-----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, BdQL/zeDq0YzZHPDUo2NU598cwDnPWEzjwdmDOrLeDG0uK8rI14RGapvXBr1SYEm btn0BRdy41IANQExdqHuOA== 0000726728-98-000005.txt : 19980323 0000726728-98-000005.hdr.sgml : 19980323 ACCESSION NUMBER: 0000726728-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REALTY INCOME CORP CENTRAL INDEX KEY: 0000726728 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 330580106 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13374 FILM NUMBER: 98570297 BUSINESS ADDRESS: STREET 1: 220 W CREST ST CITY: ESCONDIDO STATE: CA ZIP: 92025-1707 BUSINESS PHONE: 6197412111 MAIL ADDRESS: STREET 1: 220 WEST CREST ST CITY: ESCONDIDO STATE: CA ZIP: 92025-1707 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ========= ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 Commission File Number 1-13318 REALTY INCOME CORPORATION ------------------------- (Exact name of registrant as specified in its charter) Maryland 33-0580106 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 220 West Crest Street, Escondido, California 92025 --------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (760)741-2111 ------------- Securities registered pursuant to Section 12 (b) of the Act: Name of Each Exchange Title of Each Class On Which Registered ----------------------------------- ----------------------- Common Stock, $1.00 Par Value New York Stock Exchange ----------------------------------- ----------------------- Securities registered pursuant to Section 12 (g) of the Act: None ---- 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 for 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. [ ] (continued) At March 16, 1998 the aggregate market value of the Registrant's shares of common stock, $1.00 par value, held by non-affiliates of the Registrant was $667,479,358, at the New York Stock Exchange closing price of $26.00. There were 26,464,471 shares of common stock outstanding at March 16, 1998. Documents incorporated by reference: Part III, Item 10, 11 and 12 incorporate by reference certain specific portions of the definitive proxy statement for Realty Income Corporation's Annual Meeting to be held on May 5, 1998, to be filed pursuant to Regulation 14A. Only those portions of the proxy statement which are specifically incorporated by reference herein shall constitute a part of this Annual Report. FORWARD-LOOKING STATEMENT - ------------------------- This report on Form 10-K, including documents incorporated herein by reference, contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. When used in this annual report, the words estimated, anticipated and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are inherently subject to risk and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. In particular, among the factors that could cause actual results to differ materially are the continued qualification as a real estate investment trust, general business and economic conditions, competition, interest rates, accessibility of debt and equity capital markets and other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters and illiquidity of real estate investments. For further description and detail of other factors please see "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-K. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Page 2 REALTY INCOME CORPORATION Index To Form 10-K ================== Page PART I ---- Item 1: Business......................................... 4 Item 2: Properties....................................... 23 Item 3: Legal Proceedings................................ 23 Item 4: Submission of Matters to a Vote of Security Holders......................... 23 PART II Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters........... 24 Item 6: Selected Financial Data.......................... 25 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 26 Item 8: Financial Statements and Supplementary Data...... 40 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........127 PART III Item 10: Directors and Executive Officers of the Registrant................................127 Item 11: Executive Compensation...........................127 Item 12: Security Ownership of Certain Beneficial Owners and Management.................127 Item 13: Certain Relationships and Related Transactions.....................................128 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................128 SIGNATURES....................................................132 EXHIBIT INDEX.................................................134 Page 3 PART I ====== ITEM 1: BUSINESS - ----------------- THE COMPANY =========== Realty Income Corporation, a Maryland corporation ("Realty Income" or the "Company") was organized to operate as an equity real estate investment trust ("REIT"). Realty Income is a fully integrated self- administered real estate company with in-house acquisition, leasing, legal, retail and real estate research, portfolio management and capital markets expertise. As of December 31, 1997, the Company owned a diversified portfolio of 826 retail properties located in 43 states with over 6.3 million square feet of leasable space. Of the 826 properties in the portfolio, 819 are single-tenant properties with the remainder being multi-tenant properties. As of December 31, 1997, 812, or over 99%, of the 819 single-tenant properties were net leased with an average remaining lease term (excluding extension options) of approximately 8.4 years. The Company's primary business objective is to generate a consistent and predictable level of funds from operations ("FFO") per share and distributions to stockholders. Additionally, the Company generally will seek to increase FFO per share and distributions to stockholders through both active portfolio management and the acquisition of additional properties. The Company also seeks to lower the ratio of distributions to stockholders as a percentage of FFO in order to allow internal cash flow to be used to fund additional acquisitions and for other corporate purposes. Realty Income adheres to a focused strategy of acquiring freestanding, single-tenant, retail properties leased to regional and national retail chains under long-term, net lease agreements. The Company typically acquires retail store locations which provides capital to the operators for continued expansion and other corporate purposes. Realty Income's acquisitions and investment activities are concentrated in highly specific target markets and focus primarily on middle-market retailers providing goods and services which satisfy basic consumer needs. The Company's net lease agreements generally are for initial terms of 10 to 20 years, require the tenant to pay a minimum monthly rent and property operating expenses (taxes, insurance and maintenance), and provide for future rent increases (typically subject to ceilings) based on increases in the consumer price index or additional rent calculated as a percentage of the tenant's gross sales above a specified level. From 1970 and through December 31, 1997, Realty Income has acquired and leased back to regional and national retail chains 797 properties (including 32 properties that have been sold) and has collected over Page 4 98% of the contractual rent obligations on those properties. Realty Income believes that the long-term ownership of an actively managed, diversified portfolio of retail properties, leased under long-term net lease agreements, will produce consistent, predictable income and the potential for share price appreciation. Management believes that the income generated under long-term leases, coupled with the tenant's responsibility for property expenses under the net lease structure, generally produces a more predictable income stream than many other types of real estate portfolios. The Company was formed on September 9, 1993 in the State of Delaware and reincorporated in Maryland in May 1997. Realty Income commenced operations as a REIT on August 15, 1994 through the merger of 25 public and private real estate limited partnerships with and into the Company (the "Consolidation"). Each of the partnerships was formed between 1970 and 1989 for the purpose of acquiring and managing long- term, net leased properties. The five senior officers of the Company, who have each managed the Company's properties and operations for between seven and 12 years, owned approximately 1.0% of the Company's outstanding common stock with a market value of approximately $6.2 million as of March 16, 1998. The directors and five senior officers of the Company, as a group, owned approximately 3.2% of the Company's outstanding common stock with a market value of approximately $20.6 million as of March 16, 1998. Thomas A. Lewis succeeded William E. Clark as Chief Executive Officer of the Company in May 1997. Mr. Lewis has been an officer of the Company since 1987 and has served as the Vice Chairman of the Board of Directors since 1994. Mr. Clark has continued as Chairman of the Board of Directors of the Company. The Company's common stock is listed on the New York Stock Exchange under the symbol "O" and its central index key ("CIK") number is 726728. Realty Income has 48 employees as of March 16, 1998. RECENT DEVELOPMENTS =================== During 1997, the Company continued implementing its growth plan, which is intended to increase the Company's funds from operations per share. As part of its growth plan, in 1997 the Company acquired 96 additional net leased retail properties with an aggregate initial annual contractual base rental revenue of approximately $14.7 million. ACQUISITION OF 96 PROPERTIES DURING 1997. During 1997, the Company continued to increase the size of its portfolio through a strategic program of real estate acquisitions. The Company acquired 96 Page 5 additional properties (the "New Properties"), and selectively sold 10 properties, increasing the number of properties in its portfolio by 11.6% to 826 properties at December 31, 1997 from 740 properties at December 31, 1996. Of the New Properties, 88 were occupied as of February 28, 1998 and the remaining properties were pre-leased and under construction pursuant to contracts under which the tenants have agreed to develop the properties (with development costs funded by the Company) and to begin paying rent when the premises open for business. The New Properties were acquired for an aggregate cost of approximately $139.2 million (which excludes the estimated unfunded development costs totaling $2.9 million on properties under construction) at December 31, 1997. During 1997, the Company also invested $3.1 million in 12 development properties acquired during 1996. The New Properties are located in 27 states, will contain approximately 1.1 million leasable square feet and are 100% leased under net leases, with an average initial lease term of 14.4 years. The weighted average annual unleveraged return on the cost of the New Properties (including the estimated unfunded development cost of properties under construction) is estimated to be 10.4%, computed as estimated contractual net operating income (which in the case of a net leased property is equal to the base rent or, in the case of properties under construction, the estimated base rent under the lease) for the first year of each lease, divided by the estimated total development costs. Since it is possible that a tenant could default on the payment of contractual rent, no assurance can be given that the actual return on the cost of the New Properties will not differ from the foregoing percentage INCREASE IN MONTHLY DISTRIBUTION. In December 1997, the Company increased its monthly distribution to $0.16 per share from $0.1575 per share, representing an increase of 1.6%. Effective April 1998, the Company increased its monthly distribution to $0.1625 per share, representing an increase of 1.6%. The monthly distribution of $0.1625 per share represents a current annualized distribution of $1.95 per share, and an annualized distribution yield of approximately 7.5% based on the last reported sale price of the Company's Common Stock on the New York Stock Exchange ("NYSE") of $26.00 on March 16, 1998. Although the Company expects to continue its policy of paying monthly distributions, there can be no assurance that the current level of distributions will be maintained by the Company or as to the actual distribution yield for any future period. UNSECURED CREDIT FACILITY. In December 1997, the Company negotiated several modifications to its credit facility (the "Credit Facility"), including (i) an increase in borrowing capacity to $150 million; (ii) a reduction in the interest rate to London Interbank Offered Rate ("LIBOR") plus 0.85% and 0.15% per annum on the total credit commitment; (iii) the addition of a competitive bid rate option for up to 50% of the credit commitment; and (iv) an extension of the credit facility to December 2000. This credit facility has been and is expected to be used to acquire additional retail properties leased to regional and national retail chains under long-term lease agreements. Page 6 As of March 16, 1998, $138.0 million of borrowing capacity was available to the Company under the credit facility. At that time, the outstanding balance was $12.0 million with an effective interest rate of 6.6%. STOCK OFFERINGS. In February 1998, the Company issued 751,174 shares of common stock at a net price to the Company of $25.295 per share to a unit investment trust. The net proceeds of $19.0 million were used to repay borrowings under the credit facility. In October 1997, Realty Income issued 2.7 million shares of common stock at a price of $27.00 per share. The net proceeds of $68.7 million were used to repay borrowings of $62.6 under the credit facility and to acquire properties. NOTES OFFERING. On May 6, 1997, Realty Income issued $110 million of 7.75% Notes due 2007 (the "Notes"). The Notes were sold at 99.929% of par for a yield of 7.76%. After taking into effect the $1.1 million gain realized on a treasury interest rate lock agreement entered into by the Company, the effective interest rate to the Company on the Notes is 7.62%. The net proceeds from the sale of the Notes were used to repay $93.7 million of outstanding borrowings under the Company's credit facility and to acquire properties. Currently, there is no formal trading market for the Notes and the Company has not listed and does not intend to list the Notes on any securities exchange. The Company received investment grade corporate credit ratings from Duff & Phelps Rating Company, Moody's Investor Service, Inc., and Standard & Poor's Rating Group in December 1996. Currently, Duff & Phelps has assigned a rating of BBB, Moody's has assigned a rating of Baa3, and Standard & Poor's has assigned a rating of BBB- to the Company's senior debt. These ratings are subject to change based upon, among other things, the Company's results of operations and financial condition. BUSINESS OBJECTIVES AND STRATEGY ================================ GENERAL. The Company's primary business objective is to generate a consistent and predictable level of funds from operations per share and distributions to stockholders. Additionally, the Company generally seeks to increase FFO per share and distributions to stockholders through both active portfolio management and the acquisition of additional properties. The Company also seeks to lower the ratio of distributions to stockholders as a percentage of FFO in order to allow internal cash flow to be used to fund additional acquisitions and for other corporate purposes. The Company's current earnings and profits for federal taxable income tax purposes for 1996 and 1997 has been approaching the level of distributions paid during 1996 and 1997, respectively. As the level of earnings and profits for federal taxable tax purposes increases, the Company anticipates Page 7 increasing its distributions. The Company increased its monthly distributions per share from $0.1575 to $0.1600 in December 1997 and to $0.1625 in April 1998. See "Business - Distribution Policy". The Company's portfolio management focus includes: (i) contractual rent increases on existing leases; (ii) rental increases at the termination of existing leases when market conditions permit; and (iii) the active management of the Company's property portfolio, including selective sales of properties. The Company generally pursues the acquisition of additional properties under long-term, net lease agreements with initial contractual base rent which, at the time of acquisition and as a percentage of acquisition costs, is in excess of the Company's estimated cost of capital. INVESTMENT PHILOSOPHY. Realty Income believes that the long-term ownership of an actively managed, diversified portfolio of retail properties leased under long-term, net lease agreements can produce consistent, predictable income and the potential for long-term share price appreciation. Under a net lease agreement, the tenant agrees to pay a minimum monthly rent and property expenses (taxes, maintenance, and insurance) plus, typically, future rent increases (generally subject to ceilings) based on increases in the consumer price index or, in some cases, additional rent calculated as a percentage of the tenant's gross sales above a specified level. The Company believes that long-term leases, coupled with the tenants assuming responsibility for property expenses under the net lease structure, generally produce a more predictable income stream than many other types of real estate portfolios, while continuing to offer the opportunity for capital appreciation. INVESTMENT STRATEGY. In identifying new properties for acquisition, Realty Income focuses on providing expansion capital to retail chains by acquiring, then leasing back their retail store locations. The Company classifies retail tenants into three categories: venture, middle market, and upper market. Venture companies are those which typically offer a new retail concept in one geographic region of the country and operate between five and 50 retail outlets. Middle market retail chains are those which typically have 50 to 500 retail outlets, operations in more than one geographic region, have been successful through one or more economic cycles, have a proven, replicable concept, and an objective of further expansion. The upper market retail chains typically consist of companies with 500 or more stores which operate nationally in a mature retail concept. Upper market retail chains generally have strong operating histories and access to several sources of capital. Realty Income primarily focuses on acquiring properties leased to middle market retail chains which the Company believes are more attractive for investment because: (i) they generally have overcome many of the operational and managerial obstacles that affect venture companies; (ii) they typically require capital to fund expansion but have limited financing options; (iii) historically, they generally Page 8 have provided attractive risk-adjusted returns to the Company over time, since their financial strength has in many cases tended to improve as their businesses have matured; (iv) their relatively large size allows them to spread corporate expenses among a greater number of stores; and (v), middle market retailers typically have the critical mass to survive if a number of locations have to be closed due to underperformance. Realty Income also selectively seeks opportunities with venture and upper market retail chains. Periodically, opportunities arise in the venture market where the company feels that the real estate used by the tenant is of high quality and can be purchased at prices that are favorable in the market place. Realty Income also plans to explore various opportunities with upper market retailers when the Company feels that it can achieve pricing superior to the marketplace because it can provide large amounts of capital to enable an upper market retail tenant to accomplish its expansion goals. CREDIT STRATEGY. Realty Income principally provides sale leaseback financing to less than investment grade retail chains. From 1970 and through December 31, 1997, Realty Income has acquired and leased back to regional and national retail chains 797 properties (including 32 properties that have been sold) and has collected over 98% of the contractual rent obligations on those properties. The Company believes that it is within this market that it can receive the best risk-adjusted return on the financing that it provides to retailers. Realty Income believes that the primary financial obligations of middle market retailers typically include their bank and other debt, payment obligations to suppliers and real estate lease obligations. Because the Company owns the land and building on which the tenant conducts its retail business, the Company believes that the risk of default on the retailers' lease obligations is less than the retailers' unsecured general obligations. It has been the Company's experience that since retailers must retain their profitable retail locations in order to survive, in the event of a Chapter 11 reorganization they are less likely to reject a lease for a profitable location, which would terminate their right to use the property. Thus, as the property owner, the Company believes it will fare better than unsecured creditors of the same retailer in the event of a Chapter 11 reorganization. In addition, Realty Income believes that the risk of default on the real estate leases can be further mitigated by monitoring the performance of the retailers' individual unit locations and selling those units that are weaker performers. In order to qualify for inclusion in the Company's portfolio, new acquisitions must meet stringent investment and credit requirements. The properties must generate attractive current yields, and the tenant must meet the Company's credit standards. The Company has established a three part analysis that examines each potential investment based on: 1) industry, company, market conditions and credit profile; 2) location profitability, if available; and 3) overall real estate characteristics, value, and comparative rental rates. Companies that Page 9 have been approved for acquisition are generally those with fifty or more retail stores located in highly visible areas, with easy access to major thoroughfares, attractive demographics. ACQUISITION STRATEGY. Realty Income seeks to invest in industries that are dominated by independent local operators and in which several well organized regional and national chains are capturing market share through service, quality control, economies of scale, mass media advertising, and selection of prime retail locations. The Company executes its acquisition strategy by acting as a source of capital to regional and national retail chain stores in a variety of industries by acquiring, then leasing back, their retail store locations. Relying on executives from its acquisitions, retail and real estate research, portfolio management, finance, accounting, operations, capital markets, and legal departments, the Company undertakes thorough research and analysis in identifying appropriate industries, tenants, and property locations for investment. In selecting real estate for potential investment, the Company generally will seek to acquire properties that have the following characteristics: * Freestanding, commercially zoned property with a single tenant; * Properties that are important retail locations for national and regional retail chains; * Properties that are located within attractive demographic areas relative to the business of their tenants, with high visibility and easy access to major thoroughfares; * Properties that can be purchased with the simultaneous execution or assumption of long-term, net lease agreements, providing the opportunity for both current income and future rent increases (typically subject to ceilings) based on increases in the consumer price index or through the payment of additional rent calculated as a percentage of the tenant's gross sales above a specified level; and * Properties that can be acquired at prices generally ranging from $300,000 to $10 million. PORTFOLIO MANAGEMENT STRATEGY. The active management of the property portfolio is an essential component of the Company's long-term strategy. The Company continually monitors its portfolio for changes that could affect the performance of the industries, tenants, and locations in which it has invested. Realty Income's investment committee meets weekly to review industry and tenant research and property due diligence, and the executive committee meets at least monthly to discuss property operations and portfolio management. This monitoring typically includes ongoing review and analysis of: (i) the performance of various tenant industries; (ii) the operation, management, business planning, and financial condition of the tenants; (iii) the health of the individual markets in which the Company owns Page 10 properties, from both an economic and real estate standpoint; and (iv) the physical maintenance of the Company's individual properties. The portfolio is analyzed on an ongoing basis with a view towards optimizing performance and returns. While the Company generally intends to hold its net leased properties for long-term investment, the Company actively manages its portfolio of net leased properties. The Company intends to pursue a strategy of identifying properties that may be sold at attractive prices, particularly where the Company believes reinvestment of the sales proceeds can generate a higher cash flow to the Company than the property being sold. While the Company intends to pursue such a strategy, it will only do so within the constraints of the income tax rules regarding REIT status. CAPITAL STRATEGY. The Company has a $150 million revolving, unsecured acquisition Credit Facility which expires in December 2000. As of March 16, 1998, the outstanding balance on the Credit Facility was $12.0 million with an effective rate of approximately 6.6%. A commitment fee of 0.15% per annum accrues on the total credit commitment. The Company is and has been in compliance with the various leverage and interest coverage ratio limitations required by the Credit Facility. The Credit Facility has been and is expected to be used to acquire additional retail properties leased to regional and national retail chains under long term net lease agreements. The Company utilizes its Credit Facility as a vehicle for the short- term financing of the acquisition of new properties. When outstanding borrowings under the Credit Facility reach a certain level (generally in the range of $60 to $100 million), the Company intends to refinance those borrowings with the net proceeds of long-term or permanent financing, which may include the issuance of common stock, preferred stock or convertible preferred stock, debt securities or convertible debt securities. However, there can be no assurance that the Company will be able to effect any such refinancing or that market conditions prevailing at the time of refinancing will enable the Company to issue equity or debt securities upon acceptable terms. The Company believes that it is best served by a conservative capital structure, with a majority of its capital consisting of equity. As of December 31, 1997, the Company's total indebtedness was approximately 20.3% of its equity market capitalization (defined as shares of the Company's common stock outstanding multiplied by the last reported sales price of the common stock on the NYSE on December 31, 1997). Management believes that the Company's cash and cash equivalents on hand, cash provided from operating activities and borrowing capacity are sufficient to meet its liquidity needs other than the repayment of debt for the foreseeable future, except that the Company will require additional sources of capital to fund property acquisitions. The Company received investment grade credit ratings from Duff & Phelps Credit Rating Company, Moody's Investor Service, Inc., and Page 11 Standard & Poor's Rating Group in December 1996. Currently, Duff & Phelps has assigned a rating of BBB, Moody's has assigned a rating of Baa3, and Standard & Poor's has assigned a rating of BBB- to the Company's senior debt. These ratings are subject to change based upon, among other things, the Company's results of operations and financial condition. COMPETITIVE ADVANTAGES. The Company believes that, to utilize its investment philosophy and strategy most successfully, it must seek to maintain the following competitive advantages: (i) SIZE AND TYPE OF INVESTMENT PROPERTIES: The Company believes that smaller ($300,000 to $10,000,000) retail net leased properties represent an attractive investment opportunity in today's real estate environment. Due to the complexities of acquiring and managing a large portfolio of relatively small assets, the Company believes that these types of properties have not experienced significant institutional participation or the corresponding yield reduction experienced by larger income producing properties. The Company believes the less intensive day to day property management required by net lease agreements, coupled with the active management of a large portfolio of smaller properties by the Company, is an effective investment strategy. The tenants of Realty Income's freestanding retail properties provide goods and services which satisfy basic consumer needs. In order to grow and expand, they need capital. Since the acquisition of real estate is typically the single largest capital expenditure of many such retailers, Realty Income's method of purchasing the property and then leasing it back under a net lease arrangement, allows the retail chain to free up capital. (ii) INVESTMENT IN NEW INDUSTRIES: While specializing in single- tenant properties, the Company will seek to further diversify its portfolio among a variety of industries. The Company believes that diversification will allow it to invest in industries that are currently growing and have characteristics the Company finds attractive. These characteristics include, but are not limited to, industries dominated by local operators where regional and national chain operators can gain substantial market share and dominance through more efficient operations, as well as industries taking advantage of major demographic shifts in the population base. For example, in the early 1970s, Realty Income targeted the fast food industry to take advantage of the country's increasing desire to dine away from home, and in the early 1980s, it targeted the child day care industry, responding to the need for professional child care as more women entered the work force. During 1997, six new industries were added to Realty Income's portfolio. The six new industries include: apparel stores, book stores, office supply stores, pet supply stores, shoe stores, and video rental stores. Page 12 (iii) DIVERSIFICATION: Diversification of the portfolio by industry type, tenant and geographic location is key to the Company's objective of providing predictable investment results for its stockholders. As the Company expands it will seek to further diversify its portfolio. During 1997, 13 new retail chains were added to Realty Income's portfolio. (iv) MANAGEMENT SPECIALIZATION: The Company believes that its management's specialization in single-tenant retail properties operated under net lease agreements is important to meeting its objectives. The Company plans to maintain this specialization and will seek to employ and train high quality professionals in this specialized area of real estate ownership, finance and management. (v) TECHNOLOGY: The Company intends to stay at the forefront of technology in its efforts to efficiently and economically carry out its operations. The Company maintains a sophisticated information system that allows it to analyze its portfolio's performance and actively manage its investments. The Company believes that technology and information based systems will play an increasingly important role in its competitiveness as an investment manager and source of capital to a variety of industries and tenants. The Company anticipates that the year 2000 date issue will not adversely affect its current software or computers and will not have a material impact its consolidated financial position, results of operations, or liquidity. PROPERTIES ========== As of January 1, 1998, Realty Income owned a diversified portfolio of 826 properties in 43 states consisting of over 6.3 million square feet of leasable space. Of the 826 properties, 761, or 92%, were leased to regional or national retail chain operators; 41, or 5%, were leased to franchisees of retail chain operators; 16, or 2%, were leased to other tenant types; eight or less than 1% were available for lease. At January 1, 1998, over 98% of the properties were under net lease agreements. Net leases typically require the tenant to be responsible for property operating costs including property taxes, insurance and maintenance. The Company's net leased retail properties are retail locations primarily leased to regional and national retail chain store operators. At January 1, 1998, the properties averaged approximately 7,600 square feet of leasable retail space on approximately 44,500 square feet of land. Generally, buildings are single-story properties with adequate parking on site to accommodate peak retail traffic periods. The properties tend to be on major thoroughfares with relatively high traffic counts and adequate access, egress and proximity to sufficient population base to constitute a sufficient market or trade area for the retailer's business. Page 13 The following table sets forth certain information regarding the Company's properties as of January 1, 1998, classified according to the business of the respective tenants: Approximate Number of Leasable Annualized Industry Properties Square Feet Rent (1) =================== ========== ============ =========== APPAREL STORES 2 98,100 $ 1,928,000 AUTOMOTIVE PARTS & ACCESSORIES 99 525,200 6,280,000 AUTOMOTIVE SERVICE 93 311,600 6,434,000 BOOK STORES 1 30,000 450,000 CHILD CARE 317 2,016,100 24,473,000 CONSUMER ELECTRONICS 37 559,200 4,432,000 CONVENIENCE STORES 53 153,900 4,473,000 HOME FURNISHINGS & ACCESSORIES 14 803,300 5,116,000 OFFICE SUPPLIES 7 174,500 2,215,000 PET SUPPLIES 1 16,000 253,000 RESTAURANTS 171 879,700 13,314,000 SHOE STORES 1 16,000 332,000 VIDEO RENTAL 18 135,200 2,286,000 OTHER 12 583,500 4,788,000 ---------- ------------ ---------- TOTALS 826 6,302,300 $76,774,000 ========== ============ ===========
[FN] (1) Annualized rent is calculated by multiplying the monthly contractual base rent as of January 1, 1998 by 12 and adding the 1997 historical percentage rent, which totaled $1.8 million (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level). For the properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property. Of the 826 properties in the portfolio at January 1, 1998, 819 were single-tenant properties with the remaining properties being multi- tenant properties. As of January 1, 1998, 812, or 99%, of the single- tenant properties were net leased with an average remaining lease term (excluding extension options) of approximately 8.4 years. Page 14 The following table sets forth certain information regarding the timing of the initial lease term expirations on the Company's 812 net leased, single-tenant retail properties as of January 1, 1998. Percent of Number of Annualized Annualized Year Leases Expiring Base Rent (1)(2) Base Rent ======== =============== ================ ========== 1998 8 $ 304,000 0.4% 1999 29 1,272,000 1.8 2000 32 1,621,000 2.3 2001 50 4,133,000 5.8 2002 78 6,147,000 8.7 2003 66 5,137,000 7.2 2004 109 8,906,000 12.5 2005 85 5,991,000 8.4 2006 29 2,453,000 3.5 2007 87 5,495,000 7.7 2008 47 3,840,000 5.4 2009 16 1,142,000 1.6 2010 38 3,176,000 4.5 2011 36 4,644,000 6.5 2012 50 5,453,000 7.7 2013 4 1,826,000 2.6 2014 4 458,000 0.6 2015 27 4,976,000 7.0 2016 7 1,357,000 1.9 2017 9 2,733,000 3.8 2018 1 39,000 0.1 --------------- ---------------- ---------- Total 812 (2) $71,103,000 100.0% =============== ================ ==========
[FN] (1) Annualized rent is calculated by multiplying the monthly contractual base rent as of January 1, 1998 by 12. For the properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property. Annualized rent does not include percentage rents (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level), if any, that may be payable under leases covering certain properties. Percentage rent totaled $1.8 million in 1997. (2) The table does not include seven multi-tenant properties (one of which is vacant) and seven vacant, unleased single-tenant properties owned by the Company. The lease expirations for properties under construction are based on the estimated date of completion of such properties. The following table sets forth certain state-by-state information regarding the properties owned by the Company as of January 1, 1998. Page 15 Approximate Percent of Number of Percent Leasable Annualized Annualized State Properties Leased Square Feet Rent (1) Rent =========== ========== ======= =========== ============= ======== Alabama 7 100% 49,800 $ 454,000 0.6% Arizona 27 99 181,200 2,458,000 3.2 Arkansas 1 100 3,100 61,000 0.1 California 54 91 1,031,900 10,972,000 14.3 Colorado 42 98 231,800 3,215,000 4.2 Connecticut 7 100 121,100 1,545,000 2.0 Florida 52 100 480,000 4,772,000 6.2 Georgia 46 100 266,800 3,809,000 4.9 Idaho 11 100 52,000 765,000 1.0 Illinois 28 100 192,200 2,457,000 3.2 Indiana 23 100 122,100 1,516,000 2.0 Iowa 8 100 51,700 463,000 0.6 Kansas 18 100 183,500 2,010,000 2.6 Kentucky 12 100 36,000 919,000 1.2 Louisiana 2 100 10,700 126,000 0.2 Maryland 6 100 34,900 537,000 0.7 Massachusetts 5 100 25,900 545,000 0.7 Michigan 5 100 26,900 387,000 0.5 Minnesota 17 100 118,400 1,751,000 2.3 Mississippi 12 100 128,900 902,000 1.2 Missouri 29 100 168,500 2,063,000 2.7 Montana 2 100 30,000 299,000 0.4 Nebraska 9 100 93,700 1,153,000 1.5 Nevada 6 100 66,900 831,000 1.1 New Hampshire 1 100 6,400 125,000 0.2 New Jersey 2 100 22,700 353,000 0.4 New Mexico 3 100 12,000 107,000 0.1 New York 7 100 106,600 2,275,000 3.0 North Carolina 26 100 99,000 1,877,000 2.4 Ohio 59 100 280,100 4,474,000 5.8 Oklahoma 14 100 80,700 934,000 1.2 Oregon 17 100 92,400 1,284,000 1.7 Pennsylvania 9 100 62,700 924,000 1.2 South Carolina 20 100 77,800 1,224,000 1.6 South Dakota 1 100 6,100 79,000 0.1 Tennessee 18 100 172,100 1,985,000 2.6 Texas 135 99 1,089,800 10,586,000 13.8 Utah 7 100 45,400 591,000 0.8 Virginia 19 100 93,400 1,547,000 2.0 Washington 42 98 249,700 3,246,000 4.2 West Virginia 2 100 16,800 147,000 0.2 Wisconsin 11 100 60,500 738,000 1.0 Wyoming 4 100 20,100 268,000 0.3 ---------- ------- ----------- ------------- -------- Totals 826 99% 6,302,300 $76,774,000 100.0% ========== ======= =========== ============= ========
Page 16 [FN] (1) Annualized rent is calculated by multiplying the monthly contractual base rent as of January 1, 1998 by 12 and adding the 1997 historic percentage rent, which totaled $1.8 million (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level). For the properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property. DESCRIPTION OF LEASING STRUCTURE. At January 1, 1998, over 98% of the Company's properties were leased pursuant to net leases. In most cases, the leases were for initial terms of from 10 to 20 years and the tenant has an option to extend the initial term. The leases generally provide for a minimum base rent plus future increases (typically subject to ceilings) based on increases in the consumer price index or additional rent based upon the tenant's gross sales above a specified level (i.e., percentage rent). Where leases provide for rent increases based on increases in the consumer price index, generally such increases permanently become part of the base rent. Where leases provide for percentage rent, this additional rent is typically payable only if the tenant's gross sales for a given period (usually one year) exceed a specified level, and then is typically calculated as a percentage of only the amount of gross sales in excess of such level. In general, the leases require the tenant to pay property taxes, insurance, and expenses of maintaining the property. Matters Pertaining to Certain Properties and Tenants - ---------------------------------------------------- Eight of the Company's properties were vacant as of January 1, 1998 (one of which is a multi-tenant property and seven of which are single-tenant properties) and available for lease. As of January 1, 1998, 26 of the Company's properties, which were under lease, were vacant and available for sublease by the tenant. All of these tenants were current with their rent and other obligations. The Company's three largest tenants are Children's World Learning Centers, La Petite Academy, and Golden Corral Restaurants which accounted for approximately 20.4%, 13.8%, and 10.2%, respectively, of the Company's rental revenue for the year ended December 31, 1997. The financial position and results of operations of the Company and its ability to make distributions to stockholders and debt service payments may be materially adversely affected by financial difficulties experienced by any such major tenants or other tenants. For the year ended December 31, 1997, approximately 35.9%, and 19.8% of the Company's rental revenues were attributable to tenants in the child care and restaurant industries, respectively. A downturn in any of these industries generally, whether nationwide or limited to specific sectors of the United States, could adversely affect tenants in those industries, which in turn could materially adversely affect the financial position and results of operations of the Company and Page 17 its ability to make distributions to stockholders and debt service payments. In that regard, a substantial number of the Company's properties are leased to middle market retail chains which generally have more limited financial and other resources than certain upper market retail chains and therefore are more likely to be adversely affected by a downturn in their respective businesses or in the regional or national economy generally. On September 5, 1997, Levitz Furniture filed a voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy Code. Levitz Furniture occupies four of the Company's properties: two in California, one in Texas and one in Florida. As of March 1, 1998, the monthly base rent multiplied by 12 from the four stores leased to Levitz Furniture was approximately $2.5 million, or approximately 3.3% of the Company's total base rent at that date. While Levitz Furniture has paid its most recent rental payments, there can be no assurance that Levitz Furniture will continue to pay rent for the remainder of the lease terms for the four Levitz properties. Likewise, there can be no assurance that Levitz Furniture will not be released from its obligations under its leases with the Company pursuant to the bankruptcy proceedings. In the event that any of the aforementioned should occur, it could result in an adverse impact on the Company's financial condition, results of operations and ability to make distributions to stockholders and debt service payments. Eight of the Company's properties were vacant as of January 1, 1998 and available for lease. Four of the vacant properties were previously leased to restaurant operators, one to a child care operator, one to a convenience store operator, one to a automotive parts store operator and one operated as a multi-tenant location. One of the restaurant locations which had been vacant since November 1995 was sold in January 1998. Development of Certain Properties - --------------------------------- Of the 96 New Properties acquired by the Company in 1997, 88 were occupied as of March 1, 1998 and the remaining eight were pre-leased and under construction pursuant to contracts under which the tenants have agreed to develop the properties (with development costs funded by the Company) and to begin paying rent when the premises open for business. In the case of development properties, the Company typically enters into an agreement with a tenant pursuant to which the tenant retains a contractor to construct the improvements on the property and the Company funds the costs of such development. The tenant is contractually obligated to complete the construction on a timely basis, generally within eight months after the Company purchases the land, to pay construction cost overruns to the extent they exceed the construction budget by more than a predetermined amount. The Company also enters into a lease with the tenant at the time the Company purchases the land, which generally requires that the Page 18 tenant begin paying base rent, calculated as a percentage of the Company's acquisition cost for the property, including construction costs and capitalized interest, when the premises opens for business. During 1997, the Company acquired 19 development properties, 11 of which have been completed, were operating and paying rent as of March 1, 1998. The Company will continue to seek to acquire land for development under similar arrangements. DISTRIBUTION POLICY =================== Distributions are paid to the Company's stockholders on a monthly basis if, as and when declared by the Company's Board of Directors. The April 1998 distribution of $0.1625 per share represents a current annualized distribution of $1.95 per share, and an annualized distribution yield of approximately 7.5% based on the last reported sale price of $26.00 of the Company's common stock, on the NYSE on March 16, 1998. In order to maintain its tax status as a REIT for federal income tax purposes, the Company is generally required to distribute dividends (other than capital gain dividends) to its stockholders in an amount equal to at least 95% of its taxable income. The Company intends to make distributions to its stockholders which are sufficient to meet this requirement. Future distributions by the Company will be at the discretion of its Board of Directors and will depend on, among other things, its results of operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended (the "Code"), its debt service requirements and such other factors as the Board of Directors may deem relevant. In addition, the Credit Facility contains financial covenants which could limit the amount of distributions payable by the Company in the event of a deterioration in the results of operations or financial condition of the Company, and which prohibit the payment of distributions on the common stock in the event that the Company fails to pay when due (subject to any applicable grace period) any principal of or interest on borrowings under the Credit Facility. Distributions by the Company to the extent of its current and accumulated earnings and profits for federal income tax purposes generally will be taxable to stockholders as ordinary income. Distributions in excess of such earnings and profits generally will be treated as a non-taxable reduction in the stockholders' basis in its stock to the extent of such basis, and thereafter as a gain from the sale of such stock. Approximately 5.2% of the distributions made or deemed to have been made in 1997 were classified as a return of capital for federal income tax purposes. The Company is unable to predict the portion of 1998 or future distributions which may be classified as a return of capital since such amount depends on the Company's taxable income for the entire year. Page 19 OTHER ITEMS =========== COMPETITION FOR ACQUISITION OF REAL ESTATE. The Company faces competition in the acquisition, operation and sale of its properties. Such competition can be expected from other businesses, individuals, fiduciary accounts and plans and other entities engaged in real estate investment. Some of the Company's competitors are larger and have greater financial resources than the Company. This competition may result in a higher cost for properties the Company wishes to purchase. The tenants leasing the Company's properties generally face significant competition from other operators. This may result in an adverse impact on that portion, if any, of the rental stream to be paid to the Company based on a tenant's revenues and may also adversely impact the tenants' results of operations or financial condition. ENVIRONMENTAL LIABILITIES. Investments in real property create a potential for environmental liability on the part of the owner of such property for contamination resulting from the presence or discharge of hazardous substances on the property. Such liability may be imposed without regard to knowledge of, or the timing, cause or person responsible for the release of such substances onto the property. There may be environmental problems associated with the Company's properties which are not known to the Company. In that regard, a number of the Company's properties are leased to operators of oil change and tune-up facilities and to convenience stores which sell petroleum-based fuels. These facilities or other of the Company's properties utilize, or may have utilized in the past, underground tanks for the storage of petroleum-based or waste products which could create a potential for release of hazardous substances. The presence of hazardous substances on a property may adversely affect the Company's ability to sell such property and it may cause the Company to incur substantial remediation costs. Although tenants of the Company's properties generally are required by their leases to operate in compliance with all applicable federal, state and local laws and regulations and to indemnify the Company against any environmental liabilities arising from the tenant's activities on the property, the Company could nevertheless be subject to strict liability by virtue of its ownership interest, and there can be no assurance that the tenants would satisfy their indemnification obligations under the leases. The Company believes that its properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified by any governmental authority, and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of its present properties. Nevertheless, if environmental contamination should exist, the Company could be subject to strict liability by virtue of its ownership interest. Page 20 In December 1996, the Company obtained a five year environmental insurance policy on the property portfolio. Based upon the 826 properties in the portfolio at December 31, 1997, the cost of the insurance will be approximately $90,000 during 1998. The limit of the policy is $10.0 million for each loss and $20.0 million in the aggregate, with a $100,000 deductible. There is a sublimit on properties with underground storage tanks of $1.0 million per occurrence and $5.0 million in the aggregate, with a deductible of $25,000. TAXATION OF THE COMPANY. The Company has elected to be taxed as a REIT under the Code, commencing with its taxable year ended December 31, 1994. As long as the Company meets the requirements under the Code for qualification as a REIT each year, the Company will be entitled to a deduction when calculating its taxable income for dividends paid to its stockholders. For the Company to qualify as a REIT, however, certain detailed technical requirements must be met (including certain income, asset, distribution and stock ownership tests) under Code provisions for which, in many cases, there are only limited judicial or administrative interpretations. Although the Company intends to operate so that it will continue to qualify as a REIT, the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations and the possibility of future changes in the Company's circumstances preclude any assurance that the Company will so qualify in any year. If the Company were to fail to qualify as a REIT in any taxable year, the Company would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates and would not be allowed a deduction in computing its taxable income for amounts distributed to its stockholders. Moreover, unless entitled to relief under certain statutory provisions, the Company also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. This treatment would substantially reduce the net earnings of the Company available for investment or distribution to stockholders because of the additional tax liability to the Company for the years involved. Consequently, distributions to stockholders would be substantially reduced and could be eliminated because of the Company's increased tax liability. In addition, if the Company fails to qualify as a REIT, all distributions to stockholders will be taxable as ordinary income to the extent of current and accumulated earnings and profits, but, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Even if the Company qualifies for and maintains its REIT status, it is subject to certain federal, state and local taxes on its income and property. For example, if the Company has net income from a prohibited transaction, such income will be subject to a 100% tax. EFFECT OF DISTRIBUTION REQUIREMENTS. To maintain its status as a REIT for federal income tax purposes, the Company generally is required each year to distribute to its stockholders at least 95% of its Page 21 taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains) each year. The Company is also subject to tax at regular corporate rates to the extent that it distributes less than 100% of its taxable income (including net capital gains) each year. In addition, the Company is subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of 85% of its ordinary income for such calendar year, 95% of its capital gain net income for the calendar year and any amount of such income that was not distributed in prior years. The Company intends to continue to make distributions to its stockholders to comply with the distribution requirement of the Code and to reduce exposure to federal income taxes and the nondeductible excise tax. Differences in timing between the receipt of income and the payment of expenses in arriving at taxable income and the effect of required debt amortization payments could require the Company to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. DILUTION OF COMMON STOCK. The Company's future growth will depend in large part upon its ability to raise additional capital. If the Company were to raise additional capital through the issuance of equity securities, the interests of holders of common stock could be diluted. Likewise, the Company's Board of Directors is authorized to cause the Company to issue preferred stock of any class or series (with such dividends and voting and other rights as the Board of Directors may determine). Accordingly, the Board of Directors may authorize the issuance of preferred stock with voting, dividend and other similar rights which could be dilutive to or otherwise adversely affect the interests of holders of Common Stock. REAL ESTATE OWNERSHIP RISKS. The Company is subject to all of the general risks associated with the ownership of real estate, in particular the risk that rental revenue from the properties will not be sufficient to cover all corporate operating expenses and debt service payments on indebtedness incurred by the Company. These risks include adverse changes in general or local economic conditions, changes in supply of or demand for similar or competing properties, changes in interest rates and operating expenses, competition for tenants, changes in market rental rates, inability to lease properties upon termination of existing leases, renewal of leases at lower rental rates and inability to collect rents from tenants due to financial hardship, including bankruptcy. Other risks include changes in tax, real estate, zoning and environmental laws which may have an adverse impact upon the value of real estate, uninsured property liability, property damage or casualty losses and unexpected expenditures for capital improvements or to bring properties into compliance with applicable federal, state and local laws. Acts of God and other factors beyond the control of the Company's management might also adversely affect the Company. Page 22 DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of its executive officers and key employees. The loss of the services of its executive officers and key employees could have a material adverse effect on the Company's operations. ITEM 2: PROPERTIES - ------------------- Information pertaining to the properties of Realty Income can be found under Item 1. ITEM 3: LEGAL PROCEEDINGS - -------------------------- The Company is subject to certain claims and lawsuits, the outcome of which are not determinable at this time. In the opinion of management, any liability that might be incurred by the Company upon the resolution of these claims and lawsuits will not, in the aggregate, have a material adverse effect on the Company's consolidated operations, financial position or liquidity. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matters were submitted to stockholders during the fourth quarter of the fiscal year. Page 23 PART II ======= ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ---------------------------------------------------------- A. The stock of the Company is traded on the New York Stock Exchange under the symbol "O." The following table shows the high and low sales prices per share for the Common Stock as reported by the New York Stock Exchange composite tape, and distributions declared per share of common stock by Realty Income for the periods indicated. Price Per Share of Common Stock ------------------- Distributions 1997 High Low Declared (1) - ----------------------------------------------------------------- First quarter $26.625 $23.000 $0.4725 Second quarter 26.500 22.625 0.4725 Third quarter 27.813 25.438 0.4725 Fourth quarter 27.438 23.750 0.4775 ------- $1.8950 ======= 1996 - ----------------------------------------------------------------- First quarter $23.250 $20.250 $0.3100(2) Second quarter 21.375 19.500 0.4650 Third quarter 23.750 20.375 0.4650 Fourth quarter 24.500 22.250 0.4700 ------- $1.7100 =======
[FN] (1) Distributions currently are declared monthly by the Company based on financial results for the prior months. At December 31, 1997 a distribution of $0.1600 per share had been declared and was paid on January 15, 1998. (2) In the first quarter of 1996, two monthly distributions of $0.155 per share were declared. B. There were approximately 15,500 holders of record of Realty Income's shares of common stock as of March 16, 1998, however, Realty Income believes the total number of beneficial shareholders of Realty Income to be approximately 48,000. Page 24 ITEM 6: SELECTED FINANCIAL DATA - -------------------------------- (not covered by Independent Auditors' Report) As of or for the years ended December 31, (dollars in thousands, except per share data) -------------------------------------------------- 1997 1996 1995 1994 1993 ========== ========== ========== ========== ========== Total assets (book value) $ 577,021 $ 454,097 $ 417,639 $ 352,768 $ 384,474 Cash and cash equivalents 2,123 1,559 1,650 11,673 29,329 Lines of Credit and notes payable 132,600 70,000 18,597 12,616 255 Total liabilities 143,706 79,856 36,218 17,352 2,570 Stockholders' equity 433,315 374,241 381,421 335,416 381,904 Net cash provided by operating activities 52,692 48,073 40,312 28,460 38,485 Net change in cash and cash equivalents 564 (91) (10,023) (17,656) 21,915 Total revenue 67,897 56,957 51,555 48,863 49,018 Consolidation costs -- -- -- (11,201) -- Income from operations 33,688 30,768 25,582 14,059 25,735 Net gain on sales of properties 1,082 1,455 18 1,165 3,583 Net income 34,770 32,223 25,600 15,224 29,318 Distributions paid to stockholders/ partners 44,367 48,079 36,710 44,666 40,831 Ratio of earnings to fixed charges (1) 5:1 14:1 10:1 39:1 5,865:1 Basic and Diluted net income per share (2) 1.48 1.40 1.27 0.78 Distributions paid per share (2)(3)(4) 1.893 2.093 1.825 0.600 Page 25 (continued) As of or for the years ended December 31, (dollars in thousands, except per share data) -------------------------------------------------- 1997 1996 1995 1994 1993 ========== ========== ========== ========== ========== Distributions declared per share (2)(3)(4) 1.895 1.710 2.215 0.750 Basic weighted average number of shares outstanding (2) 23,568,831 22,976,789 20,230,886 19,502,091 Diluted weighted average number of shares outstanding (2) 23,572,715 22,977,837 20,230,963 19,502,091
[FN] (1) Ratio of Earnings to Fixed Charges is calculated by dividing earnings by fixed charges. For this purpose, earnings consist of net income before interest expense. Fixed charges are comprised of interest costs (including capitalized interest) and the amortization of debt issuance costs. (2) Due to the change in the capital structure caused by the Consolidation (see note 1 to the consolidated financial statements), per share information would not be meaningful for 1993 and therefore has not been included. (3) The 1994 amount represents distributions paid or declared, as the case may be, after the Consolidation. (4) 1996 distributions paid per share and 1995 distributions declared per share include a special distribution of $0.23 per share. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ---------------------------------------------------------- GENERAL - ------- Realty Income Corporation, a Maryland corporation ("Realty Income" or the "Company") was organized to operate as an equity real estate Page 26 investment trust ("REIT"). Realty Income is a fully integrated self- administered real estate company with in-house acquisition, leasing, legal, retail and real estate research, portfolio management and capital markets expertise. As of December 31, 1997, the Company owned a diversified portfolio of 826 retail properties located in 43 states with over 6.3 million square feet of leasable space. Of the 826 properties in the portfolio, 819 are single-tenant properties with the remainder being multi-tenant properties. As of December 31, 1997, 812, or over 99%, of the 819 single-tenant properties were net leased with an average remaining lease term (excluding extension options) of approximately 8.4 years. The Company's primary business objective is to generate a consistent and predictable level of funds from operations ("FFO") per share and distributions to stockholders. Additionally, the Company generally will seek to increase FFO per share and distributions to stockholders through both active portfolio management and the acquisition of additional properties. The Company also seeks to lower the ratio of distributions to stockholders as a percentage of FFO in order to allow internal cash flow to be used to fund additional acquisitions and for other corporate purposes. The Company's portfolio management focus includes: (i) contractual rent increases on existing leases; (ii) rental increases at the termination of existing leases when market conditions permit; and (iii) the active management of the Company's property portfolio, including selective sales of properties. The Company generally pursues the acquisition of additional properties under long-term, net lease agreements with initial contractual base rent which, at the time of acquisition and as a percentage of acquisition costs, is in excess of the Company's estimated cost of capital. Realty Income adheres to a focused strategy of acquiring freestanding, single-tenant, retail properties leased to regional and national retail chains under long-term, net lease agreements. The Company typically acquires retail store locations, which provides capital to the operators for continued expansion and other corporate purposes. Realty Income's acquisition and investment activities are concentrated in highly specific target markets and focus on middle-market retailers providing goods and services which satisfy basic consumer needs. The Company's net lease agreements generally are for initial terms of 10 to 20 years, require the tenant to pay a minimum monthly rent and property operating expenses (taxes, insurance and maintenance), and provide for future rent increases (typically subject to ceilings) based on increases in the consumer price index or additional rent calculated as a percentage of the tenant's gross sales above a specific level. From 1970 and through December 31, 1997, Realty Income has acquired and leased back to regional and national retail chains 797 properties (including 32 properties that have been sold) and has collected over 98% of the original contractual rent obligation on these properties. Page 27 Realty Income believes that the long-term ownership of an actively managed, diversified portfolio of retail properties leased under long- term, net lease agreements can produce consistent, predictable income and the potential for long-term share price appreciation. Management believes that the income generated under long-term leases, coupled with the tenant's responsibility for property expenses under the net lease structure, generally produces a more predictable income stream than many other types of real estate portfolios. Realty Income was organized in the State of Delaware on September 9, 1993 to facilitate the merger, which was effective on August 15, 1994 (the "Consolidation"), of ten private and 15 public real estate limited partnerships (the "Partnerships") with and into Realty Income. In May 1997, the Company was reincorporated as a Maryland corporation. From the date of the Consolidation through August 17, 1995, the Company's day-to-day affairs were managed by R.I.C. Advisor, Inc. (the "Advisor") which provided advice and assistance regarding acquisitions of properties by the Company and performed the day-to-day management of the Company's properties and business. On August 17, 1995, the Advisor was merged with and into Realty Income (the "Merger") and the company became self-administered and self-managed. Other Information Thomas A. Lewis succeeded William E. Clark as Chief Executive Officer of the Company in May 1997. Mr. Lewis has been an officer of the Company since 1987 and has served as the Vice Chairman of the Board of Directors since 1994. Mr. Clark has continued as Chairman of the Board of Directors of the Company. The Company's common stock is listed on the New York Stock Exchange under the symbol "O" and its central index key ("CIK") number is 726728. The Company anticipates that the year 2000 date issue will not adversely affect its current software or computers and will not have a material impact its consolidated financial position, results of operations, or liquidity. LIQUIDITY AND CAPITAL RESOURCES =============================== Cash Reserves Realty Income was organized for the purpose of operating as an equity REIT which acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of its net cash flow generated from leases on its retail properties. The Company intends to retain an appropriate amount of cash as working capital reserves. At December 31, 1997, the Company had cash and cash equivalents totaling $2.1 million. Page 28 Management believes that the Company's cash and cash equivalents on hand, cash provided from operating activities and borrowing capacity are sufficient to meet its liquidity needs for the foreseeable future, except that the Company will require additional sources of capital to fund property acquisitions. Capital Funding Realty Income has a $150 million, three-year revolving, unsecured acquisition credit facility that expires in December 2000. The credit facility currently bears interest at 0.85% over the London Interbank Offered Rate ("LIBOR") and offers the Company other interest rate options. As of March 16, 1998, $138.0 million of borrowing capacity was available to the Company under the acquisition credit facility. At that time, the outstanding balance was $12.0 million with an effective interest rate of 6.6%. This credit facility has been and is expected to be used to acquire additional retail properties leased to national and regional retail chains under long term lease agreements. Any additional borrowings will increase the Company's exposure to interest rate risk. Realty Income expects to meet its long-term capital needs for the acquisition of properties through the issuance of public or private debt or equity. In August 1997, the Company filed a universal shelf registration statement with the Securities and Exchange Commission covering up to $300 million in value of common stock, preferred stock and/or debt securities. Approximately $91.9 million in value of common stock and debt securities has been issued under the universal shelf registration statement through March 4, 1998. On February 23, 1998, Realty Income issued 751,174 shares of common stock at a net price to the Company of $25.295 per share to a unit investment trust. The net proceeds were used to repay borrowings of $19.0 million under the acquisition credit facility. On October 15, 1997, Realty Income issued 2,700,000 shares of common stock at a price of $27.00 per share. The net proceeds were used to repay borrowings of $62.6 million under the acquisition credit facility and to acquire properties. These borrowings under the acquisition credit facility were used to acquire properties during June 1997 through September 1997. On May 6, 1997, Realty Income issued $110 million of 7.75% notes due May 2007 (the "Notes"). The Notes were sold at 99.929% of par for a yield of 7.76%. After taking into effect the gain of $1.1 million realized on the treasury interest rate lock agreement, which is described in the next paragraph, the effective interest rate on the Notes to the Company is 7.62%. The net proceeds from the issuance of the Notes were used to repay $93.7 million of outstanding borrowings under the Company's credit facility and to acquire properties. Interest on the Notes is payable semiannually each May and November. Page 29 Currently, there is no formal trading market for the Notes and the Company has not listed and does not intend to list the Notes on any securities exchange. In December 1996, the Company entered into a treasury interest rate lock agreement to hedge against the possibility of rising interest rates. Under the terms of the interest rate lock agreement, the Company was to receive or make a payment based on the differential between a specified interest rate, 6.537%, and the actual 10-year treasury interest rate on notional principal of $90 million, at the end of six months. Based on the 10-year treasury interest rate at May 1, 1997 (the interest rate pricing date), the Company realized a $1.1 million gain on the agreement, which was received in June 1997. The gain on the agreement is being amortized over 10 years (the life of the Notes) as a yield adjustment to interest expense. The Company received investment grade corporate credit ratings from Duff & Phelps Rating Company, Moody's Investor Service, Inc., and Standard & Poor's Rating Group in December 1996. Currently, Duff & Phelps has assigned a rating of BBB, Moody's has assigned a rating of Baa3, and Standard & Poor's has assigned a rating of BBB- to the Company's senior debt. These ratings are subject to change based upon, among other things, the Company's results of operations and financial condition. Property Acquisitions During 1997, Realty Income acquired 96 retail properties located in 27 states for $139.2 million (which excludes the estimated unfunded development costs of $2.9 million on properties under construction at December 31, 1997) and selectively sold ten properties, increasing the number of properties in its portfolio by 11.6% to 826 from 740 at December 31, 1996. During 1997, the Company also invested $3.1 million in development properties acquired in 1996 and $53,000 in five existing properties in its portfolio. The 96 properties acquired will contain approximately 1.1 million leasable square feet and are 100% leased under net leases, with an average initial lease term of 14.4 years. The weighted average annual unleveraged return on the cost of the 96 properties (including the estimated unfunded development cost of the properties under development) is estimated to be 10.4%, computed as estimated contractual net operating income (which in the case of a net leased property is equal to the base rent or, in the case of properties under construction, the estimated base rent under the lease) for the first year of each lease, divided by total acquisition and estimated development costs. Since it is possible that a tenant could default on the payment of contractual rent, no assurance can be given that the actual return on the cost of the 96 properties acquired in 1997 will not differ from the foregoing percentage. Of the properties acquired during 1997, 88 were occupied as of February 28, 1998 and the remaining properties were pre-leased and Page 30 under construction pursuant to contracts under which the tenant has agreed to develop the properties (with development costs funded by the Company) and to begin paying rent when the premises open for business. All of the properties acquired in 1997, including the properties under development, are leased with initial terms of nine to 20 years. The following table summarized Realty Income's 1997 acquisition activity by quarter. Approx. 1997 Acquisi- Properties Initial Lease Leasable Total tion Activity Acquired Term (Years) Square Feet Invested (1) ============= ========== ============= =========== ============ 1st quarter 11 14.0 237,000 $ 17,933,000 2nd quarter 26 14.5 353,000 39,003,000 3rd quarter 27 15.1 380,000 59,032,000 4th quarter 32 13.8 159,000 26,319,000 - -------------- ---------- ------------- ----------- ------------ Totals 96 14.4 1,129,000 $142,287,000 ============== ========== ============= =========== ============
[FN] (1) Includes the $3.1 million invested during 1997 in development properties acquired in 1996. Distributions Cash distributions paid during 1997, 1996 and 1995 were $44.4 million, $48.1 million and $36.7 million, respectively. The 1996 cash distributions include a special distribution of $5.3 million paid in January 1996. During 1997, the Company paid 11 monthly distributions of $0.1575 per share and increased the monthly distribution to $0.16 per share in December 1997. The monthly distributions paid during 1997 totaled $1.8925 per share. In December 1997, and January and February 1998, the Company declared distributions of $0.16 per share which were paid on January 15, 1998, February 17, 1998 and payable on March 16, 1998, respectively. During 1996, the Company paid 11 monthly distributions of $0.155 per share and increased the monthly distribution to $0.1575 per share in December 1996. The regular distributions paid during 1996 totaled $1.8625 per share. In addition, the Company paid a special distribution of $0.23 per share in January 1996. Total distributions paid in 1996 were $2.0925 per share. For federal income tax purposes, a portion of the special distribution, in the amount of approximately $0.144 per share, was taxable as ordinary income in 1995 and the remaining $0.086 per share was included in each stockholders 1996 Form 1099. During 1995, the Company paid monthly distributions of $0.15 per share from January through July and increased the monthly distribution to Page 31 $0.155 per share in August 1995. Monthly distributions of $0.155 per share were paid in August through December 1995. The monthly distributions paid during 1995 totaled $1.825 per share. Other Information As a result of the Merger in August 1995, the Company assumed a defined benefit pension plan (the "Plan") covering substantially all of the employees of the Advisor. The board of directors of the Advisor froze the Plan effective May 31, 1995 and no additional employees were entitled to enter the Plan. The Plan was terminated on January 2, 1996 and final disbursement of the Plan's assets occurred on February 24, 1997. FUNDS FROM OPERATIONS ("FFO") FFO for 1997 increased by $4.63 million or 9.7% to $52.35 million versus $47.72 million during 1996. FFO during 1995 was $40.4 million. Realty Income defines FFO as net income before gain on sales of properties, plus provision for impairment losses, plus depreciation and amortization. In accordance with the recommendations of the National Association of Real Estate Investment Trusts ("NAREIT"), amortization of deferred financing costs are not added back to net income to calculate FFO. Amortization of financing costs are included in interest expense in the consolidated statements of income. The following is a reconciliation of net income to FFO, and information regarding distributions paid and diluted weighted average number of shares outstanding for 1997, 1996 and 1995 (dollars in thousands, except per share data): 1997 1996 1995 -------- -------- -------- Net income $ 34,770 $ 32,223 $ 25,600 Plus depreciation and amortization 18,596 16,422 14,849 Plus provision for impairment losses 165 579 -- Less depreciation of furniture, fixtures and equipment and amortization of organization costs (96) (51) (17) Less gain on sales of properties (1,082) (1,455) (18) -------- -------- -------- Total Funds From Operations $ 52,353 $ 47,718 $ 40,414 ======== ======== ======== Regular Cash Distributions Paid $ 44,367 $ 42,794 $ 36,710 FFO in excess of Regular Distributions $ 7,986 $ 4,924 $ 3,704 Special Cash Distributions Paid $ -- $ 5,285 $ -- Diluted weighted average number of shares outstanding 23,572,715 22,977,837 20,230,963
Page 32 Management considers FFO to be an appropriate measure of the performance of an equity REIT. FFO is used by financial analysts in evaluating REITs and can be one measure of a REIT's ability to make cash distribution payments. Presentation of this information provides the reader with an additional measure to compare the performance of different REITs, although it should be noted that not all REITs calculate FFO the same way so comparisons with such REITs may not be meaningful. FFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows from operating, investing, and financing activities as a measure of liquidity or ability to make cash distributions or to pay debt service. RESULTS OF OPERATIONS ===================== Comparison of 1997 to 1996 Rental revenue was $67.6 million for 1997 versus $56.8 million for 1996, an increase of $10.8 million. The increase in rental revenue was primarily due to the acquisition of 96 properties during 1997 and 62 properties during 1996. These properties generated revenue of $11.4 million in 1997 compared to $915,000 in 1996, an increase of $10.5 million. At January 1, 1998, annualized contractual lease payments on the properties acquired in 1996 and 1997 are approximately $20.2 million (excluding estimated rent from nine properties under development and any percentage rents). Of the 826 properties in the portfolio as of December 31, 1997, 819 are single-tenant properties with the remaining properties being multi-tenant properties. Of the 819 single-tenant properties, 812, or over 99%, were net leased with an average remaining lease term (excluding extension options) of approximately 8.4 years. At December 31, 1997, 812 of the Company's 819 single tenant properties had leases which provide for increases in rents through: (i) base rent increases tied to a consumer price index with adjustment ceilings; (ii) overage rent based on a percentage of the tenants' gross sales or (iii) fixed increases. Some leases contain more than one of these clauses. Percentage rent, which is included in rental revenue, was $1.8 million during 1997 and $1.7 million in 1996. Same store rents generated on 667 properties owned during all of both 1997 and 1996 increased by $767,000 or 1.4%, to $55.74 million from $54.97 million. Page 33 The following tables represent Realty Income's rental revenue by industry (dollars in thousands): Annualized as For the Year Ended of January 1, 1998 December 31, 1997 ---------------------- ---------------------- Rental(1) Percentage Rental Percentage Industry Revenue of Total Revenue of Total - -------------------- ------- ---------- ------- --------- Apparel Stores $ 1,928 2.5% $ 496 0.7% Automotive Parts 6,280 8.2 6,142 9.1 Automotive Service 6,434 8.4 4,332 6.4 Book Stores 450 0.6 368 0.5 Child Care 24,473 31.9 24,284 35.9 Consumer Electronics 4,432 5.8 4,388 6.5 Convenience Stores 4,473 5.8 3,738 5.5 Home Furnishings 5,116 6.7 3,812 5.6 Office Supplies 2,215 2.9 1,123 1.7 Pet Supplies 253 0.3 134 0.2 Restaurants 13,314 17.3 13,416 19.8 Shoe Stores 332 0.4 107 0.2 Video Rental 2,286 3.0 373 0.6 Other 4,788 6.2 4,900 7.3 - -------------------- ------- ---------- --------- ------- Totals $76,774 100.0% $67,613 100.0% ==================== ======= ========== ========= ========
(1) Annualized rental revenue as of January 1, 1998 has been calculated on the properties owned at January 1, 1998 by multiplying the monthly contractual base rent by 12 and adding the 1997 historical percentage rents, which totaled $1.8 million. For the Year Ended For the Year Ended December 31, 1996 December 31, 1995 -------------------- -------------------- Rental Percentage Rental Percentage Industry Revenue of Total Revenue of Total - -------------------- ------- --------- ------- --------- Apparel Stores $ -- --% $ -- --% Automotive Parts 5,966 10.5 5,855 11.4 Automotive Service 2,706 4.8 1,876 3.7 Book Stores -- -- -- -- Child Care 23,854 42.0 23,358 45.6 Consumer Electronics 507 0.9 -- -- Convenience Stores 2,647 4.6 1,254 2.4 Home Furnishings 2,496 4.4 1,471 2.9 Office Supplies -- -- -- -- (continued on next page) Page 34 (continued) Pet Supplies -- -- -- -- Restaurants 13,836 24.4 12,632 24.7 Shoe Stores -- -- -- -- Video Rental -- -- -- -- Other 4,765 8.4 4,739 9.3 - -------------------- ------- --------- ------- --------- Totals $56,777 100.0% $51,185 100.0% ==================== ======= ========= ======= =========
At December 31, 1997, the Company had eight properties (one of which is a multi-tenant property) that were not under lease as compared to nine at December 31, 1996 and four at December 31, 1995. At December 31, 1997, 818, or over 99%, of the 826 properties in the portfolio were under lease agreements with third party tenants. Interest and other revenue during 1997 and 1996 totaled $284,000 and $180,000, respectively, an increase of $104,000. The increase in 1997 was primarily due to interest earned on Note proceeds in excess of the $93.7 million used to payoff the credit facility in May 1997. These proceeds were invested in new properties during May and June 1997. Depreciation and amortization was $18.6 million in 1997 versus $16.4 million in 1996. The increase in 1997 was primarily due to depreciation of the properties acquired in 1996 and 1997. General and administrative expenses increased by $256,000 to $5.44 million in 1997 versus $5.18 million in 1996. The increase in general and administrative expenses was primarily due to an increase in property acquisition expenses and employee costs. General and administrative expenses as a percentage of revenue decreased to 8.0% in 1997 as compared to 9.1% in 1996. During 1997, the Company increased its number of employees to 47 from 35. The majority of the new employees work primarily on new property acquisitions. Property expenses are broken down into costs associated with non-net leased multi-tenant properties, unleased single-tenant properties and general portfolio expenses. Expenses related to the multi-tenant and unleased single-tenant properties include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections, bad debt expense and legal fees. General portfolio costs include, but are not limited to, insurance, legal, property inspections and title search fees. At December 31, 1997, eight properties were available for lease as compared to nine at December 31, 1996. Property expenses were $1.79 million in 1997 and $1.64 million in 1996, an increase of $145,000. The increase in property expenses was primarily attributable to costs of the environmental insurance obtained in December 1996. In 1997, environmental insurance expense totaled $85,000 and based upon the 826 properties in the portfolio at December 31, 1997, the costs of environmental insurance is anticipated Page 35 to be approximately $90,000 during 1998. The limit of the policy is $10 million for each loss and $20 million in the aggregate, with a $100,000 deductible. There is a sub-limit on properties with underground storage tanks of $1 million per occurrence and $5 million in the aggregate, with a deductible of $25,000. Interest expense in 1997 increased by $5.9 million to $8.23 million, as compared to $2.37 million in 1996. The following is a summary of the five components of interest expense for 1997 and 1996 (dollars in thousands): 1997 1996 Net Change ------- ------- ---------- Interest on outstanding loans and notes $ 8,043 $ 2,137 $ 5,906 Amortization of the gain on the treasury lock agreement (75) -- (75) Credit facility commitment fees 145 156 (11) Amortization of credit facility origination costs and deferred bond financing costs 281 224 57 Interest capitalized (168) (150) (18) ------- ------- ---------- Totals $ 8,226 $ 2,367 $ 5,859 ======== ======= ==========
Interest on outstanding loans and notes was $5.9 million higher in 1997 than in 1996, due to an increase in the average outstanding balances and a higher average interest rate. The higher average interest rate was due to interest on the Notes issued in May 1997. During 1997, the average outstanding balances and interest rate (after taking into effect amortization of the gain on the treasury lock agreement) on the Notes and credit facility were $108.4 million and 7.35% as compared to $30.7 million and 6.96% during 1996. During 1997, the credit facility's average interest rate was 6.82% and average outstanding balance was $36.1 million. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In 1997, a $165,000 charge was taken to reduce the net carrying value on three properties because they became held for sale. One of these properties was sold in 1997 and another in January 1998. In 1996, a $579,000 charge was taken to reduce the net carrying value on four properties because they became held for sale. Three of these properties have been sold. During 1997, the Company sold ten properties (six restaurants, two child care centers, one automotive parts store and one multi-tenant location) for a total of $4.4 million and recorded a gain of $1.1 million. During 1996, the Company sold seven properties (five restaurants and two multi-tenant locations) for $4.4 million and recognized a gain of $1.5 million. Page 36 In 1997, the Company had net income of $34.77 million versus $32.22 million in 1996. The $2.55 million increase in net income is primarily due to the increase in rental revenue from properties acquired in 1996 and 1997 of $10.5 million and an increase in same store rents on 667 properties owned during both periods of $767,000, which were partially offset by an increase in depreciation and amortization, general and administrative, and interest expense totaling $8.3 million. Comparison of 1996 to 1995 Rental revenue was $56.8 million for 1996 versus $51.2 million for 1995, an increase of $5.6 million. The increase in rental revenue was primarily due to the acquisition of 124 properties from December 1994 through December 1996. These properties generated revenue in 1996 and 1995 of $8.8 million and $3.8 million, respectively, an increase of $5.0 million. Of the 740 properties in the portfolio as of December 31, 1996, 732 are single-tenant properties with the remaining properties being multi-tenant properties. Of the 732 single-tenant properties, 723, or approximately 99%, had leases which provide for increases in rents through: (i) base rent increases tied to a consumer price index with adjustment ceilings; (ii) overage rent based on a percentage of the tenants' gross sales or (iii) fixed increases. Some leases contain more than one of these clauses. Percentage rent, which is included in rental revenue, was $1.7 million during 1996 and $1.6 million in 1995. Same store rents generated on 619 properties owned during all of both 1996 and 1995 increased by $871,000, or 1.9%, to $48.0 million from $47.1 million. At December 31, 1996, the Company had nine properties that were not under lease as compared to four at December 31, 1995. At December 31, 1996, 731, or approximately 99%, of the 740 properties in the portfolio were under lease agreements with third party tenants. Interest and other revenue during 1996 and 1995 totaled $180,000 and $370,000, respectively. The decrease of $190,000 was due to lower average cash and cash equivalent balances in 1996. Depreciation and amortization was $16.4 million in 1996 versus $14.8 million in 1995. The increase in 1996 was primarily due to depreciation of properties acquired during 1995 and 1996 and amortization of goodwill recorded in connection with the Merger of the Advisor. General and administrative expenses and advisor fees decreased by $1.7 million to $5.2 million in 1996 versus $6.9 million in 1995. General and administrative expenses were $5.2 million in 1996 versus $3.2 million in 1995 and advisor fees of $3.7 million in 1995. The $2.0 million increase in general and administrative expenses was primarily Page 37 due to the Merger of the Advisor. Subsequent to the Merger, the Company commenced paying for management, accounting systems, office facilities, professional and support personnel expenses (i.e. costs of being self-administered). Prior to the Merger such costs were the responsibility of the Advisor. General and administrative expenses and advisor fees as a percentage of revenue decreased to 9.1% in 1996 as compared to 13.3% in 1995. Property expenses were $1.6 million in 1996 and 1995. Property expenses are broken down into costs associated with non-net leased multi-tenant properties, unleased single-tenant properties and general portfolio expenses. Expenses related to the multi-tenant and unleased single-tenant properties include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections, bad debt expense and legal fees. General portfolio costs include, but are not limited to, insurance, legal, property inspections and title search fees. At December 31, 1996, nine properties were available for lease as compared to four at December 31, 1995. Interest expense in 1996 decreased by $275,000 to $2.37 million, as compared to $2.64 million in 1995. The following is a summary of the four components of interest expense for 1996 and 1995 (dollars in thousands): 1996 1995 Net Change ------- ------- ---------- Interest on outstanding loans and notes $ 2,137 $ 2,403 $ (266) Credit facility commitment fees 156 127 29 Amortization of credit facility origination costs and deferred bond financing costs 224 329 (105) Interest capitalized (150) (217) 67 ------- ------- ---------- Totals $ 2,367 $ 2,642 $ (275) ======= ======= ==========
Interest on outstanding loans and notes during 1996 was $266,000 lower than in 1995, due to a decrease in the average outstanding balances and lower average interest rates on the credit facility and the notes issued as part of the Consolidation. During 1996, the average outstanding balances and interest rate on the notes and credit facility were $30.7 million and 6.96% as compared to $31.3 million and 7.68% during 1995. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In 1996, a $579,000 charge was taken to reduce the net carrying value on four properties because they became held for sale. Three of these properties have been sold. No charge was recorded for an impairment loss in 1995. Page 38 During 1996, the Company sold seven properties (five restaurants and two multi-tenant locations) for a total of $4.4 million and recorded a gain of $1.5 million. During 1995, the Company sold three properties (two child care centers and a multi-tenant location) for $617,000 and recognized a gain of $18,000. In 1996, the Company had net income of $32.2 million versus $25.6 million in 1995. The $6.6 million increase in net income is primarily due to an increase in rental revenue from 124 properties acquired from December 1994 through December 1996 of $5.0 million, an increase in the net gain on sales of properties of $1.4 million and a net decrease in advisor fees, general and administrative expenses of $1.7 million, offset by an increase in depreciation and amortization expense of $1.6 million. IMPACT OF INFLATION =================== Tenant leases generally provide for limited increases in rent as a result of increases in the tenant's sales volumes and/or increases in the consumer price index. Management expects that inflation will cause these lease provisions to result in increases in rent over time. However, during times when inflation is greater than increases in rent as provided for in the leases, rent increases may not keep up with the rate of inflation. Over 98% of the properties in the portfolio are leased to tenants under net leases in which the tenant is responsible for property costs and expenses. These features in the leases reduce the Company's exposure to rising property expenses due to inflation. Inflation and increased costs may have an adverse impact on the tenants if increases in the tenant's operating expenses exceed increases in revenue. IMPACT OF ACCOUNTING PRONOUNCEMENTS =================================== In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement No. 130 establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general purpose financial statements, and is effective for periods beginning after December 15, 1997. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("Statement No. 131"). Statement No. 131 establishes standards for the way that Page 39 public business enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for periods beginning after December 15, 1997. Management believes that the adoption of the aforementioned statements will not have a material effect on the manner and nature of disclosures currently made by the Company. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- Table of Contents Page - ----------------- ---- A. Independent Auditors' Report...............................41 B. Consolidated Balance Sheets, December 31, 1997 and 1996...............................42 C. Consolidated Statements of Income, Years ended December 31, 1997, 1996 and 1995.............44 D. Consolidated Statements of Stockholders' Equity, Years ended December 31, 1997, 1996 and 1995.............45 E. Consolidated Statements of Cash Flows, Years ended December 31, 1997, 1996 and 1995.............47 F. Notes to Consolidated Financial Statements.................49 G. Consolidated Quarterly Financial Data (unaudited) for 1997 and 1996............................59 H. Schedule III-Real Estate and Accumulated Depreciation.............................................60 Schedules not Filed: All schedules, other than that indicated in the Table of Contents, have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. Page 40 Independent Auditors' Report ---------------------------- The Board of Directors and Stockholders Realty Income Corporation: We have audited the consolidated financial statements of Realty Income Corporation and subsidiaries as listed in the accompanying table of contents. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule III listed in the accompanying table of contents. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Realty Income Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule III, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/KPMG PEAT MARWICK LLP San Diego, California January 23, 1998, except as to note 6A to the consolidated financial statements, which is as of February 23, 1998 Page 41 REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets =========================== December 31, 1997 and 1996 (dollars in thousands, except per share data) 1997 1996 ========= ========= ASSETS Real estate, at cost: Land $ 214,342 $ 165,598 Buildings and improvements 485,455 398,942 --------- --------- 699,797 564,540 Less - accumulated depreciation and amortization (152,206) (138,307) --------- --------- Net real estate 547,591 426,233 Cash and cash equivalents 2,123 1,559 Accounts receivable 2,888 1,905 Due from affiliates 348 383 Other assets 3,170 2,183 Goodwill, net 20,901 21,834 --------- --------- TOTAL ASSETS $ 577,021 $ 454,097 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Distributions payable $ 4,112 $ 3,619 Accounts payable and accrued expenses 2,180 1,172 Other liabilities 4,814 5,065 Lines of credit payable 22,600 70,000 Notes payable 110,000 -- --------- --------- TOTAL LIABILITIES 143,706 79,856 --------- --------- Page 42 (continued) REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets =========================== December 31, 1997 and 1996 (dollars in thousands, except per share data) 1997 1996 ========= ========= Commitments and contingencies Stockholders' Equity Preferred stock, par value $1.00 per share, 20,000,000 shares authorized, no shares issued or outstanding -- -- Common stock, par value $1.00 per share, 100,000,000 shares authorized, 25,698,464 and 22,979,537 shares issued and outstanding in 1997 and 1996, respectively 25,698 22,980 Paid in capital in excess of par value 582,450 516,004 Accumulated distributions in excess of net income (174,833) (164,743) --------- --------- TOTAL STOCKHOLDERS' EQUITY 433,315 374,241 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 577,021 $ 454,097 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 43 REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements Of Income ================================= Years Ended December 31, 1997, 1996 and 1995 (dollars in thousands, except per share data) 1997 1996 1995 ========== ========== ========== REVENUE Rental $ 67,613 $ 56,777 $ 51,185 Interest 192 109 276 Other 92 71 94 ---------- ---------- ---------- 67,897 56,957 51,555 ---------- ---------- ---------- EXPENSES Depreciation and amortization 18,596 16,422 14,849 General and administrative 5,437 5,181 3,214 Advisor fees -- -- 3,661 Property 1,785 1,640 1,607 Interest 8,226 2,367 2,642 Provision for impairment losses 165 579 -- ---------- ---------- ---------- 34,209 26,189 25,973 ---------- ---------- ---------- Income from operations 33,688 30,768 25,582 Net gain on sales of properties 1,082 1,455 18 ---------- ---------- ---------- NET INCOME $ 34,770 $ 32,223 $ 25,600 ========== ========== ========== Basic and diluted net income per share $ 1.48 $ 1.40 $ 1.27 ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 44 REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements Of Stockholders' Equity ======================================================== Years Ended December 31, 1997, 1996 and 1995 (dollars in thousands) Accumu- Paid in lated Capital Distri- in butions Common Stock Excess in Excess ------------------- of Par of Net Shares Amount Value Income Totals ========== ======= ======== ========= ======== Balance, December 31, 1994 19,502,091 $19,502 $452,996 $(137,082) $335,416 Net income -- -- -- 25,600 25,600 Distributions paid and payable to stockholders -- -- -- (46,192) (46,192) Shares issued in exchange for advisor shares 990,704 991 20,186 -- 21,177 Shares retired (57,547) (58) (1,172) -- (1,230) Shares issued in stock offering, net offering costs of $3,217 2,540,000 2,540 44,090 -- 46,630 Shares issued in exchange for limited partnership interests 989 1 19 -- 20 ---------- ------- -------- --------- -------- Balance, December 31, 1995 22,976,237 22,976 516,119 (157,674) 381,421
Page 45 (continued) REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements Of Stockholders' Equity ======================================================== Years Ended December 31, 1997, 1996 and 1995 (dollars in thousands) Accumu- Paid in lated Capital Distri- in butions Common Stock Excess in Excess ------------------- of Par of Net Shares Amount Value Income Totals ========== ======= ======== ========= ======== Net income -- -- -- 32,223 32,223 Distributions paid and payable to stockholders -- -- -- (39,292) (39,292) Shares issued 3,300 4 73 -- 77 Stock offering costs -- -- (188) -- (188) ---------- ------- -------- --------- -------- Balance, December 31, 1996 22,979,537 22,980 516,004 (164,743) 374,241 Net income -- -- -- 34,770 34,770 Distributions paid and payable to stockholders -- -- -- (44,860) (44,860) Shares issued in stock offering, net offering costs of $4,193 2,700,000 2,700 66,007 -- 68,707 Shares issued 22,989 22 532 -- 554 Shares forfeited (4,062) (4) (93) -- (97) ---------- ------- -------- --------- -------- Balance, December 31, 1997 25,698,464 $25,698 $582,450 $(174,833) $433,315 ========== ======= ======== ========= ========
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 46 REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements Of Cash Flows ===================================== Years Ended December 31, 1997, 1996 and 1995 (dollars in thousands) 1997 1996 1995 ======== ======== ======== CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 34,770 $ 32,223 $ 25,600 Adjustments to net income: Depreciation and amortization 18,596 16,422 14,849 Provision for impairment losses 165 579 -- Net gain on sales of properties (1,082) (1,455) (18) Changes in assets and liabilities: Accounts receivable and other assets (844) (646) (1) Accounts payable, accrued expenses and other liabilities 1,087 950 (86) Due to advisor -- -- (32) -------- -------- -------- Net cash provided by operating activities 52,692 48,073 40,312 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of properties 4,432 4,405 617 Acquisition of and additions to properties (140,389) (55,705) (65,890) Payment of advisor merger costs -- -- (1,629) Cash acquired from advisor merger -- -- 647 -------- -------- -------- Net cash used in investing activities (135,957) (51,300) (66,255) -------- -------- -------- Page 47 (continued) REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements Of Cash Flows ===================================== Years Ended December 31, 1997, 1996 and 1995 (dollars in thousands) 1997 1996 1995 ======== ======== ======== CASH FLOWS FROM FINANCING ACTIVITIES Payments of distributions (44,367) (48,079) (36,710) Proceeds from lines of credit 117,000 66,700 50,600 Payments of lines of credit (164,400) (2,700) (44,600) Proceeds from notes issued, net costs of $848 109,152 -- -- Payment of notes payable -- (12,597) -- Proceeds from stock offering, net of offering costs 68,707 -- 46,630 Proceeds from other stock issuances 246 -- -- Stock offering costs -- (188) -- Payments to the defined benefit pension plan (2,223) -- -- Increase in other assets (286) -- -- -------- -------- -------- Net cash provided by financing activities 83,829 3,136 15,920 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 564 (91) (10,023) Cash and cash equivalents, beginning of year 1,559 1,650 11,673 -------- -------- -------- Cash and cash equivalents, end of year $ 2,123 $ 1,559 $ 1,650 ======== ======== ========
For supplemental disclosures, see note 12. The accompanying notes to consolidated financial statements are an integral part of these statements. Page 48 REALTY INCOME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements ========================================== December 31, 1997, 1996 and 1995 1. Organization and Operation Realty Income Corporation (the "Company") was organized in the State of Delaware in September 1993 to facilitate the merger, which was effected on August 15, 1994 (the "Consolidation"), of 10 private and 15 public real estate limited partnerships with and into the Company. In August 1995, the Company became self-administered and self-managed after acquiring R.I.C. Advisor, Inc. (the "Advisor"). In May 1997, the Company reincorporated as a Maryland corporation pursuant to a merger of the Company into a wholly-owned Maryland subsidiary and the conversion of each outstanding share of common stock of the Company into one share of common stock of the surviving corporation. The Company invests in commercial retail real estate and has elected to be taxed as a real estate investment trust ("REIT"). As of December 31, 1997, the Company owned 826 properties in 43 states. 2. Summary of Significant Accounting Policies and Procedures Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and partnerships more than 50 percent owned (subsidiaries) after elimination of all material intercompany balances and transactions. Cash Equivalents - The Company considers all short-term, highly liquid investments that are readily convertible to cash and have an original maturity of three months or less at the time of purchase to be cash equivalents. Depreciation and Amortization - Depreciation of buildings and improvements, and amortization of goodwill are computed using the straight-line method over an estimated useful life of 25 years. Leases - All leases are accounted for as operating leases. Under this method, lease payments are recognized as revenue over the term of the lease on a straight-line basis. Federal Income Taxes - The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. Management believes the Company has qualified and continues to qualify as a REIT and therefore will be permitted to deduct distributions paid to its stockholders, eliminating the federal taxation of income represented by such distributions at the Company's level. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements. Page 49 2. Summary of Significant Accounting Policies (continued) Distributions Paid and Payable - For the year ended December 31, 1997, cash distributions of $1.8925 per share were paid. The 1997 distributions consisted of eleven monthly distributions of $0.1575 per share and one monthly distribution of $0.16 per share. As of December 31, 1997, a distribution of $0.16 per share was declared and payable. For the year ended December 31, 1996, cash distributions of $2.0925 per share were paid. The 1996 distributions consisted of a special distribution of $0.23 per share, eleven monthly distributions of $0.155 per share and one distribution of $0.1575 per share. For the year ended December 31, 1995, cash distributions of $1.825 per share were paid. The 1995 distributions consisted of seven monthly distributions of $0.15 per share and five monthly distributions of $0.155 per share. As of December 31, 1995, three distributions totaling $0.54 per share were declared and payable. The following presents the federal income tax characterization of distributions paid or deemed to be paid to stockholders for the years ended December 31: 1997 1996 1995 ------ ------ ------ Ordinary Income $1.794 $1.691 $1.876 Return of Capital 0.099 0.257 0.093 ------ ------ ------ Totals $1.893 $1.948 $1.969 ====== ====== ======
For federal income tax purposes, a portion of the distributions payable at December 31, 1995, in the amount of $0.144 per share, were deemed to be paid in 1995. This amount is included in the $1.876 per share taxable as ordinary income in 1995 and represents the remaining portion of taxable earnings and profits which were assumed by the Company in the merger with the Advisor. Provision for Impairment Losses - The Company reviews long-lived assets, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Generally, a provision is made for impairment loss if estimated future operating cash flows (undiscounted and without interest charges) over a long-term holding period plus estimated disposition proceeds (undiscounted) are less than the current book value. If a property is held for sale, it is carried at the lower of cost or estimated fair value, less costs to sell. For the years ended December 31, 1997 and 1996, provisions for impairment losses of Page 50 2. Summary of Significant Accounting Policies (continued) $165,000 and $579,000, respectively, were charged to operations to reduce the net carrying value of three properties held for sale in 1997 and four properties held for sale in 1996. There was no provision for impairment losses in 1995. Net Income Per Share - The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128") effective for the period ended December 31, 1997. SFAS No. 128 simplifies the standards for computing earnings per share and makes them comparable to international earnings per share standards. All prior period net income per share data presented were restated to conform to SFAS No. 128. Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted net income per share is computed by dividing the amount of net income for the period by each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The following is a reconciliation of the denominator of the basic net income per share computation to the denominator of the diluted net income per share computation (net income was available to common shareholders for all periods presented): 1997 1996 1995 ---------- ---------- ---------- Weighted average shares used for basic net income computation 23,568,831 22,976,789 20,230,886 Incremental shares from the assumed conversion of stock options 3,884 1,048 77 ---------- ---------- ---------- Adjusted weighted average shares used for diluted net income computation 23,572,715 22,977,837 20,230,963 ========== ========== ==========
Stock Option Plan - The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock Page 51 2. Summary of Significant Accounting Policies (continued) option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Derivative Financial Instrument - The Company had an interest rate treasury lock agreement to hedge the effect of interest rate fluctuations. This instrument met the requirement for hedge accounting, including a high correlation to a specific transaction. Accordingly, the amount received under the terms of the agreement is recognized in income when interest expense related to the hedge item is recognized. Use of Estimates - The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 3. Credit Facility Available for Acquisitions The Company has a $150 million, three-year, revolving, unsecured acquisition credit facility that expires in December 2000. The credit facility is from The Bank of New York, as agent, and several U.S. and non-U.S. banks. In November 1997, the Company obtained a $10 million unsecured line of credit with The Bank of New York, which was repaid and canceled in January 1998. As of December 31, 1997 and 1996, the outstanding balances on the credit facility and line of credit were $22.6 million and $70.0 million, respectively, with an effective interest rate of approximately 6.66% and 6.85%, respectively. The credit facility currently bears interest at 0.85% over the London Interbank Offered Rate ("LIBOR") and offers the Company other interest rate options. A facility fee of 0.15%, per annum, accrues on the total commitment of the credit facility. The credit facility is subject to various leverage and interest coverage ratio limitations. The Company is and has been in compliance with these limitations. In 1997, 1996 and 1995, interest of $168,000, $150,000 and $217,000, respectively, was capitalized on properties under construction. 4. Notes Payable On May 6, 1997, Realty Income issued $110 million of 7.75% unsecured notes due May 2007 (the "Notes"). The Notes were sold at 99.929% of par for a yield of 7.76%. After taking into effect the $1.1 million Page 52 4. Notes Payable (continued) gain realized on the treasury interest rate lock agreement (see note 5), the effective interest rate to the Company on the Notes is 7.62%. The net proceeds from the issuance of the Notes were used to repay $93.7 million of outstanding borrowings under the Company's credit facility and to acquire properties. Interest on the Notes is payable semiannually each May and November. Interest incurred on the Notes for the year ended December 31, 1997 was $5.5 million. Currently, there is no formal trading market for the Notes and the Company has not and does not intend to list the Notes on any securities exchange. On March 29, 1996, the Company redeemed, at par, the $12.6 million principal amount of notes issued at the time of the Consolidation to investors in the partnerships. Interest incurred on the notes for the years ended December 31, 1996 and 1995 was $217,000 and $997,000, respectively. 5. Derivative Financial Instrument In December 1996, the Company entered into a treasury interest rate lock agreement to hedge against rising interest rates applicable to the Notes (see note 4). Under the terms of the interest rate lock agreement, the Company was to receive or make a payment based on the differential between a specified interest rate (6.537%) and the actual 10-year treasury interest rate on notional principal amount of $90 million, at the end of six months. Based on the 10-year treasury interest rate at May 1, 1997 (the interest rate pricing date), the Company realized a $1.1 million gain on the agreement, which was received in June 1997. The gain on the agreement is being amortized over 10 years (the life of the Notes) as a yield adjustment to interest expense. The Company had only limited involvement with this single derivative financial instrument and did not use it for trading purposes. 6. Common Stock Offerings A. In February 1998, the Company issued 751,174 shares of common stock to a unit investment trust at a net price to the Company of $25.295 per share. The net proceeds of $19.0 million were be used to repay borrowings under the credit facility. B. In October 1997, the Company issued 2.7 million shares of common stock at a price of $27.00 per share. The net proceeds of $68.7 million were used to repay borrowings of $62.6 million under the credit facility and to acquire properties. C. In November 1995, the Company issued 2.54 million shares of common stock at a price of $19.625 per share. Substantially all of the net proceeds of $46.6 million were used to repay borrowings under the credit facility. Page 53 7. Operating Leases A. General - At December 31, 1997, the Company owned 826 properties in 43 states. Of the Company's properties, 819 are single-tenant and the remainder are multi-tenant. At December 31, 1997, eight properties were vacant and available for lease or sale. Substantially all leases are net leases whereby the tenant pays property taxes and assessments, maintains the interior and exterior of the building, and carries insurance coverage for public liability, property damage, fire, and extended coverage. The Company's net lease agreements are generally for initial terms of 10 to 20 years, require the tenant to pay a minimum monthly rent and property operating expenses (taxes, insurance and maintenance), and provide for future rent increases (typically subject to ceilings) based on increases in the consumer price index or additional rent calculated as a percentage of the tenant's gross sales above a specified level. Percentage rent for 1997, 1996 and 1995 was $1.8 million, $1.7 million and $1.6 million, respectively. At December 31, 1997, minimum annual rents to be received on the operating leases are as follows (dollars in thousands): Years Ending December 31, ========================= 1998 $ 72,661 1999 71,364 2000 69,823 2001 68,392 2002 63,470 Thereafter 368,055 -------- TOTAL $713,765 ========
B. Major Tenants - The following schedule presents rental income, including percentage rents, from tenants representing more than 10% of the Company's total revenue for at least one of the years ended December 31, 1997, 1996 or 1995 (dollars in thousands): Tenants 1997 1996 1995 ========================= ======= ======= ======= Children's World, Inc. $13,809 $13,460 $13,121 La Petite Academy, Inc. 9,311 9,339 9,189 Golden Corral Corporation 6,899 7,017 6,550
8. Property Acquisitions During 1997, the Company acquired 96 retail properties located in 27 states for $142.3 million (excluding the estimated unfunded development costs of $2.9 million on properties under construction at Page 54 8. Property Acquisitions (continued) December 31, 1997). The 96 properties are 100% leased under net leases, with an average initial lease term of 14.4 years. During 1996, the Company acquired 62 retail properties located in 22 states for $55.5 million, with an average initial lease term of 11.7 years. 9. Net Gain on Sales of Properties In 1997, the Company sold ten properties (six restaurants, one automotive parts store, one multi-tenant and two child care centers) for a total of $4.4 million and recognized a gain of $1.1 million. In 1996, the Company sold seven properties (five restaurants and two multi-tenant centers) for a total of $4.4 million and recognized a gain of $1.5 million. In 1995, the Company sold three properties (one multi-tenant and two childcare centers) for a total of $617,000 and recognized a net gain of $18,000. 10. The Merger of R.I.C. Advisor, Inc. On August 17, 1995, the Company merged with the Advisor and issued 990,704 shares of the Company's common stock valued at approximately $21.2 million (the "Merger"). The Merger was accounted for using the purchase method. Accordingly, the purchase price was allocated to assets acquired based on their estimated fair values. This treatment resulted in approximately $22.9 million of goodwill. Amortization of goodwill for the years ended December 31, 1997, 1996 and 1995 was $916,000, $916,000 and $340,000, respectively. 11. Fair Value of Financial Instruments Management of the Company believes that the carrying values reflected in the balance sheets at December 31, 1997 and 1996 reasonably approximate the fair values for cash and cash equivalents, accounts receivable, due from affiliates and all liabilities. In making such assessments, the Company utilized estimates and quoted market prices. See note 5 for a discussion of the derivative financial instrument held at December 31, 1996. Page 55 12. Supplemental Disclosure of Cash Flow Information Interest paid during 1997, 1996 and 1995 was $6.9 million, $2.0 million and $2.2 million, respectively. The following non-cash investing and financing activities are included in the accompanying financial statements: A. In 1997, the acquisition of three properties resulted in the following (dollars in thousands): Increases in: Land $1,724 Building 227 Other liabilities 1,951 B. The Merger of the Advisor into the Company in August 1995 resulted in the following (dollars in thousands): Increases in: Other assets $ (1,143) Goodwill (21,184) Common stock retired after the merger (1,230) Increases/(decrease) in: Other liabilities 3,029 Due to advisor (2) Common stock 991 Paid in capital in excess of par value 20,186 -------- Cash acquired from Merger $ 647 ======== In 1995, other assets of $95,000 were reclassified to goodwill. Common stock retired after the Merger includes par value of common stock and paid in capital in excess of par value of $58,000 and $1,172,000, respectively. C. In 1996 and 1995, pursuant to the assumption of the defined benefit pension plan by the Company (see note 14), the Company recorded a due from affiliate and a liability (included in other liabilities) of $73,000 and $493,000, respectively. This represents the amount of the increase in the liability to the plan, of which the Company is indemnified by the former shareholders of the Advisor. 13. Related Party Transactions The Company paid the Advisor an advisory fee of $3.7 million for the period from January 1, 1995 through August 17, 1995. On August 17, 1995, the Advisor was merged into the Company and the agreement was terminated (see note 10). Page 56 14. Employee Benefit Plan A. As a result of the Merger, the Company assumed a defined benefit pension plan (the "Plan") covering substantially all of its employees. The board of directors of the Advisor froze the Plan effective May 31, 1995 and no additional employees were entitled to enter the Plan. The Plan was terminated on January 2, 1996 and final disbursement of the Plan's assets occurred on February 24, 1997. At December 31, 1996, the benefit obligation in excess of plan assets of approximately $2.3 million is included in other liabilities in the accompanying balance sheet. This amount was paid in February 1997. In connection with the Merger, the Company assumed a benefit obligation of $1.9 million. The Merger agreement provides for indemnification by the former shareholders of the Advisor with respect to increases in the benefit obligation. A receivable from the Advisor's former shareholders has been recorded as of December 31, 1997 and 1996 for $348,000 and $383,000, respectively, and is included as due from affiliates in the accompanying consolidated balance sheets. B. In August 1996, the Company initiated a 401(k) plan. Under the 401(k) plan, employees may elect to make contributions to the plan, and the Company matches 50% of such contributions up to 6% of each participant's compensation. 15. Stock Incentive Plan In September 1993, the board of directors of the Company approved a stock incentive plan (the "Stock Plan") designed to attract and retain directors, officers and employees of the Company by enabling such individuals to participate in the ownership of the Company. The Stock Plan authorizes the purchase of up to 500,000 shares of common stock and provides for the award (subject to ownership limitations) of a broad variety of stock-based compensation alternatives such as nonqualified stock options, incentive stock options, restricted stock and performance awards. Stock options are granted with an exercise price equal to the underlying stock's fair market value at the date of grant. Stock options expire 10 years from the date they are granted and vest over service periods of three, four and five years. At December 31, 1997, 1996 and 1995, options outstanding totaled 139,500, 73,000 and 30,000, respectively. Prior to December 31, 1997, 189,700 stock options and 15,800 restricted shares of common stock had been granted under the Stock Plan. Of the stock options granted, 10,489 had been exercised and 39,711 had been canceled. At December 31, 1997, there were 294,500 additional shares available for grant under the Stock Plan. The per share weighted-average fair value of stock options granted during 1997 and 1996 was $2.29 on the date of grant using the Binomial Page 57 15. Stock Incentive Plan (continued) option-pricing model with the following weighted-average assumptions: 1997 - expected dividend yield 9.92%, risk-free interest rate of 6.5%, volatility of 18.5% and an expected life of 10 years; 1996 - expected dividend yield 9.71%, risk-free interest rate of 6.7%, volatility of 17.4% and an expected life of 10 years. No stock options were granted during 1995. The Company applies APB Opinion No. 25 in accounting for its Stock Plan and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro-forma amounts indicated below: Diluted Net Income Net Income (in thousands) Per Share -------------- ----------- 1997 as reported $ 34,770 $1.48 1997 pro forma $ 34,722 $1.47 1996 as reported $ 32,223 $1.40 1996 pro forma $ 32,206 $1.40 1995 as reported $ 25,600 $1.27 1995 pro forma $ 25,583 $1.26
16. Commitments and Contingencies In the ordinary course of its business, the Company is a party to various legal actions which the Company believes are routine in nature and incidental to the operation of the business of the Company. The Company believes that the outcome of the proceedings will not have a material adverse effect upon its consolidated operations, financial position or liquidity. Page 58 REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED QUARTERLY FINANCIAL DATA (dollars in thousands, except per share data) (not covered by Independent Auditors' Report) First Second Third Fourth Quarter Quarter Quarter Quarter Year ======= ======= ======= ======= ======= 1997 ==== Total revenue $15,480 $16,123 $16,843 $19,451 $67,897 Depreciation and amortization expense 4,464 4,484 4,706 4,942 18,596 Provision for impairment losses -- 70 70 25 165 Interest expense 1,312 2,009 2,450 2,455 8,226 Other expenses 1,744 1,694 1,747 2,037 7,222 Income from operations 7,960 7,866 7,870 9,992 33,688 Net income 8,185 8,068 8,466 10,051 34,770 Basic and diluted net income per share 0.36 0.35 0.37 0.40 1.48 1996 ==== Total revenue $13,778 $13,637 $13,840 $15,702 $56,957 Depreciation and amortization expense 4,074 4,049 4,052 4,247 16,422 Provision for impairment losses 323 -- -- 256 579 Interest expense 520 485 497 865 2,367 Other expenses 1,756 1,701 1,669 1,695 6,821 Income from operations 7,105 7,402 7,622 8,639 30,768 Net income 7,850 7,615 7,890 8,868 32,223 Basic and diluted net income per share 0.34 0.33 0.34 0.39 1.40
Page 59 REALTY INCOME CORPORATION AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Apparel Stores - -------------- Danbury CT 1,083,296 6,215,244 None None Westbury NY 6,333,590 3,949,770 None None Automotive Parts & Accessories - ------------------------------ Phoenix AZ 231,000 513,057 None None Phoenix AZ 71,750 159,359 None None Phoenix AZ 222,950 495,178 None None Tucson AZ 194,250 431,434 None None Tucson AZ 178,297 396,005 None None Yuma AZ 120,750 268,190 None None Fullerton CA 47,325 66,522 None None Grass Valley CA 325,000 384,955 None None Jackson CA 300,000 390,849 None None Sacramento CA 210,000 466,419 None None Turlock CA 222,250 493,627 None None Aurora CO 221,691 492,382 None None Canon City CO 66,500 147,699 None None Colorado Springs CO 280,193 622,317 None None Colorado Springs CO 192,988 433,542 None None Denver CO 141,400 314,056 None None Denver CO 315,000 699,623 None None Denver CO 283,500 629,666 None None Littleton CO 252,925 561,759 None None Lakeland FL 500,000 233,100 None None Tampa FL 427,395 7,412 None None Council Bluffs IA 194,355 431,668 None None Boise ID 158,400 351,813 None None Boise ID 190,080 422,172 None None Coeur D'Alene ID 165,900 368,468 None None Lewiston ID 138,950 308,612 None None Moscow ID 117,250 260,417 None None Nampa ID 183,743 408,101 None None Twin Falls ID 190,080 422,172 None None Kansas City KS 185,955 413,014 None None Kansas City KS 222,000 455,881 None None Page 60 REALTY INCOME CORPORATION AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Apparel Stores - -------------- Danbury CT 1,083,296 6,215,244 7,298,540 Westbury NY 6,333,590 3,949,770 10,283,360 Automotive Parts & Accessories - ------------------------------ Phoenix AZ 231,000 513,057 744,057 Phoenix AZ 71,750 159,359 231,109 Phoenix AZ 222,950 495,178 718,128 Tucson AZ 194,250 431,434 625,684 Tucson AZ 178,297 396,005 574,302 Yuma AZ 120,750 268,190 388,940 Fullerton CA 47,325 66,522 113,847 Grass Valley CA 325,000 384,955 709,955 Jackson CA 300,000 390,849 690,849 Sacramento CA 210,000 466,419 676,419 Turlock CA 222,250 493,627 715,877 Aurora CO 221,691 492,382 714,073 Canon City CO 66,500 147,699 214,199 Colorado Springs CO 280,193 622,317 902,510 Colorado Springs CO 192,988 433,542 626,530 Denver CO 141,400 314,056 455,456 Denver CO 315,000 699,623 1,014,623 Denver CO 283,500 629,666 913,166 Littleton CO 252,925 561,759 814,684 Lakeland FL 500,000 233,100 733,100 Tampa FL 427,395 7,412 434,807 Council Bluffs IA 194,355 431,668 626,023 Boise ID 158,400 351,813 510,213 Boise ID 190,080 422,172 612,252 Coeur D'Alene ID 165,900 368,468 534,368 Lewiston ID 138,950 308,612 447,562 Moscow ID 117,250 260,417 377,667 Nampa ID 183,743 408,101 591,844 Twin Falls ID 190,080 422,172 612,252 Kansas City KS 185,955 413,014 598,969 Kansas City KS 222,000 455,881 677,881 Page 61 REALTY INCOME CORPORATION AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Apparel Stores - -------------- Danbury CT 72,210 09/30/97 300 Westbury NY 45,744 09/29/97 300 Automotive Parts & Accessories - ------------------------------ Phoenix AZ 182,837 11/09/87 300 Phoenix AZ 56,790 11/19/87 300 Phoenix AZ 145,267 11/02/89 300 Tucson AZ 154,959 10/30/87 300 Tucson AZ 112,385 01/19/90 300 Yuma AZ 76,111 01/23/90 300 Fullerton CA 66,522 08/21/72 234 Grass Valley CA 128,743 05/20/88 300 Jackson CA 126,615 05/17/88 300 Sacramento CA 166,215 11/25/87 300 Turlock CA 174,526 12/30/87 300 Aurora CO 139,737 01/29/90 300 Canon City CO 52,635 11/12/87 300 Colorado Spring CO 176,611 01/23/90 300 Colorado Springs CO 83,099 05/20/93 300 Denver CO 111,918 11/18/87 300 Denver CO 237,548 05/16/88 300 Denver CO 213,795 05/27/88 300 Littleton CO 195,461 02/12/88 300 Lakeland FL 0 In Process 12/31/97 300 Tampa FL 0 In Process 12/05/97 300 Council Bluffs IA 146,568 05/19/88 300 Boise ID 119,454 05/06/88 300 Boise ID 143,343 05/06/88 300 Coeur D'Alene ID 133,379 09/21/87 300 Lewiston ID 111,713 09/16/87 300 Moscow ID 94,267 09/14/87 300 Nampa ID 138,567 05/06/88 300 Twin Falls ID 143,343 05/06/88 300 Kansas City KS 140,235 05/13/88 300 Kansas City KS 154,696 05/16/88 300 Page 62 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Automotive Parts & Accessories (continued) - ------------------------------------------ Blue Springs MO 222,569 494,334 None None Independence MO 210,643 467,845 None None Kansas City MO 210,070 466,571 None None Kansas City MO 168,350 373,910 None None Kansas City MO 248,500 551,927 None None Missoula MT 163,100 362,249 None None Kearney NE 173,950 344,393 None None Omaha NE 196,000 435,321 None None Omaha NE 199,100 412,042 None None Albuquerque NM 80,500 178,794 None None Rio Rancho NM 211,577 469,923 None None Sante Fe NM 70,000 155,473 None None Las Vegas NV 161,000 357,585 None None Reno NV 456,000 562,344 None None Albany OR 152,250 338,153 None None Beaverton OR 210,000 466,419 None None Corvallis OR 152,250 338,153 None None Eugene OR 194,880 432,837 None None Oak Grove OR 180,250 400,336 None None Portland OR 190,750 423,664 None None Portland OR 147,000 326,493 None None Portland OR 210,000 466,412 None None Salem OR 136,500 303,170 None None Tigard OR 164,500 365,361 None None Amarillo TX 140,000 419,734 None None Austin TX 185,454 411,899 None None Dallas TX 191,267 424,811 None None El Paso TX 66,150 146,922 None None El Paso TX 56,350 125,156 None None Garland TX 242,887 539,461 None None Harlingen TX 134,599 298,948 None None Houston TX 151,018 335,417 None None Leon Valley TX 178,221 395,834 None None Lubbock TX 42,000 93,284 None None Lubbock TX 49,000 108,831 None None Midland TX 45,500 101,058 None None Odessa TX 50,750 112,718 None None Pasadena TX 107,391 238,518 None None Plano TX 187,564 417,158 700 None San Antonio TX 245,164 544,518 None None Page 63 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Automotive Parts & Accessories - ------------------------------ Blue Springs MO 222,569 494,334 716,903 Independence MO 210,643 467,845 678,488 Kansas City MO 210,070 466,571 676,641 Kansas City MO 168,350 373,910 542,260 Kansas City MO 248,500 551,927 800,427 Missoula MT 163,100 362,249 525,349 Kearney NE 173,950 344,393 518,343 Omaha NE 196,000 435,321 631,321 Omaha NE 199,100 412,042 611,142 Albuquerque NM 80,500 178,794 259,294 Rio Rancho NM 211,577 469,923 681,500 Sante Fe NM 70,000 155,473 225,473 Las Vegas NV 161,000 357,585 518,585 Reno NV 456,000 562,344 1,018,344 Albany OR 152,250 338,153 490,403 Beaverton OR 210,000 466,419 676,419 Corvallis OR 152,250 338,153 490,403 Eugene OR 194,880 432,837 627,717 Oak Grove OR 180,250 400,336 580,586 Portland OR 190,750 423,664 614,414 Portland OR 147,000 326,493 473,493 Portland OR 210,000 466,412 676,412 Salem OR 136,500 303,170 439,670 Tigard OR 164,500 365,361 529,861 Amarillo TX 140,000 419,734 559,734 Austin TX 185,454 411,899 597,353 Dallas TX 191,267 424,811 616,078 El Paso TX 66,150 146,922 213,072 El Paso TX 56,350 125,156 181,506 Garland TX 242,887 539,461 782,348 Harlingen TX 134,599 298,948 433,547 Houston TX 151,018 335,417 486,435 Leon Valley TX 178,221 395,834 574,055 Lubbock TX 42,000 93,284 135,284 Lubbock TX 49,000 108,831 157,831 Midland TX 45,500 101,058 146,558 Odessa TX 50,750 112,718 163,468 Pasadena TX 107,391 238,518 345,909 Plano TX 187,564 417,858 605,422 San Antonio TX 245,164 544,518 789,682 Page 64 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Automotive Parts & Accessories (continued) - ------------------------------------------ Blue Springs MO 148,532 07/31/89 300 Independence MO 140,572 07/31/89 300 Kansas City MO 158,419 05/13/88 300 Kansas City MO 126,957 05/26/88 300 Kansas City MO 179,292 10/25/88 300 Missoula MT 130,111 10/30/87 300 Kearney NE 93,917 05/01/90 300 Omaha NE 147,808 05/26/88 300 Omaha NE 137,987 05/27/88 300 Albuquerque NM 64,219 10/29/87 300 Rio Rancho NM 163,507 02/26/88 300 Sante Fe NM 55,842 10/29/87 300 Las Vegas NV 128,436 10/29/87 300 Reno NV 190,812 05/26/88 300 Albany OR 123,358 08/24/87 300 Beaverton OR 170,149 08/26/87 300 Corvallis OR 123,358 08/12/87 300 Eugene OR 150,604 02/10/88 300 Oak Grove OR 146,041 08/06/87 300 Portland OR 154,552 08/12/87 300 Portland OR 119,104 08/26/87 300 Portland OR 168,835 09/01/87 300 Salem OR 110,595 08/20/87 300 Tigard OR 133,284 08/26/87 300 Amarillo TX 137,505 09/12/88 300 Austin TX 115,753 02/06/90 300 Dallas TX 120,560 01/26/90 300 El Paso TX 52,770 10/27/87 300 El Paso TX 44,952 10/27/87 300 Garland TX 153,097 01/19/90 300 Harlingen TX 84,841 01/17/90 300 Houston TX 95,189 01/25/90 300 Leon Valley TX 112,337 01/17/90 300 Lubbock TX 33,504 10/26/87 300 Lubbock TX 39,090 10/29/87 300 Midland TX 36,296 10/27/87 300 Odessa TX 40,484 10/26/87 300 Pasadena TX 67,691 01/24/90 300 Plano TX 118,226 01/18/90 300 San Antonio TX 153,021 02/14/90 300 Page 65 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Automotive Parts & Accessories (continued) - ------------------------------------------ Bountiful UT 183,750 408,115 None None Provo UT 125,395 278,507 None None Bellevue WA 185,500 411,997 None None Bellingham WA 168,000 373,133 None None Bothell WA 199,500 443,098 None None Everett WA 367,500 816,227 None None Hazel Dell WA 168,000 373,135 None None Kennewick WA 161,350 358,365 None None Kent WA 199,500 443,091 None None Lacey WA 171,150 380,125 None None Marysville WA 168,000 373,135 None None Moses Lake WA 138,600 307,831 None None Pasco WA 161,700 359,142 None None Puyallup WA 173,250 384,795 None None Redmond WA 196,000 435,317 None None Renton WA 185,500 412,003 None None Richland WA 161,700 359,142 None None Seattle WA 162,400 360,697 None None Silverdale WA 183,808 419,777 None None Spanaway WA 189,000 419,777 None None Spokane WA 66,150 146,921 None None Tacoma WA 191,800 425,996 None None Tacoma WA 196,000 435,324 None None Tacoma WA 187,111 415,579 None None Vancouver WA 180,250 400,343 None None Walla Walla WA 170,100 377,793 None None Wenatchee WA 148,400 329,602 None None Woodinville WA 171,500 380,908 None None Automotive Service - ------------------ Flagstaff AZ 144,821 84,182 None None Chula Vista CA 313,293 409,654 None None Arvada CO 201,565 339,038 None None Arvada CO 241,044 344,753 None None Broomfield CO 154,930 503,626 None None Denver CO 79,717 369,586 None None Denver CO 341,726 432,986 None None Thornton CO 276,084 415,464 None None Hartford CT 248,540 482,460 None None Page 66 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Automotive Parts & Accessories (continued) - ------------------------------------------ Bountiful UT 183,750 408,115 591,865 Provo UT 125,395 278,507 403,902 Bellevue WA 185,500 411,997 597,497 Bellingham WA 168,000 373,133 541,133 Bothell WA 199,500 443,098 642,598 Everett WA 367,500 816,227 1,183,727 Hazel Dell WA 168,000 373,135 541,135 Kennewick WA 161,350 358,365 519,715 Kent WA 199,500 443,091 642,591 Lacey WA 171,150 380,125 551,275 Marysville WA 168,000 373,135 541,135 Moses Lake WA 138,600 307,831 446,431 Pasco WA 161,700 359,142 520,842 Puyallup WA 173,250 384,795 558,045 Redmond WA 196,000 435,317 631,317 Renton WA 185,500 412,003 597,503 Richland WA 161,700 359,142 520,842 Seattle WA 162,400 360,697 523,097 Silverdale WA 183,808 419,777 603,585 Spanaway WA 189,000 419,777 608,777 Spokane WA 66,150 146,921 213,071 Tacoma WA 191,800 425,996 617,796 Tacoma WA 196,000 435,324 631,324 Tacoma WA 187,111 415,579 602,690 Vancouver WA 180,250 400,343 580,593 Walla Walla WA 170,100 377,793 547,893 Wenatchee WA 148,400 329,602 478,002 Woodinville WA 171,500 380,908 552,408 Automotive Service - ------------------ Flagstaff AZ 144,821 84,182 229,003 Chula Vista CA 313,293 409,654 722,947 Arvada CO 201,565 339,038 540,603 Arvada CO 241,044 344,753 585,797 Broomfield CO 154,930 503,626 658,556 Denver CO 79,717 369,586 449,303 Denver CO 341,726 432,986 774,712 Thornton CO 276,084 415,464 691,548 Hartford CT 248,540 482,460 731,000 Page 67 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Automotive Parts & Accessories (continued) - ------------------------------------------ Bountiful UT 115,821 01/30/90 300 Provo UT 79,039 01/25/90 300 Bellevue WA 150,295 08/06/87 300 Bellingham WA 136,116 08/20/87 300 Bothell WA 161,642 08/20/87 300 Everett WA 290,874 11/17/87 300 Hazel Dell WA 122,395 05/23/88 300 Kennewick WA 130,731 08/26/87 300 Kent WA 161,638 08/06/87 300 Lacey WA 138,667 08/13/87 300 Marysville WA 136,120 08/20/87 300 Moses Lake WA 112,296 08/12/87 300 Pasco WA 131,014 08/18/87 300 Puyallup WA 139,291 09/15/87 300 Redmond WA 157,580 09/17/87 300 Renton WA 149,138 09/15/87 300 Richland WA 131,014 08/13/87 300 Seattle WA 131,582 08/20/87 300 Silverdale WA 151,952 09/16/87 300 Spanaway WA 153,132 08/25/87 300 Spokane WA 52,357 11/18/87 300 Tacoma WA 155,403 08/18/87 300 Tacoma WA 156,357 10/15/87 300 Tacoma WA 117,940 01/25/90 300 Vancouver WA 146,043 08/20/87 300 Walla Walla WA 137,817 08/06/87 300 Wenatchee WA 120,240 08/25/87 300 Woodinville WA 138,954 08/20/87 300 Automotive Service - ------------------ Flagstaff AZ 0 In Process 08/29/97 300 Chula Vista CA 26,627 05/01/96 01/19/96 300 Arvada CO 18,647 08/28/96 04/09/96 300 Arvada CO 12,840 01/03/97 07/10/96 300 Broomfield CO 27,700 08/22/96 03/15/96 300 Denver CO 216,056 10/08/85 300 Denver CO 3,569 09/25/97 06/12/97 300 Thornton CO 15,769 12/31/96 10/31/96 300 Hartford CT 24,927 09/30/96 300 Page 68 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Automotive Service (continued) - ------------------------------ Southington CT 225,882 672,508 None None Ft. Lauderdale FL 254,090 4,421 None None Jacksonville FL 76,585 355,066 None None Lauderdale Lakes FL 65,987 305,931 None None Seminole FL 68,000 315,266 None None Sunrise FL 80,253 372,069 None None Tampa FL 70,000 324,538 None None Tampa FL 67,000 310,629 None None Tampa FL 86,502 401,041 None None Atlanta GA 55,840 258,889 None None Atlanta GA 78,646 364,625 None None Bogart GA 66,807 309,732 None None Duluth GA 222,275 273,956 None None Gainesville GA 53,589 248,452 None None Marietta GA 60,900 293,461 None None Marietta GA 69,561 346,024 None None Riverdale GA 58,444 270,961 None None Rome GA 56,454 261,733 None None Anderson IN 232,170 385,790 None None Indianapolis IN 231,384 428,307 None None Olathe KS 217,995 367,055 None None Louisville KY 56,054 259,881 None None Newport KY 323,511 288,168 None None Billerica MA 399,043 461,854 None None Clinton MD 70,880 328,620 None None Minneapolis MN 58,000 268,903 None None Independence MO 297,641 233,152 None None Concord NC 237,688 64,645 None None Durham NC 55,074 255,336 None None Durham NC 354,676 360,875 None None Fayettville NC 224,326 256,992 None None Garner NC 218,294 286,665 None None Greensboro NC 287,474 315,828 None None Pineville NC 254,460 355,299 None None Raleigh NC 89,145 413,301 None None Raleigh NC 398,694 263,388 None None Cherry Hill NJ 1,074,640 1,032,304 None None Akron OH 139,126 460,066 None None Beaver Creek OH 205,000 492,538 None None Centerville OH 305,000 420,448 None None Page 69 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Automotive Service (continued) - ------------------------------ Southington CT 225,882 672,508 898,390 Ft. Lauderdale FL 254,090 4,421 258,511 Jacksonville FL 76,585 355,066 431,651 Lauderdale Lakes FL 65,987 305,931 371,918 Seminole FL 68,000 315,266 383,266 Sunrise FL 80,253 372,069 452,322 Tampa FL 70,000 324,538 394,538 Tampa FL 67,000 310,629 377,629 Tampa FL 86,502 401,041 487,543 Atlanta GA 55,840 258,889 314,729 Atlanta GA 78,646 364,625 443,271 Bogart GA 66,807 309,732 376,539 Duluth GA 222,275 273,956 496,231 Gainesville GA 53,589 248,452 302,041 Marietta GA 60,900 293,461 354,361 Marietta GA 69,561 346,024 415,585 Riverdale GA 58,444 270,961 329,405 Rome GA 56,454 261,733 318,187 Anderson IN 232,170 385,790 617,960 Indianapolis IN 231,384 428,307 659,691 Olathe KS 217,995 367,055 585,050 Louisville KY 56,054 259,881 315,935 Newport KY 323,511 288,168 611,679 Billerica MA 399,043 461,854 860,897 Clinton MD 70,880 328,620 399,500 Minneapolis MN 58,000 268,903 326,903 Independence MO 297,641 233,152 530,793 Concord NC 237,688 64,645 302,333 Durham NC 55,074 255,336 310,410 Durham NC 354,676 360,875 715,551 Fayettville NC 224,326 256,992 481,318 Garner NC 218,294 286,665 504,959 Greensboro NC 287,474 315,828 603,302 Pineville NC 254,460 355,299 609,759 Raleigh NC 89,145 413,301 502,446 Raleigh NC 398,694 263,388 662,082 Cherry Hill NJ 1,074,640 1,032,304 2,106,944 Akron OH 139,126 460,066 599,192 Beaver Creek OH 205,000 492,538 697,538 Centerville OH 305,000 420,448 725,448 Page 70 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Automotive Service (continued) - ------------------------------ Southington CT 14,470 06/06/97 300 Ft. Lauderdale FL 0 In Process 12/24/97 300 Jacksonville FL 203,413 12/23/85 300 Lauderdale Lakes FL 172,767 02/19/86 300 Seminole FL 180,611 12/23/85 300 Sunrise FL 211,445 02/14/86 300 Tampa FL 185,923 12/27/85 300 Tampa FL 177,955 12/27/85 300 Tampa FL 218,269 07/23/86 300 Atlanta GA 149,370 11/27/85 300 Atlanta GA 208,889 12/18/85 300 Bogart GA 177,443 12/20/85 300 Duluth GA 0 11/03/97 06/20/97 300 Gainesville GA 142,333 12/19/85 300 Marietta GA 168,118 12/26/85 300 Marietta GA 190,987 06/03/86 300 Riverdale GA 154,124 01/15/86 300 Rome GA 149,941 12/19/85 300 Anderson IN 639 12/19/97 300 Indianapolis IN 22,129 09/27/96 300 Olathe KS 9,173 04/22/97 11/11/96 300 Louisville KY 148,882 12/17/85 300 Newport KY 3,330 09/17/97 300 Billerica MA 13,004 04/02/97 300 Clinton MD 190,770 11/15/85 300 Minneapolis MN 154,051 12/18/85 300 Independence MO 9,715 12/20/96 300 Concord NC 0 In Process 11/05/97 300 Durham NC 148,230 11/13/85 300 Durham NC 4,173 08/29/97 03/31/97 300 Fayettville NC 423 12/03/97 300 Garner NC 0 11/18/97 06/20/97 300 Greensboro NC 6,790 06/09/97 01/31/97 300 Pineville NC 4,111 08/28/97 04/16/97 300 Raleigh NC 240,144 10/28/85 300 Raleigh NC 2,160 10/01/97 300 Cherry Hill NJ 98,069 08/02/95 01/26/95 300 Akron OH 5,333 09/18/97 300 Beaver Creek OH 15,596 02/13/97 09/09/96 300 Centerville OH 24,526 07/24/96 06/28/96 300 Page 71 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Automotive Service (continued) - ------------------------------ Cincinnati OH 293,005 200,273 None None Columbus OH 71,098 329,626 None None Columbus OH 75,761 351,246 None None Columbus OH 245,036 470,468 None None Dayton OH 70,000 324,538 None None Eastlake OH 321,347 459,774 None None Fairfield OH 323,408 234,253 None None Findlay OH 283,515 397,156 None None Hamilton OH 252,608 413,279 None None Huber Heights OH 282,000 449,381 None None Miamisburg OH 63,996 296,701 None None Milford OH 353,324 269,853 None None Mt. Vernon OH 216,115 375,365 None None Northwood OH 65,978 263,912 None None Norwalk OH 200,205 365,961 None None Sandusky OH 264,708 404,164 None None Springboro OH 191,911 522,178 None None Toledo OH 91,655 366,621 None None Toledo OH 73,408 293,632 None None Midwest City OK 106,312 90,123 None None The Village OK 143,655 116,311 None None Bethel Park PA 299,595 331,579 None None Bethlehem PA 275,328 389,330 None None Bethlehem PA 229,162 310,357 None None Philadelphia PA 858,500 877,745 None None Springfield Twp. PA 82,740 383,601 None None York PA 249,436 347,479 None None Charleston SC 217,250 293,791 None None Columbia SC 267,622 53,568 None None Columbia SC 343,785 294,701 None None Greenville SC 221,946 314,818 None None Brentwood TN 305,546 292,973 None None Nashville TN 342,960 226,897 None None Dallas TX 234,604 325,951 None None Houston TX 285,000 369,389 None None Lewisville TX 199,942 324,736 None None San Antonio TX 198,828 437,422 None None Richmond VA 149,780 399,415 None None Roanoke VA 349,628 322,763 None None Virginia Beach VA 287,675 382,092 None None Page 72 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Automotive Service (continued) - ------------------------------ Cincinnati OH 293,005 200,273 493,278 Columbus OH 71,098 329,626 400,724 Columbus OH 75,761 351,246 427,007 Columbus OH 245,036 470,468 715,504 Dayton OH 70,000 324,538 394,538 Eastlake OH 321,347 459,774 781,121 Fairfield OH 323,408 234,253 557,661 Findlay OH 283,515 397,156 680,671 Hamilton OH 252,608 413,279 665,887 Huber Heights OH 282,000 449,381 731,381 Miamisburg OH 63,996 296,701 360,697 Milford OH 353,324 269,853 623,177 Mt. Vernon OH 216,115 375,365 591,480 Northwood OH 65,978 263,912 329,890 Norwalk OH 200,205 365,961 566,166 Sandusky OH 264,708 404,164 668,872 Springboro OH 191,911 522,178 714,089 Toledo OH 91,655 366,621 458,276 Toledo OH 73,408 293,632 367,040 Midwest City OK 106,312 90,123 196,435 The Village OK 143,655 116,311 259,966 Bethel Park PA 299,595 331,579 631,174 Bethlehem PA 275,328 389,330 664,658 Bethlehem PA 229,162 310,357 539,519 Philadelphia PA 858,500 877,745 1,736,245 Springfield Twp. PA 82,740 383,601 466,341 York PA 249,436 347,479 596,915 Charleston SC 217,250 293,791 511,041 Columbia SC 267,622 53,568 321,190 Columbia SC 343,785 294,701 638,486 Greenville SC 221,946 314,818 536,764 Brentwood TN 305,546 292,973 598,519 Nashville TN 342,960 226,897 569,857 Dallas TX 234,604 325,951 560,555 Houston TX 285,000 369,389 654,389 Lewisville TX 199,942 324,736 524,678 San Antonio TX 198,828 437,422 636,250 Richmond VA 149,780 399,415 549,195 Roanoke VA 349,628 322,763 672,391 Virginia Beach VA 287,675 382,092 669,767 Page 73 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Automotive Service (continued) - ------------------------------ Cincinnati OH 2,296 09/17/97 300 Columbus OH 192,696 10/02/85 300 Columbus OH 204,088 10/24/85 300 Columbus OH 38,422 12/22/95 300 Dayton OH 188,569 10/31/85 300 Eastlake OH 37,548 12/22/95 300 Fairfield OH 2,695 09/17/97 300 Findlay OH 658 12/24/97 300 Hamilton OH 8,951 03/31/97 10/04/96 300 Huber Heights OH 17,225 12/03/96 07/18/96 300 Miamisburg OH 173,448 10/08/85 300 Milford OH 3,106 09/18/97 300 Mt. Vernon OH 622 12/30/97 300 Northwood OH 198,997 09/12/86 300 Norwalk OH 607 12/19/97 300 Sandusky OH 670 12/19/97 300 Springboro OH 16,439 03/07/97 300 Toledo OH 276,442 09/12/86 300 Toledo OH 221,406 09/12/86 300 Midwest City OK 0 In Process 08/08/97 300 The Village OK 0 In Process 07/29/97 300 Bethel Park PA 549 12/19/97 300 Bethlehem PA 646 12/19/97 300 Bethlehem PA 514 12/24/97 300 Philadelphia PA 201,430 05/19/95 12/05/94 300 Springfield Twp. PA 216,630 02/28/86 300 York PA 576 12/30/97 300 Charleston SC 4,363 07/14/97 03/13/97 300 Columbia SC 0 In Process 11/05/97 300 Columbia SC 6,298 05/27/97 02/07/97 300 Greenville SC 2,601 09/05/97 03/31/97 300 Brentwood TN 0 In Process 05/28/97 300 Nashville TN 2,610 09/17/97 300 Dallas TX 17,927 08/09/96 02/19/96 300 Houston TX 3,041 08/08/97 08/08/97 300 Lewisville TX 17,860 08/02/96 02/14/96 300 San Antonio TX 40,097 09/15/95 300 Richmond VA 16,642 12/26/96 300 Roanoke VA 534 12/19/97 300 Virginia Beach VA 14,396 01/07/97 09/27/96 300 Page 74 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Automotive Service (continued) - ------------------------------ Bremerton WA 261,172 373,080 None None Milwaukee WI 173,005 499,244 None None Milwaukee WI 152,509 475,480 None None New Berlin WI 188,491 466,268 None None Book Stores - ----------- Tampa FL 998,250 3,697,927 None None Child Care - ---------- Birmingham AL 63,800 295,791 None None Huntsville AL 28,600 197,165 None None Mobile AL 78,400 237,671 None None Mobile AL 63,000 292,084 None None Chandler AZ 144,083 668,080 None None Chandler AZ 291,720 647,923 None None Chandler AZ 271,695 603,446 None None Glendale AZ 115,000 285,172 None None Mesa AZ 297,500 660,755 None None Mesa AZ 276,770 590,417 None None Peoria AZ 281,750 625,779 None None Phoenix AZ 318,500 707,397 None None Phoenix AZ 264,504 587,471 None None Phoenix AZ 260,719 516,181 None None Scottsdale AZ 291,993 648,530 None None Tempe AZ 292,200 648,989 None None Tempe AZ 294,000 638,977 None None Tucson AZ 304,500 676,303 None None Tucson AZ 283,500 546,878 None None Calabasas CA 156,430 725,248 None None Carmichael CA 131,035 607,507 None None Chino CA 155,000 634,071 None None Chula Vista CA 350,563 778,614 None None Corona CA 144,856 671,585 None None El Cajon CA 157,804 731,621 None None Encinitas CA 320,000 710,729 None None Escondido CA 276,286 613,638 None None Folsom CA 281,563 625,363 None None Mission Viejo CA 353,891 744,367 None None Page 75 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Automotive Service (continued) - ------------------------------ Bremerton WA 261,172 373,080 634,252 Milwaukee WI 173,005 499,244 672,249 Milwaukee WI 152,509 475,480 627,989 New Berlin WI 188,491 466,268 654,759 Book Stores - ----------- Tampa FL 998,250 3,697,927 4,696,177 Child Care - ---------- Birmingham AL 63,800 295,791 359,591 Huntsville AL 28,600 197,165 225,765 Mobile AL 78,400 237,671 316,071 Mobile AL 63,000 292,084 355,084 Chandler AZ 144,083 668,080 812,163 Chandler AZ 291,720 647,923 939,643 Chandler AZ 271,695 603,446 875,141 Glendale AZ 115,000 285,172 400,172 Mesa AZ 297,500 660,755 958,255 Mesa AZ 276,770 590,417 867,187 Peoria AZ 281,750 625,779 907,529 Phoenix AZ 318,500 707,397 1,025,897 Phoenix AZ 264,504 587,471 851,975 Phoenix AZ 260,719 516,181 776,900 Scottsdale AZ 291,993 648,530 940,523 Tempe AZ 292,200 648,989 941,189 Tempe AZ 294,000 638,977 932,977 Tucson AZ 304,500 676,303 980,803 Tucson AZ 283,500 546,878 830,378 Calabasas CA 156,430 725,248 881,678 Carmichael CA 131,035 607,507 738,542 Chino CA 155,000 634,071 789,071 Chula Vista CA 350,563 778,614 1,129,177 Corona CA 144,856 671,585 816,441 El Cajon CA 157,804 731,621 889,425 Encinitas CA 320,000 710,729 1,030,729 Escondido CA 276,286 613,638 889,924 Folsom CA 281,563 625,363 906,926 Mission Viejo CA 353,891 744,367 1,098,258 Page 76 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Automotive Service (continued) - ------------------------------ Bremerton WA 16,396 03/19/97 07/24/96 300 Milwaukee WI 40,772 12/22/95 300 Milwaukee WI 24,566 09/27/96 300 New Berlin WI 38,079 12/22/95 300 Book Stores - ----------- Tampa FL 117,001 03/11/97 300 Child Care - ---------- Birmingham AL 193,248 10/31/84 300 Huntsville AL 197,165 06/15/82 180 Mobile AL 237,671 10/15/82 180 Mobile AL 181,404 04/25/85 300 Chandler AZ 349,889 12/17/86 300 Chandler AZ 229,028 12/11/87 300 Chandler AZ 213,401 12/14/87 300 Glendale AZ 264,572 02/08/84 180 Mesa AZ 216,958 09/29/88 300 Mesa AZ 193,865 09/29/88 300 Peoria AZ 215,982 03/30/88 300 Phoenix AZ 232,273 09/29/88 300 Phoenix AZ 158,578 06/29/90 300 Phoenix AZ 130,764 12/26/90 300 Scottsdale AZ 229,291 12/14/87 300 Tempe AZ 223,993 03/10/88 300 Tempe AZ 174,113 09/27/90 300 Tucson AZ 222,064 09/28/88 300 Tucson AZ 179,567 09/29/88 300 Calabasas CA 424,348 09/26/85 300 Carmichael CA 328,149 08/22/86 300 Chino CA 602,337 10/06/83 180 Chula Vista CA 279,658 10/30/87 300 Corona CA 432,880 12/19/84 300 El Cajon CA 419,133 12/19/85 300 Encinitas CA 251,283 12/29/87 300 Escondido CA 216,954 12/31/87 300 Folsom CA 225,976 10/23/87 300 Mission Viejo CA 154,359 06/24/93 300 Page 77 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Child Care (continued) - ---------------------- Moreno Valley CA 304,489 676,214 None None Oceanside CA 145,568 674,889 None None Palmdale CA 249,490 554,125 None None Rancho Cordova CA 276,328 613,733 None None Rancho Cucamonga CA 471,733 1,047,739 None None Roseville CA 297,343 660,412 None None Sacramento CA 290,734 645,731 None None Santee CA 248,418 551,748 None None Simi Valley CA 208,585 967,055 None None Valencia CA 301,295 669,185 None None Walnut CA 217,365 1,007,753 None None Aurora CO 141,811 657,497 None None Aurora CO 287,000 637,440 None None Aurora CO 301,455 655,609 None None Broomfield CO 107,000 403,080 None None Broomfield CO 155,306 344,941 None None Colorado Springs CO 58,400 271,217 None None Colorado Springs CO 92,570 241,413 None None Colorado Springs CO 115,542 535,700 None None Englewood CO 131,216 608,372 None None Englewood CO 158,651 735,571 None None Fort Collins CO 55,200 256,356 None None Fort Collins CO 117,105 542,950 None None Fort Collins CO 137,734 638,594 None None Greeley CO 58,400 270,755 None None Littleton CO 161,617 358,956 None None Littleton CO 287,000 637,435 None None Littleton CO 299,250 664,642 None None Longmont CO 115,592 535,931 None None Louisville CO 58,089 269,313 None None Parker CO 153,551 341,043 None None Westminster CO 306,387 695,737 None None Bradenton FL 160,060 355,501 None None Clearwater FL 42,223 269,380 None None Jacksonville FL 38,500 228,481 None None Jacksonville FL 48,000 243,060 None None Jacksonville FL 184,800 410,447 None None Jupiter FL 78,000 360,088 None None Margate FL 66,686 309,183 None None Melbourne FL 256,439 549,345 None None Page 78 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Child Care (continued) - ---------------------- Moreno Valley CA 304,489 676,214 980,703 Oceanside CA 145,568 674,889 820,457 Palmdale CA 249,490 554,125 803,615 Rancho Cordova CA 276,328 613,733 890,061 Rancho Cucamonga CA 471,733 1,047,739 1,519,472 Roseville CA 297,343 660,412 957,755 Sacramento CA 290,734 645,731 936,465 Santee CA 248,418 551,748 800,166 Simi Valley CA 208,585 967,055 1,175,640 Valencia CA 301,295 669,185 970,480 Walnut CA 217,365 1,007,753 1,225,118 Aurora CO 141,811 657,497 799,308 Aurora CO 287,000 637,440 924,440 Aurora CO 301,455 655,609 957,064 Broomfield CO 107,000 403,080 510,080 Broomfield CO 155,306 344,941 500,247 Colorado Springs CO 58,400 271,217 329,617 Colorado Springs CO 92,570 241,413 333,983 Colorado Springs CO 115,542 535,700 651,242 Englewood CO 131,216 608,372 739,588 Englewood CO 158,651 735,571 894,222 Fort Collins CO 55,200 256,356 311,556 Fort Collins CO 117,105 542,950 660,055 Fort Collins CO 137,734 638,594 776,328 Greeley CO 58,400 270,755 329,155 Littleton CO 161,617 358,956 520,573 Littleton CO 287,000 637,435 924,435 Littleton CO 299,250 664,642 963,892 Longmont CO 115,592 535,931 651,523 Louisville CO 58,089 269,313 327,402 Parker CO 153,551 341,043 494,594 Westminster CO 306,387 695,737 1,002,124 Bradenton FL 160,060 355,501 515,561 Clearwater FL 42,223 269,380 311,603 Jacksonville FL 38,500 228,481 266,981 Jacksonville FL 48,000 243,060 291,060 Jacksonville FL 184,800 410,447 595,247 Jupiter FL 78,000 360,088 438,088 Margate FL 66,686 309,183 375,869 Melbourne FL 256,439 549,345 805,784 Page 79 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Child Care (continued) - ---------------------- Moreno Valley CA 258,116 02/11/87 300 Oceanside CA 386,632 12/23/85 300 Palmdale CA 181,946 09/14/88 300 Rancho Cordova CA 191,244 03/22/89 300 Rancho Cucamonga CA 370,436 12/30/87 300 Roseville CA 238,630 10/21/87 300 Sacramento CA 231,929 10/05/87 300 Santee CA 202,829 07/23/87 300 Simi Valley CA 554,013 12/20/85 300 Valencia CA 225,342 06/23/88 300 Walnut CA 544,346 08/22/86 300 Aurora CO 368,615 03/25/86 300 Aurora CO 225,370 12/31/87 300 Aurora CO 241,628 09/27/89 300 Broomfield CO 403,080 01/12/83 180 Broomfield CO 119,054 03/15/88 300 Colorado Springs CO 271,217 12/22/82 180 Colorado Springs CO 232,004 08/31/83 180 Colorado Springs CO 282,492 12/04/86 300 Englewood CO 320,815 12/05/86 300 Englewood CO 385,235 12/29/86 300 Fort Collins CO 256,356 12/22/82 180 Fort Collins CO 304,395 03/25/86 300 Fort Collins CO 358,017 03/25/86 300 Greeley CO 175,757 11/21/84 300 Littleton CO 126,908 12/10/87 300 Littleton CO 209,301 09/29/88 300 Littleton CO 218,235 09/29/88 300 Longmont CO 300,461 03/25/86 300 Louisville CO 180,450 06/22/84 300 Parker CO 123,230 10/19/87 300 Westminster CO 232,355 09/27/89 300 Bradenton FL 120,707 05/05/88 300 Clearwater FL 269,380 12/22/81 180 Jacksonville FL 228,481 12/22/81 180 Jacksonville FL 243,060 12/22/81 180 Jacksonville FL 127,898 03/30/89 300 Jupiter FL 211,932 09/11/85 300 Margate FL 161,927 12/16/86 300 Melbourne FL 115,594 04/16/93 300 Page 80 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Child Care (continued) - ---------------------- Niceville FL 73,696 341,688 None None Orlando FL 68,001 313,922 None None Orlando FL 159,177 353,538 None None Orlando FL 245,249 544,704 None None Orlando FL 190,050 422,107 None None Oviedo FL 166,409 369,598 None None Panama City FL 69,500 244,314 None None Pensacola FL 147,000 326,492 None None Royal Palm Beach FL 194,193 431,309 None None Spring Hill FL 146,939 326,356 None None St. Augustine FL 44,800 213,040 None None Sunrise FL 69,400 246,671 None None Sunrise FL 245,000 533,280 None None Tallahassee FL 66,000 232,010 None None Tampa FL 53,385 199,846 None None Douglasville GA 54,000 250,356 None None Dunwoody GA 318,500 707,399 None None Ellenwood GA 119,678 275,414 None None Fayetteville GA 148,400 329,601 None None Lawrenceville GA 141,449 314,161 None None Lilburn GA 116,350 539,488 None None Lithia Springs GA 187,444 363,358 None None Lithonia GA 239,715 524,459 None None Marietta GA 231,000 513,061 None None Marietta GA 273,000 619,076 None None Marietta GA 148,620 330,090 None None Marietta GA 292,250 649,095 None None Marietta GA 295,750 596,299 None None Marietta GA 301,000 668,529 None None Martinez GA 141,153 313,504 None None Smyrna GA 274,750 610,229 None None Stockbridge GA 168,700 374,688 None None Stone Mountain GA 65,000 301,357 None None Stone Mountain GA 316,750 703,512 None None Valdosta GA 73,561 341,059 None None Cedar Rapids IA 194,950 427,085 None None Iowa City IA 186,900 408,910 None None Johnston IA 186,996 347,278 None None Addison IL 125,780 583,146 None None Algonquin IL 241,500 509,629 None None Page 81 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Child Care (continued) - ---------------------- Niceville FL 73,696 341,688 415,384 Orlando FL 68,001 313,922 381,923 Orlando FL 159,177 353,538 512,715 Orlando FL 245,249 544,704 789,953 Orlando FL 190,050 422,107 612,157 Oviedo FL 166,409 369,598 536,007 Panama City FL 69,500 244,314 313,814 Pensacola FL 147,000 326,492 473,492 Royal Palm Beach FL 194,193 431,309 625,502 Spring Hill FL 146,939 326,356 473,295 St. Augustine FL 44,800 213,040 257,840 Sunrise FL 69,400 246,671 316,071 Sunrise FL 245,000 533,280 778,280 Tallahassee FL 66,000 232,010 298,010 Tampa FL 53,385 199,846 253,231 Douglasville GA 54,000 250,356 304,356 Dunwoody GA 318,500 707,399 1,025,899 Ellenwood GA 119,678 275,414 395,092 Fayetteville GA 148,400 329,601 478,001 Lawrenceville GA 141,449 314,161 455,610 Lilburn GA 116,350 539,488 655,838 Lithia Springs GA 187,444 363,358 550,802 Lithonia GA 239,715 524,459 764,174 Marietta GA 231,000 513,061 744,061 Marietta GA 273,000 619,076 892,076 Marietta GA 148,620 330,090 478,710 Marietta GA 292,250 649,095 941,345 Marietta GA 295,750 596,299 892,049 Marietta GA 301,000 668,529 969,529 Martinez GA 141,153 313,504 454,657 Smyrna GA 274,750 610,229 884,979 Stockbridge GA 168,700 374,688 543,388 Stone Mountain GA 65,000 301,357 366,357 Stone Mountain GA 316,750 703,512 1,020,262 Valdosta GA 73,561 341,059 414,620 Cedar Rapids IA 194,950 427,085 622,035 Iowa City IA 186,900 408,910 595,810 Johnston IA 186,996 347,278 534,274 Addison IL 125,780 583,146 708,926 Algonquin IL 241,500 509,629 751,129 Page 82 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Child Care (continued) - ---------------------- Niceville FL 180,176 12/03/86 300 Orlando FL 184,760 09/04/85 300 Orlando FL 129,963 07/02/87 300 Orlando FL 192,581 12/10/87 300 Orlando FL 131,531 03/30/89 300 Oviedo FL 131,704 11/20/87 300 Panama City FL 244,314 06/15/82 180 Pensacola FL 101,737 03/28/89 300 Royal Palm Beach FL 139,211 11/15/88 300 Spring Hill FL 116,294 11/24/87 300 St. Augustine FL 213,040 12/22/81 180 Sunrise FL 246,671 06/15/82 180 Sunrise FL 168,101 05/25/89 300 Tallahassee FL 232,010 06/15/82 180 Tampa FL 199,846 12/22/81 180 Douglasville GA 163,579 10/23/84 300 Dunwoody GA 228,323 11/16/88 300 Ellenwood GA 88,893 11/16/88 300 Fayetteville GA 102,707 03/29/89 300 Lawrenceville GA 104,911 07/07/88 300 Lilburn GA 282,542 12/23/86 300 Lithia Springs GA 110,194 12/28/89 300 Lithonia GA 152,857 08/20/91 300 Marietta GA 177,079 03/18/88 300 Marietta GA 211,933 04/26/88 300 Marietta GA 108,448 09/16/88 300 Marietta GA 207,693 12/02/88 300 Marietta GA 190,800 12/30/88 300 Marietta GA 213,910 12/30/88 300 Martinez GA 110,838 12/31/87 300 Smyrna GA 196,960 11/15/88 300 Stockbridge GA 116,755 03/28/89 300 Stone Mountain GA 179,999 06/19/85 300 Stone Mountain GA 227,068 11/16/88 300 Valdosta GA 179,841 12/03/86 300 Cedar Rapids IA 105,923 09/24/92 300 Iowa City IA 103,511 09/24/92 300 Johnston IA 80,307 08/19/91 300 Addison IL 326,932 03/25/86 300 Algonquin IL 139,613 07/10/90 300 Page 83 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Child Care (continued) - ---------------------- Aurora IL 165,679 398,739 None None Bartlett IL 120,824 560,166 None None Bolingbrook IL 60,000 409,024 None None Carol Stream IL 122,831 586,416 None None Elk Grove Vlg IL 126,860 588,175 None None Elk Grove Vlg IL 214,845 477,180 None None Glendale Heights IL 318,500 707,399 None None Hoffman Estates IL 318,500 707,399 None None Hoffman Estates IL 211,082 468,818 None None Lockport IL 189,477 442,018 None None O'Fallon IL 141,250 313,722 None None Orland Park IL 218,499 485,295 None None Palatine IL 121,911 565,233 None None Roselle IL 297,541 561,036 None None Schaumburg IL 218,798 485,956 None None Vernon Hills IL 132,523 614,430 None None Westmont IL 124,742 578,330 None None Carmel IN 217,565 430,742 None None Fishers IN 212,118 419,959 None None Highland IN 220,460 436,476 None None Indianapolis IN 245,000 544,153 None None Noblesville IN 60,000 278,175 None None Zionsville IN 127,568 319,770 None None Lenexa KS 318,500 707,399 None None Olathe KS 304,500 676,308 None None Overland Park KS 305,691 707,397 None None Shawnee KS 315,000 699,629 None None Topeka KS 58,000 268,903 None None Wichita KS 108,569 401,828 None None Wichita KS 209,890 415,549 None None Lexington KY 210,427 420,883 None None Acton MA 315,533 700,813 None None Marlborough MA 352,765 776,487 None None Westborough MA 359,412 773,877 None None Ellicott City MD 219,368 630,839 None None Olney MD 342,500 760,701 None None Waldorf MD 130,430 604,702 None None Waldorf MD 237,207 526,844 None None Canton MI 55,000 378,848 None None Apple Valley MN 113,523 526,319 None None Page 84 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Child Care (continued) - ---------------------- Aurora IL 165,679 398,739 564,418 Bartlett IL 120,824 560,166 680,990 Bolingbrook IL 60,000 409,024 469,024 Carol Stream IL 122,831 586,416 709,247 Elk Grove Vlg IL 126,860 588,175 715,035 Elk Grove Vlg IL 214,845 477,180 692,025 Glendale Heights IL 318,500 707,399 1,025,899 Hoffman Estates IL 318,500 707,399 1,025,899 Hoffman Estates IL 211,082 468,818 679,900 Lockport IL 189,477 442,018 631,495 O'Fallon IL 141,250 313,722 454,972 Orland Park IL 218,499 485,295 703,794 Palatine IL 121,911 565,233 687,144 Roselle IL 297,541 561,036 858,577 Schaumburg IL 218,798 485,956 704,754 Vernon Hills IL 132,523 614,430 746,953 Westmont IL 124,742 578,330 703,072 Carmel IN 217,565 430,742 648,307 Fishers IN 212,118 419,959 632,077 Highland IN 220,460 436,476 656,936 Indianapolis IN 245,000 544,153 789,153 Noblesville IN 60,000 278,175 338,175 Zionsville IN 127,568 319,770 447,338 Lenexa KS 318,500 707,399 1,025,899 Olathe KS 304,500 676,308 980,808 Overland Park KS 305,691 707,397 1,013,088 Shawnee KS 315,000 699,629 1,014,629 Topeka KS 58,000 268,903 326,903 Wichita KS 108,569 401,828 510,397 Wichita KS 209,890 415,549 625,439 Lexington KY 210,427 420,883 631,310 Acton MA 315,533 700,813 1,016,346 Marlborough MA 352,765 776,487 1,129,252 Westborough MA 359,412 773,877 1,133,289 Ellicott City MD 219,368 630,839 850,207 Olney MD 342,500 760,701 1,103,201 Waldorf MD 130,430 604,702 735,132 Waldorf MD 237,207 526,844 764,051 Canton MI 55,000 378,848 433,848 Apple Valley MN 113,523 526,319 639,842 Page 85 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Child Care (continued) - ---------------------- Aurora IL 127,584 12/21/88 300 Bartlett IL 314,048 03/25/86 300 Bolingbrook IL 409,024 10/18/82 180 Carol Stream IL 328,765 03/25/86 300 Elk Grove Vlg IL 329,752 03/26/86 300 Elk Grove Vlg IL 163,358 04/08/88 300 Glendale Heights IL 228,323 11/16/88 300 Hoffman Estates IL 220,430 03/31/89 300 Hoffman Estates IL 134,349 12/08/89 300 Lockport IL 158,751 10/29/87 300 O'Fallon IL 112,670 10/30/87 300 Orland Park IL 174,295 10/28/87 300 Palatine IL 316,888 03/25/86 300 Roselle IL 179,517 12/30/88 300 Schaumburg IL 171,810 12/17/87 300 Vernon Hills IL 344,469 03/25/86 300 Westmont IL 324,231 03/25/86 300 Carmel IN 109,121 12/27/90 300 Fishers IN 106,389 12/27/90 300 Highland IN 110,572 12/26/90 300 Indianapolis IN 146,885 06/29/90 300 Noblesville IN 172,765 04/30/85 300 Zionsville IN 114,842 10/28/87 300 Lenexa KS 220,430 03/31/89 300 Olathe KS 222,065 09/28/88 300 Overland Park KS 232,273 09/28/88 300 Shawnee KS 227,767 10/27/88 300 Topeka KS 167,007 04/16/85 300 Wichita KS 192,353 12/16/86 300 Wichita KS 105,272 12/26/90 300 Lexington KY 116,624 08/20/91 300 Acton MA 230,112 09/30/88 300 Marlborough MA 250,621 11/04/88 300 Westborough MA 249,776 11/01/88 300 Ellicott City MD 201,849 12/19/88 300 Olney MD 268,950 12/18/87 300 Waldorf MD 397,601 09/26/84 300 Waldorf MD 186,266 12/31/87 300 Canton MI 378,848 10/06/82 180 Apple Valley MN 295,073 03/26/86 300 Page 86 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Child Care (continued) - ---------------------- Bloomington MN 124,113 575,416 None None Brooklyn Park MN 118,111 547,586 None None Brooklyn Park MN 112,823 523,073 None None Eagan MN 112,127 519,844 None None Eden Prairie MN 124,286 576,243 None None Maple Grove MN 111,691 517,822 None None Maple Grove MN 313,250 660,149 None None Minnetonka MN 146,847 680,842 None None Plymouth MN 134,221 622,350 None None W. Bloomington MN 40,000 468,484 None None White Bear Lake MN 260,750 579,133 None None White Bear Lake MN 242,165 537,855 None None Florissant MO 181,300 402,672 None None Florissant MO 318,500 707,399 None None Gladstone MO 294,000 652,987 None None Lee's Summit MO 239,627 532,220 None None Liberty MO 65,400 303,211 None None Manchester MO 287,000 637,435 None None St. Charles MO 259,000 575,246 None None Pearl MS 121,801 270,525 None None Cary NC 75,200 262,973 None None Chapel Hill NC 77,000 356,992 None None Charlotte NC 27,551 247,000 None None Charlotte NC 134,582 268,222 None None Concord NC 32,441 190,859 None None Durham NC 220,728 429,380 None None Durham NC 238,000 471,201 None None Hendersonville NC 32,748 186,152 None None Kernersville NC 162,216 316,299 None None Morrisville NC 175,700 390,234 None None Bellevue NE 60,568 280,819 None None Omaha NE 60,500 280,491 None None Omaha NE 53,000 245,720 None None Omaha NE 142,867 317,315 None None Londonderry NH 335,467 745,082 None None Clementon NJ 279,851 554,060 None None Henderson NV 82,000 380,173 None None Las Vegas NV 201,250 446,983 None None Sparks NV 244,752 543,604 None None Beavercreek OH 179,552 398,786 None None Page 87 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Child Care (continued) - ---------------------- Bloomington MN 124,113 575,416 699,529 Brooklyn Park MN 118,111 547,586 665,697 Brooklyn Park MN 112,823 523,073 635,896 Eagan MN 112,127 519,844 631,971 Eden Prairie MN 124,286 576,243 700,529 Maple Grove MN 111,691 517,822 629,513 Maple Grove MN 313,250 660,149 973,399 Minnetonka MN 146,847 680,842 827,689 Plymouth MN 134,221 622,350 756,571 W. Bloomington MN 40,000 468,484 508,484 White Bear Lake MN 260,750 579,133 839,883 White Bear Lake MN 242,165 537,855 780,020 Florissant MO 181,300 402,672 583,972 Florissant MO 318,500 707,399 1,025,899 Gladstone MO 294,000 652,987 946,987 Lee's Summit MO 239,627 532,220 771,847 Liberty MO 65,400 303,211 368,611 Manchester MO 287,000 637,435 924,435 St. Charles MO 259,000 575,246 834,246 Pearl MS 121,801 270,525 392,326 Cary NC 75,200 262,973 338,173 Chapel Hill NC 77,000 356,992 433,992 Charlotte NC 27,551 247,000 274,551 Charlotte NC 134,582 268,222 402,804 Concord NC 32,441 190,859 223,300 Durham NC 220,728 429,380 650,108 Durham NC 238,000 471,201 709,201 Hendersonville NC 32,748 186,152 218,900 Kernersville NC 162,216 316,299 478,515 Morrisville NC 175,700 390,234 565,934 Bellevue NE 60,568 280,819 341,387 Omaha NE 60,500 280,491 340,991 Omaha NE 53,000 245,720 298,720 Omaha NE 142,867 317,315 460,182 Londonderry NH 335,467 745,082 1,080,549 Clementon NJ 279,851 554,060 833,911 Henderson NV 82,000 380,173 462,173 Las Vegas NV 201,250 446,983 648,233 Sparks NV 244,752 543,604 788,356 Beavercreek OH 179,552 398,786 578,338 Page 88 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Child Care (continued) - ---------------------- Bloomington MN 322,598 03/27/86 300 Brooklyn Park MN 306,995 03/26/86 300 Brooklyn Park MN 293,253 03/27/86 300 Eagan MN 291,442 03/31/86 300 Eden Prairie MN 323,062 03/27/86 300 Maple Grove MN 290,309 03/26/86 300 Maple Grove MN 181,778 07/11/90 300 Minnetonka MN 359,030 12/12/86 300 Plymouth MN 328,183 12/12/86 300 W. Bloomington MN 468,484 06/18/82 180 White Bear Lake MN 204,755 12/23/87 300 White Bear Lake MN 142,206 08/30/90 300 Florissant MO 125,475 03/29/89 300 Florissant MO 220,430 03/30/89 300 Gladstone MO 214,408 09/29/88 300 Lee's Summit MO 155,745 09/27/89 300 Liberty MO 181,105 06/18/85 300 Manchester MO 225,369 12/22/87 300 St. Charles MO 203,382 12/23/87 300 Pearl MS 87,484 11/15/88 300 Cary NC 245,077 01/25/84 180 Chapel Hill NC 221,716 04/17/85 300 Charlotte NC 247,000 12/23/81 180 Charlotte NC 86,570 11/16/88 300 Concord NC 190,859 12/23/81 180 Durham NC 134,759 12/29/89 300 Durham NC 108,964 08/20/91 300 Hendersonville NC 186,152 12/23/81 180 Kernersville NC 101,374 12/14/89 300 Morrisville NC 121,599 03/29/89 300 Bellevue NE 147,071 12/16/86 300 Omaha NE 186,771 08/01/84 300 Omaha NE 161,441 10/11/84 300 Omaha NE 112,185 12/09/87 300 Londonderry NH 221,801 08/18/89 300 Clementon NJ 126,597 09/09/91 300 Henderson NV 236,112 04/17/85 300 Las Vegas NV 120,655 06/29/90 300 Sparks NV 190,669 01/29/88 300 Beavercreek OH 147,721 06/30/87 300 Page 89 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Child Care (continued) - ---------------------- Centerville OH 174,519 387,613 None None Cincinnati OH 165,910 368,486 None None Dublin OH 84,000 389,446 None None Englewood OH 74,000 343,083 None None Forest Park OH 170,778 379,305 None None Gahanna OH 86,000 398,718 None None Huber Heights OH 245,000 544,153 None None Loveland OH 206,136 457,829 None None Maineville OH 173,105 384,469 None None Pickerington OH 87,580 406,055 None None Westerville OH 82,000 380,173 None None Westerville OH 294,350 646,557 None None Broken Arrow OK 78,705 220,434 None None Midwest City OK 67,800 314,338 None None Oklahoma City OK 50,800 214,474 None None Oklahoma City OK 79,000 366,261 None None Yukon OK 61,000 282,812 None None Beaverton OR 135,148 626,647 None None Beaverton OR 115,232 534,301 None None Charleston SC 125,593 278,946 None None Charleston SC 140,700 312,498 None None Columbia SC 58,160 269,643 None None Elgin SC 160,831 313,600 None None Goose Creek SC 61,635 192,905 None None Ladson SC 31,543 177,457 None None Lexington SC 55,869 274,742 None None Mt. Pleasant SC 40,700 180,400 None None Summerville SC 44,400 174,500 None None Sumter SC 56,010 268,903 None None Memphis TN 238,263 504,897 None None Memphis TN 238,000 528,608 None None Memphis TN 221,501 491,962 None None Nashville TN 274,298 609,223 None None Allen TX 177,637 394,537 None None Arlington TX 82,109 380,678 None None Arlington TX 70,000 324,538 None None Arlington TX 238,000 528,604 None None Arlington TX 241,500 550,559 None None Arlington TX 195,650 387,355 None None Austin TX 103,600 230,532 None None Page 90 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Child Care (continued) - ---------------------- Centerville OH 174,519 387,613 562,132 Cincinnati OH 165,910 368,486 534,396 Dublin OH 84,000 389,446 473,446 Englewood OH 74,000 343,083 417,083 Forest Park OH 170,778 379,305 550,083 Gahanna OH 86,000 398,718 484,718 Huber Heights OH 245,000 544,153 789,153 Loveland OH 206,136 457,829 663,965 Maineville OH 173,105 384,469 557,574 Pickerington OH 87,580 406,055 493,635 Westerville OH 82,000 380,173 462,173 Westerville OH 294,350 646,557 940,907 Broken Arrow OK 78,705 220,434 299,139 Midwest City OK 67,800 314,338 382,138 Oklahoma City OK 50,800 214,474 265,274 Oklahoma City OK 79,000 366,261 445,261 Yukon OK 61,000 282,812 343,812 Beaverton OR 135,148 626,647 761,795 Beaverton OR 115,232 534,301 649,533 Charleston SC 125,593 278,946 404,539 Charleston SC 140,700 312,498 453,198 Columbia SC 58,160 269,643 327,803 Elgin SC 160,831 313,600 474,431 Goose Creek SC 61,635 192,905 254,540 Ladson SC 31,543 177,457 209,000 Lexington SC 55,869 274,742 330,611 Mt. Pleasant SC 40,700 180,400 221,100 Summerville SC 44,400 174,500 218,900 Sumter SC 56,010 268,903 324,913 Memphis TN 238,263 504,897 743,160 Memphis TN 238,000 528,608 766,608 Memphis TN 221,501 491,962 713,463 Nashville TN 274,298 609,223 883,521 Allen TX 177,637 394,537 572,174 Arlington TX 82,109 380,678 462,787 Arlington TX 70,000 324,538 394,538 Arlington TX 238,000 528,604 766,604 Arlington TX 241,500 550,559 792,059 Arlington TX 195,650 387,355 583,005 Austin TX 103,600 230,532 334,132 Page 91 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Child Care (continued) - ---------------------- Centerville OH 142,491 07/23/87 300 Cincinnati OH 138,575 04/29/87 300 Dublin OH 227,664 10/08/85 300 Englewood OH 199,343 10/23/85 300 Forest Park OH 138,377 09/28/87 300 Gahanna OH 230,045 11/26/85 300 Huber Heights OH 142,365 09/27/90 300 Loveland OH 173,464 03/20/87 300 Maineville OH 145,669 03/06/87 300 Pickerington OH 214,116 12/11/86 300 Westerville OH 222,243 10/08/85 300 Westerville OH 175,406 09/26/90 300 Broken Arrow OK 220,434 01/27/83 180 Midwest City OK 186,476 08/14/85 300 Oklahoma City OK 214,474 06/15/82 180 Oklahoma City OK 239,107 11/14/84 300 Yukon OK 174,450 05/02/85 300 Beaverton OR 328,188 12/17/86 300 Beaverton OR 279,825 12/22/86 300 Charleston SC 94,713 05/26/88 300 Charleston SC 97,377 03/28/89 300 Columbia SC 176,030 11/14/84 300 Elgin SC 100,509 12/14/89 300 Goose Creek SC 192,905 12/22/81 180 Ladson SC 177,457 12/22/81 180 Lexington SC 179,358 11/13/84 300 Mt. Pleasant SC 180,400 12/22/81 180 Summerville SC 174,500 12/22/81 180 Sumter SC 160,616 06/18/85 300 Memphis TN 165,781 09/29/88 300 Memphis TN 173,568 09/30/88 300 Memphis TN 130,073 08/31/90 300 Nashville TN 189,837 03/30/89 300 Allen TX 127,336 11/21/88 300 Arlington TX 246,924 12/13/84 300 Arlington TX 200,187 05/08/85 300 Arlington TX 173,566 09/26/88 300 Arlington TX 227,520 09/22/89 300 Arlington TX 95,988 02/07/91 300 Austin TX 230,532 10/29/82 180 Page 92 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Child Care (continued) - ---------------------- Austin TX 88,872 222,684 None None Austin TX 134,383 623,103 None None Austin TX 188,144 417,872 None None Austin TX 236,733 528,608 None None Austin TX 191,636 425,629 None None Austin TX 224,878 499,461 None None Austin TX 238,000 528,604 None None Austin TX 217,878 483,913 None None Bedford TX 241,500 550,559 None None Carrollton TX 277,850 617,113 None None Cedar Park TX 168,857 375,036 None None Colleyville TX 68,000 315,266 None None Converse TX 217,000 481,963 None None Coppell TX 139,224 645,551 None None Coppell TX 208,641 463,398 None None Desoto TX 86,000 398,715 None None Duncanville TX 93,000 431,172 None None Euless TX 234,111 519,962 None None Flower Mound TX 202,773 442,846 None None Fort Worth TX 85,518 396,495 None None Fort Worth TX 238,000 528,608 None None Fort Worth TX 210,007 444,460 None None Fort Worth TX 216,160 427,962 None None Garland TX 211,050 468,749 None None Grand Prairie TX 167,164 371,275 None None Houston TX 58,000 268,901 None None Houston TX 60,000 278,175 None None Houston TX 102,000 472,898 None None Houston TX 139,125 308,997 None None Houston TX 139,125 308,997 None None Houston TX 141,296 313,824 None None Houston TX 219,100 486,631 None None Houston TX 219,100 486,628 None None Houston TX 149,109 323,314 None None Irving TX 38,853 296,034 None None Lewisville TX 79,000 366,264 None None Lewisville TX 192,777 428,121 None None Lewisville TX 192,218 426,922 None None Mansfield TX 181,375 402,838 None None Mesquite TX 85,000 394,079 None None Page 93 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Child Care (continued) - ---------------------- Austin TX 88,872 222,684 311,556 Austin TX 134,383 623,103 757,486 Austin TX 188,144 417,872 606,016 Austin TX 236,733 528,608 765,341 Austin TX 191,636 425,629 617,265 Austin TX 224,878 499,461 724,339 Austin TX 238,000 528,604 766,604 Austin TX 217,878 483,913 701,791 Bedford TX 241,500 550,559 792,059 Carrollton TX 277,850 617,113 894,963 Cedar Park TX 168,857 375,036 543,893 Colleyville TX 68,000 315,266 383,266 Converse TX 217,000 481,963 698,963 Coppell TX 139,224 645,551 784,775 Coppell TX 208,641 463,398 672,039 Desoto TX 86,000 398,715 484,715 Duncanville TX 93,000 431,172 524,172 Euless TX 234,111 519,962 754,073 Flower Mound TX 202,773 442,846 645,619 Fort Worth TX 85,518 396,495 482,013 Fort Worth TX 238,000 528,608 766,608 Fort Worth TX 210,007 444,460 654,467 Fort Worth TX 216,160 427,962 644,122 Garland TX 211,050 468,749 679,799 Grand Prairie TX 167,164 371,275 538,439 Houston TX 58,000 268,901 326,901 Houston TX 60,000 278,175 338,175 Houston TX 102,000 472,898 574,898 Houston TX 139,125 308,997 448,122 Houston TX 139,125 308,997 448,122 Houston TX 141,296 313,824 455,120 Houston TX 219,100 486,631 705,731 Houston TX 219,100 486,628 705,728 Houston TX 149,109 323,314 472,423 Irving TX 38,853 296,034 334,887 Lewisville TX 79,000 366,264 445,264 Lewisville TX 192,777 428,121 620,898 Lewisville TX 192,218 426,922 619,140 Mansfield TX 181,375 402,838 584,213 Mesquite TX 85,000 394,079 479,079 Page 94 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Child Care (continued) - ---------------------- Austin TX 222,684 01/12/83 180 Austin TX 326,334 12/23/86 300 Austin TX 141,884 05/11/88 300 Austin TX 173,568 09/27/88 300 Austin TX 136,188 12/22/88 300 Austin TX 158,421 01/03/89 300 Austin TX 163,244 04/06/89 300 Austin TX 146,747 06/22/89 300 Bedford TX 227,520 09/22/89 300 Carrollton TX 218,184 12/11/87 300 Cedar Park TX 121,042 11/21/88 300 Colleyville TX 194,468 05/01/85 300 Converse TX 158,252 09/28/88 300 Coppell TX 338,089 12/17/86 300 Coppell TX 163,837 12/11/87 300 Desoto TX 260,488 10/24/84 300 Duncanville TX 265,962 05/08/85 300 Euless TX 194,074 05/08/87 300 Flower Mound TX 166,537 04/20/87 300 Fort Worth TX 209,075 12/03/86 300 Fort Worth TX 173,568 09/26/88 300 Fort Worth TX 127,552 02/01/90 300 Fort Worth TX 106,051 02/07/91 300 Garland TX 134,330 12/12/89 300 Grand Prairie TX 118,796 12/13/88 300 Houston TX 176,672 10/11/84 300 Houston TX 171,589 05/01/85 300 Houston TX 291,700 05/01/85 300 Houston TX 115,331 05/22/87 300 Houston TX 115,331 05/22/87 300 Houston TX 115,366 07/24/87 300 Houston TX 159,786 09/30/88 300 Houston TX 157,067 11/16/88 300 Houston TX 114,032 06/26/89 300 Irving TX 164,757 04/23/86 300 Lewisville TX 218,768 06/26/85 300 Lewisville TX 164,362 01/07/87 300 Lewisville TX 136,603 12/29/88 300 Mansfield TX 115,443 12/20/89 300 Mesquite TX 257,461 10/24/84 300 Page 95 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Child Care (continued) - ---------------------- Mesquite TX 139,466 326,525 None None Missouri City TX 221,025 437,593 None None N Richland Hills TX 238,000 528,608 None None Pasadena TX 60,000 278,173 None None Plano TX 261,912 581,658 None None Plano TX 250,514 556,399 None None Plano TX 259,000 575,246 None None Round Rock TX 80,525 373,347 None None Round Rock TX 186,380 413,957 None None San Antonio TX 130,833 606,595 None None San Antonio TX 102,512 475,289 None None San Antonio TX 81,530 378,007 None None San Antonio TX 139,125 308,997 None None San Antonio TX 181,412 402,923 None None San Antonio TX 162,161 360,166 None None San Antonio TX 234,500 520,831 None None San Antonio TX 217,000 481,967 None None San Antonio TX 182,868 406,155 None None San Antonio TX 220,500 447,108 None None Southlake TX 228,279 511,750 None None Sugarland TX 193,800 430,436 None None Texas City TX 48,000 222,918 None None The Woodlands TX 193,801 430,441 None None Watauga TX 165,914 368,502 None None Layton UT 136,574 269,009 None None Sandy UT 168,089 373,330 None None Centreville VA 371,000 824,003 None None Chesapeake VA 190,050 422,107 None None Glen Allen VA 74,643 346,060 None None Portsmouth VA 171,575 381,072 None None Richmond VA 71,001 327,771 None None Richmond VA 269,500 598,567 None None Virginia Beach VA 69,080 320,270 None None Virginia Beach VA 124,988 579,496 None None Woodbridge VA 358,050 795,239 None None Everett WA 120,000 540,363 None None Federal Way WA 150,785 699,100 None None Federal Way WA 261,943 581,782 None None Kent WA 128,300 539,141 None None Kent WA 140,763 678,809 None None Page 96 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Child Care (continued) - ---------------------- Mesquite TX 139,466 326,525 465,991 Missouri City TX 221,025 437,593 658,618 N Richland Hills TX 238,000 528,608 766,608 Pasadena TX 60,000 278,173 338,173 Plano TX 261,912 581,658 843,570 Plano TX 250,514 556,399 806,913 Plano TX 259,000 575,246 834,246 Round Rock TX 80,525 373,347 453,872 Round Rock TX 186,380 413,957 600,337 San Antonio TX 130,833 606,595 737,428 San Antonio TX 102,512 475,289 577,801 San Antonio TX 81,530 378,007 459,537 San Antonio TX 139,125 308,997 448,122 San Antonio TX 181,412 402,923 584,335 San Antonio TX 162,161 360,166 522,327 San Antonio TX 234,500 520,831 755,331 San Antonio TX 217,000 481,967 698,967 San Antonio TX 182,868 406,155 589,023 San Antonio TX 220,500 447,108 667,608 Southlake TX 228,279 511,750 740,029 Sugarland TX 193,800 430,436 624,236 Texas City TX 48,000 222,918 270,918 The Woodlands TX 193,801 430,441 624,242 Watauga TX 165,914 368,502 534,416 Layton UT 136,574 269,009 405,583 Sandy UT 168,089 373,330 541,419 Centreville VA 371,000 824,003 1,195,003 Chesapeake VA 190,050 422,107 612,157 Glen Allen VA 74,643 346,060 420,703 Portsmouth VA 171,575 381,072 552,647 Richmond VA 71,001 327,771 398,772 Richmond VA 269,500 598,567 868,067 Virginia Beach VA 69,080 320,270 389,350 Virginia Beach VA 124,988 579,496 704,484 Woodbridge VA 358,050 795,239 1,153,289 Everett WA 120,000 540,363 660,363 Federal Way WA 150,785 699,100 849,885 Federal Way WA 261,943 581,782 843,725 Kent WA 128,300 539,141 667,441 Kent WA 140,763 678,809 819,572 Page 97 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Child Care (continued) - ---------------------- Mesquite TX 104,483 10/08/92 300 Missouri City TX 110,856 12/13/90 300 N Richland Hills TX 173,568 09/26/88 300 Pasadena TX 181,737 10/23/84 300 Plano TX 223,665 01/06/87 300 Plano TX 196,717 12/10/87 300 Plano TX 188,882 09/27/88 300 Round Rock TX 195,531 12/16/86 300 Round Rock TX 127,838 04/19/89 300 San Antonio TX 340,078 03/24/86 300 San Antonio TX 250,626 12/03/86 300 San Antonio TX 199,327 12/11/86 300 San Antonio TX 115,331 05/22/87 300 San Antonio TX 148,118 07/07/87 300 San Antonio TX 132,402 07/07/87 300 San Antonio TX 184,142 12/29/87 300 San Antonio TX 156,908 10/14/88 300 San Antonio TX 129,957 12/06/88 300 San Antonio TX 139,323 03/30/89 300 Southlake TX 128,075 03/10/93 300 Sugarland TX 158,234 07/31/87 300 Texas City TX 222,918 06/15/82 180 The Woodlands TX 157,024 08/11/87 300 Watauga TX 135,464 07/07/87 300 Layton UT 85,255 02/01/90 300 Sandy UT 104,914 02/01/90 300 Centreville VA 243,004 09/29/89 300 Chesapeake VA 131,531 03/28/89 300 Glen Allen VA 231,872 06/20/84 300 Portsmouth VA 121,932 12/21/88 300 Richmond VA 192,912 09/04/85 300 Richmond VA 186,516 03/28/89 300 Virginia Beach VA 209,083 11/15/84 300 Virginia Beach VA 324,886 03/25/86 300 Woodbridge VA 261,117 09/29/88 300 Everett WA 540,363 11/22/82 180 Federal Way WA 366,136 12/17/86 300 Federal Way WA 187,771 11/21/88 300 Kent WA 524,123 06/03/83 180 Kent WA 355,509 12/17/86 300 Page 98 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Child Care (continued) - ---------------------- Kirkland WA 301,000 668,534 None None Puyallup WA 195,552 434,327 None None Redmond WA 279,830 621,512 None None Renton WA 111,183 515,490 None None Appleton WI 196,000 424,038 None None Brookfield WI 233,100 461,500 None None Waukesha WI 215,950 427,546 None None Cheyenne WY 59,856 277,506 None None Consumer Electronics - -------------------- Oxford AL 323,085 406,655 None None Tuscaloosa AL 204,790 585,115 None None Thousand Oaks CA 2,703,726 6,125,829 None None Bradenton FL 174,948 240,928 None None MaryEsther FL 149,696 363,263 None None Melbourne FL 269,697 522,414 None None Merritt Island FL 309,652 482,459 None None Ocala FL 339,690 543,504 None None Pensacola FL 419,842 1,899,287 None None Tallahassee FL 319,807 502,697 None None Titusville FL 176,459 579,793 None None Venice FL 259,686 362,562 None None Rome GA 254,902 486,812 None None Smyrna GA 1,094,058 3,091,322 None None Council Bluffs IA 255,217 117,792 None None Des Moines IA 188,520 367,614 None None Peoria IL 193,868 387,737 None None Rockford IL 159,587 618,398 None None Springfield IL 219,859 630,595 None None Anderson IN 180,628 653,038 None None Muncie IN 148,901 645,235 None None Richmond IN 93,999 193,753 None None Topeka KS 974,960 3,472,226 None None Columbus MS 144,908 463,707 None None Greenville MS 144,588 433,764 None None Gulfport MS 299,464 502,326 None None Hattiesburg MS 198,659 457,379 None None Jackson MS 405,360 656,296 None None Meridian MS 181,156 515,598 None None Page 99 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Child Care (continued) - ---------------------- Kirkland WA 301,000 668,534 969,534 Puyallup WA 195,552 434,327 629,879 Redmond WA 279,830 621,512 901,342 Renton WA 111,183 515,490 626,673 Appleton WI 196,000 424,038 620,038 Brookfield WI 233,100 461,500 694,600 Waukesha WI 215,950 427,546 643,496 Cheyenne WY 59,856 277,506 337,362 Consumer Electronics - -------------------- Oxford AL 323,085 406,655 729,740 Tuscaloosa AL 204,790 585,115 789,905 Thousand Oaks CA 2,703,726 6,125,829 8,829,555 Bradenton FL 174,948 240,928 415,876 MaryEsther FL 149,696 363,263 512,959 Melbourne FL 269,697 522,414 792,111 Merritt Island FL 309,652 482,459 792,111 Ocala FL 339,690 543,504 883,194 Pensacola FL 419,842 1,899,287 2,319,129 Tallahassee FL 319,807 502,697 822,504 Titusville FL 176,459 579,793 756,252 Venice FL 259,686 362,562 622,248 Rome GA 254,902 486,812 741,714 Smyrna GA 1,094,058 3,091,322 4,185,380 Council Bluffs IA 255,217 117,792 373,009 Des Moines IA 188,520 367,614 556,134 Peoria IL 193,868 387,737 581,605 Rockford IL 159,587 618,398 777,985 Springfield IL 219,859 630,595 850,454 Anderson IN 180,628 653,038 833,666 Muncie IN 148,901 645,235 794,136 Richmond IN 93,999 193,753 287,752 Topeka KS 974,960 3,472,226 4,447,186 Columbus MS 144,908 463,707 608,615 Greenville MS 144,588 433,764 578,352 Gulfport MS 299,464 502,326 801,790 Hattiesburg MS 198,659 457,379 656,038 Jackson MS 405,360 656,296 1,061,656 Meridian MS 181,156 515,598 696,754 Page 100 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Child Care (continued) - ---------------------- Kirkland WA 230,738 03/31/88 300 Puyallup WA 138,970 12/06/88 300 Redmond WA 228,476 07/27/87 300 Renton WA 289,001 03/24/86 300 Appleton WI 117,516 07/10/90 300 Brookfield WI 116,911 12/13/90 300 Waukesha WI 108,311 12/13/90 300 Cheyenne WY 180,139 11/20/84 300 Consumer Electronics - -------------------- Oxford AL 18,300 11/26/96 300 Tuscaloosa AL 26,330 11/26/96 300 Thousand Oaks CA 316,499 09/27/96 300 Bradenton FL 10,842 11/26/96 300 MaryEsther FL 16,347 11/26/96 300 Melbourne FL 23,509 11/26/96 300 Merritt Island FL 21,711 11/26/96 300 Ocala FL 24,458 11/26/96 300 Pensacola FL 85,468 11/26/96 300 Tallahassee FL 22,621 11/26/96 300 Titusville FL 26,091 11/26/96 300 Venice FL 16,315 11/26/96 300 Rome GA 21,907 11/26/96 300 Smyrna GA 66,804 06/09/97 300 Council Bluffs IA 5,301 11/26/96 300 Des Moines IA 16,543 11/26/96 300 Peoria IL 17,448 11/26/96 300 Rockford IL 27,828 11/26/96 300 Springfield IL 28,377 11/26/96 300 Anderson IN 29,387 11/26/96 300 Muncie IN 29,036 11/26/96 300 Richmond IN 8,719 11/26/96 300 Topeka KS 144,673 12/27/96 300 Columbus MS 20,867 11/26/96 300 Greenville MS 19,519 11/26/96 300 Gulfport MS 22,605 11/26/96 300 Hattiesburg MS 20,582 11/26/96 300 Jackson MS 29,533 11/26/96 300 Meridian MS 23,202 11/26/96 300 Page 101 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Consumer Electronics (continued) - -------------------------------- Tupelo MS 121,697 637,691 None None Vicksburg MS 494,532 174,541 None None Lakewood NY 144,859 526,301 None None Defiance OH 97,978 601,863 None None Kettering OH 229,246 488,393 None None Bristol TN 344,365 468,719 None None Clarksville TN 290,775 395,870 None None Vienna WV 324,797 526,670 None None Convenience Stores - ------------------ Fullerton CA 29,170 41,003 None 11,934 Manchester CT 118,262 305,510 None None Vernon CT 179,646 319,372 None None Westbrook CT 98,247 373,340 None None Dunwoody GA 545,462 724,254 None None Lithonia GA 386,784 776,436 None None Mabelton GA 491,069 355,957 None None Norcross GA 384,162 651,273 None None Stone Mountain GA 529,383 532,429 None None Godfrey IL 374,586 733,190 None None Granite City IL 362,287 737,255 None None Madison IL 173,812 625,030 None None New Albany IN 181,459 289,353 None None New Albany IN 262,465 331,796 None None Berea KY 252,077 360,815 None None Elizabethtown KY 286,106 286,106 None None Henderson KY 225,000 515,000 None None Lebanon KY 158,052 316,105 None None Louisville KY 198,926 368,014 None None Louisville KY 216,849 605,697 None None Mt. Washington KY 327,245 479,593 None None Owensboro KY 360,000 590,000 None None Seekonk MA 298,354 268,518 None None Flint MI 194,492 476,504 None None Cary NC 450,000 825,000 None None Greenville NC 330,000 515,000 None None Greenville NC 225,000 405,000 None None Jacksonville NC 150,000 530,000 None None Kinston NC 550,000 1,056,921 None None Page 102 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Consumer Electronics (continued) - ------------------------------- Tupelo MS 121,697 637,691 759,388 Vicksburg MS 494,532 174,541 669,073 Lakewood NY 144,859 526,301 671,160 Defiance OH 97,978 601,863 699,841 Kettering OH 229,246 488,393 717,639 Bristol TN 344,365 468,719 813,084 Clarksville TN 290,775 395,870 686,645 Vienna WV 324,797 526,670 851,467 Convenience Stores - ------------------ Fullerton CA 29,170 52,937 82,107 Manchester CT 118,262 305,510 423,772 Vernon CT 179,646 319,372 499,018 Westbrook CT 98,247 373,340 471,587 Dunwoody GA 545,462 724,254 1,269,716 Lithonia GA 386,784 776,436 1,163,220 Mabelton GA 491,069 355,957 847,026 Norcross GA 384,162 651,273 1,035,435 Stone Mountain GA 529,383 532,429 1,061,812 Godfrey IL 374,586 733,190 1,107,776 Granite City IL 362,287 737,255 1,099,542 Madison IL 173,812 625,030 798,842 New Albany IN 181,459 289,353 470,812 New Albany IN 262,465 331,796 594,261 Berea KY 252,077 360,815 612,892 Elizabethtown KY 286,106 286,106 572,212 Henderson KY 225,000 515,000 740,000 Lebanon KY 158,052 316,105 474,157 Louisville KY 198,926 368,014 566,940 Louisville KY 216,849 605,697 822,546 Mt. Washington KY 327,245 479,593 806,838 Owensboro KY 360,000 590,000 950,000 Seekonk MA 298,354 268,518 566,872 Flint MI 194,492 476,504 670,996 Cary NC 450,000 825,000 1,275,000 Greenville NC 330,000 515,000 845,000 Greenville NC 225,000 405,000 630,000 Jacksonville NC 150,000 530,000 680,000 Kinston NC 550,000 1,056,921 1,606,921 Page 103 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Consumer Electronics (continued) - -------------------------------- Tupelo MS 28,696 11/26/96 300 Vicksburg MS 7,854 11/26/96 300 Lakewood NY 23,684 11/26/96 300 Defiance OH 27,084 11/26/96 300 Kettering OH 21,978 11/26/96 300 Bristol TN 21,092 11/26/96 300 Clarksville TN 17,814 11/26/96 300 Vienna WV 23,700 11/26/96 300 Convenience Stores - ------------------ Fullerton CA 46,970 11/08/72 234 Manchester CT 34,115 03/03/95 300 Vernon CT 35,663 03/09/95 300 Westbrook CT 41,690 03/09/95 300 Dunwoody GA 15,617 06/27/97 300 Lithonia GA 16,761 06/27/97 300 Mabelton GA 7,661 06/27/97 300 Norcross GA 14,046 06/27/97 300 Stone Mountain GA 11,470 06/27/97 300 Godfrey IL 15,816 06/27/97 300 Granite City IL 15,906 06/27/97 300 Madison IL 13,495 06/27/97 300 New Albany IN 32,311 03/03/95 300 New Albany IN 37,051 03/06/95 300 Berea KY 40,291 03/08/95 300 Elizabethtown KY 31,949 03/03/95 300 Henderson KY 48,925 08/25/95 300 Lebanon KY 35,298 03/03/95 300 Louisville KY 41,095 03/03/95 300 Louisville KY 37,218 06/18/96 11/17/95 300 Mt. Washington KY 21,613 10/28/96 05/31/96 300 Owensboro KY 56,050 08/25/95 300 Seekonk MA 29,985 03/03/95 300 Flint MI 38,915 12/21/95 300 Cary NC 78,375 08/25/95 300 Greenville NC 48,925 08/25/95 300 Greenville NC 38,475 08/25/95 300 Jacksonville NC 50,350 08/25/95 300 Kinston NC 8,750 10/24/97 300 Page 104 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Convenience Stores (continued) - ------------------------------ Kingston NY 257,763 456,042 None None Atwater OH 118,555 266,748 None None Columbus OH 147,296 304,411 None None Columbus OH 273,085 471,693 None None Cuyahoga Falls OH 297,982 357,579 None None Galion OH 138,981 327,597 None None Groveport OH 277,198 445,497 None None Perrysburg OH 211,678 390,680 None None Streetsboro OH 402,988 420,351 None None Tipp City OH 355,009 398,294 None None Triffin OH 117,017 273,040 None None Wadsworth OH 266,507 153,823 None None Tulsa OK 126,545 508,266 None None Columbia SC 150,000 450,000 None None John's Isle SC 170,000 350,000 None None Lexington SC 255,000 545,000 None None Myrtle Beach SC 140,000 590,000 None None N. Charleston SC 400,000 650,000 None None Summerville SC 115,000 515,000 None None La Vergne TN 340,000 650,000 None None Shelbyville TN 200,000 465,000 None None Midlothian VA 325,000 302,516 None None Stafford VA 271,865 601,997 None None Warrenton VA 515,971 649,125 None None Home Furnishings & Accessories - ------------------------------ Cathedral City CA 1,006,923 2,293,077 None None Concord CA 4,162,500 3,037,500 None None Danbury CT 630,171 3,619,609 None None Winter Park FL 2,404,598 3,382,402 None None Ridgeland MS 281,867 769,890 None None Omaha NE 1,956,296 3,948,105 None None Henderson NV 1,268,655 3,108,726 None None Memphis TN 804,262 1,432,520 None None Arlington TX 475,069 1,374,167 None None Cedar Park TX 253,591 827,237 None None Houston TX 867,767 687,042 None None Plano TX 565,000 5,835,000 None None Spring TX 1,794,872 1,808,661 None None Webster TX 283,604 537,985 None None Page 105 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Convenience Stores (continued) - ------------------------------ Kingston NY 257,763 456,042 713,805 Atwater OH 118,555 266,748 385,303 Columbus OH 147,296 304,411 451,707 Columbus OH 273,085 471,693 744,778 Cuyahoga Falls OH 297,982 357,579 655,561 Galion OH 138,981 327,597 466,578 Groveport OH 277,198 445,497 722,695 Perrysburg OH 211,678 390,680 602,358 Streetsboro OH 402,988 420,351 823,339 Tipp City OH 355,009 398,294 753,303 Triffin OH 117,017 273,040 390,057 Wadsworth OH 266,507 153,823 420,330 Tulsa OK 126,545 508,266 634,811 Columbia SC 150,000 450,000 600,000 John's Isle SC 170,000 350,000 520,000 Lexington SC 255,000 545,000 800,000 Myrtle Beach SC 140,000 590,000 730,000 N. Charleston SC 400,000 650,000 1,050,000 Summerville SC 115,000 515,000 630,000 La Vergne TN 340,000 650,000 990,000 Shelbyville TN 200,000 465,000 665,000 Midlothian VA 325,000 302,516 627,516 Stafford VA 271,865 601,997 873,862 Warrenton VA 515,971 649,125 1,165,096 Home Furnishings & Accessories - ------------------------------ Cathedral City CA 1,006,923 2,293,077 3,300,000 Concord CA 4,162,500 3,037,500 7,200,000 Danbury CT 630,171 3,619,609 4,249,780 Winter Park FL 2,404,598 3,382,402 5,787,000 Ridgeland MS 281,867 769,890 1,051,757 Omaha NE 1,956,296 3,948,105 5,904,401 Henderson NV 1,268,655 3,108,726 4,377,381 Memphis TN 804,262 1,432,520 2,236,782 Arlington TX 475,069 1,374,167 1,849,236 Cedar Park TX 253,591 827,237 1,080,828 Houston TX 867,767 687,042 1,554,809 Plano TX 565,000 5,835,000 6,400,000 Spring TX 1,794,872 1,808,661 3,603,533 Webster TX 283,604 537,985 821,589 Page 106 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Convenience Stores (continued) - ------------------------------ Kingston NY 49,405 04/06/95 300 Atwater OH 29,787 03/03/95 300 Columbus OH 33,993 03/03/95 300 Columbus OH 38,522 12/21/95 300 Cuyahoga Falls OH 39,930 03/03/95 300 Galion OH 36,582 03/06/95 300 Groveport OH 36,382 12/21/95 300 Perrysburg OH 16,629 01/10/96 09/01/95 300 Streetsboro OH 0 01/27/97 09/03/96 300 Tipp City OH 0 01/31/97 06/27/96 300 Triffin OH 30,489 03/07/95 300 Wadsworth OH 6,560 11/26/96 07/01/96 300 Tulsa OK 10,967 06/27/97 300 Columbia SC 42,750 08/25/95 300 John's Isle SC 33,250 08/25/95 300 Lexington SC 51,775 08/25/95 300 Myrtle Beach SC 56,050 08/25/95 300 N. Charleston SC 61,750 08/25/95 300 Summerville SC 48,925 08/25/95 300 La Vergne TN 61,750 08/25/95 300 Shelbyville TN 44,175 08/25/95 300 Midlothian VA 4,500 08/21/97 300 Stafford VA 25,083 12/20/96 300 Warrenton VA 27,047 12/20/96 300 Home Furnishings & Accessories - ------------------------------ Cathedral City CA 240,773 05/26/95 300 Concord CA 318,938 05/31/95 300 Danbury CT 42,006 09/30/97 300 Winter Park FL 355,152 05/31/95 300 Ridgeland MS 16,589 06/27/97 300 Omaha NE 111,717 04/04/97 300 Henderson NV 36,077 09/26/97 300 Memphis TN 30,891 06/30/97 300 Arlington TX 43,399 03/26/97 300 Cedar Park TX 26,125 03/10/97 300 Houston TX 21,651 03/07/97 300 Plano TX 612,675 05/26/95 300 Spring TX 20,940 09/29/97 300 Webster TX 11,597 06/12/97 300 Page 107 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Office Supplies - --------------- Lakewood CA 1,398,387 3,098,787 None None Riverside CA 1,410,177 1,659,833 None None Hutchinson KS 269,964 1,704,244 None None Salina KS 240,423 1,830,037 None None Helena MT 564,241 1,503,084 None None Westbury NY 3,808,076 2,376,122 None None New Philadelphia OH 726,636 1,650,638 None None Pet Supplies - ------------ Dickson City PA 659,790 1,880,368 None None Restaurants - ----------- Siloam Springs AR 190,000 352,741 None None Douglas AZ 75,000 347,719 None None Glendale AZ 624,761 895,976 None None Tucson AZ 107,393 497,904 None None Chino CA 26,729 51,555 None None Diamond Bar CA 76,117 183,052 None 15,000 Fullerton CA 36,296 51,020 None 14,628 Hemet CA 106,164 199,179 None None Rancho Cucamonga CA 230,733 481,225 None None Rancho Cucamonga CA 95,192 441,334 None None Red Bluff CA 136,740 633,984 None None Riverside CA 90,000 170,394 None None Riverside CA 155,795 534,679 35,000 21,560 San Dimas CA 240,562 445,521 None None San Ramon CA 406,000 1,126,930 None None Boulder CO 426,675 822,676 18,000 None Colorado Springs CO 152,000 704,736 None None Colorado Springs CO 313,250 695,730 None None Montrose CO 217,595 483,284 None None Security CO 150,000 695,463 None None Sterling CO 95,320 441,928 None None Westminster CO 338,940 1,571,401 20,000 13,440 Casselberry FL 403,900 897,075 None None Green Cove Sprgs FL 86,240 399,828 None None Jacksonville FL 150,210 693,446 None None Jacksonville FL 143,299 664,373 None None Page 108 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Office Supplies - --------------- Lakewood CA 1,398,387 3,098,787 4,497,174 Riverside CA 1,410,177 1,659,833 3,070,010 Hutchinson KS 269,964 1,704,244 1,974,208 Salina KS 240,423 1,830,037 2,070,460 Helena MT 564,241 1,503,084 2,067,325 Westbury NY 3,808,076 2,376,122 6,184,198 New Philadelphia OH 726,636 1,650,638 2,377,274 Pet Supplies - ------------ Dickson City PA 659,790 1,880,368 2,540,158 Restaurants - ----------- Siloam Springs AR 190,000 352,741 542,741 Douglas AZ 75,000 347,719 422,719 Glendale AZ 624,761 895,976 1,520,737 Tucson AZ 107,393 497,904 605,297 Chino CA 26,729 51,555 78,284 Diamond Bar CA 76,117 198,052 274,169 Fullerton CA 36,296 65,648 101,944 Hemet CA 106,164 199,179 305,343 Rancho Cucamonga CA 230,733 481,225 711,958 Rancho Cucamonga CA 95,192 441,334 536,526 Red Bluff CA 136,740 633,984 770,724 Riverside CA 90,000 170,394 260,394 Riverside CA 155,795 591,239 747,034 San Dimas CA 240,562 445,521 686,083 San Ramon CA 406,000 1,126,930 1,532,930 Boulder CO 426,675 840,676 1,267,351 Colorado Springs CO 152,000 704,736 856,736 Colorado Springs CO 313,250 695,730 1,008,980 Montrose CO 217,595 483,284 700,879 Security CO 150,000 695,463 845,463 Sterling CO 95,320 441,928 537,248 Westminster CO 338,940 1,604,841 1,943,781 Casselberry FL 403,900 897,075 1,300,975 Green Cove Sprgs FL 86,240 399,828 486,068 Jacksonville FL 150,210 693,446 843,656 Jacksonville FL 143,299 664,373 807,672 Page 109 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Office Supplies - --------------- Lakewood CA 118,717 01/29/97 300 Riverside CA 19,289 09/17/97 300 Hutchinson KS 36,828 06/25/97 300 Salina KS 39,546 06/25/97 300 Helena MT 32,423 06/09/97 300 Westbury NY 27,503 09/29/97 300 New Philadelphia OH 41,151 05/30/97 300 Pet Supplies - ------------ Dickson City PA 40,504 06/20/97 300 Restaurants - ----------- Siloam Springs AR 64,212 03/06/96 300 Douglas AZ 82,043 12/13/95 300 Glendale AZ 72,258 12/22/95 300 Tucson AZ 0 04/13/95 None Chino CA 0 12/22/94 None Diamond Bar CA 0 09/29/95 06/05/95 None Fullerton CA 0 07/06/95 None Hemet CA 97,051 12/27/94 300 Rancho Cucamonga CA 0 04/13/95 None Rancho Cucamonga CA 120,149 12/23/94 300 Red Bluff CA 225,792 10/01/81 300 Riverside CA 781,969 01/05/84 180 Riverside CA 1,076,803 06/28/84 300 San Dimas CA 386,859 01/17/86 300 San Ramon CA 842,009 12/18/84 300 Boulder CO 427,598 08/28/85 300 Colorado Springs CO 549,821 05/16/84 300 Colorado Springs CO 563,098 05/08/84 300 Montrose CO 1,187,723 05/20/83 180 Security CO 1,262,104 12/10/82 180 Sterling CO 621,582 05/29/84 300 Westminster CO 469,132 11/06/84 300 Casselberry FL 332,034 12/18/86 300 Green Cove Sprgs FL 170,867 12/17/87 300 Jacksonville FL 285,019 12/27/84 300 Jacksonville FL 257,867 12/19/84 300 Page 110 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Restaurants (continued) - ----------------------- Orlando FL 230,000 1,066,339 None None Orlando FL 209,800 972,679 None None Orlando FL 339,500 746,333 None None Garden City GA 197,225 438,043 None None Hinesville GA 89,220 413,644 None None Hinesville GA 172,611 383,376 None None Lithonia GA 89,220 413,647 None None Savannah GA 143,993 345,548 None None Savannah GA 165,409 367,379 None None Statesboro GA 201,250 446,983 None None Stone Mountain GA 215,940 1,001,188 None None Ankeny IA 100,000 349,218 None None Boone IA 76,000 386,170 None None Boise ID 190,894 423,981 None None Boise ID 161,352 334,041 None None Nampa ID 74,156 343,821 None None Rexburg ID 90,760 420,787 None None Alton IL 225,785 419,315 None None Dixon IL 230,090 511,036 None None Salem IL 213,815 474,892 None None Anderson IN 197,523 438,707 None None Bedford IN 311,815 692,543 None None Decatur IN 181,020 385,618 None None Goshen IN 115,000 533,165 None None Muncie IN 136,400 632,380 8,000 3,334 Muncie IN 67,156 149,157 None None New Castle IN 246,192 320,572 None None Shelbyville IN 128,820 597,263 None None South Bend IN 133,200 617,545 None 19,211 Westfield IN 213,341 477,300 None None Derby KS 96,060 445,359 None None El Dorado KS 87,400 405,206 None None Great Bend KS 95,800 444,154 None None Wichita KS 98,000 454,350 None None Lexington KY 122,200 490,200 None None Alexandria LA 143,000 662,985 None 15,000 Jennings LA 107,120 496,636 None None La Plata MD 120,140 557,000 None None Albion MI 143,280 694,578 None 12,341 Flint MI 827,853 0 None None Page 111 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Restaurants (continued) - ----------------------- Orlando FL 230,000 1,066,339 1,296,339 Orlando FL 209,800 972,679 1,182,479 Orlando FL 339,500 746,333 1,085,833 Garden City GA 197,225 438,043 635,268 Hinesville GA 89,220 413,644 502,864 Hinesville GA 172,611 383,376 555,987 Lithonia GA 89,220 413,647 502,867 Savannah GA 143,993 345,548 489,541 Savannah GA 165,409 367,379 532,788 Statesboro GA 201,250 446,983 648,233 Stone Mountain GA 215,940 1,001,188 1,217,128 Ankeny IA 100,000 349,218 449,218 Boone IA 76,000 386,170 462,170 Boise ID 190,894 423,981 614,875 Boise ID 161,352 334,041 495,393 Nampa ID 74,156 343,821 417,977 Rexburg ID 90,760 420,787 511,547 Alton IL 225,785 419,315 645,100 Dixon IL 230,090 511,036 741,126 Salem IL 213,815 474,892 688,707 Anderson IN 197,523 438,707 636,230 Bedford IN 311,815 692,543 1,004,358 Decatur IN 181,020 385,618 566,638 Goshen IN 115,000 533,165 648,165 Muncie IN 136,400 653,714 790,114 Muncie IN 67,156 149,157 216,313 New Castle IN 246,192 320,572 566,764 Shelbyville IN 128,820 597,263 726,083 South Bend IN 133,200 636,756 769,956 Westfield IN 213,341 477,300 690,641 Derby KS 96,060 445,359 541,419 El Dorado KS 87,400 405,206 492,606 Great Bend KS 95,800 444,154 539,954 Wichita KS 98,000 454,350 552,350 Lexington KY 122,200 490,200 612,400 Alexandria LA 143,000 677,985 820,985 Jennings LA 107,120 496,636 603,756 La Plata MD 120,140 557,000 677,140 Albion MI 143,280 706,919 850,199 Flint MI 827,853 0 827,853 Page 112 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Restaurants (continued) - ----------------------- Orlando FL 266,775 12/20/84 300 Orlando FL 266,571 01/04/85 300 Orlando FL 532,577 10/30/86 300 Garden City GA 337,277 07/28/83 180 Hinesville GA 362,064 12/27/83 180 Hinesville GA 242,780 11/25/85 300 Lithonia GA 136,511 10/18/88 300 Savannah GA 180,661 12/28/87 300 Savannah GA 170,569 10/30/87 300 Statesboro GA 254,586 07/15/87 300 Stone Mountain GA 146,103 03/31/87 300 Ankeny IA 312,801 12/18/86 300 Boone IA 258,770 10/29/85 300 Boise ID 226,966 04/10/86 300 Boise ID 286,452 12/26/84 300 Nampa ID 288,564 10/17/85 300 Rexburg ID 321,080 12/03/85 300 Alton IL 166,656 11/12/87 300 Dixon IL 167,393 12/16/87 300 Salem IL 194,971 12/30/87 300 Anderson IN 269,707 12/18/84 300 Bedford IN 333,219 12/28/84 300 Decatur IN 227,220 12/03/85 300 Goshen IN 242,440 12/26/84 300 Muncie IN 171,624 07/30/87 300 Muncie IN 217,192 07/30/87 300 New Castle IN 171,624 07/30/87 300 Shelbyville IN 181,709 07/30/87 300 South Bend IN 184,298 07/31/89 300 Westfield IN 81,116 12/22/95 03/16/95 300 Derby KS 292,485 09/04/85 300 El Dorado KS 255,654 12/27/84 300 Great Bend KS 325,833 07/28/83 180 Wichita KS 217,343 05/11/87 300 Lexington KY 347,571 12/20/84 300 Alexandria LA 106,876 06/02/95 02/24/95 300 Jennings LA 75,184 12/21/95 05/31/95 300 La Plata MD 229,873 12/24/87 300 Albion MI 293,180 12/19/86 300 Flint MI 176,823 01/02/87 300 Page 113 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Restaurants (continued) - ----------------------- Sturgis MI 210,560 467,659 None None Albert Lea MN 213,150 473,412 None None Red Wing MN 248,325 551,541 None None Roseville MN 281,600 1,305,560 None None Belton MO 89,328 418,187 None None Blue Springs MO 111,440 516,665 None None Carthage MO 85,020 394,175 None None Chillicothe MO 81,080 375,908 None None Fulton MO 210,199 466,861 None None Hannibal MO 266,011 590,822 None None Hazelwood MO 157,117 725,327 None 12,930 Jackson MO 210,199 466,860 None None Mt. Vernon MO 160,000 282,519 None None Nevada MO 222,552 494,296 None None Ozark MO 140,000 292,414 None None Sedalia MO 269,798 599,232 None None St. Charles MO 175,413 809,790 None 10,000 St. Charles MO 695,121 1,001,878 None None St. Joseph MO 107,648 496,958 None None Sullivan MO 85,500 396,400 None None Clinton MS 100,000 337,371 None None Southaven MS 263,900 582,303 None None Fayetteville NC 116,240 538,919 None None Wilkesboro NC 183,050 406,562 None None Omaha NE 629,592 1,051,244 None None Amherst NY 935,355 896,819 None None Fulton NY 294,009 653,006 None None Watertown NY 139,199 645,355 None None Akron OH 723,347 17 None None Ashland OH 120,740 559,801 None None Celina OH 207,060 459,841 None None Lebanon OH 210,134 466,717 None None Stow OH 317,546 712,455 None None Troy OH 130,540 605,238 None None Wash. Courthouse OH 123,120 570,836 None None Wilmington OH 119,320 553,217 None None Broken Arrow OK 245,000 368,901 None None Norman OK 734,335 0 None None Oklahoma City OK 759,826 0 None None Owasso OK 247,450 549,597 None None Page 114 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Restaurants (continued) - ----------------------- Sturgis MI 210,560 467,659 678,219 Albert Lea MN 213,150 473,412 686,562 Red Wing MN 248,325 551,541 799,866 Roseville MN 281,600 1,305,560 1,587,160 Belton MO 89,328 418,187 507,515 Blue Springs MO 111,440 516,665 628,105 Carthage MO 85,020 394,175 479,195 Chillicothe MO 81,080 375,908 456,988 Fulton MO 210,199 466,861 677,060 Hannibal MO 266,011 590,822 856,833 Hazelwood MO 157,117 738,257 895,374 Jackson MO 210,199 466,860 677,059 Mt. Vernon MO 160,000 282,519 442,519 Nevada MO 222,552 494,296 716,848 Ozark MO 140,000 292,414 432,414 Sedalia MO 269,798 599,232 869,030 St. Charles MO 175,413 819,790 995,203 St. Charles MO 695,121 1,001,878 1,696,999 St. Joseph MO 107,648 496,958 604,606 Sullivan MO 85,500 396,400 481,900 Clinton MS 100,000 337,371 437,371 Southaven MS 263,900 582,303 846,203 Fayetteville NC 116,240 538,919 655,159 Wilkesboro NC 183,050 406,562 589,612 Omaha NE 629,592 1,051,244 1,680,836 Amherst NY 935,355 896,819 1,832,174 Fulton NY 294,009 653,006 947,015 Watertown NY 139,199 645,355 784,554 Akron OH 723,347 17 723,364 Ashland OH 120,740 559,801 680,541 Celina OH 207,060 459,841 666,901 Lebanon OH 210,134 466,717 676,851 Stow OH 317,546 712,455 1,030,001 Troy OH 130,540 605,238 735,778 Wash. Courthouse OH 123,120 570,836 693,956 Wilmington OH 119,320 553,217 672,537 Broken Arrow OK 245,000 368,901 613,901 Norman OK 734,335 0 734,335 Oklahoma City OK 759,826 0 759,826 Owasso OK 247,450 549,597 797,047 Page 115 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Restaurants (continued) - ----------------------- Sturgis MI 171,570 07/31/87 300 Albert Lea MN 251,059 12/31/87 300 Red Wing MN 319,162 12/05/86 300 Roseville MN 298,960 12/19/86 300 Belton MO 289,734 12/31/86 300 Blue Springs MO 194,315 12/28/87 300 Carthage MO 184,529 12/30/87 300 Chillicothe MO 255,830 12/18/84 300 Fulton MO 214,444 08/17/87 300 Hannibal MO 180,101 08/17/87 300 Hazelwood MO 197,719 12/01/87 300 Jackson MO 104,300 06/30/95 03/17/95 300 Mt. Vernon MO 192,582 12/01/87 300 Nevada MO 204,521 07/31/87 300 Ozark MO 226,205 12/28/87 300 Sedalia MO 241,118 12/17/85 300 St. Charles MO 262,305 11/25/85 300 St. Charles MO 266,775 12/18/84 300 St. Joseph MO 234,598 08/01/84 300 Sullivan MO 307,948 12/30/86 300 Clinton MS 287,030 10/08/85 300 Southaven MS 350,740 03/20/86 300 Fayetteville NC 248,661 12/18/85 300 Wilkesboro NC 250,043 12/10/85 300 Omaha NE 326,899 01/24/84 180 Amherst NY 199,842 07/30/87 300 Fulton NY 344,884 09/06/85 300 Watertown NY 279,746 08/01/84 300 Akron OH 256,662 12/29/87 300 Ashland OH 284,991 08/04/83 180 Celina OH 253,087 09/03/87 300 Lebanon OH 236,830 12/16/87 300 Stow OH 223,845 08/27/87 300 Troy OH 225,299 07/16/87 300 Wash. Courthouse OH 151,656 12/17/87 300 Wilmington OH 156,723 12/23/87 300 Broken Arrow OK 161,535 12/17/87 300 Norman OK 168,724 12/01/87 300 Oklahoma City OK 256,731 12/28/84 300 Owasso OK 170,154 12/01/87 300 Page 116 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Restaurants (continued) - ----------------------- Ponca City OK 234,990 521,923 None None Corvallis OR 172,788 383,766 None None Hermiston OR 85,560 396,675 None None Lake Oswego OR 175,899 815,509 None None Milwaukie OR 179,174 830,689 None None Salem OR 198,540 440,964 None None Connellsville PA 264,670 587,843 None None Waynesburg PA 222,285 493,704 None None Pierre SD 251,790 559,232 None None Memphis TN 405,274 1,060,680 None None Nashville TN 484,975 1,192,627 20,000 31,098 Athens TX 245,245 544,700 None None Bedford TX 919,303 98,231 None None Beeville TX 250,490 556,349 None None Brownwood TX 288,225 640,160 None None Crockett TX 90,780 420,880 None None Dallas TX 242,025 479,170 None None Dallas TX 742,507 0 None None El Campo TX 98,060 454,631 None None Ennis TX 173,250 384,793 None None Fort Worth TX 223,195 492,067 None None Ft. Worth TX 423,281 382,059 None None Gainesville TX 89,220 413,644 None None Hillsboro TX 75,992 352,316 None None Houston TX 194,994 386,056 None None Houston TX 184,175 364,636 None None Killeen TX 262,500 583,014 None 14,398 League City TX 126,822 588,000 None None Lufkin TX 105,904 490,998 None None Mesquite TX 134,940 625,612 None None Mesquite TX 729,596 120,820 None None Mexia TX 93,620 434,046 None None New Braunfels TX 185,500 411,997 None None Orange TX 93,560 433,768 None None Plainview TX 125,000 350,767 None None Port Lavaca TX 244,759 543,619 None None Porter TX 227,067 333,031 None None Rowlett TX 126,933 585,986 None None Sealy TX 197,871 391,754 None None Stafford TX 214,024 423,732 None None Page 117 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Restaurants (continued) - ----------------------- Ponca City OK 234,990 521,923 756,913 Corvallis OR 172,788 383,766 556,554 Hermiston OR 85,560 396,675 482,235 Lake Oswego OR 175,899 815,509 991,408 Milwaukie OR 179,174 830,689 1,009,863 Salem OR 198,540 440,964 639,504 Connellsville PA 264,670 587,843 852,513 Waynesburg PA 222,285 493,704 715,989 Pierre SD 251,790 559,232 811,022 Memphis TN 405,274 1,060,680 1,465,954 Nashville TN 484,975 1,243,725 1,728,700 Athens TX 245,245 544,700 789,945 Bedford TX 919,303 98,231 1,017,534 Beeville TX 250,490 556,349 806,839 Brownwood TX 288,225 640,160 928,385 Crockett TX 90,780 420,880 511,660 Dallas TX 242,025 479,170 721,195 Dallas TX 742,507 0 742,507 El Campo TX 98,060 454,631 552,691 Ennis TX 173,250 384,793 558,043 Fort Worth TX 223,195 492,067 715,262 Ft. Worth TX 423,281 382,059 805,340 Gainesville TX 89,220 413,644 502,864 Hillsboro TX 75,992 352,316 428,308 Houston TX 194,994 386,056 581,050 Houston TX 184,175 364,636 548,811 Killeen TX 262,500 597,412 859,912 League City TX 126,822 588,000 714,822 Lufkin TX 105,904 490,998 596,902 Mesquite TX 134,940 625,612 760,552 Mesquite TX 729,596 120,820 850,416 Mexia TX 93,620 434,046 527,666 New Braunfels TX 185,500 411,997 597,497 Orange TX 93,560 433,768 527,328 Plainview TX 125,000 350,767 475,767 Port Lavaca TX 244,759 543,619 788,378 Porter TX 227,067 333,031 560,098 Rowlett TX 126,933 585,986 712,919 Sealy TX 197,871 391,754 589,625 Stafford TX 214,024 423,732 637,756 Page 118 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Restaurants (continued) - ----------------------- Ponca City OK 311,184 12/31/85 300 Corvallis OR 481,225 04/03/81 180 Hermiston OR 445,521 03/12/81 180 Lake Oswego OR 249,357 12/29/89 300 Milwaukie OR 615,237 11/18/85 300 Salem OR 528,895 08/15/86 300 Connellsville PA 180,067 12/31/86 300 Waynesburg PA 128,132 03/12/90 300 Pierre SD 397,527 03/06/86 300 Memphis TN 477,195 08/28/85 300 Nashville TN 377,774 09/30/86 300 Athens TX 263,602 03/10/87 300 Bedford TX 372,803 09/30/86 300 Beeville TX 1,750 11/20/97 300 Brownwood TX 1,400 11/20/97 300 Crockett TX 1,450 11/20/97 300 Dallas TX 608 12/12/97 300 Dallas TX 284,518 01/17/86 300 El Campo TX 51,085 06/23/75 300 Ennis TX 252,833 12/20/85 300 Fort Worth TX 259,682 02/03/88 300 Ft. Worth TX 135,277 04/20/89 300 Gainesville TX 135,546 12/22/87 300 Hillsboro TX 122,171 12/22/87 300 Houston TX 129,890 12/22/87 300 Houston TX 129,334 11/14/89 300 Killeen TX 143,958 05/17/88 300 League City TX 108,748 10/07/88 300 Lufkin TX 147,729 03/25/88 300 Mesquite TX 51,480 03/30/88 300 Mesquite TX 122,063 01/07/87 300 Mexia TX 134,486 12/21/89 300 New Braunfels TX 258,498 12/03/86 300 Orange TX 149,458 07/24/87 300 Plainview TX 135,683 12/22/87 300 Port Lavaca TX 132,227 05/23/89 300 Porter TX 219,619 05/29/87 300 Rowlett TX 156,098 03/26/87 300 Sealy TX 119,484 10/29/87 300 Stafford TX 113,449 06/25/91 300 Page 119 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Restaurants (continued) - ----------------------- Temple TX 302,505 291,414 None None Vidor TX 90,618 420,124 None None Waxahachie TX 326,935 726,137 None None Cedar City UT 130,000 296,544 None None Orem UT 516,129 1,004,608 None None Sandy UT 635,945 884,792 None None Norfolk VA 251,207 575,250 None 12,983 Virginia Beach VA 314,790 699,161 None None Auburn WA 301,595 669,852 None None Marysville WA 276,273 613,613 None None Oak Harbor WA 275,940 612,874 None None Redmond WA 610,334 1,262,103 None None Tacoma WA 198,857 921,947 None None Tacoma WA 255,000 718,614 None None Grafton WI 149,778 332,664 None None Monroe WI 193,130 428,947 None None Portage WI 199,605 443,328 None None Shawano WI 205,730 456,932 None None Sturgeon Bay WI 214,865 477,221 None None Oak Hill WV 85,860 398,069 None None Laramie WY 210,000 466,417 None None Riverton WY 216,685 481,267 None None Sheridan WY 117,160 543,184 None None Shoe Stores - ----------- Houston TX 1,096,376 2,300,622 None None Video Rental - ------------ Birmingham AL 392,795 864,933 None None Tampa FL 401,874 933,678 None None Brunswick GA 290,369 788,633 None None Norcross GA 431,284 723,347 None None Topeka KS 285,802 966,207 None None Forest Park OH 328,187 921,232 None None Franklin OH 337,572 774,654 None None Tulsa OK 318,441 1,004,399 None None Columbia TN 466,469 716,358 None None Hendersonville TN 333,677 938,517 None None Page 120 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Restaurants (continued) - ----------------------- Temple TX 302,505 291,414 593,919 Vidor TX 90,618 420,124 510,742 Waxahachie TX 326,935 726,137 1,053,072 Cedar City UT 130,000 296,544 426,544 Orem UT 516,129 1,004,608 1,520,737 Sandy UT 635,945 884,792 1,520,737 Norfolk VA 251,207 588,233 839,440 Virginia Beach VA 314,790 699,161 1,013,951 Auburn WA 301,595 669,852 971,447 Marysville WA 276,273 613,613 889,886 Oak Harbor WA 275,940 612,874 888,814 Redmond WA 610,334 1,262,103 1,872,437 Tacoma WA 198,857 921,947 1,120,804 Tacoma WA 255,000 718,614 973,614 Grafton WI 149,778 332,664 482,442 Monroe WI 193,130 428,947 622,077 Portage WI 199,605 443,328 642,933 Shawano WI 205,730 456,932 662,662 Sturgeon Bay WI 214,865 477,221 692,086 Oak Hill WV 85,860 398,069 483,929 Laramie WY 210,000 466,417 676,417 Riverton WY 216,685 481,267 697,952 Sheridan WY 117,160 543,184 660,344 Shoe Stores - ----------- Houston TX 1,096,376 2,300,622 3,396,998 Video Rental - ------------ Birmingham AL 392,795 864,933 1,257,728 Tampa FL 401,874 933,678 1,335,552 Brunswick GA 290,369 788,633 1,079,002 Norcross GA 431,284 723,347 1,154,631 Topeka KS 285,802 966,207 1,252,009 Forest Park OH 328,187 921,232 1,249,419 Franklin OH 337,572 774,654 1,112,226 Tulsa OK 318,441 1,004,399 1,322,840 Columbia TN 466,469 716,358 1,182,827 Hendersonville TN 333,677 938,517 1,272,194 Page 121 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Restaurants (continued) - ----------------------- Temple TX 125,561 06/26/91 300 Vidor TX 43,937 02/10/95 300 Waxahachie TX 91,403 06/25/91 300 Cedar City UT 86,332 06/25/91 300 Orem UT 38,299 02/09/95 300 Sandy UT 92,753 06/25/91 300 Norfolk VA 100,324 06/26/91 300 Virginia Beach VA 33,513 02/09/95 300 Auburn WA 200,621 11/27/85 300 Marysville WA 170,562 09/25/78 300 Oak Harbor WA 56,384 11/08/72 234 Redmond WA 183,910 04/15/77 300 Tacoma WA 159,237 12/09/76 300 Tacoma WA 1,058,040 12/08/83 180 Grafton WI 382,974 12/13/85 300 Monroe WI 408,136 09/13/85 300 Portage WI 292,092 07/07/86 300 Shawano WI 355,208 03/18/86 300 Sturgeon Bay WI 352,495 04/28/86 300 Oak Hill WV 247,052 08/08/86 300 Laramie WY 348,593 08/18/86 300 Riverton WY 136,047 12/28/87 300 Sheridan WY 211,231 10/15/87 300 Shoe Stores - ----------- Houston TX 26,745 09/05/97 300 Video Rental - ------------ Birmingham AL 10,029 09/30/97 300 Tampa FL 1,547 12/23/97 300 Brunswick GA 1,306 12/31/97 300 Norcross GA 5,973 10/01/97 300 Topeka KS 1,604 12/19/97 300 Forest Park OH 4,580 11/14/97 300 Franklin OH 1,286 12/30/97 300 Tulsa OK 11,660 09/26/97 300 Columbia TN 8,306 09/26/97 300 Hendersonville TN 1,557 12/10/97 300 Page 122 Cost Capitalized Subsequent Initial Cost to Company to Acquisition ----------------------- ---------------- Buildings, Improvements and Description Acquisition Carrying (Note 1) Land Fees Improvements Costs - ------------------- --------- ----------- ------------ ----- Video Rental (continued) - ------------------------ Jackson TN 381,076 857,261 None None Murfreesboro TN 406,056 885,984 None None Smyrna TN 302,372 836,180 None None Austin TX 407,910 885,003 None None Beaumont TX 293,919 832,019 None None Lubbock TX 266,805 857,312 None None Woodway TX 372,487 835,198 None None Hampton VA 373,481 835,978 None None Other Properties - ---------------- Mesa AZ 271,754 1,259,910 27,961 None Phoenix AZ 322,708 1,496,143 197,440 10,462 Chino CA 53,271 102,748 None None Escondido CA 332,500 904,690 164,176 61,140 Fresno CA 428,900 3,434,562 None None Paramount CA 86,400 278,827 None None San Diego CA 3,745,000 8,885,351 None None San Diego CA 2,485,160 8,697,822 None None San Diego CA 5,797,411 15,473,497 None None Humble TX 106,000 545,518 None None Chesapeake VA 144,014 649,869 None 11,754 Other None 398,370 None 28,079 ----------- ----------- ------- ------- 214,342,224 484,634,653 491,277 329,292 =========== =========== ======= ======= See accompanying Independent Auditors' Report Page 123 Gross Amount at Which Carried at Close of Period (Notes 2, 3 and 5) Buildings, Improvements and Description Acquisition (Note 1) Land Fees Total - ------------------- ------------ ------------ ------------ Video Rental (continued) - ------------------------ Jackson TN 381,076 857,261 1,238,337 Murfreesboro TN 406,056 885,984 1,292,040 Smyrna TN 302,372 836,180 1,138,552 Austin TX 407,910 885,003 1,292,913 Beaumont TX 293,919 832,019 1,125,938 Lubbock TX 266,805 857,312 1,124,117 Woodway TX 372,487 835,198 1,207,685 Hampton VA 373,481 835,978 1,209,459 Other Properties - ---------------- Mesa AZ 271,754 1,287,871 1,559,625 Phoenix AZ 322,708 1,704,045 2,026,753 Chino CA 53,271 102,748 156,019 Escondido CA 332,500 1,130,006 1,462,506 Fresno CA 428,900 3,434,562 3,863,462 Paramount CA 86,400 278,827 365,227 San Diego CA 3,745,000 8,885,351 12,630,351 San Diego CA 2,485,160 8,697,822 11,182,982 San Diego CA 5,797,411 15,473,497 21,270,908 Humble TX 106,000 545,518 651,518 Chesapeake VA 144,014 661,623 805,637 Other None 426,449 426,449 ------------ ------------ ------------ 214,342,224 485,455,222 699,797,446 ============ ============ ============ Page 124 Life on which in latest Income Accumulated Statement Description Depreciation Date of Date is Computed (Note 1) (Note 4) Construction Acquired (in Months) - ------------------- ------------ ------------ -------- ----------- Video Rental (continued) - ------------------------ Jackson TN 9,948 09/26/97 300 Murfreesboro TN 10,283 09/26/97 300 Smyrna TN 9,701 09/02/97 300 Austin TX 1,466 12/01/97 300 Beaumont TX 9,659 09/05/97 300 Lubbock TX 12,792 08/29/97 300 Woodway TX 1,385 12/16/97 300 Hampton VA 1,385 12/19/97 300 Other Properties - ---------------- Mesa AZ 695,875 06/30/86 300 Phoenix AZ 840,900 06/30/86 300 Chino CA 101,811 01/07/75 300 Escondido CA 406,731 01/11/84 300 Fresno CA 3,434,562 10/29/82 180 Paramount CA 262,994 11/22/83 180 San Diego CA 4,807,435 03/25/86 300 San Diego CA 3,204,038 09/19/86 300 San Diego CA 5,269,070 08/05/87 300 Humble TX 408,806 03/25/86 300 Chesapeake VA 353,714 12/22/86 300 Other 274,364 ----------- 152,206,136 =========== Page 125 REALTY INCOME CORPORATION AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION Note 1. Eight hundred twenty three of the properties are single unit retail outlets. The Trade Center, Silverton Business Center and Empire Business Center properties are multi-tenant commercial properties. All properties were acquired on an all cash basis except one; no encumbrances were outstanding for the periods presented. Note 2. The aggregate cost for federal income tax purposes is $636,613,875. Note 3. Reconciliation of total real estate carrying value for the three years ended December 31, 1997 are as follows: 1997 1996 1995 ----------- ----------- ----------- Balance at Beginning of Period 564,539,993 515,425,548 450,703,481 Additions During Period: Acquisitions 142,286,618 55,667,447 65,392,559 Equipment 0 58,000 0 Improvements, Etc. 16,683 37,303 447,720 Other (Leasing Costs) 36,266 0 50,126 ----------- ---------- ---------- Total Additions 142,339,567 55,762,750 65,890,405 ----------- ---------- ---------- Deductions During Period: Cost of Real Estate Sold 6,917,114 6,054,238 1,162,098 Cost of Equipment Sold 0 0 0 Other (Fully Amortized Commissions) 0 15,067 6,240 Other (Provision for Impairment Losses) 165,000 579,000 0 ----------- ---------- ---------- Total Deductions 7,082,114 6,648,305 1,168,338 ----------- ---------- ---------- Balance at Close of Period 699,797,446 564,539,993 515,425,548 =========== ========== ========== Note 4. Reconciliation of accumulated depreciation for the three years ended December 31, 1997 are as follows: Balance at Beginning of Period 138,307,408 126,062,055 112,168,982 Additions During Period - Provision for Depreciation 17,465,979 15,364,936 14,462,491 Page 126 Deductions During Period: Accumulated Depreciation of Real Estate Sold 3,567,251 3,104,516 563,178 Other (Fully Amortized Commissions) 0 15,067 6,240 ----------- ----------- ----------- Balance at Close of Period 152,206,136 138,307,408 126,062,055 =========== =========== =========== Note 5. In 1997, a provision for impairment loss was made on two vacant properties in Riverside, CA and Irving, TX and a Golden Corral in McMinnville, OR which was sold in 1997. In 1996, a provision for impairment loss was made on the Automall in Phoenix, AZ; the Automall in Glendale, AZ; the Stone Meadow Center in Spring, TX and the Long John Silvers in Lexington, SC. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - --------------------------------------------------------- The corporation has had no disagreements with its independent auditors' on accountancy or financial disclosure. PART III ======== ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ The information set forth under the captions Director Nominees and Officers Of The Company and Compaliance With Federal Securities Laws in the definitive proxy statement for the Annual Meeting of Shareholders presently scheduled to be held on May 5, 1998, to be filed pursuant to Regulation 14A. ITEM 11: EXECUTIVE COMPENSATION - -------------------------------- The information set forth under the caption Executive Compensation in the definitive proxy statement for the Annual Meeting of Shareholders presently scheduled to be held on May 5, 1998, to be filed pursuant to Regulation 14A. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------- The information set forth under the caption Security Ownership Of Certain Beneficial Owners And Management in the definitive proxy Page 127 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (continued) - ------------------------------------------------------------- statement for the Annual Meeting of Shareholders presently scheduled to be held on May 5, 1998, to be filed pursuant to Regulation 14A. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- Not applicable. 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 (see Item 8) a. Independent Auditors' Report b. Consolidated Balance Sheets, December 31, 1997 and 1996 c. Consolidated Statements of Income, Years ended December 31, 1997, 1996 and 1995 d. Consolidated Statements of Stockholders' Equity, Years ended December 31, 1997, 1996 and 1995 e. Consolidated Statements of Cash Flows, Years ended December 31, 1997, 1996 and 1995 f. Notes to Consolidated Financial Statements g. Consolidated Quarterly Financial Data (unaudited) for 1997 and 1996 2. Financial Statement Schedule (see Item 8) Schedule III - Real Estate and Accumulated Depreciation Schedules not Filed: All schedules, other than those indicated in the Table of Contents, have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. Page 128 3. Exhibits 2.1 Agreement and Plan of Merger dated as of May 15, 1997 between Realty Income Corporation, a Delaware corporation, and Realty Income Maryland, Inc., a Maryland corporation (incorporated by reference to the Company's Form 8-B12B dated July 29, 1997 ("Form 8-B") and incorporated herein by reference) 3.1 Articles of Incorporation of the Company (filed) as Appendix B to the Company's Proxy Statement dated March 28, 1997 ("1997 Proxy Statement") and incorporated herein by reference) 3.2 Bylaws of the Company (filed as Appendix C to the Company's 1997 Proxy Statement and incorporated herein by reference) 4.1 Pricing Committee Resolutions and Form of 7.75% Notes due 2007 (filed as Exhibit 4.2 to the Company's Form 8-K dated May 5, 1997 and incorporated herein by reference) 4.2 Indenture dated as of May 6, 1997 between the Company and The Bank of New York (filed as Exhibit 4.1 to the Company's Form 8-K dated May 5, 1997 and incorporated herein by reference) 4.3 First Supplemental Indenture dated as of May 28, 1997, between the Company and The Bank of New York (filed as Exhibit 4.3 to the Company's Form 8-B and incorporated herein by reference) 10.1 Revolving Credit Agreement (filed as Exhibit 99.2 to the Company's Form 8-K dated December 16, 1994 and incorporated herein by reference) 10.2 First Amendment to the Revolving Credit Agreement (filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference) 10.3 Second Amendment to the Revolving Credit Agreement (filed as Exhibit 99.2 to the Company's Form 8-K dated December 19, 1995 and incorporated herein by reference) Page 129 10.4 Third Amendment to the Revolving Credit Agreement(filed as Exhibit 10.4 to the Company's Form 10-K dated December 31, 1996 and incorporated herein by reference) 10.5 Fourth Amendment to the Revolving Credit Agreement(filed as Exhibit 10.5 to the Company's Form 10-Q dated March 31, 1997 and incorporated herein by reference) 10.6 Amended and Restated Revolving Credit Agreement, dated as of November 29, 1994 and restated as of December 30, 1997, filed herein 10.7 1994 Stock Option and Incentive Plan (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (registration number 33-95708) and incorporated herein by reference) 10.8 First Amendment to the 1994 Stock Option and Incentive Plan, dated June 12, 1997 (filed as Exhibit 10.9 to the Company's Form 8-B and incorporated herein by reference) 10.9 Second Amendment to the 1994 Stock Option and Incentive Plan, dated December 16, 1997, filed herein 10.10 Management Incentive Plan, filed herein 10.11 Form of Nonqualified Stock Option Agreement for Independent Directors, filed herein 10.12 Form of Indemnification Agreement entered into between the Company and the executive officers of the Company (filed as Exhibit 10.1 to the Company's Form 8-K dated November 21, 1997 and incorporated herein by reference) 10.13 Form of Indemnification Agreement entered into between the Company and each director on the board of directors of the Company (filed as Exhibit 10.2 to the Company's Form 8-K dated November 21, 1997 and incorporated herein by reference) 10.14 Form of Employment Agreement between the Company and its Executive Officers (incorporated by reference to the Company's Form 8-B12B dated July 29, 1997 and incorporated herein by reference) 21.1 Subsidiaries of the Company as of January 1, 1998, filed herein 24.1 Consent of KPMG Peat Marwick LLP, filed herein Page 130 27 Financial Data Schedule (electronically filed with the Securities and Exchange Commission only) B. Two reports on Form 8-K were filed by the Registrant during the last quarter of the period covered by this report. A report on Form 8-K was dated and filed on October 15, 1997 reporting the issuance of 2,700,000 shares of common stock at a price of $27.00 per share on October 15, 1997. A report on Form 8-K was dated and filed on November 21, 1997 reporting; (i) an indemnification agreement between the Registrant and each executive officer of the Registrant and (ii) an indemnification agreement between the Registrant and each director of the board of directors of the Registrant. A report on Form 8-K filed on February 24, 1998 reporting the issuance of 751,174 shares of common stock on February 23, 1998. Page 131 SIGNATURES Pursuant to the requirements 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. REALTY INCOME CORPORATION By: /s/THOMAS A. LEWIS ------------------------------------ Thomas A. Lewis Vice Chairman of the Board of Directors and Chief Executive Officer Date: March 20, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/WILLIAM E. CLARK ------------------------------------ William E. Clark Chairman of the Board of Directors Date: March 20, 1998 By: /s/THOMAS A. LEWIS ------------------------------------ Thomas A. Lewis Vice Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) Date: March 20, 1998 Page 132 SIGNATURES (continued) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/DONALD R. CAMERON ------------------------------------ Donald R. Cameron Director Date: March 13, 1998 By: /s/ROGER P. KUPPINGER ------------------------------------ Roger P. Kuppinger Director Date: March 17, 1998 By: /s/MICHAEL D. MCKEE ------------------------------------ Michael D. McKee Director Date: March 12, 1998 By: /s/WILLARD H. SMITH JR ------------------------------------ Willard H. Smith Jr Director Date: March 20, 1998 By: /s/RICHARD J. VANDERHOFF ------------------------------------ Richard J. VanDerhoff Director, President and Chief Operating Officer Date: March 20, 1998 Page 133 SIGNATURES (continued) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/GARY MALINO ------------------------------------ Gary Malino Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: March 20, 1998 By: /s/GREGORY J. FAHEY ------------------------------------ Gregory J. Fahey Associate Vice President, Controller Date: March 20, 1998 EXHIBIT INDEX ============= Each Exhibit has Sequentially Exhibit No. Description Numbered Pages - ----------- ----------- ---------------- 10.6 Amended and Restated Revolving Credit Agreement dated as of November 29, 1994 and restated as of December 30, 1997 10.9 Second Amendment to the 1994 Stock Option and Incentive Plan, dated December 16, 1997 10.10 Form of Management Incentive Plan 10.11 Form of Nonqualified Stock Option Agreement for Independent Directors 21.1 Subsidiaries of the Company as of January 1, 1998 24.1 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule Page 134 EX-10.6 2 Exhibit 10.6 CONFORMED COPY AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT dated as of November 29, 1994 and amended and restated as of December 30, 1997 among REALTY INCOME CORPORATION THE BANKS NAMED HEREIN AND THE BANK OF NEW YORK as Agent and Swing Line Bank AND BNY CAPITAL MARKETS, INC. as Arranger TABLE OF CONTENTS ----------------- Page ---- RECITALS.............................................. 1 ARTICLE I DEFINITIONS Section 1.01. Definitions............................ 1 ARTICLE II THE LOANS Section 2.01. The Loans............................. 18 Section 2.02. Procedure for Pro Rata Loans.......... 18 Section 2.03. Pro Rata Notes........................ 19 Section 2.04. Certain Fees.......................... 20 Section 2.05. Cancellation or Reduction of the Commitment............................ 20 Section 2.06. Optional Prepayment................... 21 Section 2.07. Mandatory Prepayment.................. 21 Section 2.08. Procedure for Competitive Loans....... 22 Section 2.09. Competitive Notes..................... 25 Section 2.10. Swing Line Advances................... 25 Section 2.11. Increase in Commitments............... 28 ARTICLE III INTEREST, METHOD OF PAYMENT, CONVERSION, ETC. Section 3.01. Procedure for Interest Rate Determination......................... 29 Section 3.02. Interest on ABR Loans................. 29 Section 3.03. Interest on Eurodollar Loans.......... 30 Section 3.04. Interest on Absolute Rate Competitive Loans..................... 31 Section 3.05. Conversion/Continuance................ 31 Section 3.06. Post Default Interest................. 31 Section 3.07. Maximum Interest Rate................. 32 ARTICLE IV DISBURSEMENT AND PAYMENT Section 4.01. Pro Rata Treatment.................... 32 Page ---- Section 4.02. Method of Payment..................... 32 Section 4.03. Compensation for Losses............... 32 Section 4.04. Withholding, Reserves and Additional Costs................................. 34 Section 4.05. Unavailability........................ 38 ARTICLE V REPRESENTATIONS AND WARRANTIES Section 5.01. Representations and Warranties........ 39 ARTICLE VI CONDITIONS OF LENDING Section 6.01. Conditions to the Availability of the Commitment............................ 46 Section 6.02. Conditions to All Loans............... 47 ARTICLE VII COVENANTS Section 7.01. Affirmative Covenants................. 48 Section 7.02. Negative Covenants.................... 52 Section 7.03. Financial Covenants................... 55 ARTICLE VIII EVENTS OF DEFAULT Section 8.01. Events of Default..................... 56 ARTICLE IX THE AGENT AND THE BANKS Section 9.01. The Agency............................ 59 Section 9.02. The Agent's Duties.................... 59 Section 9.03. Sharing of Payment and Expenses....... 59 Section 9.04. The Agent's Liabilities............... 60 Section 9.05. The Agent as a Bank................... 60 Section 9.06. Bank Credit Decision.................. 60 Section 9.07. Indemnification....................... 61 Section 9.08. Successor Agent....................... 61 ARTICLE X CONSENT TO JURISDICTION Section 10.01. Consent to Jurisdiction.............. 62 Page ---- ARTICLE XI MISCELLANEOUS Section 11.01. APPLICABLE LAW....................... 62 Section 11.02. Set-off.............................. 62 Section 11.03. Expenses............................. 63 Section 11.04. Amendments........................... 63 Section 11.05. Cumulative Rights and No Waiver...... 63 Section 11.06. Notices.............................. 64 Section 11.07. Separability......................... 64 Section 11.08. Assignments and Participations....... 64 Section 11.09. WAIVER OF JURY TRIAL................. 66 Section 11.10. Confidentiality...................... 66 Section 11.11. Indemnity............................ 66 Section 11.12. Extension of Termination Dates; Removal of Banks; Substitutions of Banks................................ 67 Section 11.13. Knowledge of the Company............. 69 Section 11.14. Execution in Counterparts............ 69 TESTIMONIUM.............................................. 69 SIGNATURES............................................... 69 EXHIBITS AND SCHEDULES ---------------------- EXHIBIT A Form of Conversion/Continuance Request EXHIBIT B Form of Pro Rata Loan Request EXHIBIT C-1 Form of Competitive Loan Request EXHIBIT C-2 Form of Notice to Banks EXHIBIT C-3 Form of Competitive Bid EXHIBIT C-4 Form of Competitive Bid Accept/Reject Notice EXHIBIT D-1 Form of Pro Rata Note EXHIBIT D-2 Form of Competitive Note EXHIBIT D-3 Form of Swing Line Note EXHIBIT E Form of Swing Line Advance Request EXHIBIT F-1 Form of Opinion of Latham & Watkins EXHIBIT F-2 Form of Opinion of Michael R. Pfeiffer, General Counsel of the Company EXHIBIT G Form of Property Management Exception Report EXHIBIT H Form of Real Estate Investment Criteria EXHIBIT I Subsidiary Guarantee SCHEDULE 1 Commitments SCHEDULE 5.01(a) Subsidiaries and Joint Ventures of the Company SCHEDULE 5.01(q) ERISA Liabilities SCHEDULE 5.01(r) Intellectual Property AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT ----------------------------------------------- AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT, dated as of November 29, 1994 as amended and restated as of December 30, 1997 (this "Agreement"), among Realty Income Corporation, a Maryland corporation (the "Company"), each of the banks identified on the signature pages hereof (each, a "Bank" and, collectively, the "Banks") and The Bank of New York, as Agent for the Banks (the "Agent") and as the Swing Line Bank with respect to Swing Line Advances (as defined below). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company has requested the Banks to lend up to $150,000,000, subject to increase as provided herein, to the Company on a revolving basis for the acquisition of property in the ordinary course of the Company's business, including related costs and expenses and for the payment of fees and expenses incurred in connection with this Agreement and up to $15,000,000 in Swing Line Advances (as defined herein) for the purposes stated above and for working capital. NOW, THEREFORE, the parties hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. (a) Terms Generally. The definitions ascribed to terms in this Section 1.01 and elsewhere in this Agreement shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The words "hereby", "herein", "hereof", "hereunder" and words of similar import refer to this Agreement as a whole (including any exhibits and schedules hereto) and not merely to the specific section, paragraph or clause in which such word appears. All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all references to "dollars" or "$" shall be deemed references to the lawful money of the United States of America. Page 1 (b) Accounting Terms. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that, for purposes of determining compliance with any covenant set forth in Article VII which requires financial computations, such terms shall be construed in accordance with GAAP as in effect on the Effective Date applied on a basis consistent with the construction thereof applied in preparing the Company's audited financial statements referred to in Section 5.01(h). In the event there shall occur a change in GAAP which but for the foregoing proviso would affect the computation used to determine compliance with any covenant set forth in Article VII which requires financial computations, the Company and the Banks agree to negotiate in good faith in an effort to agree upon an amendment to this Agreement that will permit compliance with such covenant to be determined by reference to GAAP as so changed while affording the Banks the protection afforded by such covenant prior to such change (it being understood, however, that such covenant shall remain in full force and effect in accordance with its existing terms pending the execution by the Company and the Banks of any such amendment). (c) Other Terms. The following terms shall have the meanings ascribed to them below or in the Sections of this Agreement indicated below: "ABR Loans" shall mean Loans which bear interest at a rate based upon the Base Rate and in the manner set forth in Section 3.02. "Absolute Rate Competitive Loan" shall mean a Competitive Loan bearing interest at the Competitive Rate in the manner set forth in Section 3.04. "Adverse Environmental Condition" shall mean any of the matters referred to in clauses (i) or (ii) of the definition of Environmental Claim. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control another Person if such first Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through ownership of stock, by contract or otherwise. "Agent" shall have the meaning given to such term in the preamble of this Agreement and shall also include any successor agent hereunder. Page 2 "Applicable Margin" shall mean the margin set forth in the following chart applicable to the Pricing Level then in effect: Pricing Level Applicable LIBOR Margin ------------- ----------------------- I 0.575% II 0.650% III 0.750% IV 0.850% V 1.150% "Pricing Level I" shall be applicable for so long as the Company's Debt Rating is better than or equal to A-/A3; "Pricing Level II" shall be applicable for so long as the Company's Debt Rating is lower than A-/A3 but better than or equal to BBB+/Baa1; "Pricing Level III" shall be applicable for so long as the Company's Debt Rating is lower than BBB+/Baa1 but better than or equal to BBB/Baa2; "Pricing Level IV" shall be applicable for so long as the Company's Debt Rating is lower than BBB/Baa2 but better than or equal to BBB-/Baa3; "Pricing Level V" shall be applicable for so long as the Company's Debt Rating is lower than BBB-/Baa3 or if the Company does not have a Debt Rating. Changes in the applicable Pricing Level shall be effective as of the first day of the calendar quarter following the receipt by the Agent of a letter or letters from the applicable Rating Agencies evidencing a change in the Company's Debt Rating. "Assignee" has the meaning ascribed to such term in Section 11.08(c). "Available Commitment" shall mean (a) on any date prior to the Termination Date, an amount equal to the remainder of (i) the Total Commitment on such date minus (ii) the aggregate outstanding principal amount of Loans and Swing Line Advances on such date and (b) on and after the Termination Date, $0. "Bank" shall have the meaning given to such term in the preamble of this Agreement and shall also include any other financial institution which pursuant to the provisions hereof becomes a party to this Agreement. "Base LIBOR" shall mean, with respect to any Interest Period for a Eurodollar Loan, the rate reported to the Agent at which U.S. dollar deposits are offered to The Bank of New York by leading banks in the London Interbank deposits market at approximately 11:00 A.M., London time, on the second full Business Day preceding the first day of such Interest Period in an amount substantially equal to the respective Reference Amounts for a term equal to such Interest Period. Page 3 "Base Rate" shall mean a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall on any day be equal to the higher of: (a) the rate of interest publicly announced by the Agent from time to time as its prime commercial loan rate in effect on such day; and (b) the sum (adjusted to the nearest 1/4 of 1% or, if there is no nearest single 1/4 of 1%, to the next higher 1/4 of 1%) of (i) 1/2 of 1% per annum and (ii) the Federal Funds Rate. "Borrowing Date" shall mean the date set forth in each Loan Request as the date upon which the Company desires to borrow Loans pursuant to the terms of this Agreement. "Business Day" shall mean (i) with respect to any ABR Loan or any payment of the Facility Fee, any day except a Saturday, Sunday or other day on which commercial banks in New York City or Los Angeles are authorized by law to close and (ii) with respect to any Eurodollar Loan, any day on which commercial banks are open for domestic and international business (including dealings in U.S. dollar deposits) in London, New York City and Los Angeles. "Capital Lease" shall mean, with respect to any Person, any obligation of such Person to pay rent or other amounts under a lease with respect to any property (whether real, personal or mixed) acquired or leased by such Person that is required to be accounted for as a liability on a balance sheet of such Person in accordance with GAAP. "Capital Lease Obligations" shall mean the obligation of any Person to pay rent or other amounts under a Capital Lease. "Change of Control" shall mean any person or group of Persons (within the meaning of Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934, as amended) who shall become the beneficial owner, directly or indirectly, of capital stock of the Company representing 50% or more of the voting power of the Company or otherwise enabling such Person or group of Persons to exercise effective control over the management of the Company. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Commitment" of any Bank shall mean, in the case of each Bank (i) prior to any such Bank's Termination Date, the amount set forth opposite such Bank's name under the heading "Commitment" on Schedule 1 hereto, or set forth in the assignment agreement executed by such Bank if it is not a Bank on the date hereof, as such amount may be adjusted from time to time pursuant to assignments of such Page 4 Bank and as such amount may be reduced from time to time pursuant to Section 2.05 and (ii) after such Bank's Termination Date, zero. "Competitive Accept/Reject Notice" has the meaning ascribed to such term in Section 2.08(d). "Competitive Bid" means an offer by a Bank to make a Competitive Loan pursuant to Section 2.08(c). "Competitive Bid Rate" means, with respect to any Competitive Bid, (i) in the case of a Eurodollar Competitive Loan, the sum of the Competitive Margin plus LIBOR, and (ii) in the case of a Absolute Rate Competitive Loan, the fixed rate of interest at which the Bank making the Competitive Bid offers thereby to make a Competitive Loan. "Competitive Loan" has the meaning ascribed to such term in Section 2.01. "Competitive Loan Request" means a request for Competitive Bids made pursuant to Section 2.08(b). "Competitive Margin" means, with respect to any Eurodollar Competitive Loan for any Interest Period, the margin (expressed as a percentage rate per annum in the form of a decimal fraction to no more than four decimal places) to be added to or subtracted from LIBOR, in order to determine the interest rate applicable to such Loan during such Interest Period, as specified in the related Competitive Bid and the Competitive Accept/Reject Notice. "Competitive Notes" means, collectively, promissory notes of the Borrower evidencing Competitive Loans, each substantially in the form of Exhibit D-2. "Competitive Rate" means, with respect to any Absolute Rate Competitive Loan, the fixed rate of interest (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) for such Loan, as specified in the related Competitive Bid and Competitive Accept/Reject Notice. "Compliance Date" shall mean each of the date of this Agreement, each Borrowing Date, each Conversion Date and the date of each delivery by the Company of a certificate requiring the Company to certify as to the accuracy of the representations and warranties contained in Article V. "Consolidated Depreciation and Amortization" shall mean, at any date of determination, "Depreciation and Amortization" or the similar item, determined on a consolidated basis for the Company and its Subsidiaries, as shown on the most recent consolidated statement of income for the Company and its Subsidiaries which has been delivered to the Agent pursuant to Section 7.01(a). Page 5 "Consolidated Funds from Operations" shall mean, for any period, Consolidated Net Income excluding gain or loss from debt restructurings or sales of properties plus provision for impairment losses, plus Consolidated Depreciation and Amortization, and after adjustments for unconsolidated partnerships and joint ventures, determined on a consolidated basis for the Company and its Subsidiaries, as shown on the most recent consolidated statement of cash flows for the Company and its Subsidiaries which has been delivered to the Agent pursuant to Section 7.01(a). "Consolidated Interest Expense" shall mean, for any period, total interest expense (including that attributable to Capital Leases in accordance with GAAP) of the Company and its Subsidiaries, determined on a consolidated basis, in accordance with GAAP with respect to all outstanding Indebtedness of the Company and its Subsidiaries, including, without limitation, paid-in-kind (PIK) interest and all net costs under Interest Rate Protection Agreements. "Consolidated Net Income" shall mean, for any period, "Net Income" or the similar item, determined on a consolidated basis for the Company and its Subsidiaries, as shown on the most recent consolidated statement of income for the Company and its Subsidiaries which has been delivered to the Agent pursuant to Section 7.01(a). "Consolidated Stockholders' Equity" shall mean, for any period, "Total Stockholders' Equity" or the similar item, determined on a consolidated basis for the Company and its subsidiaries, as shown on the most recent consolidated balance sheet for the Company and its Subsidiaries which has been delivered to the Agent pursuant to Section 7.01(a). "Consolidated Tangible Stockholders' Equity" shall mean Consolidated Stockholders' Equity less all intangible assets of the Company and its Subsidiaries. For purposes of the foregoing, "intangible assets" means goodwill, patents, trade names, trademarks, copyrights, franchises, organization expenses and any other assets that are properly classified as intangible assets in accordance with GAAP. "Consolidated Total Assets" shall mean, at any date of determination, "Total Assets" or the similar item, determined on a consolidated basis for the Company and its Subsidiaries, as shown on the most recent consolidated balance sheet for the Company and its Subsidiaries which has been delivered to the Agent pursuant to Section 7.01(a). "Consolidated Total Indebtedness" shall mean total Indebtedness, determined on a consolidated basis for the Company and its Subsidiaries, as shown on the most recent consolidated balance sheet for the Company and its Subsidiaries which has been delivered to the Agent pursuant to Section 7.01(a). Page 6 "Consolidated Total Liabilities" shall mean, at any date of determination, "Total Liabilities" or the similar item, determined on a consolidated basis for the Company and its Subsidiaries, as shown on the most recent consolidated balance sheet for the Company and its Subsidiaries which has been delivered to the Agent pursuant to Section 7.01(a). "Conversion/Continuance Date" shall mean the date on which a conversion of interest rates on outstanding Loans, pursuant to a Conversion/Continuance Request, shall take effect. "Conversion/Continuance Request" shall mean a request by the Company to convert or continue the interest rate on all or portions of outstanding Loans pursuant to the terms hereof, which shall be substantially in the form of Exhibit A and shall specify, with respect to such outstanding Loans, (i) the requested Conversion/Continuance Date, which shall be not less than three Business Days after the date of such Conversion/Continuance Request, (ii) the aggregate amount of the Loans, from and after the Conversion/Continuance Date, which are to bear interest as ABR Loans or Eurodollar Loans and (iii) if any Loans are Eurodollar Loans, the term of the Interest Periods therefor, if any. "Covered Tax" means any Tax that is not an Excluded Tax. "Credit Documents" shall mean this Agreement and the Notes. "Default" shall mean any event or circumstance which, with the giving of notice or the passage of time, or both, would become an Event of Default. "Debt Rating" shall mean the highest rating published by at least two of the three Rating Agencies with respect to the senior unsecured debt of the Company, provided, that if no two Rating Agencies have published the same rating with respect to the Company's senior unsecured debt, the Debt Rating shall be the rating that is at the middle of the three published ratings. "Effective Date" shall have the meaning ascribed to such term in Section 6.01. "Environmental Claim" shall mean any notice, request for information, action, claim, order, proceeding, demand or direction (conditional or otherwise) based on, relating to or arising out of (i) any violation of any Environmental Law by the Company, any person acting on behalf of the Company or any subsidiary of the Company, or (ii) any liabilities under any Environmental Law arising out of or otherwise in respect of any act, omission, event, condition or circumstance existing or occurring in connection with the Company and its Subsidiaries, including without limitation liabilities relating to the release of hazardous substances (whether on-site or off-site), Page 7 any claim by any third party (including, without limitation, tort suits for personal or bodily injury, tangible or intangible property damage, damage to the environment, nuisance and injunctive relief), fines, penalties or restrictions, or the transportation, storage, treatment or disposal of any Hazardous Substances. "Environmental Law" means (i) any applicable federal, state, foreign and local law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, legal doctrine, order, judgment, decree, injunction, requirement or agreement with any governmental entity, (x) relating to the protection, preservation or restoration of the environment, (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety, or (y) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances, in each case as amended and as now or hereafter in effect. The term Environmental Law includes, without limitation, the federal Comprehensive Environmental Response Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the federal Water Pollution Control Act of 1972, the federal Clean Air Act, the federal Clean Water Act, the federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the federal Solid Waste Disposal and the federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act of 1970, each as amended and as now or hereafter in effect (collectively, "Environmental Ordinances"), and (ii) any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Substance. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean a corporation, partnership or other entity which is considered one employer with the Company under Section 4001 of ERISA or Section 414(b), (c) or (m) of the Code. "Eurodollar Competitive Loan" means a Competitive Loan that bears interest by reference to LIBOR and in the manner set forth in Section 3.03. "Eurodollar Loans" means, collectively, Eurodollar Pro Rata Loans and Eurodollar Competitive Loans. "Eurodollar Pro Rata Loans" shall mean Pro Rata Loans which bear interest at a rate based upon Base LIBOR and in the manner set forth in Section 3.03. Page 8 "Eurodollar Reserve Percentage" shall mean for any day, that percentage, expressed as a decimal, which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including any marginal, supplemental or emergency reserve requirements) for a member bank of the Federal Reserve System in New York City with deposits exceeding one billion dollars in respect of eurocurrency funding liabilities. LIBOR shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. "Event of Default" shall mean any of the events described in Section 8.01. "Excluded Asset Sales" shall mean, during each fiscal year, the sale, lease (not entered into in the ordinary course of business), transfer or disposal of assets, the aggregate proceeds of which, in one or more transactions, are less than $20,000,000. "Excluded Tax" means any of the following taxes, levies, imposts, duties, deductions, withholdings or charges, and all liabilities with respect thereto: (i) Taxes imposed on the net income of a Bank, the Agent, Participant or Assignee (including without limitation branch profits taxes, minimum taxes and taxes computed under alternative methods, at least one of which is based on net income (collectively referred to as "net income taxes") by (A) the jurisdiction under the laws of which such Bank, the Agent, Participant or Assignee is organized or any political subdivision thereof, (B) the jurisdiction of such Bank's, Participant's, Assignee's or the Agent's applicable lending office or any political subdivision thereof or (C) any jurisdiction in which the Bank, the Agent, Participant or Assignee is doing business (other than solely as a result of actions contemplated or required by this Agreement), (ii) any Taxes to the extent that they are in effect and would apply to a payment to such Bank or the Agent, as applicable, as of the Closing Date, or as of the date such Person becomes a Bank, in the case of any Participant or Assignee pursuant to Section 11.08, (iii) any Taxes resulting from a failure to take the actions, if any, required by subsection 4.04(a)(iv), (iv) any Taxes to the extent of any credit or other Tax benefit which, in the reasonable good faith judgment of such Bank, Participant, Assignee or the Agent, as the case may be, is available to such Bank, Participant, Assignee or the Agent, as applicable, as a result thereof and is allocable to the transactions contemplated by this Agreement, (v) any Taxes imposed on or measured by the overall net income of any Bank by the United States of America or any political subdivision or taxing authority thereof or therein, or (vi) any Taxes that would not have been imposed but for the failure by the Agent or such Bank, Participant or Assignee as applicable to provide and keep current any certification or other documentation required to qualify for an exemption from or reduced rate of any Tax. Page 9 "Facility Fee" shall have the meaning ascribed to such term in Section 2.04(a). "Facility Fee Rate" with respect to any Facility Fee payment shall mean the facility fee rate set forth in the following chart applicable to the Pricing Level (determined as set forth under "Applicable Margin" above including the receipt by the Agent of a letter or letters evidencing the Company's Debt Rating) in effect on the date on which such Facility Fee payment is due: Pricing Level Facility Fee ------------- ------------ I 0.125% II 0.150% III 0.150% IV 0.150% V 1.250% "Federal Funds Rate" for any day shall mean the rate (rounded to the nearest 1/16 of 1% or, if there is no single nearest 1/16 of 1%, to the next higher 1/16 of 1%) on such day for Federal Funds as published by the Board of Governors of the Federal Reserve System in "Statistical Release H.15 (519), Selected Interest Rates", or any successor publication, under the heading "Federal Funds (Effective)". In the event that such rate or such publication is not published with respect to such day the Federal Funds Rate on such day shall be the "Federal Funds/Effective Rate" as posted by the Federal Reserve Bank of New York for that day in its publication "Composite Closing Quotations for U.S. Government Securities". The Federal Funds Rate for Saturdays, Sundays and any other day on which the Federal Reserve Bank of New York is closed shall be the Federal Funds Rate as in effect for the next preceding day for which such rates are published or posted, as the case may be. "GAAP" shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entities as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. "Guarantee" by any person shall mean any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such Person, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Page 10 Indebtedness, (ii) to purchase property, securities or services for the purpose of assuring the holder of such Indebtedness of the payment of such Indebtedness, or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness (and "Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings correlative to the foregoing); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Hazardous Substance" means any substance presently or hereafter listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any Environmental Ordinance, whether by type or by quantity, including any substance containing any such substance as a component. Hazardous Substance includes, without limitation, any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos, asbestos containing material, urea formaldehyde foam insulation, lead and polychlorinated biphenyl. "Increase Notice" shall have the meaning ascribed to such term in Section 2.11. "Indebtedness" of any Person shall mean, without duplication, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (including all obligations, contingent or otherwise, of such Person in connection with letter of credit facilities, bankers' acceptance facilities, Interest Rate Protection Agreements or other similar facilities including currency swaps) other than indebtedness to trade creditors and service providers incurred in the ordinary course of business, (b) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, (c) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (d) all Capital Lease Obligations of such Person, (e) all Indebtedness referred to in clauses (a), (b), (c) or (d) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, (f) all preferred stock issued by such Person which is redeemable, prior to the full Page 11 satisfaction of the Company's obligations under the Credit Documents (including repayment in full of the Loans and all interest accrued thereon), other than at the option of such Person, valued at the greater of its voluntary or involuntary liquidation preference plus accumulated and unpaid dividends and (g) all Indebtedness of others Guaranteed by such Person. For purposes of this Agreement, the amount of any Indebtedness under clauses (c) and (e) shall be the lesser of (x) the principal amount of such Indebtedness and (y) the value of the property subject to the Lien referred to therein. For purposes of this Agreement tenant security deposits shall not be deemed to be Indebtedness. "Initial Loan" shall mean the first Loan which is made pursuant to the terms hereof. "Interest Period" shall mean each one, two, three or six- month period, in the case of Eurodollar Loans; such period being the one selected by the Company in a Pro Rata Loan Request or Competitive Loan Request and pursuant to Section 3.03 hereof and commencing on the date the relevant loan is made or the last day of the current Interest Period, as the case may be. "Interest Rate Protection Agreements" shall mean any interest rate swap agreement, interest rate cap agreement or similar arrangement used by a Person to fix or cap a floating rate of interest on Indebtedness to a negotiated maximum rate or amount. "Key Management" shall mean Thomas A. Lewis, Richard J. VanDerhoff, Gary M. Malino, Michael R. Pfeiffer and Richard G. Collins. "Leverage Ratio" shall mean the ratio of Consolidated Total Indebtedness to Consolidated Tangible Stockholders' Equity. "Lien" shall mean, with respect to any asset, any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset. "LIBOR" shall mean with respect to any Interest Period the rate per annum (rounded to the nearest 1/16 of 1% or, if there is no nearest single 1/16 of 1%, to the next higher 1/16 of 1%) determined pursuant to the following formula: Base LIBOR ----------------------------------- LIBOR = (1 - Eurodollar Reserve Percentage) "Loan Request" shall mean either a Pro Rata Loan Request or a Competitive Loan Request. "Loans" shall mean, collectively, Pro Rata Loans and Competitive Loans outstanding hereunder from time to time but shall not include Swing Line Advances. Page 12 "Material Adverse Change" shall mean a material adverse change in the business, properties, condition (financial or otherwise) or operations of the Company and its Subsidiaries (including the partnerships which were merged into the Company), taken as a whole since December 31, 1996. "Material Adverse Effect" shall mean (i) any material adverse effect on the business, properties, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole, from and after the date of any determination, (ii) any material adverse effect on the ability of the Company to perform its obligations hereunder and under the Credit Documents, or (iii) any adverse effect on the legality, validity, binding effect or enforceability of this Agreement or the Notes. "Maturity Date" means, with respect to a Competitive Loan, the date for repayment of such Competitive Loan, which date shall be not less than seven days after the Borrowing Date and not more than (i) 180 days after the Borrowing Date, in the case of an Absolute Rate Competitive Loan, or (ii) six months after the Borrowing Date, in the case of a Eurodollar Competitive Loan, and in any event shall not be later than the Termination Date to be in effect on the Borrowing Date. "Net Cash Proceeds" shall mean (i) when used in respect of any sale or disposition of assets of the Company or any Subsidiary, the gross cash proceeds received by the Company, or the relevant Subsidiary from such sale or disposition less (x) the costs of sale, including payment of the outstanding principal amount of, premium or penalty, if any, and interest on any Indebtedness which is paid or required to be paid as a result of such sale, all legal, accounting, title and recording tax expenses, commissions and other fees and expenses paid or to be paid in cash solely as a result of such sale, and all other federal, state, local and foreign taxes paid or payable in connection therewith and (y) the portion of gross cash proceeds from such sale or disposal which the Company must distribute to its stockholders in order to avoid the imposition of any income or excise tax with respect to a taxable gain (if any) associated with such sale or disposition, (ii) when used with respect to any loss, casualty, fire damage, theft, destruction or condemnation of any capital asset of the Company or any Subsidiary, the gross cash proceeds received by the Company or the relevant Subsidiary under any insurance policy or any award or compensation received, as the case may be, in each case as a result of any such loss, casualty, fire damage, theft, destruction or condemnation, net of all legal, accounting and other fees and expenses paid or to be paid in cash as a result of such loss, casualty, fire damage, theft, destruction or condemnation, and all other federal, state, local and foreign taxes paid or payable in connection therewith and less the portion of gross cash proceeds from such award or compensation which the Company must distribute to its stockholders in order to avoid the imposition of any income or excise Page 13 tax with respect to a taxable gain (if any) associated with such award or compensation, provided that such award or compensation shall not be deemed to be Net Cash Proceeds if such proceeds have been reinvested in or have been committed to be reinvested in the lost, damaged, stolen, destroyed or condemned property within twelve months from the date of such award or compensation and (iii) when used in respect of the issuance, assumption or incurrence of Specified Additional Indebtedness by the Company or any of its Subsidiaries, the gross cash proceeds received by the Company or the relevant Subsidiary from such issuance, assumption or incurrence less the costs of issuance, assumption or incurrence. Net Cash Proceeds shall equal $0 if it would otherwise be a negative number hereunder. "Notes" means the Pro Rata Notes, the Competitive Notes and the Swing Line Note. "Participant" shall have the meaning ascribed to such term in Section 11.08(b). "PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor thereto. "Permitted Encumbrances" shall mean (i) Liens for taxes not delinquent or being contested in good faith and by appropriate proceedings and for which adequate reserves (in accordance with GAAP) are being maintained, (ii) deposits or pledges to secure obligations under workers' compensation, social security or similar laws, or under unemployment insurance, (iii) deposits or pledges to secure bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety and appeal bonds and other obligations of like nature arising in the ordinary course of business, (iv) mechanics', workers', materialmen's or other like Liens arising in the ordinary course of business with respect to obligations which are not due or which are being contested in good faith, (v) minor imperfections of title on real estate, provided such imperfections do not render title unmarketable, (vi) all other Liens existing on the date of this Agreement, (vii) leases or subleases granted to others in the ordinary course of business of the Company and its Subsidiaries, (viii) any interest or title of a lessor in the property subject to any Capital Lease or operating lease, (ix) Liens arising from filing Uniform Commercial Code financing statements regarding leases or sub- leases, (x) any attachment or judgment Lien arising from a judgment or order against the Company or any Subsidiary that does not give rise to a Default or an Event of Default, provided that such Lien is not in place for more than sixty days or has been stayed, (xi) Liens encumbering customary initial deposits and margin deposits, and other Liens securing Indebtedness under Interest Rate Protection Agreements that are within the general parameters customary in the industry and incurred in the course of business, (xii) any option, contract or other agreement to sell an asset provided such sale is otherwise permitted by this Agreement, (xiii) any statutory right of a lender to which the Company or a Page 14 Subsidiary may be indebted to offset against, or appropriate and apply to the payment of, such Indebtedness any and all balances, credits, deposits, accounts or monies of the Company or a Subsidiary with or held by such lender, (xiv) any pledge or deposit of cash or property in conjunction with obtaining bonds or letters of credit required to engage in constructing on-site and off-site improvements required by municipalities or other governmental authorities in the ordinary course of business of the Company and its Subsidiaries, (xv) Liens in favor of all of the Banks collectively, and (xvi) purchase money security interests in personal property, with such encumbrances, in the aggregate, not to exceed $3,500,000. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether Federal, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof). "Plan" shall mean an employee benefit plan as defined in Section 3(3) of ERISA which is maintained or contributed to by the Company or an ERISA Affiliate while such entity is an ERISA Affiliate. "Pro Rata Loan Request" shall mean a request by the Company to borrow Pro Rata Loans pursuant to the terms hereof, which shall be substantially in the form of Exhibit B and shall specify, with respect to such requested Loans, (i) the requested Borrowing Date, (ii) the aggregate amount of Pro Rata Loans which the Company desires to borrow on such date, (iii) whether such requested Loans are to bear interest as ABR Loans or Eurodollar Loans, and (iv) if the requested Loans are to bear interest as Eurodollar Loans the requested term of the Interest Period therefor. "Pro Rata Loans" shall have the meaning ascribed to such term in Section 2.01(a). "Pro Rata Notes" shall mean, collectively, the promissory notes of the Company evidencing Pro Rata Loans, each substantially in the form of Exhibit D-1. "Pro Rata Share" shall mean, with respect to any Bank, the proportion of such Bank's Commitment to the Total Commitment of all the Banks or, if the Total Commitment shall have been canceled or reduced to $0 or expired, the proportion of such Bank's then outstanding Loans to the aggregate amount of Loans then outstanding. "Real Estate Investment Criteria" shall mean the Real Estate Investment Criteria established by the Company's Board of Directors as amended, restated, supplemented or revised from time to time, the current version (as of the date hereof) of which are attached hereto as Exhibit H. Page 15 "Rating Agency" shall mean Moody's Investors Service, Inc., Standard & Poor's, a division of the McGraw Hill Companies, Inc., or Duff & Phelps Credit Rating Co. "Reference Amount", with respect to any Bank and Interest Period, shall mean the amount of that Bank's Eurodollar Loan scheduled to be outstanding during that Interest Period (i) without taking into account any reduction in the amount of any Bank's Loan through any assignment or transfer and (ii) rounded up to the nearest integral multiple of $1,000,000. "REIT" shall have the meaning ascribed to such term in Section 5.01(w). "Required Banks" shall mean at any date Banks having at least 51% of the Total Commitment or, if the Total Commitment has been canceled or terminated, holding Notes evidencing at least 51% of the aggregate unpaid principal amount of the Loans. "Single-Employer Plan" shall mean any Plan that is a single- employer plan as defined in Section 4001(a)(15) of ERISA which is subject to the provisions of Title IV of ERISA. "Solvent" shall mean, when used with respect to any Person, that: (a) at the date of determination, the present fair salable value of such Person's assets is in excess of the total amount of such Person's liabilities; (b) at the date of determination, such Person is able to pay its debts as they become due; and (c) such Person does not have unreasonably small capital to carry on such Person's business as theretofore operated and all businesses in which such Person then is about to engage. "Specified Additional Indebtedness" of any Person shall mean Indebtedness which is not outstanding as of the date hereof, excluding (i) Indebtedness to the Agent, the Swing Line Bank, or the Banks hereunder and under the Notes, (ii) Indebtedness incurred in connection with the payment of any dividend necessary for the Company to maintain its qualification as a REIT and (iii) up to $10,000,000 principal amount of additional unsecured Indebtedness that matures and becomes due and payable on a date not more than one year from the date such Indebtedness was incurred by the Company. "Subsidiary" shall mean any Person of which or in which the Company and its other Subsidiaries own directly or indirectly 50% or more of: Page 16 (a) the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such Person, if it is a corporation, (b) the capital interest or profits interest of such Person, if it is a partnership, joint venture or similar entity, or (c) the beneficial interest of such Person, if it is a trust, association or other unincorporated organization; provided, however, that "Subsidiary" shall not include any such entity that the Company does not control. For the purposes of this paragraph, the term "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting equity interests, by contract or otherwise. "Swing Line Advance" means an advance made by the Swing Line Bank pursuant to Section 2.10. "Swing Line Advance Request" shall have the meaning ascribed to such term in Section 2.10(d) hereof. "Swing Line Bank" means The Bank of New York, or any successor to the duties, obligations and rights of The Bank of New York, in its capacity as the bank making Swing Line Advances hereunder. "Swing Line Borrowing" means a borrowing consisting of a Swing Line Advance made by the Swing Line Bank. "Swing Line Facility" shall have the meaning ascribed to such term in Section 2.10(a) hereof. "Swing Line Note" shall mean the promissory note of the Company in the form of Exhibit D-3. "Tax" means any present or future tax, levy, impost, duty, charge, governmental fee, deduction or withholding of any nature and whatever called, by whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or assessed. "Termination Date" shall mean, with respect to any Bank, the earliest to occur of (i) December 30, 2000 or such later date as may be agreed to by such Bank pursuant to Section 11.12, (ii) the date on which the obligations of the Banks to make loans hereunder shall terminate pursuant to Section 8.01 or the Commitments shall be reduced to zero pursuant to Section 2.05, and (iii) the date specified as such Bank's Termination Date pursuant to Section 11.12, or, if in any case (other than clause (ii) above) such day is not a Page 17 Business Day, the next succeeding Business Day; in all cases, subject to the provisions of Section 11.12(d). "Texas Subsidiary" means Realty Income Texas Properties, L.P., a Delaware limited partnership of which only the Company and one or more of its Subsidiaries are partners. "Total Commitment" shall mean the aggregate Commitment of all the Banks. "Unmatured Surviving Obligations" shall mean, as of any date, any obligations under this Agreement which are contingent and unliquidated and not then due and payable on such date and which pursuant to the provisions of this Agreement survive termination of this Agreement. "Wholly owned Subsidiary" shall mean any Subsidiary all the equity interests of which (other than directors' qualifying shares, if a corporation) at the time are owned directly or indirectly by the Company and/or one or more Wholly owned Subsidiaries of the Company. ARTICLE II THE LOANS Section 2.01. The Loans. Prior to the Termination Date, and subject to the terms and conditions of this Agreement, upon the request of the Company, and upon the satisfaction by the Company or the waiver by each of the Banks of each of the conditions precedent contained in Section 6.02, each of the Banks, severally and not jointly with the other Banks, agrees to make revolving credit loans (collectively, "Pro Rata Loans") and, to the extent offered by such Bank and accepted by the Company, competitive rate loans (collectively, "Competitive Loans" and, together with the Pro Rata Loans, the "Loans") to the Company from time to time in an aggregate principal amount at any one time outstanding not to exceed its Commitment; provided, however, that the sum of (i) aggregate outstanding Loans and (ii) aggregate outstanding Swing Line Advances may not exceed the Total Commitment. Section 2.02. Procedure for Pro Rata Loans. (a) The Company may borrow Pro Rata Loans by delivering a written Pro Rata Loan Request to the Agent on or before 5:00 P.M., New York time, one Business Day prior to the requested Borrowing Date therefor, in the case of ABR Loans, or on the date not less than three Business Days prior to the requested Borrowing Date therefor, in the case of Eurodollar Pro Rata Loans. ABR Loans shall be in the minimum aggregate amount of $1,000,000 or in integral multiples of $100,000 in excess thereof. Eurodollar Pro Rata Loans shall be in the minimum aggregate amount of $5,000,000 or in integral multiples Page 18 of $100,000 in excess thereof; provided, however, that Eurodollar Pro Rata Loans used to pay Swing Line Advances may be in a minimum aggregate amount of $2,500,000 or in integral multiples of $100,000 in excess thereof. (b) Upon receipt of any Pro Rata Loan Request from the Company, the Agent shall forthwith give notice to each Bank of the substance thereof. Not later than 2:00 P.M., New York time, on the Borrowing Date specified in such Pro Rata Loan Request, each Bank shall make available to the Agent in immediately available funds at the office of the Agent at its address set forth on the signature pages hereof, such Bank's Pro Rata Share of the requested Pro Rata Loans. (c) Upon receipt by the Agent of funds and satisfaction by the Company or waiver by each of the Banks of each of the conditions precedent contained in Section 6.02, the Agent shall disburse to the Company on the requested Borrowing Date the Pro Rata Loans requested in such Pro Rata Loan Request. The Agent may, but shall not be required to, advance on behalf of any Bank such Bank's Pro Rata Share of the Pro Rata Loans on a Borrowing Date unless such Bank shall have notified the Agent prior to such Borrowing Date that it does not intend to make available its Pro Rata Share of such Loans on such date (it being understood that no action or inaction by the Agent regarding such an advance shall affect the rights of the Company with respect to any non-performing Bank). If the Agent makes such advance, the Agent shall be entitled to recover such amount on demand from the Bank on whose behalf such advance was made, and if such Bank does not pay the Agent the amount of such advance on demand, the Company shall promptly repay such amount to the Agent. Until such amount is repaid to the Agent by such Bank or the Company, such advance shall be deemed for all purposes to be a Pro Rata Loan made by the Agent. The Agent shall be entitled to recover from the Bank or the Company, as the case may be, interest on the amount advanced by it for each day from the Borrowing Date therefor until repaid to the Agent, at a rate per annum equal to (i) in the case of the Bank, the Federal Funds Rate, for the three-day period beginning on the Borrowing Date, and the applicable rate on the Pro Rata Loans made on the Borrowing Date for the period beginning on the fourth day after the Borrowing Date, and (ii) in the case of the Company, the applicable rate on the Pro Rata Loans made on the Borrowing Date. (d) In lieu of delivering the written notice described above, the Company may give the Agent telephonic notice of any request for borrowing by the time required under this Section 2.02; provided that such telephonic notice shall be confirmed by delivery of a written notice to the Agent promptly but in no event later than 4:00 P.M., New York City time, on the date of such telephonic notice. Section 2.03. Pro Rata Notes. The Company's obligation to repay the Pro Rata Loans shall be evidenced by Pro Rata Notes, one such Pro Rata Note payable to the order of each Bank. The Pro Rata Page 19 Note of each Bank shall (i) be in the principal amount of such Bank's Commitment, (ii) be dated the date of the initial Loan and (iii) be stated to mature on the Termination Date as such date may be extended hereunder and bear interest from its date until maturity on the principal balance (from time to time outstanding thereunder) payable at the rates and in the manner provided herein. Each Bank is authorized to indicate upon the grid attached to its Pro Rata Note all Pro Rata Loans made by it pursuant to this Agreement, interest elections and payments of principal and interest thereon. Such notations shall be presumptive as to the aggregate unpaid principal amount of all Pro Rata Loans made by such Bank, and interest due thereon, but the failure by any Bank to make such notations or the inaccuracy or incompleteness of any such notations shall not affect the obligations of the Company hereunder or under the Pro Rata Notes. Section 2.04. Certain Fees. (a) The Company shall pay to the Agent for the account of the Banks a fee (the "Facility Fee") equal to the Facility Fee Rate per annum (on the basis of a 360-day year for the actual number of days involved) on the daily average amount of the Total Commitment, regardless of usage, (excluding the amount of any canceled or reduced portion of the Commitment for which the Facility Fee was paid in connection with such cancellation or reduction pursuant to Section 2.05 hereof) during the quarter with respect to which such Facility Fee is being paid. Such Facility Fee shall be payable in arrears on the last Business Day of each calendar quarter, commencing on the first such date after the date hereof, on any date that the Total Commitment is canceled or reduced pursuant to Section 2.05 (but only with respect to the amount of such cancellation or reduction) and on the Termination Date. (b) The Company shall pay to the Agent for its own account such fees as have been or may hereinafter be agreed to between the Agent and the Company, in the amounts and at the times agreed upon. (c) On the Effective Date the Company shall pay to the Agent for the account of each of the Banks (other than The Bank of New York) such fees as have been or may hereinafter be agreed to between the Agent and the Company, in the amounts and at the times agreed upon. Section 2.05. Cancellation or Reduction of the Commitment. The Company shall have the right, upon not less than three Business Days' written notice to the Agent and upon payment of the Facility Fees relating to the amount of the Total Commitment canceled or reduced which have been accrued through the date of such cancellation or reduction, with respect to the amount of the cancellation or reduction, to cancel the Total Commitment in full or to reduce the amount thereof; provided, however, that the Total Commitment may not be canceled so long as any Loan or Swing Line Advance remains outstanding; and provided, further, that the amount of any partial Page 20 reduction in the Total Commitment shall not exceed the remainder of (i) the Total Commitment on such date minus (ii) the aggregate outstanding principal amount of Loans and Swing Line Advances on such date. Partial reductions of the Total Commitment shall be in the amount of $5,000,000 or in integral multiples of $1,000,000 in excess thereof (or, if the aggregate outstanding amount of Loans is less than $5,000,000, then all of such lesser amount). All such cancellations or reductions shall be permanent. Section 2.06. Optional Prepayment. The Company shall have the right, on not less than three Business Days' written notice to the Agent in the case of Eurodollar Pro Rata Loans, and upon written notice delivered by 11:00 A.M. New York City time the day of the proposed prepayment to the Agent in the case of ABR Loans or Swing Line Advances, to prepay Pro Rata Loans or Swing Line Advances bearing interest on the same basis and having the same Interest Periods, if any, in whole or in part, without premium or penalty, in the aggregate principal amount of $1,000,000 ($100,000 in the case of Swing Line Advances) or in integral multiples of $100,000 in excess thereof (or, if the outstanding aggregate amount of such Loan or Swing Line Advance is less than $1,000,000 or $100,000, respectively, then all of such lesser amount), together with accrued interest on the principal being prepaid to the date of prepayment and, in the case of Eurodollar Loans, the amounts required by Section 4.03. Subject to the terms and conditions hereof, prepaid Loans may be reborrowed. Section 2.07. Mandatory Prepayment. (a) If (i) the Company or any Subsidiary shall sell, lease (other than in the ordinary course of business), assign, transfer or otherwise dispose of any of its assets, other than pursuant to Excluded Asset Sales, in an exchange that qualifies under Section 1031 of the Code, or to the extent that the Net Cash Proceeds therefrom received are reinvested in similar assets within 90 days of such disposition of such assets, (ii) the Company or a Subsidiary issues, assumes or incurs Specified Additional Indebtedness or (iii) the Company sells or issues equity securities, other than pursuant to the Company's Stock Incentive Plan, the Company shall prepay outstanding Pro Rata Loans and Swing Line Advances with the Net Cash Proceeds therefrom. (b) Application of Prepayments. All prepayments required to be made pursuant to this Section 2.07 shall be applied in the following order: first, to compensate the Banks for any amounts required by Section 4.03, in the case that such prepayment shall apply to any Eurodollar Pro Rata Loans, second, to accrued interest on the principal amount of Pro Rata Loans being prepaid, third, to the principal of the Pro Rata Loans then outstanding, if any, fourth, to accrued interest on the principal amount of Swing Line Advances being prepaid, and fifth, to the principal of the Swing Line Advances then outstanding, if any; provided that any prepayments shall be Page 21 applied in a manner to minimize the payments, if any, required by the Company pursuant to Section 4.03 with respect to such prepayment; and provided, further, that the accrued interest on, and the outstanding principal of, Pro Rata Loans to be prepaid shall be applied to prepayment of ABR Loans and Eurodollar Pro Rata Loans in proportion to the outstanding aggregate principal amount of such ABR Loans or Eurodollar Pro Rata Loans, respectively, relative to that of all Pro Rata Loans. (c) Officer's Certificate. Promptly upon receipt of any Net Cash Proceeds, other than pursuant to any Excluded Asset Sales, the Company shall deliver to the Agent a certificate signed by the chief financial officer of the Company, which shall be in form and substance satisfactory to the Agent, setting forth the amount of the gross cash proceeds received and the items deducted therefrom in reasonable detail in order to confirm the amount of such Net Cash Proceeds and also setting forth the Company's year-to-date asset sales. Section 2.08. Procedure for Competitive Loans. (a) Prior to the Termination Date, the Company may request that the Banks make offers to make Competitive Loans in dollars on the terms and conditions hereinafter set forth; provided, however, that (i) the aggregate principal amount of Competitive Loans that may be borrowed on any Borrowing Date may not exceed the Available Commitment (after giving effect to any Loans to be repaid or prepaid on such Borrowing Date and any other Loans to be made on such Borrowing Date), (ii) the aggregate amount of Competitive Loans outstanding on any day may not exceed 50% of the Total Commitment (after giving effect, with respect to any day, to any Loans being repaid or prepaid on such day and any other Loans to be made on such day) and (iii) the Company may not request Competitive Loans before the fifth Business Day after the Effective Date. Each Bank may, but shall have no obligation to, make such offers and the Company may, but shall have no obligation to, accept any such offers, in the manner set forth in this Section 2.08. (b) The Company may request Competitive Loans under this Section 2.08 by giving a Competitive Loan Request to the Agent, by telephone, telex, telecopy or in writing not later than 12:00 Noon, New York time (if not in writing, to be confirmed in writing in substantially the form of Exhibit C-1 not later than 2:00 P.M., New York time, on the same day), on (i) the fourth Business Day prior to the proposed Borrowing Date, in the case of Eurodollar Competitive Loans, and (ii) on the Business Day immediately prior to the proposed Borrowing Date, in the case of Absolute Rate Competitive Loans. The Agent shall promptly notify each Bank, by a letter in substantially the form of Exhibit C-2, of each such Competitive Loan Request received by it from the Company and of the terms contained therein. (c) Each Bank may, if it elects so to do, irrevocably offer to make a Competitive Loan of the requested type to the Company Page 22 at a Competitive Bid Rate or Rates, as specified by such Bank in accordance with the related Competitive Loan Request, by submitting a Competitive Bid, in substantially the form of Exhibit C-3 and indicating the maximum and minimum principal amounts of the Competitive Loan which such Bank would be willing to make (which amount may, subject to the proviso to the first sentence of Section 2.08(a), exceed such Bank's Commitment, but shall be in a principal amount equal to $1,000,000 or in integral multiples of $100,000 in excess thereof), the Competitive Rate, or Competitive Margin for the relevant Interest Period, as the case may be, and any other terms and conditions required by such Bank, not later than 9:30 A.M., New York time, on (i) the third Business Day prior to the proposed Borrowing Date, in the case of Eurodollar Competitive Loans or (ii) the proposed Borrowing Date, in the case of Absolute Rate Competitive Loans, to the Agent (which shall give notice thereof to the Borrower as promptly as practicable and in no event later than 10:00 A.M., New York time); provided that, if the Agent, at such time (if any) as it is a Bank, shall elect to submit a Competitive Bid, the Agent shall communicate the substance of its Competitive Bid to the Company not later than 15 minutes prior to the applicable deadline specified above. Banks may submit multiple Competitive Bids. Any Competitive Bid that does not conform substantially with Exhibit C-3 may be rejected by the Agent, after conferring with the Company, and the Agent shall notify the Bank that submitted such Competitive Bid of such rejection as promptly as practicable. The Agent shall (i) disclose the Competitive Bids received to the Company as promptly as reasonably practicable after the deadline stated above for the submission of Competitive Bids, (ii) maintain in confidence all Competitive Bids until each of them has been disclosed to the Company and (iii) provide copies of all Competitive Bids (or other written notice containing all of the terms thereof) to the Company as soon as practicable after completion of the bidding process described in this Section 2.08. (d) The Company shall, not later than (i) 12:00 Noon, New York time, on the third Business Day prior to the proposed Borrowing Date, in the case of Eurodollar Competitive Loans or (ii) 12:00 Noon, New York time, on the proposed Borrowing Date, in the case of Absolute Rate Competitive Loans, either (i) cancel the Borrowing Request by giving the Agent notice to that effect or (ii) accept one or more Competitive Bids, in its sole discretion, by giving notice to the Agent of the principal amount of each Competitive Loan (which principal amount shall be equal to or greater than the minimum amount offered by the relevant Bank and equal to or less than the maximum amount offered by such Bank for such Competitive Loan pursuant to Section 2.08(c)), to be made by each Bank, and reject any remaining Competitive Bids, by giving the Agent notice to that effect; provided that the aggregate Page 23 principal amount of such offers accepted by the Company shall be in a principal amount equal to $1,000,000 or in integral multiples of $100,000 in excess thereof, each such notice to be in substantially the form of Exhibit C-4 (a "Competitive Accept/Reject Notice"); provided that (A) the failure by the Company to give such notice in a timely fashion shall be deemed to be a rejection of all the Competitive Bids, (B) the Company shall not accept a Competitive Bid made at a Competitive Bid Rate if such Company has rejected a Competitive Bid made at a lower Competitive Bid Rate, (C) the aggregate principal amount of the Competitive Bids accepted by the Company shall not exceed the principal amount specified in the Competitive Loan Request, (D) if the Company shall accept Competitive Bids made at a particular Competitive Bid Rate but shall be restricted by other conditions hereof from borrowing the principal amount of Competitive Loans specified in such Competitive Loan Request in respect of which Competitive Bids at such Competitive Bid Rate have been made or if the Company shall accept Competitive Bids made at a particular Competitive Bid Rate but the aggregate amount of Competitive Bids made at such Competitive Bid Rate shall exceed the amount specified in the Competitive Loan Request, then the Company shall accept a pro rata portion of each Competitive Bid made at such Competitive Bid Rate aggregating the portion of Competitive Loans with respect to which Competitive Bids at such Competitive Bid Rate have been received (provided further that if the principal amount of Competitive Loans to be so allocated is not sufficient to enable Competitive Loans to be so allocated to each such Bank in a principal amount equal to $1,000,000 or in integral multiples of $100,000 in excess thereof, the Company shall select the Banks to be allocated such Competitive Loans in a principal amount equal to not less than $1,000,000 but may round up allocations to the next higher integral multiple of $100,000 if necessary), and (E) except as provided in clause (E) above, no Competitive Bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a principal amount equal to $5,000,000 or an integral multiple of $1,000,000 in excess thereof. (e) If the Company notifies the Agent that a Borrowing Notice for Competitive Loans is canceled, the Agent shall give prompt notice thereof to the Banks. Page 24 (f) If the Company accepts one or more Competitive Bids, the Agent shall promptly give notice (i) to each Bank of the date and aggregate amount of such Competitive Loan(s), the Competitive Bid Rate therefor and whether or not any Competitive Bid made by such Bank has been accepted by the Company, and (ii) to each Bank whose Competitive Bid, or any portion thereof, has been accepted by the Company, of the principal amount of the Competitive Loan to be made by such Bank and the date for repayment thereof, together with the Competitive Rate or Competitive Margin, as applicable, and any other terms applicable to such Competitive Loan. (g) Following any acceptance by the Company and notification by the Agent pursuant to Section 2.06(f), and upon satisfaction, or waiver by the Banks, of each of the applicable conditions precedent contained in Article VI, each such Bank shall disburse to the Agent, by 2:00 P.M. on the specified Borrowing Date, the aggregate principal amount of the Competitive Loans accepted by the Company, whereupon the Agent shall promptly disburse such funds to the Company in funds immediately available at the Company's office specified in Section 11.06. (h) Nothing in this Section 2.08 shall be construed as a right of first offer in favor of the Banks or to otherwise limit the ability of the Company to request and accept credit facilities from any Person (including any Bank). Section 2.09. Competitive Notes. The Company's obligation to repay the Competitive Loans shall be evidenced by Competitive Notes, one such Competitive Note payable to the order of each Bank making a Competitive Loan pursuant to Section 2.08. The Competitive Note of each Bank shall (i) be in the principal amount of 50% of the Total Commitment or, if less, the aggregate principal amount outstanding under Competitive Loans made by such Bank, (ii) be dated the date of the initial Competitive Loan made by such Bank and (iii) be stated to mature on the last Maturity Date of any Competitive Loan made by such Bank as such date may be extended hereunder and bear interest from its date until maturity on the principal balance (from time to time outstanding thereunder) payable at the rates and in the manner provided herein. Each Bank is authorized to indicate upon the grid attached to its Competitive Note all Competitive Loans made by it pursuant to this Agreement, interest elections and payments of principal and interest thereon. Such notations shall be presumptive as to the aggregate unpaid principal amount of all Competitive Loans made by such Bank, and interest due thereon, but the failure by any Bank to make such notations or the inaccuracy or incompleteness of any such notations shall not affect the obligations of the Company hereunder or under the Competitive Notes. Section 2.10. Swing Line Advances. (a) Prior to the Termination Date, and subject to the terms and conditions of this Agreement, the Swing Line Bank shall Page 25 make, on the terms and conditions hereinafter set forth, Swing Line Advances to the Company from time to time on any Business Day in an aggregate amount not to exceed at any time outstanding $15,000,000 (the "Swing Line Facility"); provided, however, that the sum of (i) the aggregate outstanding Loans plus (ii) the aggregate outstanding Swing Line Advances, may not exceed the Total Commitment. Each Swing Line Borrowing shall be in an amount of not less than $100,000 or an integral multiple of $100,000 in excess thereof. Each Bank other than the Swing Line Bank shall be deemed to, and hereby agrees to, have irrevocably and unconditionally purchased from the Swing Line Bank a participation in such Swing Line Advance in an amount equal to such Bank's Pro Rata Share of the principal amount thereof. (b) Interest. Each Swing Line Advance shall bear interest at a rate agreed upon by the Company and the Swing Line Bank but in no event higher than a rate based upon the Base Rate and in the manner set forth in Section 3.02, as if such Swing Line Advance were an ABR Loan. Such interest shall be payable in arrears at the end of the applicable interest period or as otherwise agreed by the Company and the Swing Line Bank. The interest period for any Swing Line Advance shall not exceed 30 days. (c) Swing Line Note. The Company's obligation to repay its Swing Line Advances shall be evidenced by a Swing Line Note which shall be (i) payable to the Swing Line Bank, (ii) in the principal amount of $15,000,000 or, if less, the principal amount of the Company's Swing Line Advances from time to time outstanding, (iii) dated not later than the date of the Company's first Swing Line Advance and (iv) stated to mature with respect to each Swing Line Advance from time to time outstanding thereunder on the date determined pursuant to this Section 2.10 but in any event not later than the Termination Date. The Swing Line Bank is authorized to indicate upon the grid attached to the Swing Line Note all borrowings thereunder and payments of principal and interest thereon. Such notations shall be presumptively correct as to the aggregate unpaid principal amount of the Swing Line Advance made by the Swing Line Bank, and interest due thereon, but the failure by the Swing Line Bank to make such notations or the inaccuracy or incompleteness of any such notations shall not affect the obligations of the Company hereunder or under the Swing Line Note. (d) Procedure. Each Swing Line Borrowing shall be made on notice, given not later than 12:00 P.M., New York time on the date of the proposed Swing Line Borrowing, by the Company to the Swing Line Bank and the Agent. Each such notice of a proposed Swing Line Borrowing (a "Swing Line Advance Request") shall be by telephone or telecopier (and if by telecopier, in the form of Exhibit E thereto), and, if by telephone, confirmed immediately in writing, specifying therein the requested (i) date of such borrowing, (ii) amount of such borrowing and (iii) maturity of such borrowing (which maturity shall be no later than the thirtieth day after the requested date of such borrowing subject to successive thirty day extensions thereof, at the Page 26 Company's option, so long as the total outstanding amount of Swing Line Advances remains less than or equal to $15,000,000). To the extent it is required to do so pursuant to Section 2.10(a) above, the Swing Line Bank will make the amount of the requested Swing Line Advance available to the Agent in immediately available funds, at the office of the Agent at its address set forth on the signature pages hereof. After the Agent's receipt of such funds and upon satisfaction by the Company, or waiver by the Agent of each of the conditions precedent contained in Article VI applicable thereto, the Agent will disburse such funds to the Company. (e) Repayment. The Company shall repay to the Agent for the account of the Swing Line Bank the outstanding principal amount of each Swing Line Advance made to the Company on the earlier of the maturity date specified in the applicable Swing Line Advance Request (which maturity shall be no later than the thirtieth day after the requested date of such borrowing subject to successive thirty day extensions thereof, at the Company's option, so long as the total outstanding amount of Swing Line Advances remains less than or equal to $5,000,000) and the Termination Date. (f) Conversion of Swing Line Advances. Subject to Section 4.03, (i) if the aggregate outstanding Swing Line Advances shall at any time exceed $1,000,000 the Company may, at its option, convert such Swing Line Advances to an ABR Loan and if the aggregate outstanding Swing Line Advances shall at any time exceed $2,500,000 the Company may, at its option, convert such Swing Line Advances to a Eurodollar Pro Rata Loan; (ii) if the aggregate outstanding Swing Line Advances shall at any time exceed $7,500,000, Swing Line Advances in excess of such amount shall, on the next date on which interest is payable on any Swing Line Advance, unless converted at the Company's option pursuant to clause (i) above, automatically be converted to an ABR Loan; and (iii) if a Default shall occur and be continuing, the Swing Line Bank may, at its option, convert such Swing Line Advances to an ABR Loan. Upon election of any conversion under clause (i), the Company shall notify the Swing Line Bank in writing of such conversion, whether such Swing Line Advances shall be ABR Loans or Eurodollar Pro Rata Loans and the Business Day on which such conversion is to be effective (which notice in the case of the Eurodollar Pro Rata Loans shall not be less than three days prior to the requested date for conversion) and upon any automatic conversion under clause (ii) or election of conversion under clause (iii), the Swing Line Bank shall immediately notify the Company in writing of such conversion. On the Business Day of any conversion described above, such Swing Line Advances shall constitute an ABR Loan or a Eurodollar Pro Rata Loan and shall bear interest at the rate of interest then applicable to ABR Loans or Eurodollar Pro Rata Loans, as the case may be. Upon written demand by the Swing Line Bank on or before 1:00 P.M., New York time, with a copy of such demand to the Agent, each other Bank shall purchase from the Swing Line Bank, and the Swing Line Bank shall sell to each such other Bank, such other Bank's Pro Rata Share of such outstanding Swing Line Advance as of Page 27 the date of such demand, by making available to the Agent for the account of the Swing Line Bank not later than 2:00 P.M., New York time, in immediately available funds, an amount equal to the portion of the outstanding principal amount of such Swing Line Advance to be purchased by such Bank. The Company hereby agrees to each such sale. Each Bank agrees to purchase its Pro Rata Share of an outstanding Swing Line Advance on (i) the Business Day on which demand therefor is made by the Swing Line Bank, provided that notice of such demand is given not later than 1:00 P.M., New York time, on such Business Day or (ii) the first Business Day next succeeding such demand if notice of such demand is given after such time. If and to the extent that any Bank shall not have so made the amount of such Swing Line Advance available to the Agent, such Bank agrees to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date of demand by the Swing Line Bank until the date such amount is paid to the Agent, at a rate per annum equal to (i) the Federal Funds Rate, for the three-day period beginning on the date of such demand, and (ii) the rate of interest then applicable to ABR Loans or Eurodollar Pro Rata Loans, as the case may be, for the period beginning on the fourth day after the date of such demand, changing as and when said rate changes. Section 2.11. Increase in Commitments. (a)(i) The Company may, by submitting a notice (an "Increase Notice") to the Agent, request that the Banks increase the Total Commitment up to the amount specified therein, provided that the amount of such increase shall be an integral multiple of $5,000,000 and the Total Commitment after such increase shall not be greater than $200,000,000. Promptly upon receipt of such Increase Notice from the Company, the Agent shall notify the Banks and any new lenders of the contents thereof. Each Bank and new lender shall provide written notice to the Agent, no later than 21 days after the date on which the Increase Notice shall have been given to the Agent, of the amount, if any, by which such Bank agrees to increase its Commitment or such new lender agrees to establish as its Commitment. Promptly upon receipt of such notice from any Bank, the Agent shall notify the Company of the contents thereof. To the extent that the aggregate amount of the proposed Commitments of such new lenders and the proposed increase of the Commitments of such existing Banks is less than the aggregate amount of the increase of the Commitments requested by the Company, the Company may either (A) request the Agent to solicit the Banks for further increases in their Commitments or (B) amend the Increase Notice by reducing the requested amount by which the aggregate amount of the Commitments is to be increased to an amount equal to the aggregate amount of proposed Commitments of such new lenders and the proposed increase of the Commitments of such existing Banks. (ii) Upon the effectiveness of the increase in Commitments pursuant to Section 2.11(b) below, each of the new lenders shall execute and deliver a counterpart of this Agreement, Schedule 1 shall be amended by the Company and the Agent to reflect the increase in the Commitment of any existing Bank and the Commitments of such new Page 28 lenders, and such new lenders shall be and become Banks hereunder for all purposes hereof and of the Credit Documents. In connection with any such increase, the Borrower shall execute and deliver new Pro Rata Notes to reflect appropriately such new Commitments and the Banks (including such new lenders) shall effect such purchases and sales among themselves of portions of the outstanding Loans (other than outstanding Competitive Loans) as shall be necessary to reflect such Commitments, as specified by the Agent, and, in connection with such purchases and sales, the Borrower shall pay to each affected Bank, in the case of Banks that are sellers of Loans, an amount equal to the amount that the Borrower would have had to pay pursuant to Section 4.04 if such Loans, or portions thereof, were prepaid on such Increase Date or, in the case of Banks that are purchasers of Loans, such amount, determined as if Section 4.04 were applicable thereto, specified by such Bank as necessary to compensate it for the funding of the Loans, or portions thereof, purchased by it. (b) An increase in Commitments pursuant to this Section 2.11 shall become effective on the Increase Date so long as each of the following conditions shall have been fulfilled on and as of such date: (i) the Agent shall have consented to any such new lenders; (ii) the Agent shall have received opinions of counsel to the Borrower in form and substance reasonably satisfactory to the Agent; (iii) the conditions to the making of Loans set forth in Section 6.02 shall be fulfilled on and as of such Increase Date as if Loans were made thereon; and (iv) the Agent shall have received such other instruments and documents, in form and substance satisfactory to it, as it shall have reasonably requested. ARTICLE III INTEREST, METHOD OF PAYMENT, CONVERSION, ETC. Section 3.01. Procedure for Interest Rate Determination. (a) Unless the Company shall request in a Loan Request or in a Conversion/Continuance Request that Pro Rata Loans (or portions thereof) bear interest as Eurodollar Pro Rata Loans, the Pro Rata Loans shall bear interest as ABR Loans. (b) Competitive Rate Loans shall bear interest as Absolute Rate Competitive Loans or Eurodollar Competitive Loans as determined in accordance with Section 2.08. Section 3.02. Interest on ABR Loans. Each ABR Loan shall bear interest from the date of such ABR Loan until maturity thereof or until such Loan is repaid, or the beginning of any relevant Interest Period, as the case may be, payable in arrears on the last day of each calendar quarter of each year, commencing with the first such date after the date hereof, and on the date such ABR Loan is repaid, at a rate per annum (on the basis of a 365- or 366-day year Page 29 for the actual number of days involved in the case of ABR Loans which accrue interest based upon the Prime Rate and on the basis of a 360- day year for the actual number of days involved in the case of ABR Loans which accrue interest based upon the Federal Funds Rate) equal to the Base Rate in effect from time to time, which rate shall change as and when said Base Rate shall change. If an ABR Loan is outstanding, the Agent shall notify the Company of the Base Rate when said Base Rate shall change; provided that the failure to give notice shall not affect the Company's obligations with respect to such ABR Loan. Section 3.03. Interest on Eurodollar Loans. (a) Each Eurodollar Loan shall bear interest from the date of such Loan until maturity thereof or until such Loan is repaid, payable in arrears, with respect to Interest Periods of three months or less, on the last day of such Interest Period, and with respect to Interest Periods longer than three months, on the day which is three months after the commencement of such Interest Period and on the last day of such Interest Period, at a rate per annum (on the basis of a 360-day year for the actual number of days involved), determined by the Agent with respect to each Interest Period with respect to Eurodollar Loans, equal to the sum of (i) the Applicable Margin, in the case of Eurodollar Pro Rata Loans or the Competitive Margin, in the case of Eurodollar Competitive Loans and (ii) LIBOR. (b) The Interest Period for each Eurodollar Loan shall be selected by the Company at least three Business Days prior to the beginning of such Interest Period. If the Company fails to notify the Agent of the subsequent Interest Period for an outstanding Eurodollar Pro Rata Loan at least three Business Days prior to the last day of the then current Interest Period of such Eurodollar Pro Rata Loan, then such outstanding Eurodollar Pro Rata Loan shall become an ABR Loan at the end of such current Interest Period. (c) Notwithstanding the foregoing: (i) if any Interest Period for a Eurodollar Loan would otherwise end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (iii) no Interest Period for a Eurodollar Loan may extend beyond the Termination Date. (d) Eurodollar Loans shall be made by each Bank from its branch or affiliate identified as its Eurodollar Lending Office on the signature page hereto, or such other branch or affiliate as it may hereafter designate to the Company and the Agent as its Page 30 Eurodollar Lending Office. A Bank shall not change its Eurodollar Lending Office designation if it, at the time of the making of such change, increases the amounts that would have been payable by the Company to such Bank under this Agreement in the absence of such a change. Section 3.04. Interest on Absolute Rate Competitive Loans. Each Absolute Rate Competitive Loan shall bear interest from the date of such Loan to (but excluding) its Maturity Date, payable in arrears, with respect to maturities of three months or less, on its Maturity Date, and with respect to maturities longer than three months, on the day which is three months after the making of such loan (and each three month anniversary thereafter, if any) and on its Maturity Date, at a rate per annum equal to the applicable Competitive Rate. Section 3.05. Conversion/Continuance. (a) The Company may request, by delivery to the Agent of a written Conversion/Continuance Request not less than three Business Days prior to a requested Conversion/ Continuance Date, that all or portions of the outstanding ABR Loans and Eurodollar Pro Rata Loans, in the aggregate amount of $1,000,000 or in integral multiples of $100,000 in excess thereof (or, if the aggregate amount of outstanding Loans is less than $1,000,000, then all such lesser amount), shall bear interest from and after the Conversion Date as either ABR Loans or Eurodollar Pro Rata Loans. (b) Upon receipt of any such Conversion/ Continuance Request from the Company, the Agent shall forthwith give notice to each Bank of the substance thereof. Effective on such Conversion/Continuance Date and upon payment by the Company of the amounts, if any, required by Section 4.03, the Loans or portions thereof as to which the Conversion/Continuance Request was made shall commence to accrue interest as set forth in this Article III for the interest rate selected by the Company. (c) In lieu of delivering the above described notice, the Company may give the Agent telephonic notice hereunder by the required time under this Section 3.04; provided that such telephonic notice shall be confirmed by delivery of a written notice to the Agent by no later than 4:00 P.M., New York City time, the date of such telephonic notice. Section 3.06. Post Default Interest. Upon the occurrence and during the continuation of an Event of Default, all Loans, Swing Line Advances and any unpaid installment of interest shall bear interest at a rate per annum equal to the sum of (i) 2% and (ii) with respect to ABR Loans and Swing Line Advances, the rate of interest then applicable to ABR Loans, changing as and when said rate shall change, with respect to Eurodollar Loans, the rate of interest applicable to each such Eurodollar Loan, and with respect to Absolute Page 31 Rate Competitive Loans, the Competitive Rate applicable to such Absolute Rate Competitive Loan. Interest payable pursuant to this Section 3.06 shall be payable on demand. Section 3.07. Maximum Interest Rate. (a) Nothing in this Agreement or the Notes shall require the Company to pay interest at a rate exceeding the maximum rate permitted by applicable law. Neither this Section nor Section 11.01 is intended to limit the rate of interest payable for the account of any Bank to the maximum rate permitted by the laws of the State of New York (or any other applicable law) if a higher rate is permitted with respect to such Bank by supervening provisions of U.S. Federal law. (b) If the amount of interest payable for the account of any Bank on any interest payment date in respect of the immediately preceding interest computation period, computed pursuant to this Article III, would exceed the maximum amount permitted by applicable law to be charged by such Bank, the amount of interest payable for its account on such interest payment date shall automatically be reduced to such maximum permissible amount. ARTICLE IV DISBURSEMENT AND PAYMENT Section 4.01. Pro Rata Treatment. Each payment of the Facility Fee and each reduction of the Total Commitment shall be apportioned among the Banks in proportion to each Bank's Pro Rata Share. Except as provided in Section 4.04 or 4.05, the ABR Loans and Eurodollar Pro Rata Loans or portions thereof as to which a Conversion/Continuance Request has been made pursuant to Section 3.05 hereof shall at all times bear interest on the same basis (as ABR Loans and Eurodollar Pro Rata Loans) and the Interest Periods applicable thereto, if any, shall be of the same duration. Section 4.02. Method of Payment. All payments by the Company hereunder and under the Notes shall be made without set-off or counterclaim to the Agent, for its account or for the account of the Bank or Banks entitled thereto, as the case may be, in lawful money of the United States and in immediately available funds at the office of the Agent on the date when due. Section 4.03. Compensation for Losses. (a) Compensation. In the event that (i) the Company makes a prepayment under Section 2.06 on a day other than the last day of the Interest Period for the amount so prepaid, (ii) a Conversion/Continuance Date selected pursuant to Section 3.05 falls on a day other than the last day of the Interest Period for the Page 32 amount as to which a conversion is made, (iii) the Company revokes any notice given under Section 2.02 requesting Eurodollar Loans, (iv) the Loans or portions thereof are converted into ABR Loans pursuant to Section 4.05 on a day other than the last day of the Interest Period for the Eurodollar Loans so converted, (v) the Eurodollar Loans shall be declared to be due and payable prior to the scheduled maturity thereof pursuant to Section 8.01 or (vi) Swing Line Advances shall be converted into an ABR Loan on any day other than the maturity date for such Swing Line Advances, the Company shall pay to each Bank or the Swing Line Bank, as the case may be, promptly after its demand an amount which will compensate such Bank or the Swing Line Bank, as the case may be, for any cost, loss, premium or penalty incurred (other than any cost, loss, premium or penalty incurred as a consequence of any Tax, which shall be governed by the provisions of Section 4.04(a)) by such Bank or the Swing Line Bank, as the case may be, as a result of such prepayment, conversion, declaration or revocation of notice in respect of funds deemed (pursuant to the last sentence of this Section 4.03(a)) obtained for the purpose of making or maintaining such Bank's Eurodollar Loans or the Swing Line Bank's Swing Line Advances, or any part thereof (it being understood, however, that the foregoing shall not be construed as covering any amounts paid pursuant to Section 2.10(c) by a Bank to the Swing Line Bank in connection with the conversion of a Swing Line Loan). Such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so paid or prepaid, or not borrowed or converted, for the period from the date of such payment or prepayment or conversion or failure to borrow to the last day of such Interest Period or the maturity date of Swing Line Advances (or, in the case of a failure to borrow, the Interest Period that would have commenced on the date of such failure to borrow) in each case at the applicable rate of interest for such Loan provided for herein (excluding, however, the Applicable Margin included therein) over (ii) the amount of interest (as reasonably determined by such Bank) which would have accrued to such Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the London Interbank market. For purposes of calculating amounts payable by the Company to the Banks under this Section, each Eurodollar Loan made by a Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at Base LIBOR used in determining LIBOR for such Eurodollar Loan by a matching deposit or other borrowing in the London Interbank deposits market for a comparable amount and for a comparable period, whether or not such Eurodollar Loan is in fact so funded. (b) Certificate, Etc. Each Bank and the Swing Line Bank, if applicable, shall promptly notify the Company, with a copy to the Agent, upon becoming aware that the Company may be required to make any payment pursuant to this Section 4.03. When requesting payment pursuant to this Section 4.03, each Bank and the Swing Line Bank, if applicable, shall provide to the Company, with a copy to the Agent, a certificate, signed by an officer of such Bank or Swing Line Bank, Page 33 setting forth the amount required to be paid by the Company to such Bank or Swing Line Bank and the computations made by such Bank or Swing Line Bank to determine such amount. In the absence of manifest error, such certificate shall be conclusive and binding on the Company as to the amount so required to be paid by the Company to such Bank. (c) Participants. Subject to Section 11.08(e), each Participant shall be deemed a "Bank" for the purposes of this Section 4.03. Section 4.04. Withholding, Reserves and Additional Costs. (a) Taxes. (i) Withholding. To the extent permitted by law, all payments under this Agreement and under the Notes (including payments of principal and interest) shall be payable to each Bank free and clear of any and all present and future Covered Taxes. If any Taxes are required to be withheld or deducted from any amount payable under this Agreement or any Note, then (1) the Company shall pay any such Tax before the date on which penalties attach thereto, and (2) in the event such Tax is a Covered Tax, the amount payable under this Agreement or such Note shall be increased to the amount which, after deduction from such increased amount of all Covered Taxes required to be withheld or deducted therefrom, will yield to such Bank the amount stated to be payable under this Agreement or such Note. The Company shall execute and deliver to any Bank upon its request such further instruments as may be necessary or desirable to give full force and effect to any such increase, including a new Note of the Company to be issued in exchange for any Note theretofore issued. The Company shall also hold each Bank harmless and indemnify it for any stamp or other taxes with respect to the preparation, execution, delivery, recording, performance or enforcement of the Credit Documents (all of which shall be included with "Taxes"). If any Covered Taxes are paid by any Bank, the Company shall, not later than 10 days after demand of such Bank, reimburse such Bank for such payments, together with any interest, penalties and expenses incurred in connection therewith, plus interest thereon at a rate per annum (based on a 360-day year for the actual number of days involved) equal to the interest rate then applicable to ABR Loans, changing as and when such rate shall change, from the date such payment or payments are made by such Bank to the date of reimbursement by the Company. The Company shall deliver to the Agent certificates or other valid vouchers for all Taxes or other charges deducted from or paid with respect to payments made by the Company hereunder. (ii) Tax Refund. If the Company determines in good faith that, (a) acting in the name of a Bank, Participant, Assignee or the Agent it is more likely than not to win a contest involving a Covered Tax, or (b) acting in the name of the Company, a reasonable basis exists for contesting a Covered Tax, then the relevant Bank, Page 34 Participant, Assignee or the Agent, as applicable, shall cooperate with the Company in challenging such Tax at the Company's expense if requested by the Company (it being understood and agreed that neither the Agent nor any Bank, Participant or Assignee shall have any obligation to contest, or any responsibility for contesting any Tax). If any Bank, Participant, Assignee or the Agent, as applicable, receives a refund (whether by way of direct payment or by offset) of any Covered Tax for which a payment has been made pursuant to subsection 4.04(a)(i) which, in the reasonable good faith judgment of such Bank, Participant, Assignee or Agent, as the case may be, is allocable to such payment made under subsection 4.04(a)(i), the amount of such refund (together with any interest received thereon) shall be paid to the Company to the extent payment has been made in full pursuant to subsection 4.04(a)(i). (iii) U.S. Tax Certificates. Each Bank that is organized under the laws of any jurisdiction other than the United States or any state thereof shall deliver to the Agent for transmission to the Company, on or prior to the Closing Date (in the case of each Bank listed on the signature pages hereof) or on the date (and as a condition to effectiveness) of an assignment pursuant to which it becomes a Bank (in the case of each other Bank), and at such other times as may be necessary in the determination of the Company or the Agent (each in the reasonable exercise of its discretion), such certificates, documents or other evidence, properly completed and duly executed by such Bank (including, without limitation, Internal Revenue Service Form 1001 or Form 4224 or any other certificate or statement of exemption required by Treasury Regulations Section 1.1441-4(a) or Section 1.1441-6(c) or any successor thereto) to establish that such Bank is not subject to deduction or withholding of United States federal income tax under Section 1441 or 1442 of the Code or otherwise (or under any comparable provisions of any successor statute) or is subject to deduction or withholding at a reduced rate under any applicable treaty or otherwise with respect to any Payments to such Bank of principal, interest, fees or other amounts payable under this Agreement or any of the Notes. The Company shall not be required to pay any additional amount to any such Bank under subsection 4.04(a)(i) if such Bank shall have failed to satisfy the requirements of the immediately preceding sentence; provided that if such Bank shall have satisfied such requirements on the Closing Date (in the case of each Bank listed on the signature pages hereof) or on the date of the agreement pursuant to which it became a Bank (in the case of each other Bank), nothing in this subsection 4.04(a)(iii) shall relieve the Company of its obligation to pay any additional amounts pursuant to subsection 4.04(a)(i) in the event that, as a result of any change in applicable law, such Bank is no longer properly entitled to deliver certificates, documents or other evidence at a subsequent date establishing the fact that such Bank is not subject to withholding as described in the immediately preceding sentence. Page 35 (iv) Mitigation. Each Bank agrees that, as promptly as practicable after the officer of such Bank responsible for administering the Loans under this Agreement becomes aware of the occurrence of an event or the existence of a condition that would require the Company to make payments with respect to such Bank under subsection 4.04(a)(i), it will, to the extent not inconsistent with such Bank's internal policies, use reasonable efforts (1) to make, fund or maintain the Commitments or Loans of such Bank through another lending office of such Bank, or (2) take such other reasonable measures, if as a result the additional amounts that would otherwise be required to be paid by the Company with respect to such Bank pursuant to subsection 4.04(a)(i) would be materially reduced and if, as determined by such Bank in its sole discretion, the making, funding or maintaining of such Commitments or Loans through such other lending office or in accordance with such other measures, as the case may be, would not otherwise materially adversely affect such Commitments or Loans or the interests of such Bank. (v) Replacement of Bank. If the Company becomes obligated to pay additional amounts described in Section 4.04(a) as a result of any condition described in such section and payment of such amount is demanded by any Bank, then the Company may, on ten business days' prior written notice to the Agent and such Bank, cause such Bank to (and such Bank shall) assign all of its rights and obligations under this Agreement to a Bank or other entity selected by the Company for a purchase price equal to the outstanding principal amount of such Bank's Loans and all accrued interest and fees, provided that in no event shall the assigning Bank be required to pay or surrender to such purchasing Bank or other entity any of the fees received by such assigning Bank pursuant to this Agreement. The Company shall remain obligated to pay to such assigning Bank all additional amounts described in Section 4.04(a) arising on or prior to the date of such assignment as a result of any condition described in such section and demanded by any Bank. (b) Additional Costs. (i) If after the date hereof, any change in any law or regulation or in the interpretation thereof by any court or administrative or governmental authority charged with the administration thereof or the enactment of any law or regulation shall either (1) impose, modify or deem applicable any reserve, special deposit or similar requirement against the Banks' Commitments or the Loans or Swing Line Advances or (2) impose on any Bank any other condition regarding this Agreement, its Commitment or the Loans or Swing Line Advances and the result of any event referred to in clause (1) or (2) of this clause (b) shall be to increase the cost (other than an increase in cost as a consequence of any Tax, which shall be governed by the provisions of Section 4.04(a)) to any Bank of maintaining its Commitment or any Loans or Swing Line Advances (which increase in cost shall be calculated in accordance with each Bank's reasonable averaging and attribution methods) by an amount which any such Bank deems to be material, then, upon receipt by the Page 36 Company of written notice by such Bank, the Company shall be obligated to pay to such Bank within 10 days of any written demand therefor an amount equal to such increase in cost incurred by any such Bank after the date the Company receives such notice; provided that in respect of any Loan or Swing Line Advances such amount shall bear interest, after receipt by the Company of any such demand until payment in full thereof, at a rate per annum (based on a 360-day year, for the actual number of days involved) equal to the sum of 2% and the interest rate then applicable to ABR Loans, changing as and when such rate shall change. (ii) If any Bank shall have determined that the adoption of any applicable law, rule, regulation or guideline regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof (including any such adoption or change made prior to the date hereof but not effective until after the date hereof), or compliance by any Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital for any such Bank or any corporation controlling such Bank as a consequence of its obligations under this Agreement to a level below that which such Bank or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy), then upon receipt by the Company of written notice by such Bank, the Company shall be obligated to pay to such Bank upon receipt of written demand from such Bank such additional amount or amounts as will compensate such Bank for such reduction suffered by such Bank after the date the Company receives such notice, plus interest thereon at a rate per annum (based on a 360-day year, for the actual number of days involved) equal to the sum of 2% and the interest rate then applicable to ABR Loans, changing as and when such rate shall change, from the date of such demand by such Bank to the date of payment by the Company. (iii) Mitigation. Each Bank agrees that, as promptly as practicable after the officer of such Bank responsible for administering the Loans under this Agreement becomes aware of the occurrence of an event or the existence of a condition that would require the Company to make payments with respect to such Bank under subsection 4.04(b)(i) or (ii), it will, to the extent not inconsistent with such Bank's internal policies, use reasonable efforts (1) to make, fund or maintain the Commitments or Loans of such Bank through another lending office of such Bank, or (2) take such other reasonable measures, if as a result the additional amounts that would otherwise be required to be paid by the Company with respect to such Bank pursuant to subsection 4.04(b)(i) or (ii) would be materially reduced and if, as determined by such Bank in its sole discretion, the making, funding or maintaining of such Commitments or Page 37 Loans through such other lending office or in accordance with such other measures, as the case may be, would not otherwise materially adversely affect such Commitments or Loans or the interests of such Bank. (iv) Replacement of Bank. If the Company becomes obligated to pay additional amounts described in Section 4.04(b)(i) or (ii) as a result of any condition described in such section and payment of such amount is demanded by any Bank, then the Company may, on ten business days' prior written notice to the Agent and such Bank, cause such Bank to (and such Bank shall) assign all of its rights and obligations under this Agreement to a Bank or other entity selected by the Company for a purchase price equal to the outstanding principal amount of such Bank's Loans and all accrued interest and fees, provided that in no event shall the assigning Bank be required to pay or surrender to such purchasing Bank or other entity any of the fees received by such assigning Bank pursuant to this Agreement. The Company shall remain obligated to pay to such assigning Bank all additional amounts described in Section 4.04(b) arising on or prior to the date of such assignment as a result of any condition described in such section and demanded by any Bank. (c) Lending Office Designations. Before giving any notice to the Company pursuant to this Section 4.04, each Bank shall, if possible, designate a different lending office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. (d) Certificate, Etc. Each Bank shall promptly notify the Company, with a copy to the Agent, upon becoming aware that the Company may be required to make any payment pursuant to this Section 4.04. When requesting payment pursuant to this Section 4.04, each Bank shall provide to the Company, with a copy to the Agent, a certificate, signed by an officer of such Bank, setting forth the amount required to be paid by the Company to such Bank and the computations made by such Bank to determine such amount. Determinations and allocations by such Bank for purposes of this Section 4.04 shall be conclusive and binding upon the Company, provided that such determinations and allocations are made on a reasonable basis and are mathematically accurate. (e) Participants. Subject to Section 11.08(e), each Participant shall be deemed a "Bank" for the purposes of this Section 4.04. Section 4.05. Unavailability. If at any time any Bank shall have determined in good faith (which determination shall be conclusive) that the making or maintenance of all or any part of such Bank's Eurodollar Loans has been made impracticable or unlawful because of compliance by such Bank in good faith with any law or guideline or interpretation or administration thereof by any official body charged with the interpretation or administration thereof or Page 38 with any request or directive of such body (whether or not having the effect of law), because U.S. dollar deposits in the amount and requested maturity of such Eurodollar Loans are not available to the Bank in the London Eurodollar Interbank market, or because of any other reason, then the Agent, upon notification to it of such determination by such Bank, shall forthwith advise the other Banks and the Company thereof. Upon such date as shall be specified in such notice and until such time as the Agent, upon notification to it by such Bank, shall notify the Company and the other Banks that the circumstances specified by it in such notice no longer apply, (i) notwithstanding any other provision of this Agreement, such Eurodollar Loans of such Bank shall automatically and without requirement of notice by the Company be converted to ABR Loans and (ii) the obligation of only such Bank to allow borrowing, elections and renewals of Eurodollar Loans shall be suspended, and, if the Company shall request in a Loan Request or Conversion/Continuance Request that such Bank make a Eurodollar Loan, the loan requested to be made by such Bank shall instead be made as an ABR Loan. ARTICLE V REPRESENTATIONS AND WARRANTIES Section 5.01. Representations and Warranties. As of each Compliance Date, the Company represents and warrants to the Banks that: Subsidiaries. At the date hereof, the Company has no Subsidiaries and is a participant in no joint ventures other than as listed on Schedule 5.01(a). Good Standing and Power. The Company is duly organized and validly existing and in good standing under the laws of the State of Maryland; and the Company has the power to own its property and to carry on its business as now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except where the failure to be so qualified or to be in good standing, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. Each of the corporate Subsidiaries of the Company are corporations, each duly organized and validly existing, under the laws of the jurisdiction of its incorporation; each other Subsidiary is an entity duly organized and validly existing under the laws of the jurisdiction of its organization; and each Subsidiary has the power to own its property and to carry on its business as now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except where the failure to be so organized, Page 39 existing, qualified, or to be in good standing, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. Corporate Authority. The Company has full corporate power and authority to execute, deliver and perform its obligations under this Agreement, to make the borrowings contemplated hereby, and to execute and deliver the Notes and to incur the obligations provided for herein and therein, all of which have been duly authorized by all proper and necessary corporate action. No consent or approval of stockholders is required as a condition to the validity or performance by the Company of its obligations under this Agreement or the Notes. Authorizations. All authorizations, consents, approvals, registrations, notices, exemptions and licenses with or from Governmental Authorities and other Persons which are necessary for the borrowing hereunder, the execution and delivery of the Credit Documents, the performance by the Company of its obligations hereunder and thereunder have been effected or obtained and are in full force and effect. Binding Agreements. This Agreement constitutes, and the Notes, when executed and delivered pursuant hereto for value received will constitute, the valid and legally binding obligations of the Company enforceable in accordance with their terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting the rights and remedies of creditors; and the effect of general principles of equity, regardless of whether enforcement is sought in a proceeding at law or in equity, and the discretion of the court before which any proceeding therefor may be brought. Litigation. There are no proceedings or investigations, so far as the executive officers of the Company know, pending or threatened before any court or arbitrator or before or by any Governmental Authority which (i) in any one case or in the aggregate, if determined adversely to the interests of the Company or any of its Subsidiaries, could reasonably be expected to have a Material Adverse Effect, (ii) relates to any Credit Document or the lending transactions contemplated hereby and thereby or (iii) seeks to (or is expected to) rescind, terminate, revoke, cancel, withdraw, suspend, modify or withhold any material license or permit of the Company or any of the Subsidiaries. No Conflicts. There is no statute, regulation, rule, order or judgment, and no provision of any material agreement or instrument binding on the Company or any of its Subsidiaries, or affecting their respective properties and no provision of the certificate of incorporation, by-laws, governing partnership agreement or other organizational document of the Company or any of its Subsidiaries, which would prohibit, conflict with or in any way Page 40 prevent the execution, delivery, or performance of the terms of the Credit Documents or the incurrence of the obligations provided for herein and therein, or result in or require the creation or imposition of any Lien on any of the Company's or its Subsidiaries' properties as a consequence of the execution, delivery and performance of any Credit Document or the lending transactions contemplated hereby and thereby. Financial Condition. (i) (A) The consolidated balance sheet as of December 31, 1996, together with consolidated statements of income, stockholders' equity and cash flows for the fiscal year then ended, audited by KPMG Peat Marwick, included in the Realty Income Corporation 1996 Year End Report and (B) the consolidated balance sheet as of September 30, 1997, together with the consolidated statements of income and cash flows for the 9 months then ended certified by the chief financial officer of the Company, heretofore delivered to the Agent, fairly present the financial condition of the Company and its consolidated Subsidiaries and the results of their operations as of the dates and for the periods referred to and have been prepared in accordance with GAAP consistently applied throughout the periods involved. As of the date hereof, there are no material liabilities, direct or indirect, fixed or contingent, of the Company and its Subsidiaries as of the dates of such balance sheet which are not reflected therein or in the notes thereto. (ii) Since December 31, 1996 there has been no Material Adverse Change. Taxes. The Company and each of its Subsidiaries has filed or caused to be filed all tax returns which are required to be filed and has paid all taxes required to be shown to be due and payable on said returns or on any assessment made against it or any of its property and all other taxes, assessments, fees, liabilities, penalties or other charges imposed on it or any of its property by any Governmental Authority, except for any taxes not yet delinquent and any taxes, assessments, fees, liabilities, penalties or other charges which are being contested in good faith and for which adequate reserves (in accordance with GAAP) have been established. Use of Proceeds. The proceeds of the Loans and Swing Line Advances will be used by the Company for the purposes described in the Whereas clause hereto. Margin Regulations. No part of the proceeds of any Loan will be used to purchase or carry, or to reduce or retire or refinance any credit incurred to purchase or carry or extend credit to others for the purpose of purchasing or carrying, any "margin stock" as defined in Regulation G or Regulation U of the Board of Governors of the Federal Reserve System. Page 41 No Material Misstatements. All written information relating to the Company and its Subsidiaries heretofore delivered by the Company and its Subsidiaries to the Agent or any Bank in connection with the Credit Documents is complete and correct in all material respects. Title to Properties; Possession Under Leases. The Company and its Subsidiaries each have good and marketable title to, or valid leasehold interests in, all properties and assets reflected on the consolidated balance sheet of the Company as of September 30, 1997, referred to in Section 5.01(h), except for such properties and assets as have been disposed of in the ordinary course of business and except for minor defects in title that do not, individually or in the aggregate, materially interfere with the ability of the Company or any of such Subsidiaries to conduct its business as now conducted. All such assets and properties are free and clear of all Liens, except Liens permitted pursuant to this Agreement. Leases. To the Company's knowledge, no condition exists which, with the giving of notice or the passage of time, or both, would permit any lessee to cancel its obligations under any lease to which the Company or any Subsidiary is a party that would create, individually or in the aggregate, a Material Adverse Effect; (ii) the Company has received no notice that any lessee or lessees intend to cease operations at any leased property or properties prior to the expiration of the term of the applicable lease (other than temporarily due to casualty, remodeling, renovation or any similar cause) that would create, individually or in the aggregate, a Material Adverse Effect; and (iii) to the Company's knowledge, none of the lessees or their sub-lessees, if any, under any of the leases to which the Company or any Subsidiary is a party to or is the subject of any bankruptcy, reorganizations, insolvency or similar proceeding that would create, individually or in the aggregate, a Material Adverse Effect. Conduct of Business. At the date hereof, the Company and its Subsidiaries hold all authorizations, consents, approvals, registrations, franchises, licenses and permits, with or from Governmental Authorities and other Persons as are required or necessary for them to own their properties and conduct their business as now conducted unless and to the extent that any failure to hold such authorizations, consents, approvals, registrations, franchises, licenses and permits, individually or in the aggregate, could not have a Material Adverse Effect. Compliance with Laws and Charter Documents. Neither the Company nor any Subsidiary thereof is, or as a result of performing any of its obligations under the Credit Documents will be, in violation of (a) any law, statute, rule, regulation or order of any Governmental Authority (including Environmental Laws) applicable to it or its properties or assets, (b) its certificate of incorporation, by- laws, governing partnership agreement or other organizational Page 42 document or (c) judgments or agreements to which it is a party or by which its assets may be bound unless and to the extent that such violations, individually or in the aggregate, would not have a Material Adverse Effect. ERISA. (i) Neither the Company nor any ERISA Affiliate has engaged in a transaction with respect to any Plan which, assuming the taxable period of such transaction expired as of the Compliance Date, could subject the Company or any ERISA Affiliate to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount that would have a Material Adverse Effect. (ii) Except as set forth on Schedule 5.01(q), neither the Company nor any ERISA Affiliate has incurred any liability since December 30, 1993, under Title IV of ERISA with respect to any "single employer plan" within the meaning of Section 4001(a)(15) of ERISA. No Single-Employer Plan had an accumulated funding deficiency, whether or not waived, as of the last day of the most recent fiscal year of such Plan ended prior to the Compliance Date, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. Neither the Company nor any ERISA Affiliate is (A) required to give security to any Single-Employer Plan pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, or (B) subject to a lien in favor of such a Plan under Section 302(f) of ERISA. (iii) No liability under Sections 4062, 4063, 4064 or 4069 of ERISA has been or is expected by the Company to be incurred by the Company or ERISA Affiliate with respect to any Single-Employer Plan in an amount that could have a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred or expects to incur any withdrawal liability with respect to any Plan which is a multiemployer plan in an amount which would have a Material Adverse Effect. (iv) Under each Single-Employer Plan, as of the last day of the most recent plan year ended prior to the Compliance Date, the actuarially determined present value of all benefit liabilities (as determined on the basis of the actuarial assumptions contained in the Plan's most recent actuarial valuation) did not exceed the fair market value of the asset of such Plan by an amount that would have a Material Adverse Effect. (v) Insofar as the representations and warranties of the Company contained in clause (i) above relates to any Plan which is a multiemployer plan, such representations and warranties are made to the best knowledge of the Company and its ERISA Affiliates. As used in this Section, (A) "accumulated funding deficiency" shall have the meaning assigned to such term in Section 412 of the Code and Section 302 of ERISA; (B) "multiemployer plan" and "plan year" shall have the respective meanings assigned to such terms in Section 3 of ERISA; (C) "benefit liabilities" shall have the meaning assigned to Page 43 such term in Section 4001 of ERISA; (D) "taxable period" shall have the meaning assigned to such term in Section 4975 of the Code; and (E) "withdrawal liability" shall have the meaning assigned to such term in Part 1 of Subtitle E of Title IV of ERISA. Intellectual Property. The Company and each of its Subsidiary owns, or is licensed to use, all trademarks, trade names, patents and copyrights (the "Intellectual Property") necessary for the conduct of its business as currently conducted, including, without limitation, the Intellectual Property listed on Schedule 5.01(r) hereto. To the knowledge of the Company, no claim has been asserted or is pending by any Person challenging or questioning the use by the Company or any Subsidiary of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does the Company know of any valid basis for any such claim. To the knowledge of the Company, the use of such Intellectual Property by the Company and its Subsidiaries does not infringe on the rights of any Person, nor, to the knowledge of the Company, are there any uses by other Persons of such Intellectual Property which infringe on the rights of the Company and its Subsidiaries. Not an Investment Company or Public Utility Holding Company. Neither the Company nor any of its Subsidiaries is or, after giving effect to the transactions contemplated hereby will be (i) an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended or (ii) subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or any foreign, federal, state or local statute or regulation limiting its ability to incur indebtedness for money borrowed as contemplated hereby. Environmental Matters. Except as they would not individually or in the aggregate have a Material Adverse Effect (i) the businesses as presently or formerly engaged in by the Company are and have been conducted in compliance with all applicable Environmental Laws, including, without limitation, having all permits, licenses and other approvals and authorizations, during the time the Company engaged in such businesses, (ii) the properties presently or formerly owned or operated by the Company (including, without limitation, soil, groundwater or surface water on, under or adjacent to the properties, and buildings thereon) (the "Properties") do not contain any Hazardous Substance other than in compliance with applicable Environmental Law (provided, however, that with respect to Properties formerly owned or operated by the Company, such representation is limited to the period the Company owned or operated such Properties), (iii) the Company has not received any notices, demand letters or request for information from any Federal, state, local or foreign governmental entity or any third party indicating that the Company may be in violation of, or liable under, in any respect, any Environmental Law in connection with the ownership or Page 44 operation of the Company's businesses, (iv) there are no civil, criminal or administrative actions, suits, demands, claims, hearings, investigations or proceedings pending or threatened against the Company with respect to the Company or the Properties relating to any violation, or alleged violation, of any Environmental Law, (v) no reports have been filed, or are required to be filed, by the Company concerning the release of any Hazardous Substance or the threatened or actual violation of any Environmental Law on or at the Properties, (vi) no Hazardous Substance has been disposed of, transferred, released or transported from any of the Properties during the time such Property was owned or operated by the Company, other than in compliance with applicable Environmental Law, (vii) there have been no environmental investigations, studies, audits, tests, reviews or other analyses conducted by or which are in the possession of the Company relating to the Company or the Properties which have not been delivered to the Banks prior to the date hereof, (viii) none of the Properties has been used at any time by the Company as a sanitary landfill or hazardous waste disposal site and (ix) the Company has not incurred, and none of the Properties are presently subject to, any material liabilities (fixed or contingent) relating to any suit, settlement, court order, administrative order, judgment or claim asserted or arising under any Environmental Law. Solvency. On the date of each Loan and Swing Line Advance hereunder, and after the payment of all estimated legal, investment banking, accounting and other fees related hereto, the Company and each of its Subsidiaries will be Solvent. Insurance. All of the properties (other than properties leased to other Persons) and operations of the Company and its Subsidiaries of a character usually insured by companies of established reputation engaged in the same or a similar business similarly situated are adequately insured, by financially sound and reputable insurers, against loss or damage of the kinds and in amounts customarily insured against by such Persons, and the Company and its Subsidiaries carry, with such insurers in customary amounts, such other insurance as is usually carried by companies of established reputation engaged in the same or a similar business similarly situated. REIT Status. The Company qualifies, and will elect or has elected to be treated, as a real estate investment trust under Sections 856 through 860 of the Code and the rules and regulations thereunder (a "REIT") beginning with its taxable year ending December 31, 1994. No fact, event or condition has occurred which could jeopardize the Company's tax status as a REIT. Page 45 ARTICLE VI CONDITIONS OF LENDING Section 6.01. Conditions to the Availability of the Commitment. The obligations of each Bank hereunder are subject to, and the Banks' Commitment shall not become available until the date (the "Effective Date") on which, each of the following conditions precedent shall have been satisfied or waived in writing by each of the Banks, and upon such satisfaction or waiver each Bank will give a written confirmation of the same to the Company on request: Credit Agreement. The Agent shall have received this Agreement duly executed and delivered by each of the Banks and the Company. Notes. The Agent on behalf of each Bank shall have received Pro Rata Notes and Swing Line Notes in the principal amounts set forth in Sections 2.03 and 2.10(c), duly executed and delivered by the Company. Good Standing Certificates. The Agent on behalf of the Banks shall have received from the Company copies of good standing certificates, dated within five (5) days prior to the date hereof, confirming the Company's representation as to good standing in Section 5.01(b). Secretary's Certificate. The Agent on behalf of the Banks shall have received from the Company a certificate from the Secretary or Assistant Secretary of the Company, dated as of the date hereof, (i) certifying the incumbency of the officers executing the Credit Documents and all related documentation, (ii) attaching and certifying the resolutions of the Board of Directors of the Company relating to the execution, delivery and performance of this Agreement, and (iii) attaching and certifying the Certificate of Incorporation and By-laws of the Company. Authorizations. The Agent shall have received copies of all authorizations, consents, approvals, registrations, notices, exemptions and licenses with or from Governmental Authorities and other Persons which are necessary for the borrowing hereunder, the execution and delivery of the Credit Documents, the performance by the Company of its obligations hereunder and thereunder. Opinion of Company Counsel. The Agent shall have received a favorable written opinion, dated the date hereof, of Latham & Watkins, special New York counsel for the Company, in substantially the form of Exhibit F-1 and of Michael R. Pfeiffer, general counsel of the Company, in substantially the form of Exhibit F-2. Page 46 Litigation. There shall not be pending or threatened any action or proceeding before any court or administrative agency relating to the lending transactions contemplated by this Agreement or any Note which, in the judgment of the Agent or any Bank, could materially impair the ability of the Company to perform its obligations hereunder or thereunder. Other Agreements. The Agent shall have received copies of other tax sharing, management and other similar agreements between the Company and any of its Subsidiaries or Affiliates, which shall be in form and substance satisfactory to the Agent. Capital Structure. The Company's capital structure shall be acceptable to the Agent. Fees. The Agent shall have received from the Company the fees set forth in Section 2.04 and fees of Agent's counsel which are due and payable on the Effective Date. Other Documents. The Agent shall have received such other certificates and documents as the Agent and the Banks reasonably may require. Section 6.02. Conditions to All Loans. The obligations of each Bank in connection with each Loan (including the Initial Loan) and the obligations of the Swing Line Bank in connection with each Swing Line Advance (including the first Swing Line Advance) are subject to the conditions precedent that, on the date of each such Loan and after giving effect thereto, each of the following conditions precedent shall have been satisfied or waived in writing by each Bank, and upon such satisfaction or waiver each Bank will give a written confirmation of the same to the Company on request: (a) Requests. For each Loan, the Agent shall have received either a Pro Rata Loan Request in substantially the form of Exhibit B or a Competitive Loan Request in substantially the form of Exhibit C- 1; for each Swing Line Advance, the Agent and the Swing Line Bank shall have received a Swing Line Advance Request in substantially the form of Exhibit E. (b) No Default. No Default or Event of Default shall have occurred and be continuing, and the Agent shall have received from the Company a certificate to that effect signed by an authorized officer of the Company. (c) Representations and Warranties; Covenants. The representations and warranties contained in Article V (other than representations and warranties that speak as of a specific date) shall be true and correct with the same effect as though such representations and warranties had been made at the time of such Loan Page 47 or Swing Line Advance, and the Agent shall have received from the Company a certificate to that effect signed by an authorized officer of the Company. ARTICLE VII COVENANTS Section 7.01. Affirmative Covenants. Until the Termination Date, and thereafter until payment in full of the Notes and performance of all other obligations of the Company hereunder (other than Unmatured Surviving Obligations), the Company will: (a) Financial Statements; Compliance Certificates. Furnish to the Agent and to each Bank (i) as soon as available, but in no event more than 60 days following the end of each fiscal quarter, copies of all consolidated quarterly balance sheets, income statements and other financial statements and reports of the Company and its Subsidiaries, prepared in a format and in scope consistent with the financial statements and reports of the Company referenced in Section 5.01(h); (ii) as soon as available, but in no event more than 105 days following the end of each fiscal year, a copy of the annual consolidated audit report and financial statements relating to the Company and its Subsidiaries, certified by KPMG Peat Marwick, one of the other "Big Six" accounting firms or another independent certified public accountant reasonably satisfactory to the Agent, prepared in a format and in scope consistent with the December 31, 1996 financial statements and reports of the Company referenced in Section 5.01(h); (iii) as soon as available, but in no event later than 60 days following the end of each fiscal year, an annual forecast for the then-current fiscal year, prepared in a manner and in the form of the forecast provided on the date of this Agreement or in such other form as is reasonably acceptable to the Agent and the Required Banks together with an annual rent roll dated the most-recent December 31; (iv) together with each of the financial statements delivered pursuant to clauses (i) and (ii) of this Section 7.01(a), a certificate of the Chief Financial Officer of the Company stating whether as of the last date of such financial statements any event or circumstance exists which constitutes a Default or Event of Default and, if so, stating the facts with respect thereto, together Page 48 with calculations, where applicable, which establish the Company's (and where applicable, each of the Company's Subsidiaries') compliance therewith; (v) promptly upon receipt thereof, copies of any reports and management letters submitted to the Company or any of its Subsidiaries or their accountants in connection with any annual or interim audit of the books of the Company or its Subsidiaries, together with the responses thereto, if any; and (vi) such additional information, reports or statements as the Agent and the Banks from time to time may reasonably request including but not limited to the quarterly furnishing to the Agent of the most recent Property Management Exception Report in a form substantially similar to Exhibit G hereto, a list of the Company's current property portfolio and a list of the Company's past quarter's acquisitions on an acquisition cost basis, an appraised value basis (to the extent available) and a projected annual rent basis. (b) Notification of Defaults and Adverse Developments. Notify the Agent (i) promptly, and in any event not later than five Business Days after the discovery by any officer of the Company of the occurrence of any Default or Event of Default; (ii) promptly, and in any event not later than five Business Days after the discovery by any officer of the Company of the occurrence of a Material Adverse Change; (iii) promptly, and in any event not later than ten Business Days after the discovery by any officer of the Company of any litigation or proceedings that are (to the knowledge of any executive officer of the Company) instituted or threatened against the Company or its Subsidiaries or any of their respective assets that (a) could reasonably be expected to have a Material Adverse Effect or (b) seeks to (or is expected to) rescind, terminate, revoke, cancel, withdraw, suspend, modify or withhold any material license or permit of the Company or any of the Subsidiaries; (iv) promptly, and in any event not later than five Business Days after the discovery by any officer of the Company of the occurrence of each and every event which would be an event of default (or an event which with the giving of notice or lapse of time or both would be an event of default) under any Indebtedness of the Company or any of its Subsidiaries in a principal amount in excess of $5,000,000, such notice to include the names and addresses of the holders of such Indebtedness and the amount thereof and (v) promptly, and in any event not later than five days after the end of the calendar quarter in which the Company receives notice of a change in the rating published by any of the Rating Agencies with respect to the Company's senior unsecured debt. Upon receipt of any such notice of default or adverse development, the Agent shall forthwith give notice to each Bank of the details thereof. Page 49 (c) Notice of ERISA Events. Within 10 days after the Company or any ERISA Affiliate knows that any of the events described in the succeeding two sentences have occurred, the Company shall furnish to the Agent a statement signed by a senior officer of the Company describing such event in reasonable detail and the action, if any, proposed to be taken with respect thereto. The events referred to in the preceding sentence are, with respect to any Single-Employer Plan: (i) any reportable event described in Section 4043 of ERISA, other than a reportable event for which the 30-day notice requirement has been waived by the PBGC; (ii) the provision to any affected party as such term is defined in Section 4001 of ERISA of a notice of intent to terminate the Plan; (iii) the adoption of or amendment to the Plan if, after giving effect to such amendment, the Plan is a plan described in Section 4021(b) of ERISA; (iv) receipt of notice of an application by the PBGC to institute proceedings to terminate the Plan pursuant to Section 4042 of ERISA; (v) withdrawal from or termination of the Plan during a plan year for which the Company or any ERISA Affiliate is or would be subject to liability under Sections 4063 or 4064 of ERISA; (vi) cessation of operations by the Company or any ERISA Affiliate at a facility under the circumstances described in Section 4062(e) of ERISA; (vii) adoption of an amendment to the Plan which would require security to be given to the Plan pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; and (viii) failure by the Company or any ERISA Affiliate to make payment to the Plan which would give rise to a lien in favor of the Plan under Section 302(f) of ERISA. Such events shall also include receipt of notice of withdrawal liability pursuant to Section 4202 of ERISA with respect to a Plan that is a multiemployer plan. (d) Other Reports, Notices and Materials. Furnish to the Agent (i) as soon as available copies of reports, notices and other materials sent to the Company or any of its Subsidiaries from any Governmental Authority, including the Securities and Exchange Commission, the Internal Revenue Service and PBGC and (ii) within 90 days of adoption by the Company's board of directors, copies of any revisions, supplements, amendments or restatements to the Real Estate Investment Criteria. (e) Environmental Matters. (i) Comply, and cause its Subsidiaries to comply, in all material respects, with all applicable Environmental Laws, (ii) notify the Agent promptly after receiving notice or becoming aware of any order, notice, claim or proceeding under any Environmental Laws, other than those that are clearly not material, and (iii) promptly forward to Agent a copy of any Environmental Claim, order, notice, permit, application, or any other communication or report received by Company or any of its Subsidiaries in connection with any such matters as they may affect such premises, if material. (f) Taxes. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges upon it, its income and its properties prior to Page 50 the date on which penalties are attached thereto, unless and to the extent that (i) such taxes, assessments and governmental charges shall be contested in good faith and by appropriate proceedings by the Company or such Subsidiary, as the case may be, (ii) adequate reserves (in accordance with GAAP) are maintained by the Company or such Subsidiary, as the case may be, with respect thereto, and (iii) any failure to pay and discharge such taxes, assessments and governmental charges could not have a Material Adverse Effect. (g) Insurance. Maintain, and cause each of its Subsidiaries to maintain, insurance with responsible insurance companies against such risks, on such properties and in such amounts as is customarily maintained by similar businesses; and file and cause each of its Subsidiaries to file with the Agent upon its request or the request of any Bank a detailed list of the insurance companies, the amounts and rates of the insurance, the dates of the expiration thereof and the properties and risks covered thereby. (h) Corporate Existence. Except as permitted by Section 7.02(c), maintain, and cause each of its Subsidiaries to maintain, its existence in good standing and qualify and remain qualified to do business in each jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business is such that the failure to maintain such existence or to qualify could reasonably be expected to have a Material Adverse Effect. (i) Authorizations. Obtain, make and keep in full force and effect all material authorizations from and registrations with Governmental Authorities. (j) Maintenance of Records. Maintain, and cause each of its Subsidiaries to maintain, complete and accurate books and records in which full and correct entries in conformity with GAAP shall be made of all dealings and transactions in its respective business and activities. (k) Inspection. Permit, and cause each of its Subsidiaries to permit, the Agent and the Banks to have one or more of their officers and employees, or any other Person designated by the Agent or the Banks, visit and inspect any of the properties of the Company and its Subsidiaries (upon reasonable request and notice and in accordance with the agreement, if any, relating to any such property) and to examine the minute books, books of account and other records of the Company and its Subsidiaries and make copies thereof or extracts therefrom, and discuss its affairs, finances and accounts with its officers and, at the request of the Agent or the Banks, with the Company's independent accountants, during normal business hours and at such other reasonable times and as often as the Agent or the Banks reasonably may desire. Page 51 (l) Conduct of Business. (i) Engage in as its principal business investing in real estate in the United States, (ii) preserve, renew and keep in full force and effect all its material contracts, (iii) preserve, renew and maintain in full force and effect all its franchises and licenses material to the normal conduct of its business as now conducted, and (iv) comply with all of the terms of all instruments which evidence, secure or govern the Indebtedness of the Company and its Subsidiaries and materially all laws, rules and regulations of all Governmental Authorities. (m) Maintenance of Property, Etc. (i) Maintain, keep and preserve and cause each of its Subsidiaries to maintain, keep and preserve all of its properties in good repair, working order and condition and from time to time make all necessary and proper repairs, renewals, replacements, and improvements thereto, and (ii) maintain, preserve and protect and cause each of its Subsidiaries to maintain, preserve and protect all franchises, licenses, copyrights, patents and trademarks material to its business, so that the business carried on in connection therewith may be properly and advantageously conducted at all times. (n) Insurance on Leased Properties. Use its, and cause its Subsidiaries to use their, commercially reasonable best efforts to ensure that each lessee of a property owned in whole or in part, directly or indirectly, by the Company or any Subsidiary, and each mortgagor of a property on which the Company or any Subsidiary holds a mortgage, has, and until the Termination Date will keep, in place adequate insurance which names the Company or such Subsidiary as a loss payee. For the purposes of the preceding sentence "adequate insurance" shall mean insurance, with financially sound and reputable insurers in such amounts and insuring against such risks as are customarily maintained by similar businesses. (o) Further Assurances. The Company agrees to do all acts and things, as may be required by law or as, in the reasonable judgment of the Agent, may be necessary or advisable to carry out the intent and purpose of this Agreement. Section 7.02. Negative Covenants. Until the Termination Date, and thereafter until payment in full of the Notes and performance of all other obligations of the Company hereunder (other than Unmatured Surviving Obligations), the Company will not: (a) Indebtedness. Create, incur or assume any Indebtedness, except (i) Indebtedness to the Agent and the Banks hereunder and under the Notes, (ii) Indebtedness incurred to pay dividends enabling the Company to maintain its status as a REIT, (iii) Indebtedness incurred to purchase Interest Rate Protection Agreements and (iv) Indebtedness that would otherwise be permitted under the Credit Documents, provided that, in each of the aforementioned cases, (A) the agreements and covenants entered into in connection therewith would be, in the written determination of the Page 52 Agent, no more restrictive on the Company than the agreements and covenants hereunder, (B) such Indebtedness is unsecured, (C) the maturity of such Indebtedness (including all scheduled payments of principal) is later than the Termination Date, (D) such Indebtedness ranks pari passu or subordinate to the Notes and (E) after giving effect to the incurrence of such Indebtedness, the Company's interest coverage ratio referred to in Section 7.03(c) herein for the most recent four-quarter period ending on the ending date of the Company's last fiscal quarter would have been greater than 2.50:1.00. The Company shall not permit any Subsidiary to create, incur, assume or suffer to exist any Indebtedness except to the Company or another Subsidiary, and such Indebtedness may not exceed $3,500,000." (b) Mortgages and Pledges. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien of any kind upon or in any of its property or assets, whether now owned or hereafter acquired, except Permitted Encumbrances. (c) Merger, Acquisition or Sales of Assets. (i) Acquire, or permit any of its Subsidiaries to acquire, all or any substantial portion of the assets of any Person other than (a) the acquisition of property in the ordinary course of the Company's business; or (b) the acquisition of the equity interests of an entity for the purpose of controlling the property of that entity in the ordinary course of the Company's business, provided that the aggregate purchase price paid by the Company in all transactions under this clause (b) and clause (ii)(b) below shall not exceed $50,000,000; (ii) enter into any merger or consolidation, or permit any Subsidiary to do so, other than (a) a merger or consolidation of a Wholly owned Subsidiary with one or more other Wholly owned Subsidiaries or into the Company, (b) a merger or consolidation of a Subsidiary or the Company with an entity for the purpose of controlling the property of that entity in the ordinary course of the Company's business, provided that the aggregate purchase price paid by the Company in all transactions under this clause (b) and clause (i)(b) above shall not exceed $50,000,000, or (c) a merger of the Company into another corporation primarily for the purpose of changing the jurisdiction of incorporation of the Company, provided that the surviving entity shall assume all obligations of the Company hereunder; or (iii) sell, lease or otherwise dispose of any assets of the Company or any of the Subsidiaries other than in the ordinary course of the Company's business for the fair market value thereof; provided, that the Company shall be permitted to spend up to $10,000,000 to acquire shares of its common stock. (d) Negative Pledge. Grant any Person a negative pledge on any assets of the Company or of the Subsidiaries, except as provided in the Stockholder Notes and in any Permitted Note Refinancing. Page 53 (e) Loans and Investments. Purchase or acquire the obligations or stock of, or any other interest in, or make loans, advances or capital contributions to, or form any joint ventures or partnerships with, any Person, or permit any Subsidiary so to do, except (i) investments in real estate which satisfy each of the Real Estate Investment Criteria, (ii) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America with a maturity not exceeding one year and debt of federal government agencies and treasury and United States government money market accounts, (iii) short-term domestic or Eurodollar time deposits of any Bank or any bank having a combined capital and surplus of not less than $500,000,000 and a long-term debt rating of A or better from Standards & Poor's Corporation or A2 or better from Moody's Investors Services, Inc. with a maturity not exceeding one year, (iv) normal business banking accounts and short- term certificates of deposit in federally insured financial institutions, (v) capital contributions to the Texas Subsidiary by the Company or a Subsidiary of the purchase price for acquisitions by the Texas Subsidiary of properties that the Company would be allowed to acquire directly under this Agreement, provided that, the Subsidiary Guarantee of the Company's payment obligations under this Agreement, attached hereto as Exhibit I, shall remain in full force and effect, and (vi) shares of the Company's common stock; provided that the Company shall not spend more than $10,000,000 in acquiring such shares. (f) Dividends and Purchase of Stock. Declare any dividends (other than dividends payable in capital stock of the Company) on any shares of any class of its capital stock, or apply any of its property or assets to the purchase, redemption or other retirement of, or set apart any sum for the payment of any dividends on, or for the purchase, redemption or other retirement of, or make any other distribution by reduction of capital or otherwise in respect of, any shares of any class of capital stock of the Company, or permit any Subsidiary which is not a Wholly owned Subsidiary so to do, or permit any Subsidiary to purchase or acquire any shares of any class of capital stock of the Company; provided, however, so long as an Event of Default pursuant to Section 8.01(a) has not occurred and is not continuing, the Company may, and may permit its Subsidiaries to, pay dividends and other distributions with respect to capital stock; and provided further that the Company may spend up to $10,000,000 to acquire shares of its common stock. (g) Stock of Subsidiaries. Issue, sell or otherwise dispose of any shares of capital stock of any Subsidiary (except in connection with a merger or consolidation of a Wholly owned Subsidiary permitted by Section 7.02(c) or with the dissolution of any Subsidiary) or permit any Subsidiary to issue any additional shares of its capital stock except pro rata to its stockholders. (h) Terms of Indebtedness. Amend or modify, or permit to be amended or modified the terms of any Company or Subsidiary Page 54 Indebtedness for borrowed money or any documents relating thereto in a manner which would (i) increase the principal amount of such Indebtedness, (ii) increase the interest borne by such Indebtedness, (iii) shorten the maturity of such Indebtedness or (iv) elevate, in relation to the Loans and Swing Line Advances, the ranking in terms of payment of such Indebtedness, without prior written consent from the Agent. (i) Contracts. Amend or modify (i) the Company's certificate of incorporation, (ii) the Real Estate Investment Criteria to a material degree or (iii) any tax sharing, management or other similar agreement between or among the Company and any of its Subsidiaries without the approval of the independent board of directors. (j) Transactions with Affiliates. Enter into any transactions, including without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate, or permit any Subsidiary so to do, except in the ordinary course of and pursuant to the reasonable requirements of its business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary, as the case may be, than could be obtained in an arm's length transaction with a person not an Affiliate. (k) Mortgage Financings. Enter into any mortgage financings. (l) Significant Properties. Without the prior written consent of the Required Banks (which consent shall not be unreasonably withheld, and which consent the Banks and the Agent shall use their best efforts to grant or deny within 10 Business Days of receipt by the Agent of the Company's written request therefor, provided that the failure to grant, deny or explain the inability to make a determination about such consent for 20 Business Days after the Agent's receipt of the Company's request shall be deemed to constitute a grant of such consent), purchase or acquire an interest in (i) multi-tenant office buildings, (ii) hotels, motels, bowling alleys or mobile home parks or (iii) any individual lot of property the price of which exceeds $15,000,000 or two contiguous lots occupied by more than one tenant, the price of which exceeds $30,000,000. Section 7.03. Financial Covenants. Until the Termination Date, and thereafter until payment in full of the Notes and performance of all other obligations of the Company hereunder (other than Unmatured Surviving Obligations), (a) Tangible Stockholders' Equity. The Company will maintain Consolidated Tangible Stockholders' Equity of not less than the sum of (i) $350,000,000 plus (ii) 75% of the sum of the net proceeds received by the Company after December 31, 1997 from any offering of its equity securities. Page 55 (b) Leverage Ratio. The Company will maintain, as measured at the end of each fiscal quarter, a Leverage Ratio of not more than 1.00:1.00. (c) Interest Coverage Ratio. The Company will not permit the ratio of (i) the sum of Consolidated Funds from Operations and Consolidated Interest Expense to (ii) Consolidated Interest Expense for the four quarter period ending on the last day of each fiscal quarter to be less than 2.50:1.00. ARTICLE VIII EVENTS OF DEFAULT Section 8.01. Events of Default. If one or more of the following events (each, an "Event of Default") shall occur: (a) Default shall be made in the payment of any installment of principal of any Note or Swing Line Advance when due and payable, whether at maturity, by notice of intention to prepay or otherwise; or default shall be made in the payment of any installment of interest upon any Note or Swing Line Advance when due and payable, and such default shall have continued for five days; or (b) Default shall be made in the payment of the Facility Fee or any other fee or amount payable hereunder when due and payable and such default shall have continued for five days; or (c) Default shall be made in the due observance or performance of any term, covenant, or agreement contained in Section 7.01(j) or in Section 7.03; or (d) Default shall be made in the due observance or performance of any other term, covenant or agreement contained in this Agreement, and such default shall have continued unremedied for a period of 30 days after any officer of the Company becomes aware, or should have become aware, of such default; or (e) Any representation or warranty made or deemed made by the Company herein or any statement or representation made in any certificate or report delivered by or on behalf of the Company in connection herewith or in connection with any Note shall prove to have been false or misleading in any material respect when made; or (f) Any obligation (other than its obligation hereunder) of the Company or any of its Subsidiaries for the payment of Indebtedness in excess of $500,000 is not paid when due or within any grace period for the payment therefor or becomes or is declared to be due and payable prior to the expressed maturity thereof, or there shall have occurred an event which, with the giving of notice or lapse of time, or both, would cause any such obligation to become, or allow any such obligation to be declared to be, due and payable; or Page 56 (g) An involuntary case or other proceeding shall be commenced against the Company or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any applicable Federal or State bankruptcy, insolvency, reorganization or similar law now or hereafter in effect or seeking the appointment of a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed, or an order or decree approving or ordering any of the foregoing shall be entered and continued unstayed and in effect, in any such event, for a period of 60 days; or (h) The commencement by the Company or any of its Subsidiaries of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by any of them to the entry of a decree or order for relief in respect of the Company or any of its Subsidiaries in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against any of them, or the filing by any of them of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by any of them to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or any of its Subsidiaries or any substantial part of their respective property, or the making by any of them of an assignment for the benefit of creditors, or the admission by any of them in writing of inability to pay their debts generally as they become due, or the taking of corporate action by the Company or any of its Subsidiaries in furtherance of any such action; or (i) One or more judgments against the Company or any of its Subsidiaries or attachments against its property, which in the aggregate exceed $500,000, or the operation or result of which could be to interfere materially and adversely with the conduct of the business of the Company or any of its Subsidiaries, remain unpaid, unstayed on appeal, undischarged, unbonded, or undismissed for a period of 30 days; or (j) With respect to any Single-Employer Plan, any of the following shall occur: (A) the provision to any affected party as such term is defined in Section 4001 of ERISA of a notice of intent to terminate the Plan, the adoption of an amendment to the Plan if, after giving effect thereto, the Plan is a plan described in Section 4021(b) of ERISA or receipt of notice of an application by the PBGC to institute proceedings to terminate the Plan pursuant to Section 4042 of ERISA; in each case, if the amount of unfunded benefit Page 57 liabilities, as such term is defined in Section 4001(a)(18) of ERISA, of the Plan as of the date such event occurs is more than $5,000,000, (B) the Company or any ERISA Affiliate incurs liability under Sections 4062(e), 4063 or 4064 of ERISA in an amount in excess of $5,000,000, (C) an amendment is adopted to the Plan which would require security to be given to the Plan pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA in an amount in excess of $5,000,000, (D) the Company or any ERISA Affiliate fails to make a payment to the Plan which would give rise to a lien in favor of the Plan under Section 302(f) of ERISA in an amount in excess of $5,000,000, or (E) any Person shall engage in any non-exempt "prohibited transaction" (as defined in Section 406 or 407 of ERISA or Section 4975 of the Code) involving any Plan, in an amount in excess of $5,000,000; or (k) Any court or governmental or regulatory authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) which is in effect and which prohibits, enjoins or otherwise restricts in a manner that would have a Material Adverse Effect on any of the lending transactions contemplated under the Credit Documents; or (l) The Company shall fail to maintain its status as a "real estate investment trust", as such term is defined in the Code; or (m) There shall occur a Change of Control; or (n) During any twelve month period two or more members of Key Management are terminated or resign; then (i) upon the happening of any of the foregoing Events of Default, the obligation of the Banks to make any further Loans or the obligation of the Swing Line Bank and the other Banks to make any further Swing Line Advances under this Agreement shall terminate upon declaration to that effect delivered by the Agent or the Required Banks to the Company and (ii) upon the happening of any of the foregoing Events of Default which shall be continuing, the Notes and the Swing Line Advances shall become and be immediately due and payable upon declaration to that effect delivered by the Agent or the Required Banks to the Company; provided that upon the happening of any event specified in Section 8.01(g) or (h), the Notes and Swing Line Advances shall become immediately due and payable and the obligation of the Banks to make any further Loans and the obligation of the Swing Line Bank and the other Banks to make any further Swing Line Advances hereunder shall terminate without declaration or other notice to the Company. The Company expressly waives any presentment, demand, protest or other notice of any kind. Page 58 ARTICLE IX THE AGENT AND THE BANKS Section 9.01. The Agency. (a) Each Bank appoints The Bank of New York as its Agent hereunder and irrevocably authorizes the Agent to take such action on its behalf and to exercise such powers hereunder as are specifically delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental hereto, and the Agent hereby accepts such appointment subject to the terms hereof. The relationship between the Agent and the Banks shall be that of agent and principal only and nothing herein shall be construed to constitute the Agent a trustee for any Bank nor to impose on the Agent duties or obligations other than those expressly provided for herein. Section 9.02. The Agent's Duties. The Agent shall promptly forward to each Bank copies, or notify each Bank as to the contents, of all notices and other communications received from the Company pursuant to the terms of this Agreement and the Notes and, in the event that the Company fails to pay when due the principal of or interest on any Loan, the Agent shall promptly give notice thereof to the Banks. As to any other matter not expressly provided for herein or therein, the Agent shall have no duty to act or refrain from acting with respect to the Company, except upon the instructions of the Required Banks. The Agent shall not be bound by any waiver, amendment, supplement, or modification of this Agreement or any Note which affects its duties hereunder and thereunder, unless it shall have given its prior written consent thereto. The Agent shall have no duty to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements binding on the Company pursuant to this Agreement or any Note nor shall it be deemed to have knowledge of the occurrence of any Default or Event of Default (other than a failure of the Company to pay when due the principal or interest on any Loan), unless it shall have received written notice from the Company or a Bank specifying such Default or Event of Default and stating that such notice is a "Notice of Default". Section 9.03. Sharing of Payment and Expenses. All funds for the account of the Banks received by the Agent in respect of payments made by the Company pursuant to, or from any Person on account of, this Agreement or any Note shall be distributed forthwith by the Agent among the Banks, in like currency and funds as received, ratably in proportion to their respective interests therein. In the event that any Bank shall receive from the Company or any other source any payment of, on account of, or for or under this Agreement or any Note (whether received pursuant to the exercise of any right of set- off, banker's lien, realization upon any security held for or appropriated to such obligation or otherwise as permitted by law) other than in proportion to its Pro Rata Share, then such Bank shall purchase from each other Bank so much of its interest in obligations Page 59 of the Company as shall be necessary in order that each Bank shall share such payment with each of the other Banks in proportion to each Bank's Pro Rata Share; provided that no Bank shall purchase any interest of any Bank that does not, to the extent that it may lawfully do so, set-off against the balance of any deposit accounts maintained with it the obligations due to it under this Agreement. In the event that any purchasing Bank shall be required to return any excess payment received by it, the purchase shall be rescinded and the purchase price restored to the extent of such return, but without interest. Section 9.04. The Agent's Liabilities. Each of the Banks and the Company agrees that (i) neither the Agent in such capacity nor any of its officers or employees shall be liable for any action taken or omitted to be taken by any of them hereunder except for its or their own gross negligence or willful misconduct, (ii) neither the Agent in such capacity nor any of its officers or employees shall be liable for any action taken or omitted to be taken by any of them in good faith in reliance upon the advice of counsel, independent public accountants or other experts selected by the Agent, and (iii) the Agent in such capacity shall be entitled to rely upon any notice, consent, certificate, statement or other document (including any telegram, cable, telex, facsimile or telephone transmission) believed by it to be genuine and correct and to have been signed and/or sent by the proper Persons. Section 9.05. The Agent as a Bank. The Agent shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not the Agent, and the terms "Bank" or "Banks", unless the context otherwise indicated, include the Agent in its individual capacity. The Agent may, without any liability to account, maintain deposits or credit balances for, invest in, lend money to and generally engage in any kind of banking business with the Company or any Subsidiary or affiliate of the Company as if it were any other Bank and without any duty to account therefor to the other Banks. Section 9.06. Bank Credit Decision. Neither the Agent nor any of its officers or employees has any responsibility for, gives any guaranty in respect of, nor makes any representation to the Banks as to, (i) the condition, financial or otherwise, of the Company or any Subsidiary thereof or the truth of any representation or warranty given or made herein or in any other Credit Document, or in connection herewith or therewith or (ii) the validity, execution, sufficiency, effectiveness, construction, adequacy, enforceability or value of this Agreement or any other Credit Document or any other document or instrument related hereto or thereto. Except as specifically provided herein and in the other Credit Documents to which the Agent is a party, the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Bank with any credit or other information with respect to the operations, business, property, condition or creditworthiness of the Page 60 Company or any of its Subsidiaries, whether such information comes into the Agent's possession on or before the date hereof or at any time thereafter. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank, based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will independently and without reliance upon the Agent or any other Bank, based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement or any Note. Section 9.07. Indemnification. Each Bank agrees (which agreement shall survive payment of the Loans and the Notes) to indemnify the Agent, to the extent not reimbursed by the Company, ratably in accordance with their respective Commitments, from and against any and all liabilities, obligations, losses, claims, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any other Credit Document, or any action taken or omitted to be taken by the Agent hereunder or thereunder; provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of the Agent or any of its officers or employees. Without limiting the foregoing, each Bank agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees) incurred by the Agent in such capacity in connection with the preparation, execution or enforcement of, or legal advice in respect of rights or responsibilities under, this Agreement or any Note or any amendments or supplements hereto or thereto, to the extent that the Agent is not reimbursed for such expenses by the Company. Section 9.08. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Banks and the Company, and the Agent may be removed at any time by the Required Banks by giving written notice thereof to the Agent, the other Banks and the Company at least ten Business Days prior to the effective date of such removal. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and shall have accepted such appointment within 30 days after the resigning Agent's giving of notice of resignation, or the Required Banks' giving notice of removal, as the case may be, the resigning Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $250,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all Page 61 the rights, powers, privileges and duties of the resigned or removed Agent, and the resigned or removed Agent shall be discharged from its duties and obligations under this Agreement. After any Agent's resignation hereunder as Agent, the provisions of this Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. ARTICLE X CONSENT TO JURISDICTION Section 10.01. Consent to Jurisdiction. The Company hereby irrevocably submits to the non-exclusive jurisdiction of the State of New York for the purpose of any suit, action, proceeding or judgment relating to or arising out of this Agreement and each Note. The Company hereby appoints CT Corporation System, with offices on the date hereof at 1633 Broadway, New York, New York 10019, as its authorized agent on whom process may be served in any action which may be instituted against it by the Agent or the Banks in any state or federal court in the Borough of Manhattan, The City of New York, arising out of or relating to any Loan or this Agreement and each Note. Service of process upon such authorized agent and written notice of such service to the Company shall be deemed in every respect effective service of process upon the Company, and the Company hereby irrevocably consents to the jurisdiction of any such court in any such action and to the laying of venue in the Borough of Manhattan, The City of New York. The Company hereby irrevocably waives any objection to the laying of the venue of any such suit, action or proceeding brought in the aforesaid courts and hereby irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Notwithstanding the foregoing, nothing herein shall in any way affect the right of the Agent or any Bank to bring any action arising out of or relating to the Loans or this Agreement and each Note in any competent court elsewhere having jurisdiction over the Company or its property. ARTICLE XI MISCELLANEOUS Section 11.01. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA. Section 11.02. Set-off. Each Bank is authorized to set off and apply any and all deposits at any time held by such Bank against obligations of the Company under the Credit Documents. Page 62 Section 11.03. Expenses. The Company agrees to pay (i) all reasonable out-of-pocket expenses of the Agent (including, without limitation, all reasonable fees and expenses of Sullivan & Cromwell, as counsel to the Agent) in connection with the preparation of this Agreement and the other Credit Documents and any amendments, supplements or modifications hereto or thereto, (ii) all reasonable out-of-pocket expenses incurred by the Agent, the Swing Line Bank and any Bank, including fees and expenses of counsel, in connection with the enforcement of, and the protection of their rights under, any provisions of this Agreement, the Notes or any amendment or supplement hereto or thereto, whether or not any loan is made hereunder, and (iii) all reasonable out-of-pocket expenses of the Agent, including reasonable fees and disbursements of counsel, in connection with the syndication of the Loans. The Company shall pay any transfer taxes, documentary taxes, assessments or charges made by any Governmental Authority by reason of the execution and delivery of this Agreement or the Notes incurred up to and including the date of this Agreement. Section 11.04. Amendments. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Company and the Required Banks (and, if the rights or duties of the Agent or the Swing Line Bank are affected thereby, by the Agent and the Swing Line Bank, respectively); provided that no such amendment, waiver or modification shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank, subject any Bank to any additional obligation or change the several nature of the obligations of each Bank, (ii) reduce the principal of or rate of interest on any Loan (other than interest payable pursuant to Section 3.06) or any fees hereunder, (iii) except as otherwise provided in Section 11.12, postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any reduction or termination of any Commitment, (iv) except as otherwise may result from actions taken in accordance with Section 11.12, change the percentage of any of the Commitments or of the aggregate unpaid principal amount of the Notes or Swing Line Advances, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement, or (v) amend or waive the provisions of Article IV or of this Section 11.04. Section 11.05. Cumulative Rights and No Waiver. Each and every right granted to the Agent, the Swing Line Bank and the Banks hereunder or under any other document delivered hereunder or in connection herewith, or allowed them by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Agent, the Swing Line Bank or any Bank to exercise, and no delay in exercising, any right will operate as a waiver thereof, nor will any single or partial exercise by the Agent, the Swing Line Bank or any Bank of any right preclude any other or future exercise thereof or the exercise of any other right. Page 63 Section 11.06. Notices. Any communication, demand or notice to be given hereunder or with respect to the Notes will be duly given when delivered in writing or by telecopy to a party at its address as indicated below, except that notices from the Company pursuant to Section 2.02 will not be effective until received by the Agent. A communication, demand or notice given pursuant to this Section 11.06 shall be addressed: If to the Company, at 220 West Crest Street Escondido, California 92025-1725 Telecopy: (619) 741-8674 Attention: Legal Department If to the Agent or the Swing Line Bank, at its address as indicated on the signature pages hereof, with a copy, only in the case of default notices, to: Sullivan & Cromwell 444 South Flower Street, 12th Floor Los Angeles, California 90071 Telecopy: (213) 683-0457 Attention: Alison S. Ressler If to any Bank, at its address as indicated on the signature pages hereof. Unless otherwise provided to the contrary herein, any notice which is required to be given in writing pursuant to the terms of this Agreement may be given by telex, telecopy or facsimile transmission. Section 11.07. Separability. In case any one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect under any law, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. Section 11.08. Assignments and Participations. (a) This Agreement shall be binding upon and inure to the benefit of the Company, the Swing Line Bank and the Banks and their respective successors and assigns, except that the Company may not assign any of its rights hereunder without the prior written consent of the Banks. Page 64 (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Company and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Company and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Company hereunder including the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clauses (i) through (vi), inclusive, of Section 11.04 without the consent of the Participant. Subject to Section 11.08(e), the Company agrees that each Participant shall be entitled to the benefits of Sections 4.03, 4.04 and 11.04 with respect to its participating interest. An assignment or other transfer which is not permitted by clause (c) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this clause (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or (except insofar as such assignment relates to Competitive Loans) a proportionate part of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an instrument executed by such Assignee and such transferor Bank, with (and subject to) the signed consents of the Company and the Agent and the Swing Line Bank (which consents shall not be unreasonably withheld or delayed); provided, however, any such assignment shall be in the minimum aggregate amount of $10,000,000; provided, further, that the foregoing consent requirement shall not be applicable in the case of, and this subsection (c) shall not restrict, an assignment of all, or (except insofar as such assignment relates to Competitive Loans) a proportionate part of all, of its rights and obligations under this Agreement and the Notes by any Bank to an Affiliate of such Bank or a pledge and assignment of all, or (except insofar as such assignment relates to Competitive Loans) a proportionate part of all, of its rights and obligations under this Agreement and the Notes to a Federal Reserve Bank as collateral; and provided, further, that no consent of the Company shall be required if an Event of Default has occurred and is continuing. Upon (i) execution and delivery of such an instrument, (ii) payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee and (iii) payment by the transferee Bank or transferor Bank to the Agent of an administrative fee in the amount of $3,500, such Assignee shall be a Bank party to this Agreement and shall have all the rights and Page 65 obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank (and the Company as to the transferor Bank) shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Company shall make appropriate arrangements so that, if required, new Notes are issued to the Assignee. (d) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 4.03 or 4.04 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Company's prior written consent or by reason of the provisions of Section 4.04 requiring such Bank to designate a different lending office under certain circumstances or at a time when the circumstances giving rise to such payment did not exist. (e) No Participant of any Bank shall be entitled to receive any greater payment under Section 4.03, Section 4.04 or Section 11.04 than such Bank would have been entitled to receive if it had not granted a participation to such Participant. Section 11.09. WAIVER OF JURY TRIAL. THE COMPANY, THE AGENT AND EACH OF THE BANKS HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT, THE NOTES OR THE RELATIONSHIPS ESTABLISHED HEREUNDER. Section 11.10. Confidentiality. Except as may be required to enforce the rights and duties established hereunder, the parties hereto shall preserve in a confidential manner all information received from the other pursuant to this Agreement, the Notes and the transactions contemplated hereunder and thereunder, and shall not disclose such information except to those persons with which a confidential relationship is maintained (including regulators, legal counsel, accountants, or designated agents), or where required by law. Nothing in this paragraph shall prevent the filing of this Agreement with the Securities and Exchange Commission. Section 11.11. Indemnity. The Company agrees to indemnify the Agent, the Swing Line Bank and each of the Banks and their respective directors, officers, employees and agents (each such person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages and liabilities of any party other than the Company and related expenses, including reasonable counsel fees and expenses incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Page 66 Agreement or any Note or any agreement or instrument contemplated hereby or thereby, the performance by the parties thereto of their respective obligations hereunder or thereunder or the consummation of the transactions and the other transactions contemplated hereby or thereby, (ii) the use of the proceeds of the Loans or (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto and notwithstanding that any claim, proceeding, investigation or litigation relating to any such losses, claims, damages, liabilities or expenses is or was brought by a stockholder, creditor, employee or officer of the Company; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of any Indemnitee or from the breach by any Indemnitee of its obligations hereunder or with respect to claims or actions solely between or among the Banks relating to this Agreement or the transactions contemplated hereby and provided further, that such Indemnity shall not apply to any loss, claim, damage, or liability or related expense incurred as a consequence of any additional costs (as contemplated by Section 4.04(b)) or any Tax, which shall be governed by the provisions of Section 4.04(b) and (a), respectively. The provisions of this Section 11.11 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the reduction or cancellation of the Commitment, the invalidity or unenforceability of any term or provision of this Agreement or any Note, or any investigation made by or on behalf of the Banks. All amounts due under this Section 11.11 shall be payable in immediately available funds upon written demand therefor. Section 11.12. Extension of Termination Dates; Removal of Banks; Substitutions of Banks. (a) (i) No earlier than the first anniversary of the Effective Date and no later than 120 days prior to the scheduled Termination Date, the Company may, at its option, request all the Banks then party to this Agreement to extend their scheduled Termination Dates by one calendar year by means of a letter, addressed to each such Bank and the Agent. If such a request is accepted and the Termination Date is extended pursuant to subsection 11.12(a)(ii), the Company may, at its option, no earlier than the date one year after the first request for extension and no later than 120 days prior to the rescheduled Termination Date, make one further request that all the Banks then party to this Agreement to extend their scheduled Termination Dates by one additional year in the same manner, subject to the provisions of subsection 11.12(a)(ii); provided that in no event shall the Termination Date be extended to a date which is later than the fifth anniversary of the Effective Date. Page 67 (ii) Each Bank electing (in its sole discretion) so to extend its scheduled Termination Date shall execute and deliver within forty-five (45) days following such request counterparts of such letter to the Company and the Agent, whereupon (unless Banks with an aggregate percentage of the Total Commitment in excess of 25% decline to extend their respective scheduled Termination Dates, in which event the Agent shall notify all the Banks thereof), such Bank's scheduled Termination Date shall be extended to the anniversary date of the year immediately succeeding such Bank's then-current scheduled Termination Date. If no such election is received within such forty-five day period from any Bank, such Bank shall be deemed to have elected not to extend its scheduled Termination Date. (b) With respect to any Bank which has declined to extend such Bank's scheduled Termination Date and if Banks with an aggregate percentage of the Total Commitment not in excess of 25% have not declined to extend their respective Termination Dates, the Company may in its discretion, upon not less than 30 days' prior written notice to the Agent and each Bank, remove such Bank as a party hereto. Each such notice shall specify the date of such removal (which shall be a Business Day), which shall thereupon become the scheduled Termination Date for such Bank. (c) In the event that any Bank does not extend its scheduled Termination Date pursuant to subsection (a) above or is the subject of a notice of removal pursuant to subsection (b) above, then, at any time prior to the Termination Date for such Bank (a "Terminating Bank"), the Company may, at its option, arrange to have one or more other financial institutions acceptable to the Agent (which may be a Bank or Banks and each of which shall herein be called a "Successor Bank") succeed to all or a percentage of the Terminating Bank's outstanding Loans, if any, and rights under this Agreement and assume all or a like percentage (as the case may be) of such Terminating Bank's Commitment and other obligations hereunder, as if (i) in the case of any Bank electing not to extend its scheduled Termination Date pursuant to subsection (a) above, such Successor Bank had extended its scheduled Termination Date pursuant to such subsection (a) and (ii) in the case of any Bank that is the subject of a notice of removal pursuant to subsection (b) above, no such notice of removal had been given by the Company. Such succession and assumption shall be effected by means of one or more agreements supplemental to this Agreement among the Terminating Bank, the Successor Bank, the Company and the Agent. On and as of the effective date of each such supplemental agreement, each Successor Bank party thereto shall be and become a Bank for all purposes of this Agreement and to the same extent as any other Bank hereunder and shall be bound by and entitled to the benefits of this Agreement in the same manner as any other Bank. (d) On the originally scheduled Termination Date for any Terminating Bank, such Terminating Bank's Commitment shall terminate and, except to the extent assigned pursuant to subsection (c) above, Page 68 the Company shall pay in full all of such Terminating Bank's Loans and all other amounts payable to such Bank hereunder, including any amounts payable pursuant to Section 4.3 on account of such payment. (e) To the extent that all or a portion of any Terminating Bank's obligations are not assumed pursuant to subsection (c) above, the Total Commitment shall be reduced on the applicable Termination Date and each Bank's percentage of the reduced Total Commitment shall be revised pro rata to reflect such Terminating Bank's absence. Section 11.13. Knowledge of the Company. As used in this Agreement, knowledge of the Company shall mean to the best of any executive officer's knowledge, after a reasonable investigation. Section 11.14. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all the counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. REALTY INCOME CORPORATION By: /s/ Michael R. Pfeiffer --------------------------- Name: Michael R. Pfeiffer Title: Senior Vice President, General Counsel and Secretary THE BANK OF NEW YORK, as Agent for the Banks By: /s/ Lisa Y. Brown --------------------------- Name: Lisa Y. Brown Title: Vice President Page 69 Address for Notices: One Wall Street 18th Floor New York, NY 10286 Attn: Kalyani Bose Agency Function Administration Fax: (212) 635-6365 With a copy to: The Bank of New York 10990 Wilshire Boulevard Suite 1700 Los Angeles, CA 90024 Attn: Lisa Y. Brown Vice President Fax: (310) 996-8667 THE BANK OF NEW YORK as a Bank and as the Swing Line Bank By: /s/ Lisa Y. Brown --------------------------- Name: Lisa Y. Brown Title: Vice President Address for Notices: One Wall Street 18th Floor New York, NY 10286 Attn: Kalyani Bose Agency Function Administration Fax: (212) 635-6365 Page 70 With a copy to: The Bank of New York 10990 Wilshire Boulevard Suite 1700 Los Angeles, CA 90024 Attn: Lisa Y. Brown Vice President Fax: (310) 996-8667 Eurodollar Lending Office: One Wall Street 18th Floor New York, NY 10286 Attn: Kalyani Bose Agency Function Administration Fax: (212) 635-6365 SANWA BANK CALIFORNIA By: /s/ Dirk Price Name: Dirk A. Price Title: Vice President Address for Notices: Sanwa Bank California 601 S. Figueroa St., 8th Floor Los Angeles, CA 90017 Attn: Dirk A. Price Vice President Fax: (213) 896-7282 Eurodollar Lending Office: Sanwa Bank California 601 S. Figueroa St., 8th Floor Los Angeles, CA 90017 Attn: Dirk A. Price Vice President Fax: (213) 896-7282 Page 71 FIRST UNION NATIONAL BANK By: /s/ John Schissel --------------------------- Name: John Schissel Title: Vice President Address for Notices: One First Union Center, DC-6 Charlotte, NC 28288 Attn: John Schissel Fax: (704) 383-6205 Eurodollar Lending Office: One First Union Center, DC-6 Charlotte, NC 28288 Attn: John Schissel Fax: (704) 383-6205 BANK HAPOALIM, B.M. SAN FRANCISCO BRANCH By: /s/ Paul Watson --------------------------- Name: Paul Watson Title: Vice President By: /s/ John Rice --------------------------- Name: John Rice Title: Vice President/ Senior Loan Officer Address for Notices: 250 Montgomery Street, Ste 700 San Francisco, CA 94104 Attn: Paul Watson Fax: (415)989-9948 Eurodollar Lending Office: 250 Montgomery Street, Ste 700 San Francisco, CA 94104 Attn: Paul Watson Fax: (415)989-9948 Page 72 DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH By: /s/ Christopher E. Sarisky --------------------------- Name: Christopher E. Sarisky Title: Assistant Treasurer By: /s/ Colleen Madden --------------------------- Name: Colleen Madden Title: Vice President Address for Notices: Dresdner Bank AG 333 So. Grand Ave., Ste. 1700 Los Angeles, CA 90071 Attn: Vitol Wiacek Fax: (213) 473-5450 Eurodollar Lending Office: Dresdner Bank AG, New York Branch 75 Wall Street New York, NY 10005 Attn: Robert Reddington Fax: (212) 429-2130 BANK OF MONTREAL By: /s/ John Mead --------------------------- Name: John Mead Title: Director Address for Notices: 115 S. LaSalle St., 12th Fl. Chicago, IL 60603 Attn: Jeff Forsythe Director Fax: (312) 750-4352 Page 73 Eurodollar Lending Office: 115 S. LaSalle St., 12th Fl. Chicago, IL 60603 Attn: Debra Fahey Fax: (312) 750-4345 AMSOUTH BANK By: /s/ John Meriwether --------------------------- Name: John Meriwether Title: Senior Vice President Address for Notices: P.O. Box 11007 Birmingham, AL 35288 Attn: John Meriwether Fax: (205) 326-4075 Eurodollar Lending Office: P.O. Box 11007 Birmingham, AL 35288 Attn: Sue Ailshie Fax: (205) 326-4075 Page 74 EXHIBIT A FORM OF CONVERSION/CONTINUANCE REQUEST [Dated as provided in Section 3.05] The Bank of New York One Wall Street, 18th Floor New York, New York 10286 Attn: Kalyani Bose Realty Income Corporation (the "Company") hereby gives notice of its intention to [convert/continue] [$___________ Principal Amount] [the entire outstanding amount] of its [ABR Loans] [Eurodollar Pro Rata Loans] with an Interest Period of ____ days and ending on __________, ____] [to/as] [ABR Loans] [Eurodollar Pro Rata Loans], pursuant to the Amended and Restated Revolving Credit Agreement, dated as of November 29, 1994 and amended and restated as of December __, 1997, among the Company, the Banks and The Bank of New York, as Agent and Swing Line Bank (as amended, supplemented or otherwise modified from time to time, the "Agreement"), such [conversion/ continuance to be effective as of ___________, ____. [The Interest Period for the Eurodollar Pro Rata Loans shall be _____ days, with a Scheduled Maturity on __________.] Unless otherwise defined herein, capitalized terms used herein shall have the respective meanings specified in the Agreement. REALTY INCOME CORPORATION By:_______________________ Name: Title: Page 75 EXHIBIT B FORM OF PRO RATA LOAN REQUEST [Dated as provided in Section 2.02] The Bank of New York One Wall Street, 18th Floor New York, New York 10286 Attn: Kalyani Bose Realty Income Corporation (the "Company") hereby gives notice of its intention to borrow $____________ of Loans on _________, ____ pursuant to the Amended and Restated Revolving Credit Agreement, dated as of November 29, 1994 and amended and restated as of December __, 1997, among the Company, the Banks and The Bank of New York, as Agent and Swing Line Bank (as amended, supplemented or otherwise modified from time to time, the "Agreement"). [The Company hereby requests that such Loan constitute a Eurodollar Pro Rata Loans with a scheduled maturity of ___________, 19__ and an Interest Period of _____ days.] The Company hereby confirms that the amounts of Loans outstanding on the date hereof is as follows: Total Commitment $150,000,000 Outstanding Pro Rata Loans $___________ Outstanding Competitive Loans $___________ Availability $___________ The Company also hereby confirms that each of the representations and warranties (other than the representations and warranties that speak as of a specific date) contained in Article V of the Agreement is true and correct on the date hereof and, after giving effect to this borrowing, will be true and correct on the proposed borrowing date as though such representation or warranty had originally been made on such dates. No Default or Event of Default has occurred and is continuing, nor will any such event occur as a result of this borrowing. Unless otherwise defined herein, capitalized terms used herein shall have the respective meanings specified in the Agreement. REALTY INCOME CORPORATION By:_______________________ Name: Title: Page 76 EXHIBIT C-1 Form of Competitive Loan Request [Date] The Bank of New York, as Agent One Wall Street New York, New York 10286 Attention: Kalyani Bose Agency Function Administration Re: Request for Competitive Bids Reference is made to the Amended and Restated Revolving Credit Agreement, dated as of November 29, 1994 and amended and restated as of December __,1997 (as amended, modified or supplemented from time to time, the "Credit Agreement"), among Realty Income Corporation (the "Company"), the banks from time to time parties thereto and The Bank of New York, as Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement. The Company hereby gives you notice pursuant to Section 2.08 of the Credit Agreement that it requests the Lenders to make offers to make Competitive Loans under the Credit Agreement, and in that connection sets forth below the terms on which such Competitive Loans are requested to be made: (A) Borrowing Date(1) (B) Principal Amount of Competitive Loan(2) (C) Maturity Date(3) (D) Interest rate basis [Absolute Rate] [Eurodollar] (E) Interest Period, if any(4) Very truly yours, REALTY INCOME CORPORATION By:_______________________ Title: Page 77 (1) Must be a Business Day. (2) Must be an amount not less than $1,000,000, or an integral multiple of $100,000 in excess thereof. (3) At least seven days after the Borrowing Date and not more than (i) 180 days after the Borrowing Date, in the case of Absolute Rate Competitive Loans, or (ii) six months after the Borrowing Date, in the case of Eurodollar Competitive Loans. (4) One, two, three or six months with respect to Eurodollar Competitive Loans. Not applicable to Absolute Rate Competitive Loans. Page 78 EXHIBIT C-2 FORM OF NOTICE TO BANKS [Date] [Name of Bank] [Address] Attention: ________________ Re: Notice of a Request for Competitive Bids Reference is made to the Amended and Restated Revolving Credit Agreement, dated as of November 29, 1994 and amended and restated as of December __, 1997 (as amended, modified or supplemented from time to time, the "Credit Agreement"), among Realty Income Corporation (the "Company"), the banks from time to time parties thereto and The Bank of New York, as Agent. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement. The Company delivered to the Agent a Competitive Loan Request on ____________, ____, pursuant to Section 2.08 of the Credit Agreement, and in that connection you are invited to submit a Bid to make a Competitive Loan to the Company by [TIME], on _______________, ___. Your Bid must comply with Section 2.08 of the Credit Agreement and the terms set forth below on which the Competitive Loan Request was made: (A) Proposed Borrowing Date (B) Principal amount of Competitive Loan (C) Interest rate basis [Absolute Rate] [Eurodollar] (E) Interest Period and the last day thereof Very truly yours, THE BANK OF NEW YORK, as Agent By:___________________________ Title: Page 79 EXHIBIT C-3 FORM OF COMPETITIVE BID [Date] The Bank of New York, as Agent One Wall Street New York, New York 10286 Attention: Kalyani Bose Agency Function Administration Re: Competitive Bid Reference is made to the Amended and Restated Revolving Credit Agreement, dated as of November 29, 1994, and amended and restated as of December __, 1997 (as amended, modified or supplemented from time to time, the "Credit Agreement"), among Realty Income Corporation (the "Company"), the other lenders from time to time parties thereto and The Bank of New York, as Agent. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement. [NAME OF BANK] hereby submits a Competitive Bid to make an [Absolute Rate] [Eurodollar] Competitive Loan pursuant to Section 2.08 of the Credit Agreement, in response to the Borrowing Request made by the Company on ______________, ____, and in that connection sets forth below the terms on which such Competitive Bid is made: (A) Principal Amount(1) _______________ (B) Competitive Bid _______________ (C) Competitive Bid [Rate] [Margin](2) _______________ The undersigned hereby confirms that it will, subject only to the conditions set forth in the Credit Agreement, extend credit to the Borrower upon acceptance by the Borrower of this Competitive Bid in accordance with Section 2.08 of the Credit Agreement. Very truly yours, [NAME OF BANK] By:______________________ Title: (1) Principal amount must be at least $1,000,000, or an integral multiple of $100,000 in excess thereof, and not greater than the requested Competitive Loan. Multiple bids may be accepted by the Agent. (2) In the case of Absolute Rate Competitive Loans, __%; in the case of Eurodollar Competitive Loans, a margin (+/- __%) over LIBOR. Page 80 EXHIBIT C-4 FORM OF COMPETITIVE BID ACCEPT/REJECT NOTICE [Date] The Bank of New York, as Agent One Wall Street New York, New York 10286 Attention: Kalyani Bose Agency Function Administration Re: Competitive Bid Acceptance/Reject Letter Realty Income Corporation (the "Company") refers to the Amended and Restated Revolving Credit Agreement, dated as of November 29, 1994, and amended and restated as of December __, 1997 (as amended, modified or supplemented or extended from time to time, the "Credit Agreement"), among the Company, the banks from time to time parties thereto (the "Banks") and The Bank of New York, as Agent. In accordance with Section 2.08 of the Credit Agreement, we have received a summary of bids in connection with our Competitive Loan Request, dated ________, ____, and in accordance with Section 2.08 of the Credit Agreement, we hereby accept the following Competitive Bids for Competitive Loans to be made on _________, ____, with a Maturity Date of ____________, ____: Competitive Principal Amount Rate/Margin Bank ---------------- ----------- -------------- %/+/-. % We hereby reject the following Competitive Bids: Competitive Principal Amount Rate/Margin Bank ---------------- ----------- -------------- %/+/-. % Very truly yours, REALTY INCOME CORPORATION By:_______________________ Title: Page 81 EXHIBIT D-1 FORM OF PRO RATA NOTE $__________________ December __, 1997 Realty Income Corporation, a Maryland corporation (the "Company"), for value received, hereby promises to pay on the Termination Date to the order of _______________ (the "Bank"), at the office of The Bank of New York, as Agent, at One Wall Street, New York, New York 10286, in lawful money of the United States, the principal sum of $__________ or if less, the aggregate unpaid principal amount of all Pro Rata Loans made by the Bank to the Company pursuant to that certain Amended and Restated Revolving Credit Agreement dated as of November 29, 1994 and amended and restated as of December __, 1997 (as amended, supplemented or otherwise modified from time to time, the "Agreement") among the Company, each of the banks party thereto, and The Bank of New York, as Agent and Swing Line Bank. This Note shall bear interest, and such interest shall be payable, as set forth in the Agreement for ABR Loans and Eurodollar Pro Rata Loans. Upon the occurrence and during the continuation of an Event of Default, this Note shall bear interest at the default rate pursuant to Section 3.06 of the Agreement. Except as otherwise provided in the Agreement, with respect to Eurodollar Pro Rata Loans, if interest or principal on the Loan evidenced by this Note becomes due and payable on a day which is not a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and interest shall be payable thereon at the rate herein specified during such extension. This Note is one of the Pro Rata Notes referred to in the Agreement, and is subject to prepayment in whole or in part and its maturity is subject to acceleration upon the terms provided in the Agreement. Unless otherwise defined herein, capitalized terms used herein shall have the respective meanings specified in the Agreement. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Page 82 All Pro Rata Loans made by the Bank to the Company pursuant to the Agreement and all payments of principal hereof and interest thereon may be indicated by the Bank upon the grid attached hereto which is a part of this Note. Such notations shall be presumptive as to the aggregate unpaid principal amount of and interest on all Pro Rata Loans made by the Bank pursuant to the Agreement. REALTY INCOME CORPORATION By:_______________________ Name: Title: Loan and Payments of Principal and Interest Interest Interest Method period if Amount (ABR or Eurodollar Date of Loan Eurodollar) Loan) - -------- --------- ------------ ------- __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ Page 83 Name of Amount of Unpaid Amount of Person Principal Principal Interest Making Paid Balance Paid Notation - --------- --------- ---------- ---------- __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ Page 84 EXHIBIT D-2 FORM OF COMPETITIVE NOTE $[75,000,000] __________________ Realty Income Corporation, a Maryland corporation (the "Company"), for value received, hereby promises to pay on the Termination Date to the order of _______________ (the "Bank"), at the office of The Bank of New York, as Agent, at One Wall Street, New York, New York 10286, in lawful money of the United States, the principal sum of $[75,000,000] or if less, the aggregate unpaid principal amount of all Competitive Loans made by the Bank to the Company pursuant to that certain Amended and Restated Revolving Credit Agreement dated as of November 29, 1994 and amended and restated as of December __, 1997 (as amended, supplemented or otherwise modified from time to time, the "Agreement") among the Company, each of the banks party thereto, and The Bank of New York, as Agent and Swing Line Bank. This Note shall bear interest, and such interest shall be payable, as set forth in the Agreement for Absolute Rate Competitive Loans and Eurodollar Competitive Loans. Upon the occurrence and during the continuation of an Event of Default, this Note shall bear interest at the default rate pursuant to Section 3.06 of the Agreement. Except as otherwise provided in the Agreement, with respect to Eurodollar Competitive Loans, if interest or principal on the Loan evidenced by this Note becomes due and payable on a day which is not a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and interest shall be payable thereon at the rate herein specified during such extension. This Note is one of the Competitive Notes referred to in the Agreement, and is subject to prepayment in whole or in part and its maturity is subject to acceleration upon the terms provided in the Agreement. Unless otherwise defined herein, capitalized terms used herein shall have the respective meanings specified in the Agreement. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Page 85 All Competitive Loans made by the Bank to the Company pursuant to the Agreement and all payments of principal hereof and interest thereon may be indicated by the Bank upon the grid attached hereto which is a part of this Note. Such notations shall be presumptive as to the aggregate unpaid principal amount of and interest on all Competitive Loans made by the Bank pursuant to the Agreement. REALTY INCOME CORPORATION By:_______________________ Name: Title: Loan and Payments of Principal and Interest Interest Interest Method period if Amount (ABR or Eurodollar Date of Loan Eurodollar) Loan) - -------- --------- ------------ ------- __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ Page 86 Name of Amount of Unpaid Amount of Person Principal Principal Interest Making Paid Balance Paid Notation - --------- --------- ---------- ---------- __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ Page 87 EXHIBIT D-3 FORM OF SWING LINE NOTE $15,000,000 December __, 1997 Realty Income Corporation, a Delaware corporation (the "Company"), for value received, hereby promises to pay to the order of The Bank of New York (the "Bank"), on the maturity date thereof, the principal amount of each Swing Line Advance made by the Bank pursuant to that certain Revolving Credit Agreement, dated as of November 29, 1994, and amended and restated as of December __, 1997 (as amended, supplemented or otherwise modified from time to time, the "Agreement"), among the Company, each of the banks party thereto, and The Bank of New York, as Agent and Swing Line Bank. The Company also promises to pay interest on the unpaid principal amount hereof from time to time outstanding from the date hereof until maturity (whether by acceleration or otherwise) and, after maturity, until paid, at the rate or rates per annum, on the date or dates and in the manner specified in the Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America in immediately available funds to the Swing Line Bank, in the manner specified in the Agreement. This Note is the Swing Line Note referred to in the Agreement, which among other things, contains provisions for the acceleration of the maturity hereof upon the happening of certain events and for the amendment or waiver of certain provisions of the Agreement, all upon the terms and conditions therein specified. Unless otherwise defined herein, capitalized terms used herein have the respective meanings specified in the Agreement. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York. The Bank is authorized to indicate upon the grid attached to this Note all borrowings hereunder and payments of principal and interest hereon. Such notations shall be presumptive as to the aggregate unpaid principal amount of and interest on all Swing Line Advances made by the Bank pursuant to the Agreement. REALTY INCOME CORPORATION By___________________________ Name: Title: Page 88 SWING LINE ADVANCES AND PRINCIPAL PAYMENTS Amount of Swing Line Advances Made Swing Line Date Advance Maturity Interest Rate - ----- -------------- ---------- -------------- ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ Page 89 Amount of Amount of Unpaid Principal Principal Repaid Balance Swing Line Swing Line Notation Advance Advance Total Made by - ---------- ---------- -------- ---------- ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ Page 90 EXHIBIT E FORM OF SWING LINE ADVANCE REQUEST [Dated as provided in Section 2.10] The Bank of New York One Wall Street, 18th Floor New York, New York 10286 Attn: Kalyani Bose Realty Income Corporation (the "Company") hereby gives notice of its intention to borrow $____________ in a Swing Line Advance on _________, ____ pursuant to the Amended and Restated Revolving Credit Agreement, dated as of November 29, 1994 and amended and restated as of December __, 1997, among the Company, the Banks and The Bank of New York, as Agent and Swing Line Bank (as amended, supplemented or otherwise modified from time to time, the "Agreement"). The Company hereby confirms that the amounts of Loans and Swing Line Advances outstanding on the date hereof are as follows: Total Commitment $150,000,000 Outstanding Loans $___________ Commitment Availability $___________ Swing Line Facility $ 15,000,000 Outstanding Swing Line Advances $___________ Swing Line Availability $___________ The Company also hereby confirms that each of the representations and warranties (other than the representations and warranties that speak as of a specific date) contained in Article V of the Agreement is true and correct on the date hereof and, after giving effect to this borrowing, will be true and correct on the proposed borrowing date as though such representation or warranty had originally been made on such dates. No Default or Event of Default has occurred and is continuing, nor will any such event occur as a result of this borrowing. Unless otherwise defined herein, capitalized terms used herein shall have the respective meanings specified in the Agreement. REALTY INCOME CORPORATION By:_______________________ Name: Title: Page 91 The Bank of New York, as Agent for the Banks December __, 1997 Page 1 December __, 1997 EXHIBIT F-1 FORM OF OPINION OF LATHAM & WATKINS The Bank of New York, as Agent for the Banks One Wall Street, Twenty-Second Floor New York, New York 10286 The Banks Signatory to the Credit Agreement Referred to Below Re: Amended and Restated Revolving Credit Agreement dated as of November 29, 1994 and amended and restated as of December __, 1997, among Realty Income Corporation, the Banks Named Therein and The Bank of New York, as Agent and Swing Line Bank Ladies/Gentlemen: We have acted as special counsel for Realty Income Corporation, a Maryland corporation (the "Company"), in connection with the Amended and Restated Revolving Credit Agreement (the "Credit Agreement") dated as of November 29, 1994 and amended and restated as of December __, 1997, among the Company, each of the banks identified on the signature pages thereof (the "Banks") and The Bank of New York, as Agent for the Banks and Swing Line Bank (the "Agent"). This opinion is rendered to you pursuant to Section 6.01(f) of the Credit Agreement. Capitalized terms defined in the Credit Agreement are used herein as therein defined. In our capacity as such counsel, we have examined such matters of fact and questions of law as we have considered appropriate for purposes of rendering the opinions expressed below. We have examined among other things, the following: (a) The Credit Agreement; Page 92 The Bank of New York, as Agent for the Banks December __, 1997 Page 2 (b) The following promissory notes of the Company dated _________________, 1997 (collectively, the "Notes", and together with the Credit Agreement, the "Loan Documents"): (i) note in the original principal amount of $__________ payable to The Bank of New York; (ii) note in the original principal amount of $_________________ payable to ______________; [and (____) note in the original principal amount of $_____________ payable to _____________________;] (c) The Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws of the Company; and (d) Such other documents and agreements as we deem necessary for purposes of rendering the opinions expressed below. In our examination, we have assumed the genuineness of all signatures (other than those of officers of the Company on the Loan Documents as to which we have relied on a certificate of incumbency), the authenticity of all documents submitted to us as originals, and the conformity to authentic original documents of all documents submitted to us as copies. We have been furnished with, and with your consent have relied upon, certificates of officers of the Company with respect to certain factual matters. In addition, we have obtained and relied upon such certificates and assurances from public officials as we have deemed necessary. We are opining herein as to the effect on the subject transaction only of the federal laws of the United States and the internal laws of the State of New York, as applicable, and we express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or as to any matters of municipal law or the laws of any other local agencies within any state. Our opinions set forth in paragraph 1 below are based upon our consideration of only those statutes, rules and regulations which, in our experience, are normally applicable to bank credit transactions. Subject to the foregoing and the other matters set forth herein, it is our opinion that, as of the date hereof: Page 93 The Bank of New York, as Agent for the Banks December __, 1997 Page 3 1. None of the execution and delivery of the Loan Documents by the Company, the borrowing of the funds pursuant to the Loan Documents by the Company and the payment of the indebtedness of the Company evidenced by the Notes: (a) violate any federal or New York statute, rule, or regulation applicable to the Company (including, without limitation, Regulations G, T, U, or X of the Board of Governors of the Federal Reserve System), or (b) require any consents, approvals, authorizations, registrations, declarations, or filings by the Company under any applicable federal or New York statute, rule or regulation. 2. Each of the Loan Documents has been duly executed and delivered by the Company and constitutes a legally valid and binding obligation of the Company enforceable against the Company in accordance with its terms. 3. The Company is not an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. The opinions set forth in paragraph 2 above are subject to the following limitations, qualifications and exceptions: (a) the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting the rights or remedies of creditors; (b) the effect of general principles of equity, whether enforcement is considered in a proceeding in equity or at law, and the discretion of the court before which any proceeding therefor may be brought; (c) the unenforceability under certain circumstances under law or court decisions of provisions providing for the indemnification of or contribution to a party with respect to a liability where such indemnification or contribution is contrary to public policy; (d) the unenforceability of any provision requiring the payment of attorney's fees, except to the extent that a court determines such fees to be reasonable; and (e) we express no opinion with respect to the enforceability of Section 10.01 of the Credit Agreement by a federal court. Page 94 The Bank of New York, as Agent for the Banks December __, 1997 Page 4 To the extent that the obligations of the Company may be dependent upon such matters, we assume for purposes of this opinion that: all parties to the Loan Documents other than the Company are duly incorporated, validly existing and in good standing under the laws of their respective jurisdictions of incorporation; all parties to the Loan Documents other than the Company have the requisite corporate power and authority to execute and deliver the Loan Documents and to perform their respective obligations under the Loan Documents to which they are a party; and the Loan Documents to which such parties other than the Company are a party have been duly authorized, executed and delivered by such parties and constitute their legally valid and binding obligations, enforceable against them in accordance with their terms. We express no opinion as to compliance by any parties to the Loan Documents with any state or federal laws or regulations applicable to the subject transactions because of the nature of their business. This opinion is rendered only to you and is solely for your benefit in connection with the transactions covered hereby. This opinion may not be relied upon by you for any other purpose, or furnished to, quoted to or relied upon by any other person, firm or corporation for any purpose, without our prior written consent. Very truly yours, Page 95 The Bank of New York, as Agent for the Banks December __, 1997 Page 1 December ___ , 1997 EXHIBIT F-2 FORM OF OPINION OF MICHAEL R. PFEIFFER, ESQ. The Bank of New York, as Agent for the Banks One Wall Street 22nd Floor New York, New York 10286 The Banks Signatory to the Credit Agreement Referred to Below Re: Amended and Restated Revolving Credit Agreement dated as of November 29, 1994 and amended and restated as of December __, 1997, among Realty Income Corporation, the Banks Named Therein and The Bank of New York, as Agent and Swing Line Bank Ladies/Gentlemen: I am general counsel of Realty Income Corporation, a Maryland corporation (the "Company"). This opinion is rendered to you pursuant to Section 6.01(f) of the Amended and Restated Revolving Credit Agreement (the "Credit Agreement") dated as of November 29, 1994 and amended and restated as of December __, 1997, among the Company, each of the banks identified on the signature pages thereof (the "Banks") and The Bank of New York, as Agent for the Banks and Swing Line Bank (the "Agent"). Capitalized terms defined in the Credit Agreement are used herein as therein defined. In my capacity as general counsel, I have examined such matters of fact and questions of law as I have considered appropriate for purposes of rendering the opinions expressed below, except where a statement is qualified as to knowledge or awareness, in which case I have made no or limited inquiry as specified below. I have examined, among other things, the following: (a) The Credit Agreement; Page 96 The Bank of New York, as Agent for the Banks December __, 1997 Page 2 (b) The following promissory notes of the Company dated _____________, 1997 (collectively, the "Notes", and together with the Credit Agreement, the "Loan Documents"): (i) note in the original principal amount of $_____________ payable to The Bank of New York; (ii) note in the original principal amount of $____________ payable to ________________ [[and] (_____) note in the original principal amount of $__________ payable to ________________]; (c) The Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws of the Company; and (d) Such other documents and agreements as I deem necessary for purposes of rendering the opinions expressed below. In my examination, I have assumed the genuineness of all signatures (other than those of officers of the Company on the Loan Documents), the authenticity of all documents submitted to me as originals, and the conformity to authentic original documents of all documents submitted to me as copies. I have been furnished with, and with your consent have relied upon, certificates of officers of the Company with respect to certain factual matters. In addition, I have obtained and relied upon such certificates and assurances from public officials as I have deemed necessary. I am opining herein as to the effect on the subject transaction only of the federal laws of the United States and the internal laws of the State of California, as applicable, and I express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or as to any matters of municipal law or the laws of any other local agencies within any state. Whenever a statement herein is qualified by "to the best of my knowledge" or a similar phrase, it is intended to indicate that I do not have current actual knowledge of the inaccuracy of such statement. Except as otherwise expressly indicated, I have not undertaken any independent investigation to determine the accuracy of any such statement, and no inference that I have any knowledge of any matters pertaining to such statement should be drawn from my representation of the Company. Subject to the foregoing and the other matters set forth herein, it is my opinion that, as of the date hereof: Page 97 The Bank of New York, as Agent for the Banks December __, 1997 Page 3 1. Based solely on certificates from public officials, I confirm that the Company is qualified to do business in the states in which the Company owns properties. 2. To the best of my knowledge, there are no proceedings or investigations pending or threatened before any court or arbitrator or before or by any governmental authority which would have a material adverse effect on the legality, validity, binding effect or enforceability of any Loan Document. This opinion is delivered by me as general counsel for the Company to you and is solely for your benefit in connection with the transactions covered hereby. This opinion may not be relied upon by you for any other purpose, or furnished to, quoted to or relied upon by any other person, firm or corporation for any purpose, without my prior written consent. Very truly yours, Page 98 Exhibit G --------- Form of Property Management Exception Report This document has been excluded. Page 99 Exhibit H --------- Real Estate Investment Criteria The Investment Committee is authorized, without prior Board of Director approval, to approve real estate investments which meet all of the following criteria: 1. The Purchase Price for each property shall not exceed $10,000,000. 2. The investment must consist of a fee interest in real property. 3. If the real property is unimproved at the time of acquisition, there must be an agreement to complete specified improvements on the property by a certain date. 4. Prior to, or concurrent with the acquisition, the property must be net-leased to a tenant approved by the Company's Investment Committee. 5. The real estate investment may not cause (i) the total investment with that tenant to exceed $25 million, or (ii) the amount of annualized rental revenue to be derived by the Company from a tenant to exceed 5% of the Company's previous 12 months' rental revenues. 6. The real estate investment may not cause the amount of annualized rental revenue to be derived by the Company from any one industry to exceed 25% of the Company's previous 12 month's rental revenues. Page 100 EXHIBIT I SUBSIDIARY GUARANTY This SUBSIDIARY GUARANTY, dated as of December 13, 1994, is made by each entity that is identified on Schedule A hereto or that hereafter executes and delivers a Subsidiary Joinder pursuant to the Credit Agreement described herein (each such entity, a "Guarantor") in favor of the lenders (the "Lenders") from time to time party to the Credit Agreement (as defined below), and The Bank of New York ("BONY"), as agent (BONY and any successor thereto in such capacity, "Agent") for the Lenders and in favor of all other present and future Holders of any of the Guaranteed Obligations described herein. RECITALS A. The Lenders and Agent have entered into that certain Credit Agreement, dated as of November 28, 1994 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Realty Income Corporation, a Delaware corporation ("Borrower"), Agent and the Lenders. B. Each Guarantor is a Subsidiary of Borrower and expects to derive substantial direct and indirect benefit from the transactions contemplated by the Credit Agreement. C. It is a condition precedent to the making of Loans by the Lenders under the Credit Agreement that each Guarantor shall have guaranteed payment of each and all debts, liabilities and obligations of Borrower under the Credit Agreement and the Notes (collectively, the "Obligations"), on the terms set forth herein. D. Borrower has agreed, in the Credit Agreement, to cause any future Subsidiaries of Borrower to which the Borrower or any Subsidiary of Borrower transfers its properties located in the State of Texas to become party to this Guaranty, as a Guarantor hereunder, by executing and delivering a Subsidiary Joinder as set forth in the Credit Agreement. NOW, THEREFORE, in consideration of the foregoing and in order to induce the Lenders to make Loans under the Credit Agreement, each Guarantor hereby agrees as follows: Page 101 ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1 General Definitions. Except as otherwise specifically provided herein, the terms which are defined in Article I of the Credit Agreement shall have the same meanings when used in this Guaranty and the provisions of Sections 1.2 and 1.3 of the Credit Agreement shall apply to this Guaranty. SECTION 1.2 Certain Defined Terms. As used in this Guaranty, the following terms shall have the following meanings: "Bankruptcy Code" means Title 11 of the United States Code, as from time to time amended. "Disallowed Post-Commencement Interest and Expenses" means interest computed at the rate provided in the Credit Agreement and claims for reimbursements, costs, expenses or indemnities under the terms of the Credit Agreement accruing or claimed at any time after commencement of any Insolvency or Liquidation Proceeding, if the claim for such interest, reimbursement, cost, expense or indemnity is not allowable, allowed or enforceable against Borrower in such Insolvency or Liquidation Proceeding. "Guaranty" means this Subsidiary Guaranty, dated as of _______________, 1994, made by the Guarantors for the benefit of the Lenders, Agent and other Holders of Guaranteed Obligations. "Guaranty Taxes" is defined in Section 3.8(a). "Holder" means, in respect of any Guaranteed Obligation, the Person entitled to enforce payment thereof and specifically includes Agent and the Lenders. "Insolvency or Liquidation Proceeding" means any (i) any case under the Bankruptcy Code, any other insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding, relative to Borrower or to any of its creditors, as such, or to a substantial part of any of its assets, or (ii) any proceeding for the liquidation, dissolution or other winding up of Borrower, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of Borrower. "Subordinated Liabilities" is defined in Section 2.8(a). Page 102 ARTICLE II GUARANTY AND RELATED PROVISIONS SECTION 2.1 Guaranty. Each Guarantor hereby unconditionally: (a) guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of (i) all Obligations now outstanding or hereafter arising under or in connection with the Credit Agreement or the Notes, whether for principal, interest, fees, taxes, additional compensation, expense reimbursements, indemnification or otherwise, and (ii) each other debt, liability or obligation of Borrower now outstanding or hereafter arising under any of the Credit Agreement and the Notes (such Obligations, liabilities and other debts, liabilities and obligations, collectively, the "Guaranteed Obligations"), and (b) agrees to pay on demand (i) all Disallowed Post- Commencement Interest and Expenses, to the Person entitled to payment thereof if the claim therefor had been allowed in any Insolvency or Liquidation Proceeding and (ii) all costs and expenses (including, without limitation, reasonable attorneys' fees and legal expenses) incurred by any Holder of Guaranteed Obligations in enforcing this Guaranty; provided, however, that the amount of each Guarantor's payment obligations hereunder shall not exceed an aggregate amount equal to such Guarantor's stockholders' or partners' equity, as the case may be. SECTION 2.2 Acceleration of Payment. If (i) the Notes become immediately due and payable pursuant to Section 8.01 of the Credit Agreement, then all liability of each Guarantor under this Guaranty in respect of any Guaranteed Obligation that is not then due and payable shall thereupon become and be immediately due and payable, without notice or demand. SECTION 2.3 Guaranty Absolute and Unconditional. Each Guarantor guarantees that the Guaranteed Obligations will be paid in accordance with the terms of the Credit Agreement and the Notes, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights and claims of any Holder of Guaranteed Obligations against Borrower with respect thereto and even if any such rights or claims are modified, reduced or discharged in an Insolvency or Liquidation Proceeding or otherwise. The obligations of each Guarantor under this Guaranty are independent of the Guaranteed Obligations, and a separate action or actions may be brought and prosecuted against each Guarantor to enforce this Guaranty, irrespective of whether any action is brought against Borrower or whether Borrower is joined in any such action or actions. The liability of each Guarantor under this Guaranty shall Page 103 be absolute and unconditional irrespective of (i) any lack of validity or enforceability of the Credit Agreement or any Note or any other agreement or instrument relating thereto; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations, or any other amendment or waiver of or any consent to departure from the Credit Agreement or any Note, including, without limitation, any increase in the Guaranteed Obligations resulting from the extension of additional credit to Borrower or otherwise; (iii) any taking, exchange, release or non-perfection of any collateral, or any taking, release or amendment or waiver of or consent to departure from any other guaranty, for all or any of the Guaranteed Obligations; (iv) any manner of application of collateral, or proceeds thereof, to all or any of the Guaranteed Obligations, or any manner of sale or other disposition of any collateral for all or any of the Guaranteed Obligations or any other assets of Borrower; (v) any change, restructuring or termination of the corporate structure or existence of Borrower; or (vi) any other circumstance which might otherwise constitute a defense available to, or a discharge of, a surety or guarantor. SECTION 2.4 Guaranty Irrevocable and Continuing. This Guaranty is an irrevocable and continuing offer and agreement guaranteeing payment of any and all Guaranteed Obligations and shall extend to all Guaranteed Obligations now outstanding or created or incurred at any future time, whether or not created or incurred pursuant to any agreement presently in effect or hereafter made, until all obligations of the Lenders to extend credit to Borrower have expired or been terminated, and all Guaranteed Obligations have been fully, finally and indefeasibly paid. To the extent any contingent Obligation survives the expiration or termination of the Credit Agreement and the repayment of the Loans, each Guarantor's liability under this Guaranty shall likewise survive. This Guaranty may be released only in writing. SECTION 2.5 Reinstatement. If at any time any payment on any Guaranteed Obligation is set aside, avoided or rescinded or must otherwise be restored or returned, this Guaranty and the liability of each Guarantor under this Guaranty shall remain in full force and effect and, if previously released or terminated, shall be automatically and fully reinstated, without any necessity for any act, consent or agreement of any Guarantor, as fully as if such payment had never been made and as fully as if any such release or termination had never become effective. SECTION 2.6 Waiver. Each Guarantor hereby waives and agrees not to assert or take advantage of: (a) Marshaling. Any right to require any Holder of Guaranteed Obligations to proceed against or exhaust its recourse against Borrower or any other Subsidiary Guarantor or any other Person liable for any of the Guaranteed Obligations or Page 104 against any collateral for any of the Guaranteed Obligations or against any other Person or property, before demanding and enforcing payment of the Guaranteed Obligations from any Guarantor under this Guaranty; (b) Other Defenses. Any defense that may arise by reason of (i) the incapacity, lack of authority, death or disability of Borrower or any other Person; (ii) the revocation or repudiation of any of the Credit Agreement or the Notes by Borrower or any other Person; (iii) the unenforceability in whole or in part of the Credit Agreement or the Notes or any other instrument, document or agreement; (iv) the failure of any Holder of Guaranteed Obligations to file or enforce a claim against any Person liable for any of the Guaranteed Obligations or in any Liquidation or Insolvency Proceeding; or (v) any borrowing or grant of a security interest under Section 364 of the Bankruptcy Code; (c) Notices. Presentment, demand for payment, protest, notice of discharge, notice of acceptance of this Guaranty, notice of the incurrence of, or any default in respect of, any debt, liability or obligation guaranteed hereunder, and all other indulgences and notices of every type or nature, including, without limitation and to the maximum extent permitted by law, notice of the disposition of any collateral for any of the Guaranteed Obligations; (d) Election of Remedies. Any defense based upon an election of remedies (including, if available, an election to proceed by non-judicial foreclosure) or any other act or omission of any Holder of Guaranteed Obligations or any other Person which destroys or otherwise impairs any right that any Guarantor might otherwise have for subrogation, recourse, reimbursement, indemnity, exoneration, contribution or otherwise against Borrower or any other Person; (e) Collateral. Any defense based upon any taking, modification or release of any collateral or guaranties for the Guaranteed Obligations, or any failure to create or perfect or ensure the priority or enforceability of any security interest in any collateral for any of the Guaranteed Obligations or any act or omission related thereto; (f) Offsets. Any right to recoup from or offset against any of the Guaranteed Obligations any claim that may be held or asserted by or available to (i) Borrower or any other Guarantor or any other Person liable for any of the Guaranteed Obligations against any Holder of Guaranteed Obligations or (ii) any Guarantor against Borrower, any other Guarantor, any other Holder of Guaranteed Obligations or any other Person; or Page 105 (g) Defenses of Others. Any other claim, right or defense (including, by way of illustration and without limitation, such matters as failure or insufficiency of consideration, statute of limitations, breach of contract, tortious conduct, accord and satisfaction, and discharge by agreement, conduct or in a Liquidation or Insolvency Proceeding), except the defense of payment, that may be held or asserted by or available to (i) Borrower or any other Guarantor or any other Person liable for any of the Guaranteed Obligations against any Holder of Guaranteed Obligations or (ii) any Guarantor against Borrower, any other Guarantor, any other Holder of Guaranteed Obligations or any other Person. SECTION 2.7 Subrogation. Each Guarantor hereby represents, warrants and agrees, in respect of any and all present and future rights of subrogation, recourse, reimbursement, indemnity, exoneration, contribution and other claims that such Guarantor at any time may have against Borrower, any other Guarantor or any other Person liable for the payment of any of the Guaranteed Obligations (including, without limitation, the owner of any interest in collateral for any of the Guaranteed Obligations) as a result of or in connection with this Guaranty or any payment hereunder, that: (a) No Agreement. Such Guarantor has not entered into, and agrees that it will not enter into, any agreement providing, directly or indirectly, for any such right or claim against Borrower or, except as set forth in Section 2.10, against any other Subsidiary of Borrower, and each such agreement now existing or hereafter entered into (except Section 2.10) is and shall be void; (b) Release. Such Guarantor forever waives and releases, and agrees never to sue upon, any such right or claim against Borrower and, except as set forth in Section 2.10, against any other Subsidiary of Borrower, whether or not the Guaranteed Obligations have been paid in full; (c) Capital Contribution. Each payment made by such Guarantor under this Guaranty shall be a contribution to the capital of Borrower, and no such payment shall give rise to any claim (as that term is defined in the Bankruptcy Code) in favor of such Guarantor against Borrower; (d) Subordination of Contribution Rights. Each Guarantor reserves, as against each other Guarantor, its right of contribution under Section 2.10 but agrees that all such contribution rights shall be included among the Subordinated Liabilities; and (e) Deferral of Other Rights and Claims. Until all obligations of the Lenders to extend credit to Borrower have expired or been terminated and all the Guaranteed Obligations Page 106 have been paid in full, such Guarantor will not demand, sue for, accept or receive any payment or transfer on account of any such right or claim from any Person (other than Borrower and its Subsidiaries) liable for the payment of any of the Guaranteed Obligations. SECTION 2.8 Subordination Provisions. (a) Subordination. Any and all present and future debts, liabilities and obligations of every type and description (whether for money borrowed, on intercompany accounts, for provision of goods or services, under tax sharing or contribution agreements or on account of any other transaction, agreement, occurrence or event and whether absolute or contingent, direct or indirect, matured or unmatured, liquidated or unliquidated, created directly or acquired from another, or sole, joint, several or joint and several) of Borrower now outstanding or hereafter incurred or owed to any Guarantor (the "Subordinated Liabilities") shall be, and hereby are, subordinated to full and final payment of the Guaranteed Obligations. (b) Prohibited Payments. No Guarantor will demand, sue for, accept or receive, or cause or permit any other Person to make, any payment on or transfer of property on account of any Subordinated Liabilities except to the extent payment is permitted at the time under Section 7.02 of the Credit Agreement. (c) No Liens or Transfers. No Guarantor will demand, accept or hold any Lien upon any real or personal property of Borrower as security for any of the Subordinated Liabilities and agrees that any such Lien shall be void. (d) Insolvency Proceedings. In any Insolvency or Liquidation Proceeding, the Holders of Guaranteed Obligations shall be entitled to receive payment in full of all amounts due or to become due on or in respect of the Guaranteed Obligations, or provision shall be made for such payment in money or money's worth, before any Guarantor is entitled to receive any payment or distribution of any kind or character, whether in cash, property or securities, on account of any of the Subordinated Liabilities, and to that end the Holders of Guaranteed Obligations shall be entitled to receive, for application to the payment thereof, all payments and distributions of any kind or character, whether in cash, property or securities (including any such payment or distribution which may be payable or deliverable by reason of the payment of any other debt or liability of Borrower being subordinated to the payment of the Subordinated Liabilities), which may be payable or deliverable in respect of the Subordinated Liabilities in any such Insolvency or Liquidation Proceeding. Page 107 (e) Disallowed Post-Commencement Interest and Expenses. If in any Insolvency or Liquidation Proceeding (i) any payment or distribution of any kind or character, whether in cash, property or securities (including any such payment or distribution which may be payable or deliverable by reason of the payment of any other debt or liability of Borrower being subordinated to the payment of the Subordinated Liabilities) is payable or deliverable in respect of the Subordinated Liabilities, and (ii) the Holders of Guaranteed Obligations are not otherwise entitled to receive such payment or distribution pursuant to Section 2.8(d), and (iii) any amount remains unpaid to any Holder of Guaranteed Obligations on account of any Disallowed Post-Commencement Interest and Expenses, then the Holders of Guaranteed Obligations shall be entitled to receive payment of all such unpaid Disallowed Post- Commencement Interest and Expenses from and out of any and all such payments and distributions in respect of the Subordinated Liabilities. (f) Held in Trust. If any payment, transfer or distribution is made to any Guarantor upon any Subordinated Liabilities that is not permitted to be made under this Section 2.8 or that the Holders of Guaranteed Obligations are entitled to receive under this Section 2.8, such Guarantor shall receive and hold the same in trust, as trustee for the benefit of the Holders of Guaranteed Obligations, and shall forthwith transfer and deliver the same to Agent, in precisely the form received (except for any required endorsement), for application to the payment of Guaranteed Obligations or any unpaid Disallowed Post- Commencement Interest and Expenses. (g) Claims in Bankruptcy. Each Guarantor will file all claims against Borrower in any Liquidation or Insolvency Proceeding in which the filing of claims is required or permitted by law upon any of the Subordinated Liabilities and will assign to Agent, for the benefit of the Holders of Guaranteed Obligations, all rights of such Guarantor thereunder. If any Guarantor does not file any such claim at least 30 days prior to any applicable claims bar date, Agent is hereby authorized (but shall not be obligated), as attorney-in-fact for such Guarantor with full power of substitution, either to file such claim or proof thereof in the name of such Guarantor or, at Agent's option, to assign the claim and cause the claim or proof thereof to be filed by an agent or nominee. Agent and its agents and nominees shall have the sole right, but no obligation, to accept or reject any plan proposed in such Insolvency or Liquidation Proceeding and to cast any votes and to take any other action with respect to all claims upon any of the Subordinated Liabilities. (h) Subordination Effective and not Impaired. This Section 2.8 shall remain effective for so long as this Guaranty Page 108 is continuing and thereafter for so long as any Guaranteed Obligation is outstanding. Each Guarantor's obligations under this Section 2.8 (i) shall be absolute and unconditional as set forth in Section 2.3, irrevocable and continuing as set forth in Section 2.4, subject to reinstatement as set forth in Section 2.5, and not be affected or impaired by any of the matters waived in Section 2.6, (ii) shall be subject to the provisions of Article V, and (iii) shall otherwise be as equally enduring and free from defenses as such Guarantor's liability under this Guaranty. SECTION 2.9 Fraudulent Transfer Limitation. If, in any action to enforce this Guaranty or any proceeding to allow or adjudicate a claim under this Guaranty, a court of competent jurisdiction determines that enforcement of this Guaranty against any Guarantor for the full amount of the Guaranteed Obligations is not lawful under, or would be subject to avoidance under, Section 548 of the Bankruptcy Code or any applicable provision of comparable state law, the liability of such Guarantor under this Guaranty shall be limited to the maximum amount lawful and not subject to avoidance under such law. SECTION 2.10 Contribution among Guarantors. The Guarantors desire to allocate among themselves, in a fair and equitable manner, their rights of contribution from each other when any payment is made by one of the Guarantors under this Guaranty. Accordingly, if any payment is made by a Guarantor under this Guaranty (a "Funding Guarantor") that exceeds its Fair Share, the Funding Guarantor shall be entitled to a contribution from each other Guarantor in the amount of such other Guarantor's Fair Share Shortfall, so that all such contributions shall cause each Guarantor's Aggregate Payments to equal its Fair Share. For these purposes: (a) "Fair Share" means, with respect to a Guarantor as of any date of determination, an amount equal to (i) the ratio of (x) the Adjusted Maximum Amount of such Guarantor to (y) the aggregate Adjusted Maximum Amounts of all Guarantors, multiplied by (ii) the aggregate amount paid on or before such date by all Funding Guarantors under this Guaranty. (b) "Fair Share Shortfall" means, with respect to a Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Guarantor over the Aggregate Payments of such Guarantor. (c) "Adjusted Maximum Amount" means, with respect to a Guarantor as of any date of determination, the maximum aggregate amount of the liability of such Guarantor under this Guaranty, limited to the extent required under Section 2.9 (except that, for purposes solely of this calculation, any assets or Page 109 liabilities arising by virtue of any rights to or obligations of contribution under this Section 2.10 shall not be counted as assets or liabilities of such Guarantor). (d) "Aggregate Payments" means, with respect to a Guarantor as of any date f determination, the aggregate net amount of all payments made on or before such date by such Guarantor under this Guaranty (including, without limitation, under this Section 2.10). The amounts payable as contributions hereunder shall be determined as of the date on which the related payment or distribution is made by the Funding Guarantor. The allocation and right of contribution among the Guarantors set forth in this Section 2.10 shall not be construed to limit in any way the liability of any Guarantor under this Guaranty to the Holders of the Guaranteed Obligations. SECTION 2.11 Joint and Several Obligation. This Guaranty and all liabilities of each Guarantor hereunder shall be the joint and several obligation of each Guarantor and may be freely enforced against each Guarantor, for the full amount of the Guaranteed Obligations (subject to Section 2.9), without regard to whether enforcement is sought or available against any other Guarantor. ARTICLE III MISCELLANEOUS PROVISIONS SECTION 3.1 Condition of Borrower. Each Guarantor is fully aware of the financial condition of Borrower and is executing and delivering this Guaranty based solely upon such Guarantor's own independent investigation of all matters pertinent hereto and is not relying in any manner upon any representation or statement by any Holder of Guaranteed Obligations. Each Guarantor represents and warrants that it is in a position to obtain, and each Guarantor hereby assumes full responsibility for obtaining, any additional information concerning the financial condition of Borrower and any other matter pertinent hereto as such Guarantor may desire, and such Guarantor is not relying upon or expecting any Holder of Guaranteed Obligations to furnish to such Guarantor any information now or hereafter in the possession of any Holder of Guaranteed Obligations concerning the same or any other matter. By executing this Guaranty, each Guarantor knowingly accepts the full range of risks encompassed within a contract of this type, which risks each Guarantor acknowledges. No Guarantor shall have the right to require any Holder of Guaranteed Obligations to obtain or disclose any information with respect to the Guaranteed Obligations, the financial condition or prospects of Borrower, the ability of Borrower to pay or perform the Guaranteed Obligations, the existence, perfection, priority or enforceability of any collateral security for any or all Page 110 of the Guaranteed Obligations, the existence or enforceability of any other guaranties of all or any part of the Guaranteed Obligations, any action or non-action on the part of any Holder of Guaranteed Obligations, Borrower, or any other Person, or any other event, occurrence, condition or circumstance whatsoever. SECTION 3.2 Amendments. (a) Amendment to Guaranty. No amendment or waiver of any provision of this Guaranty, and no consent to any departure by any Guarantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Banks, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given, except that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders, (i) limit the liability of any Guarantor hereunder, (ii) postpone any date fixed for payment hereunder, or (iii) change the number of Lenders required to take any action hereunder. (b) Amendment or Modification of The Notes. The Notes may be amended, modified or supplemented in accordance with their terms without notice to or consent or agreement by any Guarantor, including, without limitation, so as to (i) alter, compromise, modify, accelerate, extend, renew, refinance or change the time or manner for making of advances, provision of other financial accommodations, or the payment or performance of all or any portion of the Guaranteed Obligations, (ii) increase or reduce the rate of interest or amount of principal payable on the Notes, (iii) release or discharge Borrower or any other Person as to all or any portion of the Guaranteed Obligations, or (iv) release, substitute or add any one or more guarantors or endorsers, accept additional or substituted security for payment or performance of the Guaranteed Obligations, or release or subordinate any security therefore. SECTION 3.3 Notices. All notices and other communications provided for hereunder shall be in writing (including telecopier communication) and mailed, telecopied or delivered; if to any Guarantor, at c/o Realty Income Corporation, 220 West Crest Street, Escondido, CA 92025-1707, Attention: Richard J. VanDerhoff, Esq., with a copy to: Michael J. Brody Esq., Latham & Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, CA 90071-2007, if to Agent, at The Bank of New York, One Wall Street, 18th Floor, New York, NY 10286, Attention: Kalyani Bose -- Agency Function Administration, with a copy to: Sullivan & Cromwell, 444 South Flower Street, Los Angeles, CA 90071, Attention: Alison S. Ressler; and if to any Lender, at its address specified in the Credit Agreement, or, as to any party, at such other address as shall be designated by such party in a written notice to each other party. All such notices and other communications shall, when mailed or telecopied be effective when deposited in the mails or telecopied respectively. Page 111 SECTION 3.4 Right of Set-off. If any request is made or consent is given by the Required Banks pursuant to Section 8.01 of the Credit Agreement for a declaration by Agent that the Notes are immediately due and payable, or if the Notes become immediately due and payable pursuant to Section 8.01 of the Credit Agreement, each Lender shall have the right at any time and from time to time thereafter, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other liability at any time owing by such Lender to or for the credit or the account of any Guarantor against any and all liability of such Guarantor under this Guaranty, whether or not such Lender shall have made any demand under this Guaranty and even though such liability may then be contingent and unmatured. Each Lender agrees promptly to notify the effected Guarantor after any such set-off and application made by such Lender, but the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 3.4 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Lender may have. SECTION 3.5 Successors and Assigns. This Guaranty is binding upon and enforceable against each Guarantor, its successors and assigns, and shall inure to the benefit of, and be enforceable by, each Holder of any of the Guaranteed Obligations and such Holder's heirs, representatives, successors and assigns. SECTION 3.6 No Inquiry. Each Holder of Guaranteed Obligations may rely, without further inquiry, on the power and authority of each Guarantor, Borrower and each of its Subsidiaries and on the authority of all officers, directors and agents acting or purporting to act on their behalf. SECTION 3.7 Bankruptcy. So long as any Commitments or Guaranteed Obligation are outstanding, no Guarantor will, without the prior written consent of Agent and the Required Banks, commence or join with any other Person in commencing any Insolvency or Liquidation Proceeding against Borrower or any of its Subsidiaries. SECTION 3.8 No Waiver; Remedies. No failure on the part of any Holder of Guaranteed Obligations to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, and any single or partial exercise of any right hereunder shall not preclude any other or further exercise of any other right or of the same right as to any other matter or on a subsequent occasion. SECTION 3.9 Remedies Cumulative. All rights, powers and remedies of each Holder of Guaranteed Obligations under this Guaranty, under any other agreement now or at any time hereafter in effect between any such Holder and each and all of the Guarantors (whether relating to the Guaranteed Obligations or otherwise) or now Page 112 or hereafter existing at law or in equity or by statute or otherwise, shall be cumulative and concurrent and not alternative and each such right, power and remedy may be exercised independently of, and in addition to, each other such right, power or remedy. SECTION 3.10 Severally Enforceable. This Guaranty may be enforced severally and successively by any one or more of the Holders of Guaranteed Obligations in one or more actions, whether independent, concurrent, joint, successive or otherwise. The claims, rights and remedies of any Holder of Guaranteed Obligations (i) may not be modified or waived by any other Holder, except as set forth in Section 3.2(a), and (ii) shall not be reduced, discharged, affected or impaired by any deed, act or omission, whether or not wrongful, of any other Holder. SECTION 3.11 Counterparts. This Guaranty may be executed in counterparts, and each such counterpart for all purposes shall be deemed an original and all such counterparts together shall constitute but one and the same agreement. SECTION 3.12 Severability. If any provision hereof or the application thereof in any particular circumstance is held to be unlawful or unenforceable in any respect, all other provisions hereof and such provision in all other applications shall nevertheless remain effective and enforceable to the maximum extent lawful. SECTION 3.13 Integration. This Guaranty is intended as an integrated and final expression of the entire agreement of such Guarantor with respect to the subject matter hereof. No representation, understanding, promise or condition concerning the subject matter hereof shall be binding upon any Holder of Guaranteed Obligations unless expressed herein or therein, and no course of prior dealing or usage of trade, and no parol or extrinsic evidence of any nature, shall be admissible to supplement, modify or vary any of the terms hereof. Acceptance of or acquiescence in a course of performance rendered under this Guaranty or any other dealings between any Guarantor and any Holder of Guaranteed Obligations shall not be relevant to determine the meaning of this Guaranty even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection. SECTION 3.14 GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. (a) GOVERNING LAW. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. (b) SUBMISSION TO JURISDICTION. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND BY EXECUTION AND DELIVERY OF Page 113 THIS AGREEMENT, EACH PARTY HERETO CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE JURISDICTION OF THOSE COURTS. EACH PARTY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS MAY BE MADE BY ANY MEANS PERMITTED BY NEW YORK LAW. (c) WAIVER OF JURY TRIAL. EACH PARTY HERETO WAIVES ALL RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS GUARANTY, THE NOTES OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE, AND AGREES THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. SECTION 3.15 Acceptance and Notice. Each Guarantor acknowledges acceptance hereof and reliance hereon by each Holder of any of the Guaranteed Obligations and waives, irrevocably and forever, all notice thereof. IN WITNESS WHEREOF, the Guarantors have caused this Subsidiary Guaranty to be duly executed and delivered by an officer of each Guarantor thereunto duly authorized as of the date first above written. THE GUARANTORS: Realty Income Texas Properties, L.P, a Delaware limited partnership By: Realty Income Corporation Its: General Partner By: _______________________________ Michael R. Pfeiffer Senior Vice President, General Counsel Page 114 Schedule 1 ---------- Commitments ----------- BANK ALLOCATION - ---------------------------------------------------- The Bank of New York $32,000,000 AmSouth Bank $22,000,000 Bank of Montreal $22,000,000 Dresdner Bank $22,000,000 First Union $22,000,000 Sanwa Bank $17,000,000 Bank Hapoalim $13,000,000 ============ TOTAL $150,000,000 Page 115 Schedule 5.01(a) ---------------- Subsidiaries and Joint Ventures of the Company ---------------------------------------------- SUBSIDIARIES: Realty Income Texas Properties, Inc., a Delaware corporation Realty Income Texas Properties, L.P., a Delaware limited partnership CO-TENANCIES: Sizzler #514 101 North Village Court San Dimas, CA 91773 Sizzler #567 9588 Baseline Road Rancho Cucamonga, CA 91730 Children's World #134 510 West Second Street Corona, CA 91720 Page 116 Schedule 5.01(q) ---------------- ERISA Liabilities ----------------- 1. Termination of the Realty Income Corporation Defined Benefit Pension Plan (the "Plan") on January 2, 1996. All Plan benefits were distributed on or before February 24, 1997. Page 117 Schedule 5.01(r) ---------------- Intellectual Property --------------------- REGISTERED U.S. SERVICE MARKS: #1,470,945 "R.I.C." #1,470,946 "RIC" #1,908,766 "Realty Income Corporation" #1,928,373 Building & Sun Design APPLIED FOR U.S. SERVICE MARKS: #75/182,734 "Realty Income" #75/182,736 "Realty Income" with Building & Sun Design Page 118 EX-10.9 3 Exhibit 10.9 SECOND AMENDMENT TO THE 1994 STOCK OPTION AND INCENTIVE PLAN FOR KEY EMPLOYEES OF REALTY INCOME CORPORATION, AND RIC ADVISOR, INC -------------------- THIS SECOND AMENDMENT ("Amendment") TO THE 1994 STOCK OPTION AND INCENTIVE PLAN FOR KEY EMPLOYEES OF REALTY INCOME CORPORATION and RIC ADVISOR, INC. (the "Plan") is made as of December 16,1997, by Realty Income Corporation, a Maryland corporation (the "Company"). W I T N E S S E T H - - - - - - - - - - WHEREAS, the Board of Directors approved the First Amendment to the Plan on June 12, 1997; and WHEREAS, the Board of Directors of the Company has determined that it is appropriate and in the best interests of the Company to further amend the Plan as set forth herein; NOW, THEREFORE, in consideration of the foregoing recitals, the Plan is hereby amended as set forth herein: 1. Capitalized terms used herein which are not otherwise defined herein but are defined in the Plan shall have the meanings given to such terms in the Plan. 2. Section 10.1 of the Plan is hereby amended and restated in its entirety as follows: "10.1 Non-Transferability. No Option or Performance Award or Restricted Stock (each, an "Award") under this Plan may be sold, pledged, assigned or transferred in any manner other than by a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder ("QDRO") or by will or the laws of descent and distribution unless and until such Award has been exercised, or the shares underlying such Award have been issued, and all restrictions applicable to such shares have lapsed. In the case of Options granted to Independent Directors, however, an Optionee who is an Independent Director may transfer an Option to a Permitted Transferee (as defined below) to the extent permitted by any applicable law or regulations and subject to the following terms and conditions: (a) An Option transferred to a Permitted Transferee shall not be assignable or transferable by the Permitted Transferee other than by a QDRO or by will or the laws of descent and distribution. Page 1 (b) Any Option which is transferred to a Permitted Transferee shall continue to be subject to all the terms and conditions of the Option as applicable to the original holder (other than the ability to further transfer the Option). (c) The Optionee and the Permitted Transferee shall execute any and all documents reasonably requested by the Board, including without limitation documents to (i) confirm the status of the transferee as a Permitted Transferee, (ii) satisfy any requirements for an exemption for the transfer under applicable federal and state securities laws and (iii) evidence the transfer. (d) Shares of Common Stock acquired by a Permitted Transferee through exercise of an Option have not been registered under the Securities Act of 1933, as amended, or any state securities act and may not be transferred, nor will any assignee or transferee thereof be recognized as an owner of such shares of Common Stock for any purpose, unless a registration statement under the Securities Act of 1933, as amended, and any applicable state securities act with respect to such shares shall then be in effect or unless the availability of an exemption from registration with respect to any proposed transfer or disposition of such shares shall be established to the satisfaction of counsel for the Company. As used in this Section 10.1, "Permitted Transferee" shall mean (i) one or more of the following family members of an Optionee: spouse, former spouse, child (whether natural or adopted), stepchild, any other lineal descendant of the Optionee, (ii) a trust, partnership or other entity established and existing for the sole benefit of, or under the sole control of, one or more of the above family members of the Optionee, or (iii) any other transferee specifically approved by the Board after taking into account any state or federal tax or securities laws applicable to transferable Options. No Award or interest or right therein shall be liable for the debts, contracts or engagements of the holder thereof or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect, except to the extent that such disposition is permitted by the preceding provisions of this Section 10.1. Except as specifically provided in this Section 10.1, an Option shall be exercised during the Optionee's lifetime only by the Optionee or his guardian or legal representative, and a Performance Award under this Plan shall be exercised during the Grantee's lifetime only by the Grantee or his guardian or legal representative." Page 2 3. Except as expressly provided in this Amendment, all of the terms, covenants, conditions, restrictions and other provisions contained in the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned, being duly authorized to do so, has caused this Amendment to be executed as of the date first above written. REALTY INCOME CORPORATION By: ---------------------------- Name: Michael R. Pfeiffer Title: Senior Vice President, General Counsel and Secretary Page 3 EX-10.10 4 Exhibit 10.10 REALTY INCOME CORPORATION MANAGEMENT INCENTIVE PLAN I. INTRODUCTION The Realty Income Corporation Management Incentive Plan is an annual, stock and cash-based incentive plan that is designed to ensure that Realty Income Corporation (Realty Income) is managed in keeping with the best short- and long-term interests of its shareholders and employees. In light of this objective, the plan rewards certain executives for the achievement of key corporate and individual- specific performance objectives. A participant's total award shall be determined on the basis of annual performance and shall be made in the form of restricted stock, stock options and cash, which encourage executives to focus on Realty Income Corporation's long-term success and shareholder interests. This document sets forth all terms and conditions of the plan as approved by the Board of Directors. II. DEFINITIONS For the purposes of the Plan, the following terms shall have the meaning set forth below: "Board" means the Board of Directors of Realty Income. "CEO" means the Chief Executive Officer of Realty Income. "Change in Control" means the acquisition of shares of Realty Income Common Stock by any person, entity or group in a transaction or series of transactions, resulting in the beneficial ownership of more than thirty percent of the outstanding Common Stock of Realty Income; a merger, consolidation or sale of substantially all the assets of Realty Income; a contested election of directors of Realty Income resulting in a majority of the nominees recommended by the Board of Directors of Realty Income not being elected; a change in composition within a sixty day period of a majority of Realty Income's Board of Directors; or any other event which results in a change of voting power sufficient to elect a majority of the Board of Directors of Realty Income. "Committee" means the Compensation Committee of the Board of Directors of Realty Income. "Date of Grant" means December 31 of the year for which performance is being measured. "Exercise Price" of a Realty Income stock option means the price at which a share of Realty Income common stock can be purchased over a specified option term. Page 1 "Funds from Operations" or "FFO" means net income excluding gain or loss from sales of properties, plus provision for impairment losses, plus depreciation and amortization. FFO per share means total FFO for a Performance Period divided by the average number of Common Shares outstanding for the Performance Period. "Grant Price" means the per share market value of Realty Income common stock on the date a Total Award is made. "Individual-Specific" means individual performance measures and/or objectives that can determine a portion of a Participant's Total Award. "Maximum Award" means a Participant's maximum award for a certain portion of the Plan for a Performance Period. Maximum Award is determined by the Committee under the Plan and typically is expressed as a percentage of a Participant's Target Award. "Maximum Performance" means the performance objective at or above which a Maximum Award is made for a certain portion of the Plan. "Minimum Award" means a Participant's minimum award for a certain portion of the Plan for a Performance Period. Minimum Award is determined by the Committee under the Plan and typically is expressed as a percentage of a Participant's Target Award. "Minimum Performance" means the performance objective at which a Minimum Award is made for a certain portion of the Plan and below which no award is made for that portion of the Plan. "Participant" means any executive or key employee of Realty Income selected by the Committee to participate in the Plan. "Peer Group" means the group of peer companies used in Realty Income's proxy statement performance graph. "Performance Period" means a Realty Income fiscal year for which Total Awards under the Plan are made. "Plan" means the Realty Income Corporation Management Incentive Plan. "President" means the President of Realty Income. "Target Award" means a Participant's target award for a certain portion of the Plan for a Performance Period. Target Award for each portion of the Plan is determined on the basis of the weight assigned to that portion of the Plan (i.e., a certain performance measure) and a Participant's Target Total Award. Page 2 "Target Total Award" means a Participant's target Total Award for a Performance Period, as determined by the Committee under the Plan. Target Total Award typically is expressed as a percentage of a Participant's base salary. "Target Performance" means the performance objective at which a Target Award is made for a certain portion of the Plan. "Total Award" means a stock and cash-based award made by the Board to any Plan Participant for performance on FFO, TSR, and Individual-Specific objectives for a Performance Period. "Total Shareholder Return" or "TSR" means a shareholder's annual percentage return on an investment in stock, including stock appreciation and dividends. TSR is calculated by adding Realty Income's stock price on the last day of a Performance Period to total dividends for that Performance Period, dividing the resulting value by Realty Income's stock price on the last day of the preceding Performance Period, and subtracting one from the resulting value. III. BASIC APPROACH The Plan rewards Participants for the achievement of three performance objectives: A predetermined FFO per share objective A predetermined measure of TSR relative to the Peer Group Individual-Specific objectives. The Committee shall set a Target Total Award for each Participant that is expressed as a percentage of the Participant's base salary. A Target Total Award is set on the basis of competitive pay practices and the scope of a Participant's responsibilities. Each performance objective carries a certain weight in determining a Participant's actual Total Award. FFO performance carries a weight of 60%, TSR performance carries a weight of 20%, and Individual-Specific performance carries a weight of 20% of the Total Award. FFO PER SHARE PERFORMANCE. FFO per share performance shall be measured by the amount of increase in FFO per share for the Performance Period over the previous Performance Period. Performance awards for percentage FFO growth shall be determined as set forth on Exhibit "1," attached hereto and incorporated herein. Page 3 RELATIVE TSR PERFORMANCE. TSR performance shall be measured as follows: Performance Level ------------------------------ TSR Performance TSR Objective (e.g., TSR Rank Relative to Peer Group) Third Second First Percentage of Target Award Made for TSR Performance 50% 100% 150% No award shall be made to Participants for the relative TSR portion of the Plan if actual TSR is zero or negative, regardless of TSR performance vis-a-vis the Peer Group for the Performance Period. INDIVIDUAL-SPECIFIC PERFORMANCE. At the beginning of a Performance Period, the CEO and the Board shall work with the Participants to develop their Individual-Specific objectives. Following the end of each Performance Period, the CEO shall make recommendations to the Committee on the percentage of Target Award that should be paid to a Participant on the basis of whether individual performance is below expectations, meets expectations, or exceeds expectations. The individual portion of the award shall be between 0% and 150%, which percentage shall be determined by the Committee. After actual performance and corresponding awards for each portion of the Plan are determined, a Participant's Total Award shall be calculated as the sum of awards from each portion of the Plan. Straight-line interpolation shall be used to determine award levels for actual performance between performance increments for FFO performance. A Participant shall receive no award on a performance measure if actual performance for that measure is below the Minimum Performance objective. A Participant shall receive the Maximum Award on a performance measure if actual performance for that measure is at or above the Maximum Performance objective. After a Participant's Total Award (up to 100% of the Target Total Award) is calculated, 25% of the Participant's Total Award shall be paid in cash, 25% shall be in the form of restricted stock and 50% shall be made in the form of stock options. All awards above the Target Total Award level shall be in the form of stock options. The number of underlying shares that is granted in the form of restricted stock shall be determined by dividing 25% of the Total Award (up to the Target Total Award level) by Realty Income's stock price (the Grant Price) on the Date of Grant. The number of underlying shares that is granted in the form of stock options shall be determined by dividing the balance of the Total Award, less the amount paid in cash, by the expected value of a Realty Income stock option on the Date of Grant (using the same Grant Price). The expected value of a Realty Income stock option shall be estimated using the binomial option valuation formula, a widely accepted formula for determining the Page 4 expected value of stock options. The Exercise Price of stock options shall equal the Grant Price. The number of restricted stock and stock option shares granted shall be rounded to the nearest 100. The Table below provides an example of how the number of underlying shares granted in the form of restricted stock and stock options is determined for a Participant who earns an assumed Total Award of $40,000. Assuming the Total Award does not exceed the Target Award, $10,000 (25%) would be paid in cash, and the balance would be computed as follows: TABLE HOW THE NUMBER OF UNDERLYING SHARES FOR A TOTAL AWARD IS DETERMINED - EXAMPLE (ASSUMING TOTAL AWARD OF $40,000) Number of Underlying Shares Made in Restricted Stock - ---------------------------------------------------------------------- Number of 25% of Total RS Shares Award Made in Assumed Number of (Rounded to Restricted Stock Grant Price RS Shares Nearest 100) ---------------- ----------- --------- ------------ $10,000 $22.00 455 500 Number of Underlying Shares Made in Stock Options - ---------------------------------------------------------------------- Number of 50% of Total Assumed SO Shares Award Made in Assumed Binomial Number of (Rounded to Stock Options Grant Price Value (1) SO Shares Nearest 100) ------------- ----------- -------- --------- ------------ $20,000 $22.00 $5.76 3,472 3,500 RS: restricted stock; SO: stock option. (1) Assumed binomial option value of $5.76 was determined using assumptions for interest rate, stock volatility, dividend yield, and option term. All restricted stock and stock option grants made pursuant to the Plan shall be made in accordance with the provisions of Realty Income's Stock Incentive Plan. IV. ASSESSMENT OF PERFORMANCE Actual performance for FFO, TSR, and Individual-Specific measures shall be determined as of the last day of a Performance Period. Actual performance shall be assessed as soon as feasible after the end of a Performance Period. Page 5 V. ADJUSTMENT OF PERFORMANCE OBJECTIVES The Committee shall have the authority to change performance objectives from one Performance Period to another or in the event of special circumstances (e.g., in the event that a company is added to or omitted from the Peer Group that is used to determine relative TSR performance). At the beginning of each Performance Period (i.e., within the first three months of the Performance Period), the Board and/or CEO shall work with other Participants to develop their Individual-Specific objectives. The Board and/or CEO shall have the authority to change performance objectives from one Performance Period to another or in the event of special circumstances (e.g., in the event that a Participant's position or scope of responsibilities change). VI. ADJUSTMENT OF AWARDS LEVELS The Committee shall set Participants' Target Total Award, Minimum Award, Target Award, and Maximum Award levels under the Plan and shall have the authority to adjust award levels on the basis of competitive practices and/or Realty Income's business objectives. VII. TIMING OF TOTAL AWARD PAYMENTS All Total Awards shall be made as soon as feasible after all performance results for the Performance Period are available. The number of underlying shares for restricted stock and stock options that are granted shall be determined on the basis of Realty Income's stock price (the Grant Price) on the Date of Grant. VIII. VESTING OF TOTAL AWARDS Restricted stock and stock options that comprise a Total Award shall vest over three years, with one-third of the Total Award vesting one year after the Date of Grant, one-third vesting two years after the Date of Grant, and one-third vesting three years after the Date of Grant. Dividends on the restricted stock portion of a Total Award shall be payable from the Date of Grant. IX. PARTICIPATION Participation in the Plan shall be limited to executives and key employees who have a significant impact on the growth and profitability of Realty Income. The CEO shall make recommendations to the Committee on which executives and key employees should participate in the Plan. The Committee shall have the authority to approve employees for participation in the Plan. Page 6 X. SEPARATION OF EMPLOYMENT Payment of a Total Award under the Plan shall be conditioned on a Participant's continued employment with Realty Income during the entire Performance Period. SEPARATION OF EMPLOYMENT FOR CAUSE. In the event that a Participant's employment with Realty Income is terminated for a reason other than death, disability, retirement, or a Change in Control, any Total Award for the current, incomplete Performance Period shall be forfeited. SEPARATION OF EMPLOYMENT WITHOUT CAUSE. If employment ends by reason of death, disability, retirement, or a Change in Control, a Total Award shall be paid subject to the conditions of the Plan and Committee approval, except that the Total Award shall be prorated on the basis of the number of months in the Performance Period actually completed prior to said death, disability, retirement, or Change in Control. TIMING AND FORM OF PAYMENT. If employment ends by reason of death, disability, or retirement, such a Total Award shall be payable in cash at the same time as those paid to Participants who complete the Performance Period (as described in Section VII above). If employment ends by reason of a Change in Control, a prorated Target Total Award shall be payable in cash immediately. The prorated Target Total Award shall be made on the basis of the number of months in the Performance Period actually completed prior to the Change in Control. NONVESTED STOCK AWARDS EARNED FROM PRECEDING PERFORMANCE PERIODS. If employment ends by reason of death, disability, retirement, or a Change in Control, all nonvested restricted stock and stock options earned in preceding Performance Periods shall vest in accordance with the provisions of Realty Income's Stock Incentive Plan. XI. MISCELLANEOUS (a) Term and Adoption of the Plan - The Plan, as set forth herein, shall become effective on January 1, 1998. The Plan shall remain in effect until it is terminated pursuant to subsection (b) below. The adoption of this Plan or any modification hereof does not imply any commitment to continue the Plan, or any modification thereof, or adopt any other plan for incentive compensation for any succeeding year. Neither the Plan nor any Total Award made under the Plan shall create any employment contract or relationship between Realty Income and any Participant. Furthermore, no person has any rights with respect to a Total Award until it is payable to such person after the expiration of the applicable Performance Period and verification Page 7 of actual performance on FFO, TSR, and applicable Individual- Specific measures. (b) Right to Amend or Terminate the Plan - The Board can amend, suspend, or terminate the Plan at any time and for any reason, except that the provisions of the Plan pertaining to the amount and timing of a Total Award shall not be amended more than once in any 12-month period. (c) Liens on Company Assets - No Participant shall hold a lien on any assets of Realty Income by reason of any Total Award made under the Plan. (d) Payment of Awards - Payment of Total Awards under the Plan for a particular Performance Period shall be made as soon as feasible following the end of that Performance Period. All Total Awards shall be made in the form of restricted stock and stock options and cash. (e) Deductions - Realty Income retains the right to deduct from all amounts paid in restricted stock and stock options any taxes required by law to be withheld from such payments. (f) Plan Agreement - Each Participant must sign the Realty Income Corporation Management Incentive Plan Agreement (Exhibit 2) to confirm his or her participation in the Plan under the terms and conditions set forth herein. A new agreement must be signed within the first four months of each Performance Period. Exhibit 2 Realty Income Corporation Management Incentive Plan Agreement This document shall constitute the agreement between Realty Income Corporation (Realty Income) and (the Participant), which confirms participation in the Realty Income Corporation Management Incentive Plan (the Plan). Subject to the terms and conditions of the Plan, you are a Participant in the Performance Period beginning January 1, 1998 and ending December 31, 1998. Your Target Total Award for the Performance Period shall be % of your base salary, or $ , as shown in Table 1 below. Table 1 Target Total Award Base Salary as a % of Base Salary Target Total Award ----------- --------------------- ------------------ $ % $ Page 8 Your actual Total Award shall be calculated on the basis of the achievement of the performance objectives specified pursuant to the terms of the Plan and as described in this agreement. Realty Income reserves the right to amend performance objectives and targets on the basis of factors beyond the control of the Participant. The performance objectives, the weight each objective carries in determining your Total Award, and the award levels for the Performance Period are shown in Table 2 below and further described on the attached schedule of Management Awards. Table 2 1998 Performance Objectives and Award Levels - (Name of Participant) - ---------------------------------------------------------------------- Performance Objectives Performance Level and Award Levels --------------------------------------- Minimum Target Maximum Performance Performance Performance - --------------------------------------------------------------------- FFO PERFORMANCE Carries Weight of 60% of Total Award FFO Per Share Objective $ $ $ Percentage of Target Award Made for FFO Performance 20% 100% 300% - --------------------------------------------------------------------- TSR PERFORMANCE Carries Weight of 20% of Total Award TSR Ranking Objective (Relative to Proxy Performance Graph Peer Group) Third Second First Percentage of Target Award Made for TSR Performance 50% 100% 150% - --------------------------------------------------------------------- INDIVIDUAL-SPECIFIC PERFORMANCE Carries Weight of 20% of Total Award Performance on Individual -Specific Objectives Below Meets Exceeds Percentage of Target Award Made for Individual Performance 0% 100% 150% Page 9 Pursuant to the provisions of the Plan, your Total Award, up to the Target Award, shall be made in the form of cash (25%), restricted stock (25%) and stock options (50%). The amount of your Total Award that exceeds the Target Award shall be in the form of stock options. The number of underlying shares that is granted to you in the form of restricted stock and stock options shall be determined on the basis of Realty Income's stock price (the Grant Price) on the Date of Grant. The Exercise Price on stock options shall equal the Grant Price. Your Total Award shall be made as soon as feasible after the end of the Performance Period. Restricted stock and stock options that comprise a Total Award shall vest over three years, with one-third of the Total Award vesting one year after the Date of Grant, one-third vesting two years after the Date of Grant, and one-third vesting three years after the Date of Grant. Dividends on the restricted stock portion of a Total Award shall be payable from the Date of Grant. In the event that your employment with the Company is terminated for reasons other than death, disability, retirement, or a Change in Control, any Total Award for the current, incomplete Performance Period or nonvested restricted shares or stock options from preceding Performance Periods shall be forfeited. (See Section X of the Realty Income Corporation Management Incentive Plan.) Please read the Realty Income Corporation Management Incentive Plan carefully and retain a copy of the plan document and a copy of the plan agreement for your reference. Indicate your acceptance of the terms of this agreement by signing in the space provided below. Accepted: REALTY INCOME CORPORATION Accepted: (Name of Participant) By: ------------------------------- ------------------------------- Thomas A. Lewis Chief Executive Officer Date: Date: ------------------------------ -------------------------- Page 10 Exhibit 1 Proration of Incentive Awards Percentage FFO Percentage Growth per Share of Award - ------------------- ---------- 0-4% 0.00% 4.00% 20.00% 4.25% 26.67% 4.50% 33.33% 4.75% 40.00% 5.00% 46.67% 5.25% 53.33% 5.50% 60.00% 5.75% 66.67% 6.00% 73.33% 6.25% 80.00% 6.50% 86.67% 6.75% 93.33% 7.00% 100.00% 7.25% 105.00% 7.50% 110.00% 7.75% 115.00% 8.00% 120.00% 8.25% 125.00% 8.50% 130.00% 8.75% 135.00% 9.00% 140.00% 9.25% 145.00% 9.50% 150.00% 9.75% 155.00% 10.00% 160.00% 10.25% 165.00% 10.50% 170.00% 10.75% 175.00% 11.00% 180.00% 11.25% 185.00% 11.50% 190.00% 11.75% 195.00% 12.00% 200.00% 12.25% 208.33% 12.50% 216.67% 12.75% 225.00% 13.00% 233.33% 13.25% 241.67% 13.50% 250.00% 13.75% 258.33% 14.00% 266.67% 14.25% 275.00% 14.50% 283.33% 14.75% 291.67% 15.00% 300.00% Page 11 EX-10.11 5 Exhibit 10.11 NONQUALIFIED STOCK OPTION AGREEMENT FOR INDEPENDENT DIRECTORS THIS AGREEMENT, dated June 12, 1997, is made by and between Realty Income Corporation, a Maryland corporation hereinafter referred to as "Company," and ____________________, an independent director of the Company, hereinafter referred to as "Optionee": WHEREAS, the Company wishes to afford the Optionee the opportunity to purchase shares of its $1.00 par value Common Stock; and WHEREAS, the Company wishes to carry out the Plan (the terms of which are hereby incorporated by reference and made a part of this Agreement); NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I DEFINITIONS Whenever the following terms are used in this Agreement, they shall have the meaning specified below unless the context clearly indicates to the contrary. The masculine pronoun shall include the feminine and neuter, and the singular the plural, where the context so indicates. SECTION 1.1 - BOARD "Board" shall mean the Board of Directors of the Company. SECTION 1.2 - CODE "Code" shall mean the Internal Revenue Code of 1986, as amended. SECTION 1.3 - COMMITTEE "Committee" shall mean the Compensation Committee of the Board, or a subcommittee of the Board, appointed as provided in Section 9.1 of the Plan SECTION 1.4 - COMMON STOCK "Common Stock" shall mean the common stock of the Company, par value $1.00 per share, and any equity security of the Company issued or authorized to be issued in the future, but excluding any warrants, options or other rights to purchase Common Stock. Debt securities of Page 1 the Company convertible into Common Stock shall be deemed equity securities of the Company. SECTION 1.5 - COMPANY "Company" shall mean Realty Income Corporation, a Maryland corporation. SECTION 1.6 - DIRECTOR "Director" shall mean a member of the Board. SECTION 1.7 - EMPLOYEE "Employee" shall mean any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of the Company, or of any corporation which is a Subsidiary. SECTION 1.8 - EXCHANGE ACT "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. SECTION 1.9 - FAIR MARKET VALUE "Fair Market Value" of a share of Common Stock as of a given date shall be the daily market price for the trading day on which the purchase of such share by the exercising party is consummated. The market price for each such trading day shall be: (i) if the shares of Common Stock are listed or admitted to trading on any national securities exchange or the NASDAQ-National Market System, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, (ii) if the shares of Common Stock are not listed or admitted to trading on any national securities exchange or the NASDAQ-National Market System, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the Company, or (iii) if the shares of Common Stock are not listed or admitted to trading on any national securities exchange or the NASDAQ-National Market System and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the Company, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 10 days prior to the date in question) for which prices have been so reported; provided that if there are no bid and asked prices reported during the 10 days prior to the date in question, the Fair Market Value of the shares of Common Stock shall be determined by the Company acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. Page 2 SECTION 1.10 - INDEPENDENT DIRECTOR "Independent Director" shall mean a member of the Board who is not an Employee of the Company. SECTION 1.11 - OPTION "Option" shall mean a non-qualified stock option granted under this Agreement and Article III of the Plan. SECTION 1.12 - OPTIONEE "Optionee" shall mean an Independent Director granted an Option under this Agreement and the Plan. SECTION 1.13 - PLAN "Plan" shall mean The 1994 Stock Option and Incentive Plan for Key Employees of Realty Income Corporation and R.I.C. Advisor, Inc., as amended by the First Amendment dated as of June 12, 1997, and the Second Amendment dated as of December 16, 1997. SECTION 1.14 - RULE 16B-3 "Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as such Rule may be amended from time to time. SECTION 1.15 - SECRETARY "Secretary" shall mean the Secretary of the Company. SECTION 1.16 - SECURITIES ACT "Securities Act" shall mean the Securities Act of 1933, as amended. SECTION 1.17 - SUBSIDIARY "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 1.18 - TERMINATION OF DIRECTORSHIP "Termination of Directorship" shall mean the time when the Optionee ceases to be a Director for any reason, including, but not by way of limitation, a termination by resignation, failure to be elected, death or retirement. The Board, in its sole and absolute discretion, shall determine the effect of all matters and questions relating to Termination of Directorship. Page 3 ARTICLE II GRANT OF OPTION SECTION 2.1 - GRANT OF OPTION In consideration of the Optionee's agreement to serve as an Independent Director of the Company or its Subsidiaries until the next annual meeting of stockholders of the Company and for other good and valuable consideration, on the date hereof the Company irrevocably grants to the Optionee the option to purchase any part or all of an aggregate of 5,000 shares of its $1.00 par value Common Stock upon the terms and conditions set forth in this Agreement. SECTION 2.2 - PURCHASE PRICE The purchase price of the shares of stock covered by the Option shall be $25.375 per share (which is the Fair Market Value of a share of Common Stock on the date of the granting of this Option) without commission or other charge. SECTION 2.3 - CONSIDERATION TO COMPANY In consideration of the granting of this Option by the Company, the Optionee agrees to render faithful and efficient services to the Company or a Subsidiary, with such duties and responsibilities as the Company shall from time to time prescribe, until the next annual meeting of stockholders of the Company. Nothing in the Plan or this Agreement shall confer upon any Optionee any right to continue as a director of the Company, or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge the Optionee at any time for any reason whatsoever, with or without good cause. SECTION 2.4 - ADJUSTMENTS IN OPTION (a) In the event that the outstanding shares of the stock subject to the Option are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock splitup, stock dividend or combination of shares, the Board shall make an appropriate and equitable adjustment in the number and kind of shares as to which the Option, or portions thereof then unexercised, shall be exercisable, to the end that after such event the Optionee's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in the Option may include any necessary corresponding adjustment in the Option price per share, but shall be made without change in the total price applicable to the unexercised portion of the Option (except for any change in the aggregate price resulting from rounding-off of Page 4 share quantities or prices). Any such adjustment made by the Board shall be final and binding upon the Optionee, the Company and all other interested persons. (b) Notwithstanding the foregoing, in the event of such a reorganization, merger, consolidation, recapitalization, reclassification, stock splitup, stock dividend or combination, or other adjustment or event which results in shares of Common Stock being exchanged for or converted into cash, securities or other property, the Company will have the right to terminate the Plan as of the date of the exchange or conversion, in which case all options, rights and other awards under this Plan shall become the right to receive such cash, securities or other property, net of any applicable exercise price. (c) In the event of a "spin-off" or other substantial distribution of assets of the Company which has a material diminutive effect upon the Fair Market Value of the Company's Common Stock, the Board may in its discretion make an appropriate and equitable adjustment to the Option to reflect such diminution. ARTICLE III PERIOD OF EXERCISABILITY SECTION 3.1 - COMMENCEMENT OF EXERCISABILITY (a) Subject to Section 5.6, the Option shall become exercisable one (1) year after the date the Option is granted. (b) No portion of the Option which is unexercisable at Termination of Directorship shall thereafter become exercisable. SECTION 3.2 - DURATION OF EXERCISABILITY Each Option shall remain exercisable until it becomes unexercisable under Section 3.3. SECTION 3.3 - EXPIRATION OF OPTION The Option may not be exercised to any extent by anyone after the first to occur of the following events: (a) The expiration of 10 years from the date the Option was granted; or (b) The expiration of one year from the date of the Optionee's Termination of Directorship; or Page 5 (c) The effective date of either the merger or consolidation of the Company with or into another corporation, the exchange of all or substantially all of the assets of the Company for the securities of another corporation, the acquisition by another corporation or person of all or substantially all of the Company's assets or 80% or more of the Company's then outstanding voting stock, or the liquidation or dissolution of the Company, unless the Board waives this provision in connection with such transaction and such waiver is consistent with Rule 16b-3. At least 10 days prior to the effective date of such merger, consolidation, exchange, acquisition, liquidation or dissolution, the Committee or the Board shall give the Optionee notice of such event if the Option has then neither been fully exercised nor become unexercisable under this Section 3.3. SECTION 3.4 - ACCELERATION OF EXERCISABILITY To the extent consistent with the requirements of Rule 16b-3, in the event of the merger or consolidation of the Company with or into another corporation, the exchange of all or substantially all of the assets of the Company for the securities of another corporation, the acquisition by another corporation or person of all or substantially all of the Company's assets or 80% or more of the Company's then outstanding voting stock, or the liquidation or dissolution of the Company, the Board may, in its absolute discretion and upon such terms and conditions as it deems appropriate, provide by resolution, adopted prior to such event and incorporated in the notice referred to in Section 3.3(f), that at some time prior to the effective date of such event this Option shall be exercisable as to all the shares covered hereby, notwithstanding that this Option may not yet have become fully exercisable under Section 3.1(a); provided, however, that this acceleration of exercisability shall not take place if: (a) This Option becomes unexercisable under Section 3.3 prior to said effective date; or (b) In connection with such an event, provision is made for an assumption of this Option or a substitution therefor of a new option by an employer corporation or a parent or subsidiary of such corporation; and provided, further, that nothing in this Section 3.4 shall make this Option exercisable if it is otherwise unexercisable by reason of Section 5.6. The Board may make such determinations and adopt such rules and conditions as it, in its absolute discretion, deems appropriate in connection with such acceleration of exercisability, including, but not by way of limitation, provisions to ensure that any such acceleration and resulting exercise shall be conditioned upon the consummation of the contemplated corporate transaction. Page 6 None of the foregoing discretionary terms of this Section shall be permitted to the extent that such discretion would be inconsistent with the requirements of Rule 16b-3. SECTION 3.5 - ACCELERATION OF EXERCISABILITY UPON RETIREMENT To the extent consistent with the requirements of Rule 16b-3, this Option shall be exercisable as to all the shares covered hereby, notwithstanding that this Option may not yet have become fully exercisable under Section 3.1(a), upon the retirement of the Optionee in accordance with the Company's retirement policy applicable to Directors. ARTICLE IV EXERCISE OF OPTION SECTION 4.1 - PERSON ELIGIBLE TO EXERCISE Unless the Option has been transferred in accordance with the provisions of Section 5.2 herein, during the lifetime of the Optionee, only he (or, in the event of a disability or incapacity, his legal representative) may exercise the Option or any portion thereof, unless it has been disposed of pursuant to a qualified domestic relations order as defined by the Code or Title 1 of Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder ("QDRO"), in which case the Option shall be exercisable only by the beneficiary of the QDRO to the same extent it would have been exercisable by the Optionee. After the death of the Optionee, any exercisable portion of the Option may, prior to the time when the Option becomes unexercisable under Section 3.3, be exercised by his personal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. SECTION 4.2 - PARTIAL EXERCISE Any exercisable portion of the Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part at any time prior to the time when the Option or portion thereof becomes unexercisable under Section 3.3; provided, however, that each partial exercise shall be for not less than 100 shares or the remaining number of shares if less than 100 and shall be for whole shares only. SECTION 4.3 - MANNER OF EXERCISE The Option, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary or his office of all of the following prior to the time when the Option or such portion becomes unexercisable under Section 3.3: Page 7 (a) Notice in writing signed by the Optionee or the other person then entitled to exercise the Option or portion, stating that the Option or portion is thereby exercised, such notice complying with all applicable rules established by the Committee or the Board; and (b) (i) Full payment (in cash) for the shares with respect to which such Option or portion is exercised; (ii) With the consent of the Board, payment delayed for up to thirty (30) days from the date the Option, or portion thereof, is exercised; or (iii) With the consent of the Board, (A) shares of the Company's Common Stock owned by the Optionee duly endorsed for transfer to the Company or (B) subject to the timing requirements of Section 4.4, shares of the Company's Common Stock issuable to the Optionee upon exercise of the Option, with a Fair Market Value on the date of Option exercise equal to the aggregate purchase price of the shares with respect to which such Option or portion is exercised; or (iv) With the consent of the Board, property of any kind which constitutes good and valuable consideration; or (v) With the consent of the Board, a full recourse promissory note bearing interest (at no less than such rate as shall then preclude the imputation of interest under the Code or successor provision) and payable upon such terms as may be prescribed by the Committee or the Board. The Committee or the Board may also prescribe the form of such note and the security to be given for such note. The Option may not be exercised, however, by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law; or (vi) With the consent of the Board, any combination of the consideration provided in the foregoing subparagraphs (iii), (iv) and (v); and (c) A bona fide written representation and agreement, in a form satisfactory to the Committee or the Board, signed by the Optionee or other person then entitled to exercise such Option or portion, stating that the shares of stock are being acquired for his own account, for investment and without any present intention of distributing or reselling said shares or any of them except as may be permitted under the Securities Act and then applicable rules and regulations thereunder, and that the Optionee or other person then entitled to exercise such Option or portion will indemnify the Company against and hold it free and harmless from any loss, damage, expense or liability resulting to the Company Page 8 if any sale or distribution of the shares by such person is contrary to the representation and agreement referred to above. The Committee or the Board may, in its absolute discretion, take whatever additional actions it deems appropriate to insure the observance and performance of such representation and agreement and to effect compliance with the Securities Act and any other federal or state securities laws or regulations. Without limiting the generality of the foregoing, the Committee or the Board may require an opinion of counsel acceptable to it to the effect that any subsequent transfer of shares acquired on an Option exercise does not violate the Securities Act, and may issue stop-transfer orders covering such shares. Share certificates evidencing stock issued on exercise of this Option shall bear an appropriate legend referring to the provisions of this subsection (c) and the agreements herein. The written representation and agreement referred to in the first sentence of this subsection (c) shall, however, not be required if the shares to be issued pursuant to such exercise have been registered under the Securities Act, and such registration is then effective in respect of such shares; and (d) Full payment to the Company (or other employer corporation) of all amounts which, under federal, state or local tax law, it is required to withhold upon exercise of the Option; with the consent of the Board, (i) shares of the Company's Common Stock owned by the Optionee duly endorsed for transfer, or (ii) subject to the timing requirements of Section 4.4, shares of the Company's Common Stock issuable to the Optionee upon exercise of the Option, having a Fair Market Value at the date of Option exercise equal to the sums required to be withheld, may be used to make all or part of such payment; and (e) In the event the Option or portion shall be exercised pursuant to Section 4.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option. SECTION 4.4 - CERTAIN TIMING REQUIREMENTS Shares of the Company's Common Stock issuable to the Optionee upon exercise of the Option may be used to satisfy the Option price or the tax withholding consequences of such exercise only (i) during the period beginning on the third business day following the date of release of the quarterly or annual summary statement of sales and earnings of the Company and ending on the twelfth business day following such date or (ii) pursuant to an irrevocable written election by the Optionee to use shares of the Company's Common Stock issuable to the Optionee upon exercise of the Option to pay all or part of the Option price or the withholding taxes (subject to the Page 9 approval of the Board) made at least six months prior to the payment of such Option price or withholding taxes. SECTION 4.5 - CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES The shares of stock deliverable upon the exercise of the Option, or any portion thereof, may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. Such shares shall be fully paid and nonassessable. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of the Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; and (b) The completion of any registration or other qualification of such shares under any state or federal law or under rulings or regulations of the Securities and Exchange Commission or of any other governmental regulatory body, which the Committee or Board shall, in its absolute discretion, deem necessary or advisable; and (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee or Board shall, in its absolute discretion, determine to be necessary or advisable; and (d) The receipt by the Company of full payment for such shares, including payment of all amounts which, under federal, state or local tax law, it is required to withhold upon exercise of the Option; and (e) The lapse of such reasonable period of time following the exercise of the Option as the Committee or Board may from time to time establish for reasons of administrative convenience; and (f) The restrictions on ownership and transfer of Common Stock set forth in the Company's charter and bylaws. SECTION 4.6 - RIGHTS AS SHAREHOLDER The holder of the Option shall not be, nor have any of the rights or privileges of, a shareholder of the Company in respect of any shares purchasable upon the exercise of any part of the Option unless and until certificates representing such shares shall have been issued by the Company to such holder. Page 10 ARTICLE V OTHER PROVISIONS SECTION 5.1 - ADMINISTRATION With respect to this Option, the full Board, acting by a majority of its members in office, shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Board in good faith shall be final and binding upon the Optionee, the Company and all other interested persons. No member of the Board shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Option. SECTION 5.2 - NON-TRANSFERABILITY The Option may not be sold, pledged, assigned or transferred in any manner other than by a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder ("QDRO") or by will or the laws of descent and distribution; provided, however, the Optionee may transfer the Option to a Permitted Transferee (as defined below) to the extent permitted by any applicable law or regulations and subject to the following terms and conditions: (a) An Option transferred to a Permitted Transferee shall not be assignable or transferable by the Permitted Transferee other than by a QDRO or by will or the laws of descent and distribution. (b) Any Option which is transferred to a Permitted Transferee shall continue to be subject to all the terms and conditions of the Option as applicable to the original holder (other than the ability to further transfer the Option). (c) The Optionee and the Permitted Transferee shall execute any and all documents reasonably requested by the Board, including without limitation documents to (i) confirm the status of the transferee as a Permitted Transferee, (ii) satisfy any requirements for an exemption for the transfer under applicable federal and state securities laws and (iii) evidence the transfer. (d) Shares of Common Stock acquired by a Permitted Transferee through exercise of an Option have not been registered under the Securities Act or any state securities act and may not be transferred, nor will any assignee or transferee thereof be recognized as an owner of such shares of Common Stock for any purpose, unless a registration Page 11 statement under the Securities Act and any applicable state securities act with respect to such shares shall then be in effect or unless the availability of an exemption from registration with respect to any proposed transfer or disposition of such shares shall be established to the satisfaction of counsel for the Company. As used in this Section 5.2, "Permitted Transferee" shall mean (i) one or more of the following family members of an Optionee: spouse, child (whether natural or adopted), stepchild, any other lineal descendant of the Optionee, (ii) a trust, partnership or other entity established and existing for the sole benefit of, or under the sole control of, one or more of the above family members of the Optionee, or (iii) any other transferee specifically approved by the Board after taking into account any state or federal tax or securities laws applicable to transferable Options. Neither the Option nor any interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Optionee or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy). SECTION 5.3 - SHARES TO BE RESERVED The Company shall at all times during the term of the Option reserve and keep available such number of shares of stock as will be sufficient to satisfy the requirements of this Agreement. SECTION 5.4 - NOTICES Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Secretary, and any notice to be given to the Optionee shall be addressed to him at the address given beneath his signature hereto. By a notice given pursuant to this Section 5.4, either party may hereafter designate a different address for notices to be given to him. Any notice which is required to be given to the Optionee shall, if the Optionee is then deceased, be given to the Optionee's personal representative if such representative has previously informed the Company of his status and address by written notice under this Section 5.4. Any notice shall be deemed duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service. SECTION 5.5 - TITLES Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. Page 12 SECTION 5.6 - CONSTRUCTION This Agreement shall be administered, interpreted and enforced under the laws of the State of Maryland. SECTION 5.7 - CONFORMITY TO SECURITIES LAWS The Optionee acknowledges that the Plan is intended to conform to the extent necessary with all provisions of the Securities Act and the Exchange Act and any and all regulations and rules promulgated by the Securities and Exchange Commission thereunder, including without limitation Rule 16b-3. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the Option is granted and may be exercised, only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law, the Plan and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto. REALTY INCOME CORPORATION By: ___________________________ Thomas A. Lewis Chief Executive Officer By: ___________________________ Michael R. Pfeiffer Secretary ____________________________ __________________, Optionee ____________________________ ____________________________ Address Optionee's Taxpayer Identification Number: ____________________________ Page 13 EX-21.1 6 Exhibit 21.1 ============ Subsidiaries of the Company as of January 1, 1998 - ------------------------------------------------- Realty Income Texas Properties, L.P. a Delaware limited partnership Realty Income Texas Properties, Inc. a Delaware corporation Page 1 EX-24.1 7 EXHIBIT 24.1 The Board of Directors Realty Income Corporation: We consent to incorporation by reference in Registration Statement Nos. 333-10431 and 333-34311, each on Form S-3 of Realty Income Corporation and to incorporation by reference in Registration Statement No. 33-95708 on Form S-8 of Realty Income Corporation, of our report relating to the consolidated balance sheets of Realty Income Corporation as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, and the related Schedule III. Such report is dated January 23, 1998, except as to Note 6A, which is as of February 23, 1998, and appears in the December 31, 1997, annual report on Form 10-K of Realty Income Corporation. /s/KPMG Peat Marwick LLP San Diego, California March 19, 1998 Page 1 EX-27 8
5 This Schedule contains summary financial information extracted from the registrant's Balance Sheet as of December 31, 1997 and Income Statement for the twelve months ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1 12-MOS DEC-31-1997 DEC-31-1997 2,123,000 0 3,236,000 0 0 0 699,797,000 152,206,000 577,021,000 0 134,319,000 25,698,000 0 0 407,617,000 577,021,000 0 67,897,000 0 0 25,818,000 165,000 8,226,000 34,770,000 0 34,770,000 0 0 0 34,770,000 1.48 1.48 Current assets and current liabilities are not applicable to the Company under current industry standards. /FN Page 1
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