --------- --------- Gross Revenues $ 33,369 $ 20,580 $ 12,289 $ 5,069 $ 2,604 Net Earnings $ 19,839 $ 12,707 $ 8,915 $ 3,522 $ 1,562 Total Assets $ 370,953 $ 219,257 $ 152,211 $ 91,619 $ 23,134 Total Long-Term Debt $ 116,956 $ 82,600 $ 14,800 $ - $ 8,500 Total Equity $ 252,574 $ 135,842 $ 136,665 $ 91,145 $ 14,388 Cash Dividends Paid to Stock- holders $ 18,868 $ 13,529 $ 9,897 $ 3,156 $ 1,766 Weighted Average Shares 16,798,918 11,663,672 8,606,138 3,711,807 1,635,350 Per Share Information: Net Earnings $ 1.18 $ 1.09 $ 1.04 $ 0.95 $ 0.95 Dividends $ 1.18 $ 1.16 $ 1.14 $ 1.10 $ 1.08 Other Data Funds from oper- ations (1) $ 22,570 $ 14,443 $ 9,992 $ 3,884 $ 1,879 Cash Flows from: Operating activities $ 22,216 $ 14,140 $ 9,505 $ 3,750 $ 2,067 Investing activities $(144,247 ) $ (67,518 ) $ (79,081 ) $(48,609) $ 344 Financing activities $ 123,140 $ 52,609 $ 50,799 $ 64,236 $ (2,933) Equity Market Capitalization ($ mil) $329.6 $148.7 $142.9 $105.4 $ 21.7
- ------------------------------------------------------------------------------- (1) 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 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. Management considers funds from operations an appro- priate measure of performance of an equity REIT because it is predicated on cash flow analysis.The Company's computation of funds from operations may differ from the methodology for calculating funds from operations utilized by other equity REIT's and, therefore, may not be comparable to such other REIT's. 1996 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, 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, 1996, Commercial Net Lease Realty, Inc. and its subsidiaries (the "Company") owned 195 properties (the "Properties") that are leased to major retail businesses, including Academy, Baby Superstore, Barnes & Noble, Best Buy, Blockbuster Music, Borders, Burger King, CompUSA, Computer City, Denny's, Dick's Clothing & Sporting Goods, Eckerd, Food 4 Less, Food Lion, Golden Corral, Good Guys, Hardee's, Hi-Lo Automotive, HomePlace, International House of Pancakes, Kash N' Karry, Levitz, Linens 'n Things, Luria's, Marshalls, Office Depot, OfficeMax, Oshman's, Pier 1 Imports, Scotty's, Sears Homelife Centers, Sports Authority 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, 1996, 1995 and 1994, the Company generated $22,216,000, $14,140,000 and $9,505,000 respectively, in net cash provided by operating activities. The increase in cash from operations for each of the years ended December 31, 1996 and 1995, is primarily a result of changes in revenues and expenses as discussed in "Results of Operations." The Company's leases typically provide that the tenant bears responsibility for substantially all property costs and expenses associated with ongoing main- tenance and operation, including utilities, property taxes and insurance. In addition, the Company's leases generally provide that the tenant is responsible for roof and structural repairs. Certain of the Company's Properties are subject to leases under which the Company retains responsibility for certain costs and expenses associated with the Property. Because many of the Prop- erties which are subject to leases that place these responsibilities on the Company are recently constructed, management anticipates that capital demands to meet obligations with respect to these Properties will be minimal for the for- eseeable future and can be met with funds from operations and working capital. The Company may be required to use bank borrowings or other sources of capital in the event of unforeseen significant capital expenditures. Indebtedness. In July 1994, the Company entered into an agreement establishing a $100,000,000 revolving credit facility. In September 1996, the Company entered into an amended and restated loan agreement for $150,000,000 revolving credit facility (the "Credit Facility"). The Credit Facility amended the Company's $100,000,000 credit facility by (i) increasing the borrowing capacity from $100,000,000 to $150,000,000, (ii) extending the expiration date to June 30, 1998 (and for up to two additional 12 month periods at the option of the Company), and (iii) lower- ing the interest rate from 170 basis points above LIBOR to 160 basis points above LIBOR or the lender's prime rate, whichever the Company selects. 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. The Credit Facility is collateralized by an assignment of the rents and leases of certain of the Company's Properties. As of December 31, 1996, $58,700,000 was outstanding under the Credit Facility. The Credit Facility will be used primarily to in- vest in freestanding, retail properties, although up to $15,000,000 of the available credit may be used for the issuance of standby letters of credit or working capital. As a means to reduce its exposure to rising interest rates on the Company's variable rate Credit Facility, the Company entered into three interest rate cap agreements during the three years ended December 31, 1996. As of December 31, 1996, two of the interest rate cap agreements had expired and one remained effective, providing for a fixed LIBOR rate of 6.9% per annum on a notional amount of $30 million. This agreement is effective through December 1999. In December 1995, the Company entered into a long-term, fixed rate mortgage and security agreement for $13,150,000. The loan 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 mortgage is secured by a first lien on and assignment of rents and leases of certain of the Co- mpany's Properties. As of December 31, 1996, the outstanding principal balance was $13,150,000. In January 1996, the Company entered into a long-term, fixed rate mortgage and security agreement for $39,450,000. The loan is a ten-year loan with principal and interest payable monthly, based on a 17-year amortization, with the balance due in February 2006 and bears interest at a rate of 7.435% per annum. The loan is secured by a first lien on and an assignment of rents and leases of certain of the Company's Properties. As of December 31, 1996, the outstanding principal balance was $38,352,000. 1996 ANNUAL REPORT - PAGE 7 In June 1996, the Company acquired three Properties each subject to a mortgage totalling $6,864,000 (collectively the "Mortgages"). The Mortgages bear interest at a weighted average rate of 8.6% and have a weighted average maturity of eight years. As of December 31, 1996, the outstanding principal balances for the Mortgages totalled $6,754,000. Payments of principal on the mortgaged debt and on advances outstanding under the Credit Facility are expected to be met from the proceeds of renewing or refinancing the Credit Facility, proceeds from public or private offerings 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. 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. In January 1996, the Company filed a prospectus supplement to the shelf registration and issued 4,025,000 shares of common stock, including the underwriters' over-allotment of 525,000 shares, and received gross proceeds of $52,325,000. In September 1996, the Company filed a prospectus supplement to the shelf registration and issued 4,850,000 shares of common stock and received gross proceeds of $67,900,000. In addition, in October 1996, the Company issued an additional 225,000 shares of common stock in connection with the underwriters'over-allotment option and received gross proceeds of $3,150,000. In connection with these offerings, the Company incurred stock issuance costs totalling $7,614,000, consisting primarily of underwriters' commissions and fees, legal and accounting fees and printing expenses. Net proceeds from the offerings were generally used to pay down the outstanding indebtedness under the Company's Credit Facility. On February 13, 1997, the Company filed a prospectus supplement to the shelf registratio nwhich offered 2,300,000 shares of common stock at $15.125 per share. The net proceeds of the offering were approximately $32,900,000, after deducting offering expenses and underwriting discounts. Proceeds of the offering will be used to pay down the outstanding indebtedness under the Company's Credit Facility. Property Acquisitions and Commitments. During the year ended December 31, 1996, the Company borrowed $144,600,000 under its Credit Facility and assumed mortgages totalling $6,864,000 to acquire 40 Properties and nine buildings (the "Acquisition Properties") which were developed by the tenant on land parcels owned by the Company. The 40 Properties include nine Eckerd drugstores, four OfficeMax office supply stores, four Academy sporting goods stores, three Computer City computer stores, three Sears Homelife furniture stores, three Luria's jewelry and giftware stores, two Barnes & Noble bookstores, two Borders bookstores, two Good Guys consumer electronic stores, two Dick's Clothing and Sporting Goods stores, one HomePlace home furnishing store, one Baby Superstore baby products retailer, one Pier 1 Imports home furnishings store, one Kash N' Karry grocery store, one Waccamaw home decorating store and one Sports Authority sporting goods store. The nine buildings included five Barnes & Nobles bookstores, three Academy sporting goods stores and one Food 4 Less grocery store. The Company leases the Acquisition Properties to major retail tenants and accounts for the leases under the provisions of the Statement of Financial Accounting Standards No. 13, Accounting for Leases. Pursuant to the re- quirements of this provision, 28 of the leases relating to the 40 Properties have been classified as operating leases and 12 leases have been classified as direct financing leases. For the leases classified as direct financing leases, the building portions of the leases are accounted for as direct financing leases while the land portions of eight of these leases are accounted for as operating leases. Also pursuant to the requirements of this provision, four of the leases relating to the nine buildings which were developed by the tenant on land parcels owned by the Company have been classified as operating leases and five leases have been classified as direct financing leases. [Picture 1] Photograph of an exterior view of the Barnes & Noble bookstore located in Lakeland, Florida. [Picture 2] Photograph of an exterior view of the OfficeMax located in Altamonte Springs, Florida. [Picture 3] Photograph of an exterior view of the Eckerd drugstore located on Colleyville, Texas. [Picture 4] Photograph of an exterior view of the Best Buy located in Corpus Christi, Texas. 1996 ANNUAL REPORT - PAGE 8 In connection with the acquisition and lease relating to the land parcels of the Kash N' Karry Property, the Pier 1 Imports Property, one of the Academy Properties and one of the Barnes & Noble Properties, the tenants are obligated to develop a building on the respective land parcels. The Company has agreed to acquire the completed buildings for an aggregate amount of up to $8,583,000, at which time rental income will increase for each of the Properties. As of December 31, 1996, the Company had entered into agreements to purchase 12 additional properties for an estimated aggregate amount of $33,521,000. The purchase of these properties is subject to conditions relating to completion of development activities, review of title and obtaining title insurance, engineer- ing and environmental inspections and other matters. In addition to the 12 properties under contract and the four buildings being developed by tenants as of December 31, 1996, the Company is currently negot- iating the acquisition of prospective properties. The Company may elect to acquire these prospective properties or other 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 long-term, fixed rate financing, the Company may enter into additional financing arrangements. During 1996, the Company sold its properties in Marble Falls and Gonzales, Texas for a total of $790,000 and received net proceeds of $759,000, resulting in a gain of $73,000 for financial statement purposes. The Company reinvested the proceeds to acquire two additional Properties and structured the transactions to qualify as like-kind exchange transactions for federal income tax purposes. 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, 1996, 1995 and 1994, the Company declared and paid dividends to its stockholders of $18,868,000, $13,529,000, and $9,897,000, respectively, or $1.18, $1.16 and $1.14 per share of common stock, respectively. For the years ended December 31, 1996, 1995 and 1994, 89.8%, 79.3% and 83.3%, respectively, of such dividends were considered to be ordinary income and 10.2%, 20.7% and 16.7%, respectively, were considered return of capital for federal income tax purposes. In January 1997, the Company declared dividends to its stockholders of $6,229,000 or $.30 per share of common stock, payable in February 1997. RESULTS OF OPERATIONS Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995. During the years ended December 31, 1996 and 1995, the Company owned and leased 197 (including two properties which were sold during 1996) and 157 Properties, respectively, to operators of major retail businesses. 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, 1996, the average remaining initial lease term of the Properties was approximately 14 years. During the years ended December 31, 1996 and 1995 the Company earned $32,487,000 and $19,723,000, respectively, in rental income from operating leases and earned income from direct financing leases. The 65 percent increase in rental and earned income during 1996, as compared to 1995, is primarily attributable to income earned on the 40 Properties acquired and the nine buildings upon which construction was completed during 1996. In addition, rental and earned income increased during 1996 as a result of the fact that the 29 Properties acquired and four buildings upon which construction was completed during 1995 were operational for a full fiscal year in 1996. Rental and earned income is expected to increase in 1997 as the Company acquires additional properties and due to the fact that the 40 Properties acquired and nine buildings upon which construction was completed in 1996 will contribute to the Company's income for a full fiscal year. During 1996, one of the Company's lessees, Barnes & Noble Superstores, Inc., accounted for more than ten percent of the Company's total rental income. As of December 31, 1996, Barnes & Noble Superstores, Inc. was the lessee under leases relating to 11 Properties. It is anticipated that, based on the minimum rental payments required by the lease, Barnes & Noble Superstores, Inc. will continue to account for more than ten percent of the Company's total rental income in 1997. Any failure of this lessee could materially affect the Company's income. The Company incurred $7,206,000 and $3,834,000 in interest expense for the years ended December 31, 1996 and 1995, respectively. Interest expense increased for the year ended December 31, 1996, as a result of higher average borrowing levels. However, the increase in interest expense in 1996 was partially offset by the Company's long-term, fixed rate financing and a decrease in the average interest rates under the Company's credit facility. As a means to reduce its exposure to variable rate debt, the Company entered into interest rate cap agreements as described above in "Liquidity and Capital Resources." During the years ended December 31, 1996 and 1995, the Company's operating expenses, including depreciation and amortization, were $6,397,000 and $4,039,000, respectively (19.2% and 19.6%, respectively, of gross operating revenues). The increase in the dollar amount of operating 1996 ANNUAL REPORT - PAGE 9 expenses for each of the years ended December 31, 1996 and 1995, is primarily attributable to the increase in depreciation as a result of the depreciation of the additional Properties acquired during 1996 and 1995 and a full year of depreciation on the Properties acquired during the previous year.The increase is also attributable to an increase in amortization expense as a result of the amortization of loan costs relating to the Company's long-term fixed rate financing and amendment to the Company's Credit Facility. In addition, advisory fees increased as a result of increased funds from operations for the year ended December 31, 1996. In December 1996, the Company sold two of its Properties to an unrelated, third party for $790,000, resulting in an aggregate gain of $73,000. No such sales occurred during the year ended December 31, 1995. Comparison of Year Ended December 31, 1995, to Year Ended December 31, 1994. During the years ended December 31, 1995 and 1994, the Company owned and leased 157 and 128 Properties, respectively, to operators of major retail businesses. The Properties are leased on a long-term basis, generally 15 to 20 years, with renewal options for an additional 10 to 20 years.During the years ended December 31, 1995 and 1994, the Company earned $19,723,000 and $11,240,000, respectively, in rental income from operating leases and earned income from direct financing leases. The increase in rental and earned income during 1995, as compared to 1994, is primarily attributable to the income earned on the 29 Properties acquired and four buildings upon which construction was completed during 1995 and the fact that a full year of income was earned on 44 Properties that the Company acquired during 1994. The Company incurred $3,834,000 and $498,000 in interest expense for the years ended December 31, 1995 and 1994, respectively. Interest expense increased for the year ended December 31, 1995, as a result of higher average borrowing levels. However, the increase in interest expense in 1995 was partially offset by the Company's long-term, fixed rate financing and a decrease in the average interest rates under the Company's credit facility. As a means to reduce its exposure to variable rate debt, the Company entered into interest rate cap agreements as described above in "Liquidity and Capital Resources." During the years ended December 31, 1995 and 1994, the Company's operating expenses, including depreciation and amortization, were $4,039,000 and $2,876,000, respectively (19.6% and 23,4%, 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 de- precation as a result of the depreciation of the additional Properties acquired during 1995 and a full year of depreciation on the Properties acquired during the previous year. The increase is also attributable to an increase in amorti- zation expense as a result of the amortization of loan costs relating to the Co- mpany's long-term fixed rate financing and amendment to the Company's Credit Facility. In addition, advisory fees increased as a result of increased funds from operations for the year ended December 31, 1995. However, the increase in operating expenses for 1995 was partially offset by a decrease in legal fees 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 Company had made an election to be taxed as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations.As a REIT, for federal income tax purposes, the Company generally will not be subject to federal income tax on income that it distributes to its stockholders.If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost. Such an event could materially affect the Company's income. However, the Company believes that it is organized and operates in such a manner as to qualify for treatment as a REIT for the years ended December 31, 1996, 1995 and 1994, and intends to continue to operate the Company so as to remain qualified as a REIT for federal income tax purposes. 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; however, inflation and changing prices also may have an adverse impact on the operating margins of retail businesses and on potential capital appreciation of the Properties. Management of the Company currently knows of no trends that will have a material adverse effect on liquidity, capital resources or results of operations. This information contains forward-looking statements within the meaning of Sect- ion 27A of the Securities Act of 1933 and Section 21E of the Securities Ex- change Act of 1934. Although the Company believes that the expectations re- flected in such forward-looking statements are based upon reasonable assumptions, the Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include the following: changes in general economic conditions, changes in real estate market conditions, continued availability of proceeds from the Company's debt or equity capital, the ability of the Company to locate suitable tenants for its Properties and the ability of tenants to make payments under their respective leases. DIVERSIFICATION OF ASSETS [PIE CHART 1] Line of Trade Diversification Percentage of Line of Trade Pie Chart - ------------- ------------ Apparel 1.2% Auto Supply/Service 4.6% Baby Supplies .8% Books 19.5% Consumer Electronics 9.4% Drugstores 10.6% Furniture 4.7% Grocers 4.6% Home Furnishings & Accessories 6.4% Home Improvement 1.8% Jewelry 2.8% Music .7% Office Supplies 7.4% Restaurants 14.3% Sporting Goods 11.2% TENANT DIVERSIFICATION ---------------------- Barnes & Noble The Good Guys Oshman's Eckerd Golden Corral CompUSA OfficeMax Luria's Linens 'n Things Borders Food & Music Hardee's Baby Superstore Academy Denny's Sports Authority Computer City Food Lion Levitz Hi-Lo Automotive Food 4 Less Blockbuster Music Sears Homelife IHOP Office Depot Burger King Scotty's Pier 1 imports Dick's Sporting Goods HomePlace Kash N' Karry Waccamaw Marshalls [MAP 1] Tenant Diversification by Geographic Location State # of Properties - ----- --------------- Alaska 1 Alabama 6 Arizona 2 California 5 Colorado 1 Delaware 1 Florida 32 Georgia 6 Illinois 1 Kansas 1 Kentucky 1 Louisiana 12 Maryland 1 Maine 1 Michigan 2 Minnesota 2 Missouri 2 Mississippi 5 North Carolina 8 New Hampshire 2 New Jersey 7 Nevada 1 New York 1 Ohio 5 Oklahoma 4 Oregon 1 South Carolina 7 Tennessee 6 Texas 64 Virginia 6 West Virginia 1 1996 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, 1996 and 1995, 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, 1996. 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 stand- ards. Those standards require that we plan and perform the audit to obtain re- asonable 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 at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /S/KPMG Peat Marwick LLP Orlando, Florida January 20, 1997, except for Note 12 for which the date is February 13, 1997 1996 ANNUAL REPORT - PAGE 11 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) December 31, ASSETS 1996 1995 --------- --------- Real estate leased to others: Accounted for using the operating method, net of accumulated depreciation $269,031 $155,957 Accounted for using the direct financing method 92,413 56,829 Cash and cash equivalents 1,410 301 Receivables 812 394 Prepaid expenses 335 155 Loan costs, net of accumulated amortization of $1,055 and $405 2,185 1,065 Accrued rental income 4,421 2,194 Other assets 346 2,362 -------- -------- $370,953 $219,257 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable $116,956 $ 82,600 Accrued interest payable 390 128 Accounts payable and accrued expenses 161 351 Real estate taxes payable - 83 Due to related party 93 69 Rents paid in advance 779 184 -------- -------- Total liabilities 118,379 83,415 -------- -------- Commitments and contingencies (Note 11) Stockholders' equity: Common stock, $.01 par value. Authorized 50,000,000 and 30,000,000 shares, respect- ively; issued and outstanding 20,763,672 and 11,663,672 shares, respectively 208 117 Excess stock, $0.01 par value. Authorized 50,000,000 and 30,000,000 shares, respec- tively; none issued and out- standing - - Capital in excess of par value 254,299 138,629 Accumulated dividends in excess of net earnings (1,933) (2,904) -------- -------- Total stockholders' equity 252,574 135,842 -------- -------- $370,953 $219,257 ======== ======== See accompanying notes to consolidated financial statements. 1996 ANNUAL REPORT - PAGE 12 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except per share data) Year Ended December 31, 1996 1995 1994 ----------- ----------- ----------- Revenues: Rental income from operating leases $ 24,418 $ 14,455 $ 8,117 Earned income from direct financing leases 8,069 5,268 3,123 Contingent rental income 722 745 828 Interest and other 160 112 221 ----------- ----------- ----------- 33,369 20,580 12,289 ----------- ----------- ----------- Expenses: General operating and administrative 1,183 722 605 Advisory fees to related party 1,466 1,001 727 Interest 7,206 3,834 498 State taxes 195 258 213 Depreciation and amortization 3,553 2,058 1,331 ----------- ----------- ----------- 13,603 7,873 3,374 ----------- ----------- ----------- Net earnings before gain on sale of land and buildings 19,766 12,707 8,915 Gain on sale of land and buildings 73 - - ----------- ----------- ----------- Net earnings $ 19,839 $ 12,707 $ 8,915 =========== =========== =========== Earnings per share of common stock $ 1.18 $ 1.09 $ 1.04 =========== =========== =========== Weighted average number of shares outstanding 16,798,918 11,663,672 8,606,138 =========== =========== =========== See accompanying notes to consolidated financial statements. [PICTURE 5] Photograph of an exterior view of the Borders Books & Music located in Ft. Lauderdale, Florida [PICTURE 6] Photograph of an exterior view of The Good Guys! located in Stockton, California. 1996 ANNUAL REPORT - PAGE 13 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1996, 1995 and 1994 (dollars in thousands, except per share data) 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, 1993 7,663,672 $ 77 $ 92,168 $ (1,100) $ 91,145 Net earnings - - - 8,915 8,915 Dividends declared and paid ($1.14 per share of common stock) - - - (9,897) (9,897) Issuance of common stock 4,000,000 40 49,960 - 50,000 Stock issuance costs - - (3,499) - (3,499) ---------- ----- --------- -------- -------- Balance at December 31, 1994 11,663,672 117 138,629 (2,082) 136,664 Net earnings - - - 12,707 12,707 Dividends declared and paid ($1.16 per share of common stock) - - - (13,529) (13,529) ---------- ----- -------- ------- -------- Balance at December 31, 1995 11,663,672 117 138,629 (2,904) 135,842 Net earnings - - - 19,839 19,839 Dividends declared and paid ($1.18 per share of common stock) - - - (18,868) (18,868) Issuance of common stock 9,100,000 91 123,284 - 123,375 Stock issuance costs - - (7,614) - (7,614) ---------- ----- -------- -------- -------- Balance at December 31, 1996 20,763,672 $ 208 $254,299 $ (1,933) $252,574 ========== ===== ======== ======== ======== See accompanying notes to consolidated financial statements. [PICTURE 7] Photograph of an exterior view of the Pier 1 Imports located in Dallas, Texas [PICTURE 8] Photograph of an exterior view of the Academy located in Houston, Texas. 1996 ANNUAL REPORT - PAGE 14 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Year Ended December 31, 1996 1995 1994 -------- -------- -------- Cash flows from operating activities: Net earnings $ 19,839 $ 12,707 $ 8,915 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 2,804 1,736 1,077 Amortization 748 322 254 Gain on sale of land and buildings (73) - - Decrease in net investment in direct financing leases 751 462 268 Increase in accrued rental income (2,227) (1,233) (783) Increase in receivables (279) (50) (11) Decrease (increase) in prepaid expenses (180) 207 (314) Decrease (increase) in other assets 10 (7) (10) Increase in accrued interest payable 262 93 36 Increase (decrease) in accounts payable and accrued expenses (12) 12 75 Increase (decrease) in real estate taxes payable (83) 49 (27) Increase (decrease) in due to related party 60 (46) (62) Increase (decrease) in rents paid in advance 596 (112) 87 -------- -------- -------- Net cash provided by operating activities 22,216 14,140 9,505 -------- -------- -------- Cash flows from investing activities: Proceeds from sale of land and buildings 759 - - Additions to land and buildings on operating leases (108,597) (51,402) (53,175) Investment in direct financing leases (36,335) (14,710) (25,570) Increase in other assets (185) (1,451) (332) Other 111 45 (4) -------- -------- -------- Net cash used in investing activities (144,247) (67,518) (79,081) -------- -------- -------- Cash flows from financing activities: Proceeds from notes payable 168,150 81,950 46,905 Repayment of notes payable (140,658) (14,150) (32,105) Payment of loan costs (1,389) (899) (606) Proceeds from issuance of common stock 123,375 - 50,000 Payment of stock issuance costs (7,467) (4) (3,498) Payment of dividends (18,868) (13,529) (9,897) Other (3) (759) - -------- -------- -------- Net cash provided by financing activities 123,140 52,609 50,799 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 1,109 (769) (18,777) Cash and cash equivalents at beginning of year 301 1,070 19,847 -------- -------- -------- Cash and cash equivalents at end of year $ 1,410 $ 301 $ 1,070 ======== ======== ======== Supplemental disclosure of cash flow information: Interest paid $ 6,857 $ 3,545 $ 489 ======== ======== ======== Supplemental disclosure of non-cash investing and financing activities: Mortgages assumed in acquisition of three properties $ 6,864 $ - $ - ======== ======== ======== See accompanying notes to consolidated financial statements. 1996 ANNUAL REPORT - PAGE 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1996, 1995 and 1994 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND NATURE OF BUSINESS - Commercial Net Lease Realty, Inc., a Maryland corporation, is a real estate investment trust formed in 1984. Commercial Net Lease Realty, Inc. owns and manages high-quality, freestanding properties leased to major retail businesses under long-term commercial net leases. PRINCIPLES OF CONSOLIDATION - In November 1995, Commercial Net Lease Realty,Inc. 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 Commercial Net Lease Realty, Inc. and these wholly-owned subsidiaries (hereinafter referred to as the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. REAL ESTATE AND LEASE ACCOUNTING-The Company records the acquisition of land and buildings at cost, including acquisition and closing costs. 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 using either the direct financing or the operating methods. Such methods are described below: Direct financing method - Leases accounted for using the direct financing method are recorded at their net investment (which at the time of acquisition generally represents the cost of the property) (Note 4). 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 leases. Operating method - Land and building leases accounted for using the operating method are recorded at cost, revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives (generally 35 to 40 years). When scheduled rentals vary during the lease term, income is recognized on a straight- line basis so as to produce a constant periodic rent over the term of the lease. 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. When properties are sold, the related cost and accumulated depreciation for operating leases and the net investment for direct financing leases, plus any accrued rental income, are removed from the accounts and gains and losses from the sales are reflected in income. Management reviews its properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. Management determines whether an impairment in value occurred by comparing the estimated future undiscounted cash flows, including the residual value of the property, with the carrying cost of the individual property. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair market value. CASH AND CASH EQUIVALENTS - 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 and money market accounts. 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 of $257,000 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, 1996, approximate fair value. INCOME TAXES - The Company has made an election to be taxed as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. The Company generally 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, 1996,theCompany believes it has qualified as a real estate investment trust; accordingly, no provisions have been made for federal income taxes in the accompanying consolidated 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 outstand- ing 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, revenues and expenses and disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted account- ing principles. Actual results could differ from those estimates. 1996 ANNUAL REPORT - PAGE 16 NEW ACCOUNTING STANDARDS - Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impair- ment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement 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. Adoption of this standard had no material effect on the Company's financial position or results of operations. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. The statement provides that companies must either charge the value of stock options granted to earnings or provide pro forma equivalent information in a footnote disclosure. The Company adopted this standard by providing pro forma equivalent information in Note 8. 2. 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, 1996, 121 of the leases have been classified as operating leases and 74 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 47 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 15 to 20 years (expiring between 1997 and 2020) 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, substantially 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. 3. LAND AND BUILDINGS ON OPERATING LEASES: Land and buildings on operating leases consisted of the following at December 31 (dollars in thousands): 1996 1995 -------- -------- Land $138,520 $ 83,356 Buildings and improvements 138,589 78,098 -------- -------- 277,109 161,454 Less accumulated depreciation (8,078) (5,497) -------- -------- $269,031 $155,957 ======== ======== Some leases provide for scheduled rent increases throughout the lease term. Such amounts are recognized on a straight-line basis over the terms of the leases. For the years ended December 31, 1996, 1995 and 1994, the Company recognized $2,285,000, $1,233,000 and $783,000, respectively, of such income. The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 1996 (dollars in thousands): 1997 $ 27,611 1998 27,667 1999 27,906 2000 28,296 2001 28,936 Thereafter 326,411 -------- $466,827 ======== Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the initial lease terms. In addition, this table does not include any amounts for future contingent rentals which may be received on the leases based on a percentage of the tenant's gross sales. 4. NET INVESTMENT IN DIRECT FINANCING LEASES: The following lists the components of net investment in direct financing leases at December 31 (dollars in thousands): 1996 1995 --------- --------- Minimum lease payments to be received $207,838 $126,314 Estimated residual values 28,309 17,354 Less unearned income (143,734) (86,839) --------- --------- Net investment in direct financing leases $ 92,413 $ 56,829 ========= ========= 1996 ANNUAL REPORT - PAGE 17 The following is a schedule of future minimum lease payments to be received on direct financing leases at December 31, 1996 (dollars in thousands): 1997 $ 11,250 1998 11,254 1999 11,301 2000 11,419 2001 11,451 Thereafter 151,163 -------- $207,838 ======== The above table does not include future minimum lease payments for renewal periods or for contingent rental payments that may become due in future periods (See Note 3). 5. OTHER ASSETS: Other assets consisted of the following at December 31 (dollars in thousands): 1996 1995 -------- -------- Deposits and miscellaneous acquisition costs $ 237 $1,574 Deposits for loan commitments - 526 Deferred offering costs 61 223 Other 48 39 ------ ------ $ 346 $2,362 ====== ====== 6. NOTES PAYABLE: In July 1994, the Company entered into a loan agreement for a three-year $100,000,000 revolving credit facility. In September 1996, the Company entered into an amended and restated loan agreement for a $150,000,000 revolving credit facility (the "Credit Facility"). The Credit Facility amended the Company's $100,000,000 credit facility by (i) increasing the borrowing capacity from $100,000,000 to $150,000,000, (ii) extending the expiration date to June 30, 1998, and (iii) lowering the interest rate from 170 basis points above LIBOR to 160 basis points above LIBOR or the lender's prime rate, whichever the Company selects. 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. The Credit Facility is collateralized by an assignment of 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, 1998, which can be extended for two additional 12 month periods at the option of the Company, and interest is payable quarterly. As of December 31, 1996 and 1995, the outstanding principal balance was $58,700,000 and $69,450,000, respectively, plus accrued interest of $192,000 and $84,000, respectively. 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, 1996. During the three years ended December 31, 1996, the Company entered into three interest rate cap agreements as a means to reduce its exposure to rising interest rates on the Company's variable rate Credit Facility. As of December 31, 1996,two of the interest rate cap agreements had expired and one remained effective, providing for a fixed LIBOR rate of 6.9% per annum on a notional amount of $30 million. This agreement is effective through December 1999. On December 14, 1995, the Company entered into a long-term, fixed rate mortgage and security agreement for $13,150,000. The loan 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 loan is secured by a first lien on and assignment of rents and leases of certain of the Company's properties. As of December 31, 1996, the aggregate carrying value of these properties totalled $17,067,000. The outstanding principal balance as of December 31, 1996 and 1995, was $13,150,000, plus accrued interest of $37,000 and $44,000 respectively. In January 1996, the Company entered into a long-term, fixed rate mortgage and security agreement for $39,450,000. The loan provides for a ten-year loan with principal and interest payable monthly, based on a 17-year amortization, with the balance due in February 2006 and bears interest at a rate of 7.435% per annum. The loan is secured by a first lien on and assignments of rents and leases of certain of the Company's properties. As of December 31, 1996, the aggregate carrying value of these properties totalled $74,706,000. The out- standing principal balance as of December 31, 1996, was $38,352,000, plus accrued interest of $119,000. In June 1996, the Company acquired three properties each subject to a mortgage totalling $6,864,000 (collectively, the "Mortgages"). The Mortgages bear interest at a weighted average rate of 8.6% and have a weighted average maturity of eight years, with principal and interest payable monthly. As of December 31, 1996, the outstanding balances for the Mortgages totalled $6,754,000, plus accrued interest of $42,000. As of December 31, 1996, the aggregate carrying value of these three properties totalled $4,950.000. 1996 ANNUAL REPORT - PAGE 18 The following is a schedule of the annual maturities of the Companies out- standing term indebtedness for each of the next five years (dollars is thousands): 1997 $ 1,520 1998 1,673 1999 14,984 2000 2,005 2001 2,170 ------- $22,352 ======= 7. DIVIDENDS: The following presents the characterization for tax purposes of dividends paid to stockholders for the years ended December 31: 1996 1995 1994 ----- ------ ------ Ordinary income $1.06 $ .92 $ .95 Capital gain - - - Return of capital .12 .24 .19 ----- ----- ----- $1.18 $1.16 $1.14 ===== ===== ===== On January 15, 1997, the Company declared dividends of $6,229,000 or 30 cents per share of common stock, payable on February 14, 1997, to stockholders of record on January 31, 1997. 8. STOCK OPTION PLAN: The Company's stock option plan (the "Plan") provides compensation and incentive to persons ("Key Employees of the Advisor") whose services are considered essential to the Company's continued growth and success. As of December 31, 1995, the Plan had 600,000 shares of common stock reserved for issuance. Pursuant to the Plan, the shares of common stock reserved for issuance auto- matically increased to 1,200,000 shares in connection with the equity offering during January 1996. The Plan provides for an additional automatic increase in the number of shares issuable under the Plan to 2,000,000 shares at such time as the Company has 25,000,000 shares of common stock issued and outstanding. The following summarizes transactions in the Plan for the years ended December 31: 1996 1995 1994 -------------------- -------------------- ------------- Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price -------- --------- -------- -------- -------- -------- Outstanding, January 1578,100 $13.36 568,100 $13.38 87,400 $12.35 Granted 390,000 13.01 10,000 12.50 480,700 13.56 Exercised - - - - - Surrendered(11,500) 13.54 - - - - -------- -------- --------- Outstanding, December 31 956,600 13.21 578,100 13.36 568,100 13.38 ======== ======== ======== Exercisable, December 31 403,533 13.29 232,000 13.11 44,135 13.20 ======== ======== ======== Available for grant, December 31 231,900 21,900 31,900 ======== ======== ======== The weighted-average remaining contractual life of the 956,600 options outstand- ing at December 31, 1996 was 8.1 years, with exercise prices ranging from $11.25 to $14.125. 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 and the options maximum term is ten years. 1996 ANNUAL REPORT - PAGE 19 The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for the Plan. Accordingly, no compensation expense has been recorded with respect to the options in the accompanying consolidated financial statements. Had comp- ensation cost for the Plan been determined based upon the fair value at the grant dates for options under the Plan consistent with the method of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below for the years ended December 31 (dollars in thousands, except per share data):
1996 1995 1994 ----------- ----------- ----------- Net earnings as reported $ 19,839 $ 12,707 $ 8,915 =========== =========== =========== Pro forma net earnings $ 19,681 $ 12,596 $ 8,865 =========== =========== =========== Earnings per share as reported $ 1.18 $ 1.09 $ 1.04 =========== =========== =========== Pro forma earnings per share $ 1.17 $ 1.08 $ 1.03 =========== =========== ===========
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1996, 1995 and 1994: (i) risk free rates of 6.17 and 6.95 percent for 1996 grants, 7.2% for 1995 grants and 6.0, 7.22 and 8.13 percent for 1994 grants, (ii) expected volatility of 12.9% for all years, (iii) dividend yields of 8.6, 8.8 and 8.6 percent, respectively, and (iv) expected lives of ten years for grants in 1996, 1995 and 1994. 9. RELATED PARTY TRANSACTIONS: Certain directors and officers of the Company hold similar positions with CNL Realty Advisors, Inc. (the "Advisor"), the Company's advisor. During the year ended December 31, 1994, the Company acquired one property for a purchase price of $548,000 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 addition, during the year ended December 31, 1996, the Company acquired one property for a purchase price of $3,400,000 from a partnership in which an affiliate of the Advisor is a partner. The purchase price paid by the Company for this property represented the costs incurred by the affiliate to acquire the property, including closing costs. In connection with the acquisition of these two properties, plus 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 and 26 other properties and nine buildings which were developed by the tenant on land parcels owned by the Company in 1996 from unrelated, third parties, the Company paid the Advisor $1,436,000, $937,000 and $2,278,000, 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, 1996, 1995, and 1994, the Co- mpanyacquired 13 properties for purchase prices totalling $34,313,000, seven properties for purchase prices totalling $17,969,000, and six properties for purchase prices totalling $6,713,000 respectively, from affiliates of the Ad- visor 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 $1,453,000 in 1996, $1,106,000 in 1995, and $574,000 in 1994 paid to an affiliate of the Advisor. No acquisition fees or expense reimbursement fees were paid to the Advisor in connection with the acquisition of these 26 properties. During 1996, the Company sold its properties in Marble Falls and Gonzales, Texas for a total of $790,000 and received net proceeds of $759,000, resulting in a gain of $73,000. In connection with the sale of these properties, the Company paid the Advisor $16,000 in disposition fees. The Company and the Advisor have entered into an advisory agreement (the "Ad- visory Agreement"), which provides for the Advisor to perform services in connection with the day to day operations of the Company. In connection ther- ewith, the Advisor receives an annual fee, payable monthly, equal to (i) seven percent of funds from operations, as defined in the Advisory Agreement, up to $10,000,000, (ii) six percent of funds from operations in excess of $10,000,000 but less than $20,000,000 and (iii) five percent of funds from operations in excess of $20,000,000. For purposes of the Advisory Agreement, funds from operations generally includes 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 $1,466,000, $1,001,000, and $727,000 in advisory fees for the years ended December 31, 1996, 1995, and 1994, respectively. 1996 ANNUAL REPORT - PAGE 20 The amount due to related party consisted of the following at December 31 (dollars in thousands): 1996 1995 ----- ----- Due to the Advisor: Advisory fee $76 $20 Acquisition and expense reimbursement fees - 27 Real estate disposition fee 7 - Expenditures incurred on behalf of the Company 10 22 --- --- $93 $69 === === 10. MAJOR TENANTS: The following schedule presents rental and earned income, including contingent rent, from operators or affiliated groups of operators representing more than ten percent of the Company's total rental and earned income for the years ended December 31 (dollars in thousands): 1996 1995 1994 ------ ------ ------ Barnes & Noble Superstores, Inc. $5,204 $2,371 (a) Denny's, Inc. and Flagstar Enterprises, Inc. (a) 2,075 2,082 Golden Corral Corporation (a) (a) 1,833 Burger King Corporation (a) (a) 1,463 (a) Rental and earned income from the operator or affiliated group of operators did not represent more than ten percent of the Company's total rental and earned income for the respective year. 11. COMMITMENTS AND CONTINGENCIES: As of December 31, 1996, the Company had entered into agreements to purchase 12 additional properties for an estimated aggregate amount of $33,521,000. In connection with the acquisition of 11 of these properties, the Company was contingently liable for $2,641,000 related to bank letters of credit which guarantee the Company's obligation under the purchase agreements to acquire these properties. In addition, the Company was contingently liable for $1,805,000 relating to its obligation under a purchase agreement to acquire one property. As of December 31, 1996, the Company owned and leased four land parcels to tenants which were obligated to develop a building on the respective land parcels. The Company has agreed to acquire the completed buildings for an aggregate amount of up to $8,583,000, at which time rental income will increase for each of the properties. 12. SUBSEQUENT EVENT: On February 13, 1997, the Company filed a prospectus supplement with the Securities and Exchange Commission dated February 12, 1997, which offered 2,300,000 shares of common stock at $15.125 from the shelf registration. Pro- ceeds from the offering will be used to pay down the outstanding indebtedness under the Company's Credit Facility. 1996 ANNUAL REPORT - PAGE 21 CONSOLIDATED QUARTERLY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 Quarter First Second Third Fourth Year - ------------ ------- ------- ------- ------- ------- Rent and other revenue $6,924 $7,631 $9,221 $9,666 $33,442 Depreciation and amortization expense 748 806 944 1,055 3,553 Interest expense 1,460 1,602 2,473 1,671 7,206 Other expense 727 689 690 738 2,844 Net earnings 3,989 4,534 5,114 6,202 19,839 Net earnings per share 0.28 0.29 0.31 0.30 1.18 1995 Quarter - ------------ Rent and other revenue $4,415 $4,746 $5,534 $5,885 $20,580 Depreciation and amortization expense 436 490 537 595 2,058 Interest expense 415 675 1,245 1,499 3,834 Other expenses 505 447 527 502 1,981 Net earnings 3,059 3,134 3,225 3,289 12,707 Net earnings per share 0.26 0.27 0.28 0.28 1.09 SHARE PRICE AND DIVIDEND DATA The common stock of the Company currently is traded on the New York Stock Ex- change ("NYSE") under the symbol "NNN." For each calendar quarter indicated, the following table reflects the respective high, low and closing sales prices for the common stock as quoted by the "NYSE" and the dividends paid per share in each such period. 1996 Quarter First Second Third Fourth Year - ------------ ------- ------- ------- ------- ------- High $13.375 $14.000 $14.250 $16.375 $16.375 Low 12.750 12.750 13.375 13.375 12.750 Close 13.250 13.875 13.625 15.875 15.875 Dividends paid per share 0.29 0.29 0.30 0.30 1.18 1995 Quarter - ------------ 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 The portion of dividends paid in 1996 and 1995, which was treated as a non- taxable return of capital, was 9.8% and 20.8%, respectively. On February 14, 1997, there were approximately 1,500 shareholders of record of common stock. APPENDIX PICTURE 1 1996 ANNUAL REPORT - PAGE 7 PICTURE 2 1996 ANNUAL REPORT - PAGE 7 PICTURE 3 1996 ANNUAL REPORT - PAGE 7 PICTURE 4 1996 ANNUAL REPORT - PAGE 7 PIE CHART 1 1996 ANNUAL REPORT - PAGE 9 MAP 1 1996 ANNUAL REPORT - PAGE 9 PICTURE 5 1996 ANNUAL REPORT - PAGE 12 PICTURE 6 1996 ANNUAL REPORT - PAGE 12 PICTURE 7 1996 ANNUAL REPORT - PAGE 13 PICTURE 8 1996 ANNUAL REPORT - PAGE 13 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS DATED MARCH 19, 1997 The Board of Directors Commercial Net Lease Realty, Inc.: We consent to the use of our reports dated January 20, 1997, except for Note 12 for which the date is February 13, 1997, incorporated herein by reference. /s/ KPMG Peat Marwick LLP Orlando, Florida March 19, 1997 -----END PRIVACY-ENHANCED MESSAGE-----