<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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
1045281
CAPTEC NET LEASE REALTY, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-3368333
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
24 Frank Lloyd Wright Drive
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Ann Arbor, Michigan 48106
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(Address of Principal Executive Office) (Zip Code)
(313)994-5505
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of Class Name of Exchange on Which Registered
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Common Stock, par value $.01 per share NASDAQ National Market System
</TABLE>
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. [ ]
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant:
$150,168,960 based on the average bid price of the
Common Stock on March 17, 1998
The number shares of Common Stock, par value $.01 per share,
outstanding as of March 17, 1998: 9,508,108
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held
May 8, 1998, into Part III, Items 10, 11, 12, and 13.
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PART I
ITEM 1. BUSINESS
Captec Net Lease Realty, Inc. (the "Company"), which operates as a
real estate investment trust ("REIT"), acquires, develops and owns high-quality
freestanding properties leased principally on a long-term triple-net basis to
national and regional chain and franchised restaurants, retailers and
automobile dealers (the "Lessees"). The Company was incorporated in Delaware in
August 1997. In September 1997, Captec Net Lease Realty, Inc., a Michigan
corporation ("Net Lease Michigan"), and Captec Net Lease Realty Advisors, Inc.,
a Michigan corporation ("Advisors Michigan"), were merged into the Company. Net
Lease Michigan and Advisors Michigan each were incorporated in Michigan in
October 1994 and commenced operations in February 1995. Prior to being merged
into the Company, Net Lease Michigan was engaged in substantially the same
business as the Company and Advisors Michigan was engaged in the business of
providing management, investment and financial advisory services to Net Lease
Michigan. The Company completed its initial public offering (the "Offering") of
8,000,000 shares of its par value $.01 per share common stock (the "Common
Stock") in November 1997.
As of December 31, 1997, the Company had a portfolio of 112 properties
(the "Existing Properties") located in 29 states, with a cost basis of $153.4
million. The Existing Properties are leased to 39 operators of 23 distinct
restaurant concepts such as Applebee's, Arby's and Denny's; 9 retailers such as
Athlete's Foot, Blockbuster Video and Michael's Crafts; and 2 automotive
dealers operating under the BMW and Nissan brands. The restaurant, retail and
automobile dealership markets represented approximately 70.0%, 23.0% and 7.0%,
respectively, of the current minimum annual rent from the Existing Properties.
In addition, as of December 31, 1997, the Company had agreements for the
acquisition of 43 properties (23 restaurant properties and 20 retail
properties) (the "Acquisition Properties") located in 14 states for an
aggregate cost of approximately $74.8 million, which the Company expects to be
substantially completed during 1998. The restaurant and retail markets
represented approximately 45.0% and 55.0%, respectively, of the estimated cost
of the Acquisition Properties. All of the Acquisition Properties will be newly
constructed at the time of acquisition. The Acquisition Properties will expand
the Company's portfolio and further diversify its property, concept and Lessee
base to include operators of Office Depot, Taco Bell, Rite Aid and Tony Roma's.
As of December 31, 1997, the Company also had agreements to acquire the general
partnership interests of two affiliated limited partnerships (the "Affiliated
Partnerships") engaged in substantially the same business as the Company.
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The Company generally acquires properties from operators or developers
in locations which have exhibited growth in retail sales and population. Upon
acquiring a property, the Company normally enters into a long-term triple-net
lease (a "Lease" and collectively the "Leases") typically for a 15- to 20- year
term (plus one or more five-year renewal options) with the Lessee which will
operate the property. Under the terms of a typical Lease, the Lessee is
responsible for all operating costs and expenses including repairs,
maintenance, real property taxes, assessments, utilities and insurance. The
Leases generally provide for minimum rent plus specified fixed periodic rent
increases or, in limited circumstances, indexation to the Consumer Price Index
("CPI") and/or percentage rent. The Company believes that the structure of its
Leases provides steady, periodically escalating long-term cash flow while
reducing operating expenses and capital costs, and that its underwriting
standards reduce the risk of Lessee default or non-renewal.
The Company's executive officers and directors have extensive
experience in the acquisition, development and ownership of net leased
properties, particularly for restaurant and retail operations, and have served
in senior positions with large restaurant franchisees, retailers and real
estate companies. The Company's executive officers have substantial experience
in the franchise and retail finance industry and have been primarily
responsible for the Company's acquisition, development and leasing of the
Existing Properties and agreements to acquire the Acquisition Properties.
THE ADVISOR. The Company has retained Captec Net Lease Realty
Advisors, Inc. (the "Captec Advisors"), an affiliate, which, together with
Captec Financial Group, Inc. ("Captec Financial"), an affiliate (Captec
Advisors and Captec Financial collectively referred to herein as the
"Advisor"), manages the operations of the Company and provides it with
investment and financial advisory services pertaining primarily to the
acquisition, development and leasing of properties. Captec Financial and its
affiliates provide a diverse line of financing products to the franchise and
chain restaurant, retail and automobile dealership industries including
equipment leases, mortgage and acquisition loans, construction and development
financing and private equity financing. Since 1981, Captec Financial and its
affiliates have developed substantial expertise in all aspects of the
franchise, chain restaurant and specialty retail finance business, including
business concept, property and lessee underwriting, property acquisition,
lessee credit analysis and monitoring, direct marketing, portfolio management,
accounting and other administrative functions. As of December 1997, Captec
Financial had over 65 employees, including a senior management team with
substantial direct industry experience.
Subject to the direction of the Board of Directors, the Advisor's
responsibilities include (i) selecting restaurant and automobile dealership
properties for acquisition, formulating and evaluating the terms of each
proposed acquisition, and arranging for the
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acquisition of properties by the Company; (ii) identifying potential Lessees
for the restaurant and automobile dealership properties and formulating,
evaluating and negotiating the terms of Leases; (iii) negotiating the terms of
any borrowing; (iv) performing credit analyses of prospective Lessees; (v)
conducting legal and business diligence and overseeing the preparation of all
legal documentation for the development and leasing of all properties; and (vi)
identifying properties for sale consistent with the Company's investment
objectives and prevailing economic conditions. The Advisor also provides all
necessary and customary billing and administrative functions with respect to
the Leases; takes all actions necessary to cause the Company to comply with all
applicable laws and regulations; prepares reports to stockholders and materials
for stockholders meetings; prepares and delivers to the Company periodic
financial statements; promptly notifies the Company upon the occurrence of
certain events including defaults under the Leases; and performs such other
administrative and managerial functions as may be requested by the Company.
Captec Advisors renders advisory, management and other services to the
Company pursuant to an Advisory Agreement (the "Advisory Agreement"). See Note
11 to the Financial Statements included with this Form 10-K for a description
of the compensation paid to Captec Advisors pursuant to the Advisory Agreement.
The Advisory Agreement expires on December 31, 1998, subject to successive,
automatic one-year renewals unless terminated by either party at the conclusion
of the then-applicable term, upon 90 days prior written notice. Captec
Financial provides to Captec Advisors certain of the services required by the
Advisory Agreement for which it is compensated by Captec Advisors.
GROWTH STRATEGY. The Company seeks to maximize returns to
stockholders by increasing cash flow per share and the value of its property
portfolio. The Company believes it can achieve these objectives primarily by
acquiring additional properties and structuring Leases on advantageous terms.
The Company actively pursues acquisition opportunities, generating numerous
acquisition proposals leading to acquisition commitments such as for the
Acquisition Properties. The Company's principal growth strategies include:
Acquisitions from Operators. The Company purchases properties from,
and enters into Leases with, creditworthy multi-unit operators of national and
regional chain and franchised restaurants, multi-unit automobile dealerships
and retailers. The Company makes such acquisitions when it can achieve
escalating revenue and targeted returns on its investment through base rent and
periodic rent increases. Occasionally, the Company purchases from an operator a
property undergoing development subject to a Lease which commences upon
completion of construction. In those circumstances, the Lease is executed at
the time the land is purchased and is structured to provide the Company with
rates of return based upon the Company's total acquisition cost.
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In 1997, the Company completed its first acquisitions of automobile
dealership properties. Subsequently, the Company intensified its efforts to
fulfill a growing need for capital and liquidity in the automobile dealership
industry. In so doing, the Company expects to leverage its knowledge of
franchise and retail businesses and its experience of financing industries
undergoing changing dynamics. Consolidation of smaller and lesser capitalized
dealerships, increasing demand for inter-generational ownership transfers and
the manufacturers' focus on upgrading dealership facilities are major factors
which the Company expects to create a significant need for capital in this
industry for the foreseeable future.
Acquisitions from Developers. The Company selectively acquires
primarily retail properties from developers prior to the completion of the
development process but subsequent to execution of a Lease with the property's
operator. By acquiring a property during construction, and assuming certain
development risks (principally of completion), the Company seeks to obtain a
more favorable purchase price, thereby enhancing its overall return. In limited
circumstances, the Company forms joint ventures with developers to combine the
capital resources of the Company with the developer's capability and property
supply. In these joint ventures the Company typically provides some or all of
the development capital in return for a market rate of return plus a share of
development profits. Upon completion of development, the Company may acquire
some or all of the property from the joint venture with the objective of
obtaining a higher return than otherwise is realized when acquiring a developed
property.
Acquisition Structuring. The Company intends to maintain significant
flexibility with respect to the form of its acquisitions, including through
tax-advantaged partnership structures to attract tax-motivated sellers. The
sellers may be offered interests in the ventures which are convertible into, or
exchangeable for, shares of Common Stock or otherwise allow the seller to
participate in the financial growth of the Company.
Although the Company has no present intention of doing so, the Company
may in the future acquire all or substantially all of the securities of other
REITs or similar entities when such investments would be consistent with the
Company's investment objectives.
Increases in Revenues and Operating Margins. The Company will seek to
enhance the financial performance of its portfolio primarily through increasing
cash flows, maintaining high Lessee retention and aggressively managing
operating expenses and borrowing costs. To provide cash flow growth, the
Company's Leases require fixed periodic increases in rents over the term of the
Lease, indexation to the CPI and/or percentage rent. The Company believes that
as its portfolio grows, it will
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realize additional operating efficiencies and benefit from its underwriting
policies which are designed to minimize defaults and non-renewals.
COMPETITION. The restaurant and retail chain finance industry is
fragmented and characterized by intense competition. Although the Company
competes with other restaurant and retail finance companies (some of which are
REITs), commercial banks, other financial institutions and certain franchisors
which offer financing services directly to their franchisees (and some of which
have substantially greater financial resources for investments), the Company
believes that it has several key competitive advantages that enable it to
compete favorably for property acquisitions.
The Company, in tandem with Captec Financial, "banks" the chain
restaurant industry, meaning that the Company is dedicated to the industry for
the long-term and is in a position to meet most of the chain restaurant
operator's financing needs on a "one-stop shopping" basis. To execute this
strategy, the Company and Captec Financial have strategically developed
diversified financing products and a relationship-based marketing strategy
founded upon the value of building long-term relationships with customers. The
Company and Captec Financial offer to customers net lease financing, mortgage
and acquisition loans, construction loans, equipment leases and loans and
private equity financing, with all net lease acquisition opportunities directed
to the Company.
The Company and Captec Financial are pursuing a similar "banking"
strategy in a new effort to penetrate the retail automobile dealership
industry. Based upon its experience in the chain restaurant market and
industry research, the Company believes that the broad product line offered by
the Company (in tandem with Captec Financial) will give the Company a distinct
competitive advantage in the automobile dealership market.
The Company also has developed strategies to compete favorably for
property acquisitions in the retail industry principally focused on
establishing alliances with select retail developers. The Company does not
develop retail properties directly, but chooses to co-develop retail properties
in partnership with developers with which it has established alliances.
Additionally, the Company seeks to compete for development contracts directly
with certain retailers, providing retailers with the combination of a
nationwide network of select developers and a complete financing commitment.
In these situations, the Company then awards the development contracts to its
allied developers in their respective regional markets. These business
practices enable the Company to establish mutually beneficial, rather than
competitive, relationships with developers, which
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increase the Company's supply of retail acquisition opportunities and provide
the Company with a share of the associated development profits.
Finally, the Company benefits from having a very large market with
multiple segments from which to select acquisition opportunities. The
Company's largest competitor in the chain restaurant market owns less than two
percent of the real estate in this market. Similar fragmentation exists in the
retail sector.
OPERATING STRATEGY. The Company continually monitors the success of
its existing and targeted restaurant and retail concepts, the financial
condition of its Lessees, Lease compliance and other factors affecting the
financial performance of its properties. The Company's operating strategies,
which have resulted from years of development and refinement include:
Underwriting Restaurant Chains and Retailers. The Company leases its
properties to franchisees and operators of select major regional and national
restaurants and retailers because the Company believes these widely recognized
and centrally supported chains possess significant advantages over their
independent competitors. These competitive advantages, which include the use of
nationally recognized trademarks and logos and substantial management,
training, advertising, market and product support from franchisors and national
or regional chain management, strengthen the business and financial position of
the Company's Lessees.
The Company employs thorough underwriting procedures to select the
franchise and chain business concepts towards which to direct its acquisition
activities. This analysis includes a review of publicly available information
concerning franchisors or chain operators; credit analysis of the franchisor's
or operator's financial statements; assessment of business strategies,
operating history and key personnel; operational and financial evaluation of
unit level performance; comparison of fee and expense structure to industry
averages; analysis of concept penetration and name recognition; assessment of
non-quantitative factors contributing to concept success; and, for franchisors,
surveys of representative franchisees to develop data on average sales,
profitability and satisfaction with franchisor support. The Company's concept
underwriting procedures also result in the establishment of credit standards
for concept Lessees. Once selected, the Company conducts ongoing review of the
performance of the business concept through monitoring of financial information
and news releases. Each business concept is formally reevaluated annually.
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Underwriting Lessee Credit. The Lessees predominantly are
experienced, multi-unit operators of fast-food, family-style and casual dining
restaurants, multi-unit automobile dealership owners and retailers. The Company
subjects each proposed Lessee to a thorough underwriting process to identify
the most creditworthy Lessees and minimize the Company's risk from defaults and
business failures. The Company targets only Lessees with the competitive
position and financial strength to meet Lease obligations. The Company's
Lessees, as franchisees or operators of major national and regional franchised
and chain outlets, also undergo rigorous scrutiny and training by national and
regional franchisor and chain management and often must make substantial
capital investments prior to conducting business. This provides additional
assurance as to the quality of the Lessees and further reduces the Company's
risk.
Underwriting Site Selection. Prior to acquiring a property, the
Company engages in an extensive site review. The Company typically undertakes a
long-term viability and market value analysis, including an inspection of the
property and surrounding area by an acquisition specialist, and assessment of
market area demographics, consumer demand, traffic patterns, surrounding land
use, accessibility, visibility, competition and parking. The Company also (i)
obtains an independent appraisal of the property; (ii) obtains an independent
engineering report of the property's mechanical, electrical and structural
integrity; (iii) evaluates both the current and potential alternative use of
the property; and (iv) obtains an independent Phase I environmental site
assessment.
In addition, many of the restaurant chain operators and franchisors
have sophisticated full-time staffs engaged in site selection, evaluation and
pre-approval of all new sites. As operators of national and regional franchised
and chain restaurants, the Company's Lessees generally are required to submit
their proposed locations to rigorous site evaluation pre-approval by
franchisors or national chain management, which generally includes assessments
of many of the factors considered by the Company in performing its analysis.
These studies often are made available to, and utilized by, the Company in
analyzing a potential acquisition. The retailers which become the Company's
Lessees also generally have full-time staffs engaged in site selection and
evaluation and typically develop new retail sites in conjunction with selected
developers which assist in site evaluation and selection. The retailers
operating on the Company's properties also submit their proposed locations to a
rigorous site evaluation and pre-approval process similar to that for
restaurants. These processes provide additional support and confirmation for
the Company's site selection process.
Maintenance of Relationships with Restaurant Chains, Retailers and
Lessees. Once a business concept has been approved, the Company seeks to
develop a strong ongoing working relationship with national or regional senior
chain or retailer management.
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The Company believes that such relationships facilitate the identification,
negotiation and consummation of transactions, are beneficial in resolving
disputes or problems which arise during the terms of Leases and are an
excellent referral source of additional financing opportunities.
Active Management of Lessee Credit. In addition to monitoring Lease
compliance, the Company regularly reviews the financial condition of its
Lessees and business, economic and market trends in order to identify and
anticipate problems with Lessee performance which could adversely affect the
Lessee's ability to meet Lease obligations. When potential problems are
identified, the Company seeks early intervention with its Lessees and, when
appropriate, chain or retailer national management to address and avoid such
problems. The Company and the Advisor have an established record of
successfully identifying and resolving underperforming and non-performing
leased assets.
Diversification of Portfolio. The Company believes that it has
achieved, and will continue to emphasize, significant diversification of its
portfolio geographically and among retail and restaurant concepts and Lessees.
The Company's 112 Existing Properties are located in 29 states and leased to 47
Lessees operating 34 different restaurant and retail concepts. Assuming the
acquisition of all 43 Acquisition Properties (of which there is no assurance),
the Company's portfolio will be further diversified to consist of 155
properties located in 30 states and leased to 57 Lessees operating 41 different
restaurant and retail concepts.
ENVIRONMENTAL MATTERS. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real estate may be required to investigate and remediate hazardous
or toxic substances or petroleum product releases at such property and may be
held liable to a governmental entity or to private parties for property damage
and for investigation and remediation costs incurred by such parties in
connection with the contamination. Such laws typically impose remediation
responsibility and liability without regard to whether the owner knew or caused
the presence of the contaminants, and the liability under such laws has been
interpreted to be joint and several unless the harm is divisible and there is a
reasonable basis for allocation of responsibility. The costs of investigation,
remediation or removal of such substances may be substantial, and the presence
of such substances, or the failure properly to remediate the contamination on
the property, may adversely affect the owner's ability to sell or rent such
property or to borrow using the property as collateral. Persons who arrange
for the disposal or treatment of hazardous or toxic substances at a disposal or
treatment facility also may be liable for the costs of removal or remediation
of hazardous or toxic substances at the disposal or treatment facility, whether
or not the facility is owned or operated by such person. In addition, some
environmental laws create a lien on the contaminated site in favor of the
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government for damages and costs incurred in connection with the contamination.
Finally, the owner of a site may be subject to common law claims by third
parties for damages and costs resulting from environmental contamination
emanating from such site.
Independent environmental consultants have conducted or updated
environmental site assessments, including Phase I site assessments, and other
environmental investigations as appropriate ("Environmental Site Assessments")
at the Existing Properties. Where possible, the Company has entered into
indemnification agreements with Lessees and/or prior owners at certain of the
Existing Properties where potential environmental issues have been raised, but
have been remediated or otherwise resolved. The Company currently is not
directing or paying the costs of any remediation or monitoring work at any
Existing Property. The Environmental Site Assessments of the Existing
Properties have not revealed any environmental liability that the Company
believes could have a material adverse effect on the Company's financial
condition, nor is the Company aware of any material environmental liability.
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
ownership of any of the Existing Properties. As part of its underwriting
procedures, the Company will obtain Environmental Site Assessments for all
future properties, including the Acquisition Properties. The Company believes
that the extent and geographic diversity of its portfolio minimizes the
likelihood of the Company being exposed to a material environmental liability.
All of the Company's operations are conducted in the United States.
The Company's operations historically have not been seasonal.
EMPLOYEES. The Company's only employees are its executive officers.
Day-to-day services are provided to the Company by employees of the Advisor.
ITEM 2. PROPERTIES
EXISTING PROPERTIES. As of December 31, 1997 the Company's portfolio
consisted of 112 properties located in 29 states, which were leased to 39
operators of 23 distinct restaurant concepts, 9 retailers and 2 automotive
dealers. The Existing Properties averaged 4.6 years of age and were subject to
Leases with an average remaining term (excluding renewals) of approximately
16.3 years. Investments in individual properties ranged from $267,000 to $6.8
million and the total investment in the Existing Properties (excluding
accumulated depreciation) was $153.4 million. The size of facilities located
on the Existing Properties ranged from 1,200
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to 78,400 square feet and the Existing Properties aggregated approximately
708,000 square feet. The Existing Properties include six properties which
presently are under construction, for which the Company had invested $3.5
million and had remaining commitments totaling $4.9 million. The following
table sets forth certain information concerning the Existing Properties as of
December 31, 1997.
<TABLE>
<CAPTION>
Facility No. of No. of Location Acquisition
Concept Type Properties Lessees (2) (State) Cost
------- ---- ---------- ----------- ------- ----
<S> <C> <C> <C> <C> <C>
Boston Market Restaurant 26 6 IL,IN,MI,NJ,OH,OR,PA,WA,WI $28,775,605
Black Angus Restaurant 4 1 MN 9,689,373
Denny's Restaurant 9 3 AZ,FL,LA,NC,TX 8,980,768
Keg Steakhouse Restaurant 5 1 OR,WA 6,643,500
BMW Auto Dealer 1 1 GA 7,115,013
Red Robin Restaurant 2 2 CO,WA 6,436,898
Video Update Retail 5 1 AZ,IL,MN,MO,NM 6,078,144
Sportmart Retail 1 1 IL 6,096,913
Blockbuster Video Retail 6 1 AL,GA,SC,TX 5,792,692
Applebee's Restaurant 3 3 KY,MO,WA 5,804,628
Golden Corral Restaurant 4 4 FL,NE,TX 5,561,841
Carrows Restaurant 4 1 CA 4,855,722
Carino's Restaurant 3 1 TX 4,587,339
Stop & Go Retail 5 1 TX 4,306,346
Circle K Retail 3 1 CA,GA 4,061,265
Mountain Jack's Restaurant 3 1 MI,OH 4,314,971
Taco Cabana Restaurant 3 2 GA, NV 3,817,286
Nissan Auto Dealer 1 1 GA 3,250,023
Babies R Us Retail 1 1 MO 3,156,219
Michael's Crafts Retail 1 1 MD 2,770,281
Stanford's Restaurant 1 1 CO 2,427,861
Arby's Restaurant 3 2 GA,IN,MI 2,542,218
Burger King Restaurant 2 2 VA,WV 2,095,925
Texas Roadhouse Restaurant 2 1 CO 1,918,260
Kenny Rogers Roasters Restaurant 4 1 AZ, NM 3,453,029
Damon's Restaurant 1 1 AZ 1,429,445
Blockbuster Music Retail 1 1 AL 1,526,653
Roadhouse Grill Restaurant 1 1 NY 1,048,395
Jack In The Box Restaurant 1 1 CA 1,035,703
Popeye's Restaurant 1 1 GA 877,941
Hooters Restaurant 1 1 FL 1,048,870
Whataburger Restaurant 1 1 NM 894,568
Athlete's Foot Retail 1 1 GA,IN,MI 461,858
Red Line Burgers Restaurant 2 1 TX 561,240
---- -- --------------
Total 112 50 $153,416,796
---- -- -------------
<CAPTION>
% of
Annualized Total
Rent at Annual
Concept Dec. 31, 1997(1) Rent
------- ---------------- ----
<S> <C> <C>
Boston Market $2,730,150 18.0%
Black Angus 1,005,108 6.6
Denny's 885,227 5.8
Keg Steakhouse 709,512 4.7
BMW 709,200 4.7
Red Robin 689,940 4.5
Video Update 638,662 4.2
Sportmart 600,000 4.0
Blockbuster Video 584,791 3.9
Applebee's 578,688 3.8
Golden Corral 553,313 3.6
Carrows 483,996 3.2
Carino's 467,451 3.1
Stop & Go 460,782 3.0
Circle K 433,959 2.9
Mountain Jack's 426,192 2.8
Taco Cabana 388,476 2.6
Nissan 323,952 2.1
Babies R Us 315,563 2.1
Michael's Crafts 279,500 1.8
Stanford's 248,664 1.6
Arby's 245,807 1.6
Burger King 211,908 1.4
Texas Roadhouse 213,031 1.4
Kenny Rogers Roasters 158,400 1.0
Damon's 152,508 1.0
Blockbuster Music 148,750 1.0
Roadhouse Grill 118,428 0.8
Jack In The Box 100,896 0.7
Popeye's 87,516 0.6
Hooters 73,500 0.5
Whataburger 72,000 0.5
Athlete's Foot 50,804 0.3
Red Line Burgers 30,000 0.2
------------- -------
Total $15,176,672 100.0%
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</TABLE>
Segment Information:
<TABLE>
<CAPTION>
% of
% of Total Annualized Total
No. of No. of No. of Acquisition Acquisition Rent at Annual
Segment Concepts Properties Lessees (2) Cost Cost Dec. 31, 1997(1) Rent
------- -------- ---------- ----------- ----------- ---- ---------------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Restaurant 23 86 39 70.9% $108,801,388 $10,630,709 70.0%
Retail 9 24 7 22.3 34,250,372 3,512,811 23.1
Auto Dealer 2 2 1 6.8 10,365,036 1,033,152 6.8
-- --- -- ------- ----------- ---------- -----
34 112 47 100.0% $153,416,796 $15,176,672 100.0%
-- --- -- ------ ------------ ----------- -----
</TABLE>
- -----------------------------
(1) Based upon monthly rent at December 31, 1997, as annualized and
without giving effect to any future rent increases or percentage rent
or deduction for the effect of the non-revenue producing properties
which in the aggregate accounted for $171,664 or 1.1% of annualized
rent at December 31, 1997.
(2) Certain Lessees lease properties under more than one concept, and
therefore the number of Lessees by concept exceeds the number of
actual Lessees (47).
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DESCRIPTION OF PROPERTIES. The Existing Properties conform generally
to the following specifications for size, cost and type of land and buildings.
Based upon its experience and knowledge of the fast-food, family-style and
casual dining restaurant and retail industries, the Company expects that a
majority of its future properties, including the Acquisition Properties, will
conform generally to these specifications, although the Company may purchase
properties which vary materially from these specifications.
The properties typically are freestanding, surrounded by paved parking
areas, and are convertible to various uses with certain modifications. Lot
sizes generally range from 20,000 to 80,000 square feet for restaurant
properties and up to 150,000 square feet for retail properties, depending upon
building size and local demographics. Properties purchased by the Company are
in locations zoned for commercial use which have been reviewed for traffic
patterns and volume. Land costs vary but generally range from $250,000 to $3.0
million, depending upon various factors including the size of the parcel,
competition for sites and local commercial real property values generally.
The style and appearance of the buildings typically are dictated by
the franchisors and chain owners of the businesses which are operated from the
properties. The buildings generally are rectangular and constructed from
various combinations of stucco, steel, wood, brick and tile and typically range
from 2,000 to 6,000 square feet for restaurant properties and up to 40,000
square feet for retail properties. Building and site preparation costs, which
generally range from $300,000 to $4.0 million for each property, vary depending
upon the size of the building and the site and area in which the property is
located. Generally, the properties acquired by the Company are improved with
buildings although in some instances the Company may acquire only land (even if
improved) or only improvements. The Company believes the size of its typical
retail property is especially well-suited to meet changes occurring in the
retail industry. In order to meet changing consumer preferences, and as a
result of the relatively high cost of mall space, the Company believes that
retailers increasingly prefer smaller, freestanding facilities which are more
accessible and facilitate the customized presentation of the retail concept.
The Company believes that it will benefit from these trends because its
properties meet these retailer preferences.
DESCRIPTION OF THE LEASES. The Company typically acquires only
properties which are subject to long-term (typically 15-20 years with one or
more five-year renewal options) triple-net Leases with creditworthy multi-unit
franchisees and operators of national and regional restaurants and retailers.
Upon termination of a Lease, the Lessee surrenders possession of the
property to the Company, usually with any improvements made during the Lease
term.
12
<PAGE> 13
During the term of a Lease, the Lessee pays the Company minimum annual
rent on a monthly basis. Leases provide for automatic, fixed increases in the
minimum annual rent at predetermined intervals during the Lease term. In
certain limited circumstances, in addition to the minimum annual rent, Lessees
may be required to pay percentage rent computed on a percentage of the Lessee's
gross sales or revenues.
As of December 31, 1997, the net weighted average capitalization rate
(annual minimum rent divided by the total property investment, including
acquisition cost) for the Existing Properties was 10.3% and the weighted
average annualized rate of automatic fixed increases in the minimum annual rent
was 2.2%. In accordance with GAAP, the Company recognizes the total rental, as
stipulated by the Lease (including automatic fixed increases), as income on a
straight-line basis over the term of the Lease. For the Existing Properties as
of December 31, 1997, the net weighted average straight-line capitalization
rate (annual straight-line rental revenue divided by the total property
investment, including capitalized acquisition cost) was 11.8%.
Under the terms of the Company's triple-net Leases, the Lessees are
responsible for all costs of repairs, maintenance, real property taxes,
assessments, utilities and insurance. In limited circumstances, the Company's
retail Leases are on a "double-net" basis pursuant to which the Company, rather
than the Lessee, is responsible for maintenance of the exterior walls and/or
roof of the property. Therefore, the Company generally is not required to make
significant capital expenditures with respect to its portfolio. Capital
expenditures totaled approximately $5,000 in 1997 and the Company incurred no
capital expenditures in 1996 or 1995.
The following table sets forth as of December 31, 1997, scheduled
Lease expirations for the Existing Properties. Only 9.7% of the Company's
Leases are scheduled to expire during the next 10 years (assuming no renewals).
<TABLE>
<CAPTION>
Number of
Leases Total Percentage of
Year of Expiration (1) Expiring Annual Rental(2) Total Rental
---------------------- -------- ---------------- ------------
<S> <C> <C> <C> <C>
1998-2003.............................. - $ 0.0%
2004.................................... 1 600,000 4.0
2005..................................... 1 78,464 0.5
2006..................................... 3 322,856 2.1
2007..................................... 5 477,721 3.1
2008 and thereafter...................... 101 13,697,631 90.3
--- ---------- ------
Total 111 $15,176,672 100.0%
=== =========== =====
</TABLE>
(1) Assumes no early termination due to exercise of purchase options,
defaults or otherwise.
(2) Based upon monthly rent as of December 31, 1997, as annualized and
without giving effect to any future rent increases or percentage rent
or deduction for the effect of the non-revenue producing properties
which in the aggregate accounted for $171,884 or 1.1% of annualized
rent at December 31, 1997.
13
<PAGE> 14
OCCUPANCY AND LEASE PERFORMANCE. As of December 31, 1997, 108 of the
112 Existing Properties were subject to Leases which were performing. Of the 4
underperforming properties (all of which are restaurant properties), 2
properties were vacant and non-revenue producing and 2 properties were vacant
but subject to agreements supporting ongoing revenues. Non-revenue producing
properties represent 1.5% of the total investment in the Existing Properties.
All vacant properties, including non-revenue producing properties, represent
3.0% of the Company's total investment in the Existing Properties. The Company
is actively remarketing the vacant properties. The Company periodically
reviews its real estate portfolio for impairment whenever events or changes in
circumstances indicate that the carrying amount of the property may not be
recoverable, such as may be the case with vacant properties. Management
believes that anticipated proceeds from the vacant properties will be in excess
of the carrying amount of these properties.
PROPERTY AND LEASE CONCENTRATIONS. The Company invests in restaurant
and retail properties throughout the United States. The Existing Properties
generally are well diversified geographically across 29 states with a maximum
"geographic concentration" in Georgia equal to 11.0% of the Company's
investment in the Existing Properties. Existing Properties located in Texas
and Illinois represent concentrations of 10.9% and 10.2%, respectively, with no
other geographic concentrations exceeding 10.0%.
The Existing Properties are leased to 47 different Lessees. As of
December 31, 1997, no single Lessee contributed more than 6.8% of the total
annual rent from the Existing Properties and no single property contributed
more than 4.7% of the total annual rent from the Existing Properties. Of the
Existing Properties, 86 are restaurant properties leased to 39 different
Lessees representing 70.9% of the Company's investment in properties; 24 are
retail properties leased to 7 different Lessees representing 22.3% of the
Company's investment in properties; and 2 are automobile dealer properties
leased to 1 Lessee representing 6.8% of the Company's investment in properties.
The Existing Properties are leased to operators of 34 distinct
restaurant, retail and automobile dealer concepts or brands. As of December
31, 1997, Leases to Boston Market restaurant operators contributed 18.0% of the
total annual rent from the Existing Properties, and the next highest "concept
concentration" was 6.6%. The Company presently is not making any further
acquisitions, or financing the development, of Boston Market properties, and
the concentration in the Boston Market concept will decline as the Company's
portfolio grows. Upon completion of the acquisition of the Acquisition
Properties (of which there is no assurance), the Boston Market concept
concentration will decline to approximately 12.0%.
14
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any material legal
proceedings, nor, to its knowledge, are any material claims threatened against
the Company or its properties other than claims arising in the ordinary course
of business. In the opinion of management, these liabilities will not have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the
fourth quarter of the fiscal year ended December 31, 1997. Certain matters
relating to the organization and formation of the Company and its initial
public offering were approved by the unanimous written consent of the Company's
stockholders prior to the completion of the Offering.
EXECUTIVE OFFICERS
The executive officers of the Company, who are elected by, and serve at the
discretion of, the Board of Directors, are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Patrick L. Beach . . . . . . . . . 41 Chairman of the Board of Directors,
President and Chief Executive
Officer
W. Ross Martin . . . . . . . . . . 37 Director, Executive Vice President,
Chief Financial Officer and
Treasurer
Ronald Max . . . . . . . . . . . . 40 Vice President and Chief Investment
Officer
</TABLE>
PATRICK L. BEACH is the Chairman of the Board of Directors, President and Chief
Executive Officer of the Company and Captec Advisors. Since founding Captec
Financial in 1981, Mr. Beach has served as the Chairman of its Board of
Directors, President and Chief Executive Officer, as well as in similar
capacities for various of its affiliates. Mr. Beach has worked exclusively with
Captec Financial and its affiliates since 1991. From 1989 to 1991 Mr. Beach
also served as Chairman and President of Illiana Printing, Inc., the master
franchisor for American Speedy Printing Centers, Inc. in Illinois and Indiana.
From 1986 until 1990 Mr. Beach was the
15
<PAGE> 16
Chairman of Wendy's of San Diego, Inc., a 27-unit franchisee of Wendy's
International. Mr. Beach is a graduate of the University of Michigan School of
Business Administration (B.B.A. 1977).
W. ROSS MARTIN is a director, Executive Vice President, Chief
Financial Officer and Treasurer of the Company and a director, Executive Vice
President and Chief Financial Officer of Captec Advisors. Mr. Martin joined
Captec Financial in 1985 as Controller, was promoted to Vice President --
Finance in 1986 and Chief Financial Officer in 1994, and currently serves as a
director and Senior Vice President and Chief Financial Officer of Captec
Financial and in a similar capacity for various of its affiliates. From 1982
until 1985, he was employed by Deloitte Haskins & Sells, most recently as
senior consultant in the Emerging Business Services practice. Mr. Martin is a
graduate of the University of Michigan School of Business Administration
(B.B.A. 1982) and a Certified Public Accountant.
RONALD MAX is Vice President and Chief Investment Officer of the Company. Mr.
Max joined Captec Financial in 1995 to help establish a retail properties
acquisition and development program. From 1988 to 1995 Mr. Max held various
positions with Brauvin Real Estate Funds, including Chief Financial Officer and
Director of Acquisitions, where he was responsible for the acquisition and
funding of over $100.0 million of retail properties. Prior to 1988, Mr. Max had
extensive experience in real estate and financing. Mr. Max is a graduate of
Northern Illinois University (B.S. 1979) and a Certified Public Accountant.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is listed for quotation on the Nasdaq
National Market System under the symbol "CRRR." The Company completed the
Offering on November 19, 1997. During the fourth quarter of fiscal 1997, the
high and low bid prices of the Company's Common Stock were $18.063 and $15.50,
respectively.
As of March 20, 1998, there were 39 record holders of the Common
Stock.
16
<PAGE> 17
On January 20, 1998, the Company paid a dividend of $0.195 per share
to stockholders of record on December 29, 1997. The amount of this dividend
was based on the anticipated quarterly dividend rate of $0.375 per share,
prorated for the number of days the Company was operational during 1997 after
the completion of the Offering. While the Company intends to continue paying
dividends, dividend payment determinations, subject to the Company's
obligations in order to maintain its status as a REIT, will be made by the
Company's Board of Directors based on an analysis of the Company's earnings,
the competitive climate in which the Company operates and other relevant
considerations.
In September 1997 the Company made the following sales of the Common
Stock which were not registered under the Securities Act:
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Patrick L. Beach 460,266
W. Ross Martin 210,036
George R. Beach 14,710
H. Reid Sherard 33,086
Gary A. Bruder 19,587
Captec Financial Group, Inc. 99,273
Michigan Corp. 143,373
-------
Total 980,331
=======
</TABLE>
Pursuant to the terms of the mergers of Net Lease Michigan and Advisors
Michigan into the Company the common shares, without par value, of each of Net
Lease Michigan and Advisors Michigan became, and were exchanged for, shares of
the Common Stock as further adjusted for a .745249 for one reverse stock split
in November 1997. Pursuant to the merger of Net Lease Michigan into the
Company, the 50,000 issued and outstanding redeemable preferred shares, without
par value, of Net Lease Michigan owned by a single institutional stockholder
were exchanged for 50,000 shares of the Company's issued and outstanding
preferred stock all of which either were redeemed or exchanged for shares of
the Common Stock upon the closing of the Offering. These transactions did not
involve any public offering and were exempt pursuant to Section 4(2) of the
Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical operating and
financial data for the Company and Net Lease Michigan (deemed to be the
"Predecessor" for financial reporting purposes, as of December 31, 1997, 1996
and 1995 and for each of the three years in the period ended December 31, 1997
and have been derived from the financial statements of the Company, audited by
Coopers & Lybrand L.L.P., independent public accountants, whose reports with
respect thereto are included herein (see Index to Financial Statements at F-1).
17
<PAGE> 18
The pro forma information is presented as if the initial public
offering of the Common Stock and the application of proceeds therefrom occurred
on January 1, 1996. The pro forma financial information is not audited and is
not necessarily indicative of the results which actually would have occurred if
the transactions had been consummated on the dates described, nor does it
purport to represent the Company's future financial position or results of
operations.
The following selected financial data should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operation" and all of the financial statements and notes thereto
included elsewhere in this Form 10-K.
18
<PAGE> 19
<TABLE>
<CAPTION>
YEAR ENDED
----------
DECEMBER 31,
------------
(in thousands, except per share data) YEAR ENDED DECEMBER 31, 1997 PRO YEAR ENDED DECEMBER 31, 1996 1995
-------------------------------- ---------------------------- ----
PRO FORMA COMBINED (2) PRO FORMA PREDECESSOR PREDECESSOR
--------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUE:
Rental income $ 11,565 $ 11,565 $ 4,907 $ 4,907 $ 614
Interest and other income 2,217 1,831 2,480 2,011 1,255
------------- ------------ ------------ ------------ -----------
Total revenue 13,782 13,396 7,387 6,918 1,869
------------- ------------ ------------ ------------ -----------
EXPENSES:
Interest 521 5,895 0 1,977 112
General and administrative 1,661 2,074 1,436 1,218 329
Depreciation and amortization 1,734 1,606 778 649 88
-------------- ------------- ------------- ------------- ------------
Total expenses 3,916 9,575 2,214 3,844 529
-------------- ------------- ------------- ------------- ------------
Income before gain on sale of
properties and income tax 9,866 3,821 5,173 3,074 1,340
Gain on sale of properties 148 148 - - -
-------------- ------------- ------------- ------------- ------------
Income before income tax 10,014 3,969 5,173 3,074 1,340
Provision for income tax - 167 - 95 457
-------------- ------------ ------------- ------------ ------------
Net income 10,014 3,802 5,173 2,979 883
Redeemable Preferred Stock dividend
requirements - 6,637 - 7,496 3,619
-------------- ------------- ------------ ------------ -----------
Income/(loss) attributable to
Common Stock $ 10,014 ($ 2,835) $ 5,173 ($ 4,517) ($ 2,736)
============== ============== ============ ============= ============
Income/(loss) per share of Common Stock
$ 1.05 ($ 1.43) $ 0.54 ($ 4.61) ($ 2.79)
============== ============== ============ ============= ============
Weighted Average number of shares of
Common Stock outstanding 9,508,108 1,984,972 9,508,108 980,330 980,330
========== =========== ========== ============ ===========
(in thousands, except property and per
share data)
OTHER DATA:
Cash flows from operating activities n/a $ 4,925 n/a $ 3,994 $ 869
Cash flows from investing activities n/a ($ 78,142) n/a ($ 53,274) ($ 39,526)
Cash flows from financing activities n/a $ 72,883 n/a $ 51,173 $ 40,626
Funds From Operations (1) $ 11,600 $ 5,260 $ 5,951 $ 3,628 $ 971
Pro forma FFO per share $ 1.22 n/a $ 0.63 n/a n/a
Total properties (at end of period) 112 112 63 63 18
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
(in thousands) 1997 1996 1995
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 3,528 $ 3,862 $ 1,969
Properties subject to operating 151,492 70,175 15,554
leases, net
Total investments 166,953 85,735 37,302
Total assets 181,702 98,614 42,292
Notes payable 42,746 48,160 1,588
Total liabilities 46,896 49,214 2,121
Redeemable Preferred Stock 0 49,399 40,000
Total stockholders' equity 134,806 1 171
</TABLE>
(1) Industry analysts generally consider FFO to be an appropriate measure of
the performance of an equity REIT. In March, 1995, the National Association
of Real Estate Investment Trusts ("NAREIT") adopted the NAREIT White Paper
which provided additional guidance on the calculation of FFO. FFO is defined
by NAREIT as net income (computed in accordance with GAAP), excluding gains
(or losses) from debt restructuring and sales of property, plus real estate
related depreciation and amortization (includes amortization of deferred
financing costs) and after adjustments for unconsolidated partnerships and
joint ventures. FFO does not represent cash generated from operating
activities in accordance with GAAP and is not necessarily indicative of cash
available to fund cash needs. In addition, FFO should not be considered an
alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flow as a measure of liquidity.
(2) The 1997 results include the combined results of the Predecessor for the
period January 1, 1997 through September 30, 1997 and the Company for the
period October 1, 1997 through December 31, 1997.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company, which operates as a REIT, acquires, develops and owns
freestanding properties which are leased on a long-term triple-net basis to
operators of national and regional chain restaurants and retailers. Triple-net
leases generally impose on the lessee all of the obligations of repairs,
maintenance, real property taxes, assessments, utilities and insurance. The
Company's Leases typically provide for minimum rent plus specified fixed
periodic rent increases or, in certain limited circumstances, indexation to CPI
and/or percentage rent. Other revenues are derived primarily from interest
income on long- and short-term investments.
As of December 31, 1997, the Company owned 112 properties, located in
29 states, subject to long-term net Leases with 47 different Lessees operating
34 distinct restaurant and retail concepts.
The Company completed the Offering of 8,000,000 shares of Common Stock
in November 1997. Subsequent to the Offering, the Company has operated as a
REIT.
The following discussion should be read in conjunction with the
historical financial statements and pro forma statements of operations
appearing elsewhere herein. The historical financial data include certain
interest, general and administrative and income tax expenses which will not be
incurred by the Company after the Offering which are excluded from the pro
forma financial data. Conversely, the historical financial data does not
include certain revenues from the Affiliated Partnerships and which are
included in the pro forma financial data.
The historical data reflects the combined results of the Predecessor
for the period January 1, 1997 through September 30, 1997 and the Company for
the period October 1, 1997 through December 31, 1997.
HISTORICAL RESULTS OF OPERATIONS - 1997 TO 1996
Total revenue increased 93.6% to $13.4 million for the year ended
December 31, 1997 as compared to $6.9 million for the year ended December 31,
1996. Rental revenue increased 135.7% to $11.6 million for 1997 as compared to
$4.9 million for 1996. The increase in rental revenue resulted principally
from the acquisition of 55 net leased properties, offset by the sale of
20
<PAGE> 21
six net leased properties, and the benefit of a full period of rental revenue
from properties acquired and leased in the preceding year. Interest and other
income decreased by 9.0% to $1.8 million for 1997 as compared to $2.0 million
for 1996, primarily due to a reduction in the interest rate on loans to
affiliates. On October 1, 1996 the interest rate on the Company's master
revolving note with an affiliate was reduced to 8.0% per annum from 9.0% per
annum.
Interest expense increased by 198.2% to $5.9 million for 1997 as
compared to $2.0 million for 1996. The increase was primarily due to interest
on $75.2 million of additional debt used to fund the acquisition of properties
which was incurred during 1997, as well as a full period of interest on debt
incurred in the prior year; however, this was offset by the $80.6 million of
debt repaid from Offering proceeds. General and administrative expenses,
including management fees to affiliates, increased 70.3% to $2.1 million for
1997 as compared to $1.2 million for 1996, primarily due to an increase in
management fees paid due to the increased asset base. Depreciation and
amortization increased 147.4% to $1.6 million for 1997 as compared to $649,000
for 1996, primarily due to the continued acquisition of net leased properties
and the effect of a full period of depreciation of properties acquired and
leased in the preceding year.
The Company sold six properties during 1997, collecting gross proceeds
of $4.2 million and reflecting a gain of $148,000 on the sale of these
properties.
Since the Company has not historically been a REIT, a provision for
income tax has been recorded. The provision for income tax does not bear the
usual relationship to pretax income as a result of the treatment of dividends
paid on the redeemable preferred stock as deductible interest expense for tax
purposes. If deduction as interest is challenged by the Internal Revenue
Service, the Company could be assessed and ultimately required to pay income
taxes. The provision for income tax increased to $167,000 for 1997 as compared
to $95,000 for 1996, primarily due to an allowance recorded to reflect the
Company's estimate of the minimum settlement of this matter, should a claim be
asserted by the Internal Revenue Service. Since the preferred stock was
redeemed in November 1997, no further allowances are anticipated related to the
deductibility of the dividends thereon. See Note 9 to the Financial
Statements.
As a result of the foregoing, the Company's net income before income
tax increased 29.1% to $4.0 million for 1997 as compared to $3.1 million for
1996, and net income increased 27.6% to $3.8 million for 1997 as compared to
$3.0 million for
21
<PAGE> 22
1996. FFO increased 45.0% to $5.3 million from $3.6 million in 1996. Loss
attributable to Common Stock decreased to $2.8 million from $4.5 million in
1996.
PRO FORMA RESULTS OF OPERATIONS - 1997 TO 1996
Pro forma net income was $10.0 million for the year ended December 31,
1997, compared to historical net income of $3.8 million. Pro forma revenue
increased by $386,000 as a result of the inclusion of revenues from the
Affiliated Partnerships. Pro forma expenses declined by $5.8 million as a
result of: (i) the reduction of interest expense based on repayment of the
first $80.6 million of debt outstanding during 1997; (ii) a reduction in
management fees to conform with the terms of the new Advisory Agreement; and
(iii) elimination of the provision for income tax based upon the Company's
operation as a REIT, the aggregate effects of which were offset in part by an
increase in general and administrative expenses to reflect the commencement of
salaries and benefits and other incremental costs related to operating as a
public REIT and an increase in depreciation expense to reflect the increase in
recorded values of properties subject to operating Leases. The pro forma
adjustments were assumed to have occurred on January 1, 1996.
Pro forma net income increased 93.6% to $10.0 million for 1997, as
compared to $5.2 million for 1996, and pro forma FFO increased 94.9% to $11.6
million for 1997, as compared to $6.0 million in 1996.
HISTORICAL RESULTS OF OPERATIONS - 1996 TO 1995
Total revenue increased to $6.9 million for the year ended December
31, 1996 from $1.9 million for the year ended December 31, 1995. Rental
revenue increased to $4.9 million for 1996 as compared to $614,000 for 1995.
The increase in rental revenue resulted principally from the acquisition of 45
net leased properties and the benefit of a full period of rental revenue from
properties acquired and leased in the preceding period. Interest and other
income increased to $2.0 million for 1996 as compared to $1.2 million for 1995,
primarily as a result of the benefit of a full period of interest income from
investments made in the preceding year, offset by a decline in the average
balance of short-term investments.
Interest expense increased to $2.0 million for 1996 from $112,000 for
1995. The increase was primarily due to interest on $46.6 million of debt used
to fund the acquisition of properties which was incurred during 1996, as well
as a full period of
22
<PAGE> 23
interest on debt incurred in the preceding year. General and administrative
expenses, including management fees to affiliates, increased to $1.2 million
for 1996 as compared to $329,000 for 1995, primarily due to increased
management fees related to the increased asset base. Depreciation and
amortization increased to $649,000 in 1996 from $88,000 in 1995, primarily due
to the continued acquisition of net leased properties and the effect of a full
period of depreciation of properties acquired and leased in the preceding year.
The provision for income tax for 1996 decreased to $95,000 from
$457,000 in 1995 primarily as a result of the increased amount of preferred
stock dividends paid in 1996 and their treatment as deductible interest for tax
purposes. See Note 9 to Financial Statements.
As a result of the foregoing, the Company's net income before income
tax increased to $3.1 million for 1996 as compared to $1.3 million for 1995,
and net income increased to $3.0 million for 1996 from $883,000 in 1995. FFO
increased to $3.6 million in 1996 from $971,000 for 1995. Loss attributable to
Common Stock increased to $4.5 million in 1996 from $2.7 million in 1995.
PRO FORMA RESULTS OF OPERATIONS - 1996
Pro forma net income was $5.2 million for the year ended December
31,1996, compared to historical net income of $3.0 million. Pro form revenue
increased by $469,000 as a result of the inclusion of revenues from the
Affiliated Partnerships. Pro forma expenses declined by $1.7 million as a
result of: (i) the elimination of interest expense based on repayment of the
entire outstanding balance of the notes payable; (ii) a reduction in management
fees to conform with the terms of the new Advisory Agreement; and (iii)
elimination of the provision for income tax based upon the Company's operation
as a REIT, the aggregate effects of which were offset in part by an increase in
general and administrative expenses to reflect the commencement of salaries and
benefits and other incremental costs related to operating as a public REIT and
an increase in depreciation expense to reflect the increase in recorded values
of properties subject to operating Leases. The pro forma adjustments were
assumed to have occurred on January 1, 1996.
23
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal use of funds is for property development and
acquisition, payment of interest on its outstanding indebtedness and payment of
operating expenses and dividends. Historically, interest expense, operating
expenses and dividends have been paid out of cash flows from operations.
Property acquisitions have typically been funded out of proceeds from equity
offerings and borrowings. The Company expects to meet its long-term liquidity
requirements (principally property development and acquisition and scheduled
debt maturities) through a variety of future sources of capital, including
long-term secured and unsecured indebtedness and the issuance of additional
equity or debt securities. Although its organizational documents contain no
limitation on the amount of debt it may incur, the Company, subject to the
discretion of the Board of Directors, intends to maintain a debt capitalization
ratio (total consolidated debt of the Company as a percentage of market
capitalization) of not more that 50.0%.
The Company's Leases generally provide for specified periodic rent
increases including fixed increase amounts, and in limited circumstances,
indexation to CPI and/or percentage rent. In addition, most of the Company's
Leases require the Lessee to pay all operating costs and expenses including
repairs, maintenance, real property taxes, assessments, utilities and
insurance, thereby substantially reducing the Company's exposure to increases
in costs and operating expenses. Based upon these factors, the Company does
not anticipate significant capital demands related to the management of its
Existing Properties.
At December 31, 1997, the Company had cash and cash equivalents of
$3.5 million. For the year ended December 31, 1997, the Company generated cash
from operations of $4.9 million as compared to $4.0 million in 1996. Cash
generated from operations provides funds for dividends. Any excess cash from
operations may also be used for investment in properties.
On November 19, 1997, the Company completed the Offering at a price of
$18.00 per share. Net proceeds from the Offering totaled $132.1 million, after
underwriting commissions and Offering expenses. The Company used the net
proceeds of the Offering to repay $80.6 million of its existing notes payable
and to redeem $40.5 million of the redeemable preferred stock and $10.9 million
of accrued dividends thereon. The remaining $9.5 million of redeemable
preferred stock was exchanged for 527,778 shares of the Common Stock. As a
result, the Company's preferred stock dividend requirement has been eliminated
and cash required to service debt has decreased substantially.
24
<PAGE> 25
NEW CREDIT FACILITY. On February 26, 1998 the Company entered into a
$175.0 million unsecured revolving credit facility (the "Credit Facility"),
which will be used to provide funds for the acquisition of properties and
working capital, and repaid all amounts outstanding under the then existing
credit facility. At December 31, 1997, the Company had $42.7 million of
outstanding borrowings under its prior credit facility.
The Credit Facility has a three year term and borrowings are subject
to borrowing base restrictions. The credit agreement contains covenants which,
among other restrictions, require the Company to maintain a minimum net worth,
a maximum leverage ratio, and specified interest and fixed charge coverage
ratios.
The annual interest rate on the prior credit facility was LIBOR plus
2.32% prior to completion of the Offering and was reduced to LIBOR plus 1.75%
thereafter. The Credit Facility bears interest at an annual rate of LIBOR plus
a spread ranging from 1.25% to 1.50%, set quarterly depending on the Company's
leverage ratio, or at the Company's option, the bank's base rate. In
connection with the Credit Facility, the Company paid an initial commitment fee
of $1.3 million and is also required to pay an unused commitment fee ranging
from .125% to .20% per annum on the unused amount of the commitment.
The Credit Facility, combined with the reduced leverage after the
Offering, will enhance the Company's ability to take advantage of acquisition
opportunities. The Company expects that the Credit Facility will be used
primarily to acquire properties, although up to $50.0 million may be borrowed
for general working capital purposes.
The Credit Facility expires in February 2001 and may be renewed
annually thereafter, one year in advance of maturity subject to the consent of
the lender. Upon expiration, the entire outstanding balance of the Credit
Facility will mature and become immediately due and payable. At that time, the
Company expects to refinance such debt either through additional debt
financings secured by individual properties or groups of properties, by
unsecured private or public debt offerings or by additional equity offerings.
PROPERTY ACQUISITIONS AND COMMITMENTS. During the year ended
December 31, 1997, the Company acquired $81.3 million of properties. The gross
weighted average capitalization rate (annual rental divided by the property
purchase price) on aggregate 1997 property acquisitions was 10.5% on a cash
basis (using annual minimum rents) and 11.8% on a straight-line basis (using
estimated annual revenue under GAAP). The net weighted average capitalization
rate (annual rental divided by the total
25
<PAGE> 26
property investment, including capitalized acquisition costs) on aggregate 1997
property acquisitions was 10.2% on a cash basis and 11.5% on a straight-line
basis. Since the completion of the Offering, the amount of acquisition costs
incurred by the Company on new acquisitions, as a percentage of the purchase
price, has declined principally due to the reduced fees paid under the Advisory
Agreement. Thus, for future acquisitions the difference between gross and net
capitalization rates is expected to decrease.
In addition, as of December 31, 1997, the Company had entered into
commitments to acquire the 43 Acquisition Properties totaling $74.8 million.
The commitments are subject to various conditions to closing which are
described in the contracts or letters of intent relating to these properties,
and there is no assurance the Company will acquire all 43 of the Acquisition
Properties. The Company has availability under the Credit Facility to meet the
entire funding obligation under these commitments.
In the ordinary course of business the Company negotiates for the
acquisition of additional properties and related co-development opportunities.
The Company may enter into commitments to acquire some of these prospective
properties in the future. Property acquisition commitments arising out of
these negotiations are expected to generate the primary demand for additional
capital in the future.
See ITEM 2. PROPERTIES for additional information regarding the Existing
Properties, the Leases and the Acquisition Properties.
DIVIDENDS. The Company historically has paid quarterly dividends on
its redeemable preferred stock. After payment of the accrued preferred stock
dividends and the redemption and exchange of the Company's outstanding
redeemable preferred stock out of the proceeds of the Offering, the Company's
preferred stock dividend requirement has been eliminated.
The Company declared a fourth quarter dividend on its Common Stock in
the amount of $0.195 per share or $1,854,082. The dividend was payable to
shareholders of record on December 29, 1997 and was paid on January 20, 1998.
This was a partial dividend for the portion of the fourth quarter of 1997
following completion of the Offering. As a result of the one-time effect of
the payment of the accrued preferred stock dividends, the entire amount of the
Common Stock dividend was considered return of capital for federal income tax
purposes.
26
<PAGE> 27
The Company intends to pay during 1998 a regular quarterly dividend
on its Common Stock of $.375 per share (which if annualized would be $1.50 per
share). The Company expects to pay future dividends from cash available for
distribution, which the Company believes will exceed historical cash available
for distribution due to the reduction in debt service and preferred stock
dividend requirements, the decrease in advisory fee rates, as well as the
anticipated growth of the portfolio of net leased properties. The Company
believes that cash from operations will be sufficient to allow the Company to
make distributions necessary to enable the Company to qualify as a REIT.
INFLATION
The Company's Leases contain provisions which mitigate the adverse
impact of inflation. The Leases generally provide for specified periodic rent
increases including fixed increase amounts and, in limited circumstances,
indexation to CPI and/or percentage rent. In addition, most of the Leases
require the Lessee to pay all operating costs and expenses including repairs,
maintenance, real property taxes, assessments, utilities and insurance, thereby
substantially reducing the Company's exposure to increases in costs and
operating expenses resulting from inflation.
The Credit Facility bears interest at a variable rate which will be
influenced by changes in short-term interest rates and will be sensitive to
inflation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130. "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." Each standard is effective
for financial statements for fiscal years beginning after December 15, 1997.
SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
This statement defines business segments as components of an enterprise about
which separate financial information is available and used internally for
evaluating segment performance and decision making on resource allocation.
SFAS No. 131 requires reporting a measure of segment profit or loss, certain
specific revenue and expense
27
<PAGE> 28
items, segment assets and other reporting about geographic and customer
matters. The Company believes that it operates as a single business segment.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to the Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference
to the information under the headings "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement in connection with its Annual Meeting of Stockholders to be held on
May 8, 1998 (the "Proxy Statement"), and the information under the heading
"Executive Officers" in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference
to the information under the heading "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference
to the information under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement.
28
<PAGE> 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference
to the information under the heading "Transactions with Management" in the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
See page F-1 for an index to financial statements.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.2 Bylaws of the Company**
3.3 Form of Amended and Restated Certificate of Incorporation**
10.2 Employment Agreement between the Company and Patrick L. Beach*
10.3 Employment Agreement between the Company and W. Ross Martin*
10.6 Advisory Agreement between the Company and Captec Net Lease Realty Advisors, Inc.**
10.7 Form of Indemnification Agreement to be entered into by the Company's directors and
officers**
10.9 Long-Term Incentive Plan*
10.10 Directors' Deferred Compensation Plan*
27 Financial Data Schedules
</TABLE>
*Incorporated by reference from the Company's Registration Statement on Form
S-11 (Registration No. 333-34983) (the "S-11") filed with the Commission on
September 5, 1997.
**Incorporated by reference from Amendment No. 2 to the S-11 filed with the
Commission on November 6, 1997.
No reports on Form 8-K were filed during the quarter ended December 31, 1997.
FORWARD LOOKING STATEMENTS
This Form 10-K contains certain "forward-looking statements" which represent
the Company's expectations or beliefs, including, but not limited to,
statements concerning industry performance and the Company's operations,
performance, financial condition,
29
<PAGE> 30
plans, growth and strategies. Any statements contained in this Form 10-K which
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may," "will," "expect," "anticipate," intent," "could," estimate" or continue"
or the negative or other variations thereof or comparable terminology are
intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, certain of which are beyond
the Company's control, and actual results may differ materially depending on a
variety of important factors many of which are beyond the control of the
Company.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
March 31, 1998 CAPTEC NET LEASE REALTY, INC.
/s/ Patrick L. Beach
--------------------------------------
Patrick L. Beach
Director, Chairman of the Board,
President and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 31, 1998 CAPTEC NET LEASE REALTY, INC.
/s/ Patrick L. Beach
--------------------------------------
Patrick L. Beach
Director, Chairman of the Board,
President and
Chief Executive Officer
(Principal Executive Officer)
March 31, 1998 /s/ W. Ross Martin
--------------------------------------
W. Ross Martin
Director, Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
March 31, 1998 /s/ H. Reid Sherard
--------------------------------------
H. Reid Sherard
Director
March 31, 1998 /s/ Lee C. Howley, Jr.
--------------------------------------
Lee C. Howley, Jr.
Director
31
<PAGE> 32
March 31, 1998 /s/ Richard J. Peters
---------------------------------------
Richard J. Peters
Director
March 31, 1998 /s/ Creed L. Ford, III
--------------------------------------
Creed L. Ford, III
Director
March 31, 1998 /s/ William H. Krul, II
-------------------------------------
William H. Krul, II
Director
32
<PAGE> 33
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheets as of December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations for the Periods October 1, 1997 through December 31, 1997
and January 1, 1997 through September 30, 1997, and for the Years Ended
December 31, 1996, and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statement of Changes in Stockholders' Equity for the Periods October 1, 1997
through December 31, 1997 and January 1, 1997 through September 30, 1997,
and for the Years Ended December 31, 1996, and 1995 . . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows for the Periods October 1, 1997 through December 31, 1997
and January 1, 1997 through September 30, 1997, and for the Years Ended
December 31, 1996, and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7 - F-18
Pro forma financial information (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-19
Pro forma Statements of Operations (unaudited) for the Years
Ended December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-20
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Schedule III - Properties and Accumulated Depreciation as of December 31, 1997 . . . . . . . . . . . . . S-2 - S-3
Notes to Schedule III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
</TABLE>
F-1
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Captec Net Lease Realty, Inc.
We have audited the accompanying balance sheet of Captec Net Lease Realty, Inc.
(a Delaware corporation) as of December 31, 1997 and the related statements of
operations, changes in stockholders' equity, and cash flows for the period
October 1 through December 31, 1997. We have also audited the accompanying
balance sheet of Captec Net Lease Realty, Inc. (a Michigan corporation - the
"Predecessor") as of December 31, 1996 and the related statements of
operations, changes in stockholders' equity, and cash flows for the period
January 1, 1997 through September 30, 1997 and for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting financial statement amounts and disclosures. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Captec Net Lease Realty, Inc.
and its Predecessor as of December 31, 1997 and 1996, and the results of their
operations, changes in stockholders' equity and cash flows for the periods
indicated above, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Detroit, Michigan
March 16, 1998
F-2
<PAGE> 35
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
ASSETS Predecessor
1997 1996
-------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 3,528,129 $ 3,862,159
Investments:
Properties subject to operating leases, net 151,491,551 70,175,031
Loans to Affiliates, collateralized by mortgage loans 13,061,845 9,101,714
Impaired mortgage loans - 4,066,168
Other loans 703,950 788,512
Other loans, related party 421,920 421,920
Financing leases, net 1,274,044 1,181,900
------------- ------------
Total investments 166,953,310 85,735,245
Short-term loans to Affiliates 7,449,505 6,637,537
Unbilled rent 2,271,043 622,354
Accounts receivable 651,481 135,451
Due from Affiliates 186,625 269,780
Other assets 661,875 1,351,954
------------ ------------
Total assets $181,701,968 $ 98,614,480
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 42,746,189 $ 48,160,231
Accounts payable 1,434,668 375,544
Dividends payable 1,854,082 -
Federal income tax payable 719,000 268,000
Deferred income tax - 284,000
Security deposits held on leases 141,892 126,769
------------- ------------
Total liabilities 46,895,831 49,214,544
------------ ------------
Redeemable preferred stock (mandatory redemption amount
of $56,651,395 in 1996) - 49,398,936
----------- ------------
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, ($.01 par value in 1997); authorized:
40,000,000 shares; issued and outstanding: 9,508,108 in
1997 and 1,000 in 1996 95,081 1,000
Additional paid-in capital 134,711,056 -
Retained earnings -
------------ ------------
Total stockholders' equity 134,806,137 1,000
------------ ------------
Total liabilities & stockholders' equity $181,701,968 $ 98,614,480
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 36
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Predecessor
------------------
For the Period For the Period
October 1, January 1,
through through
December 31, September 30,
1997 1997
----------------- ------------------
<S> <C> <C>
Revenue:
Rental income $ 3,590,602 $ 7,974,798
Interest income on loans to Affiliates 238,341 749,788
Interest income on short-term loans to Affiliates 117,375 360,587
Interest and other income 112,187 251,893
--------------- -----------------
Total revenue 4,058,505 9,337,066
--------------- -----------------
Expenses:
Interest 1,475,412 4,419,226
Management fees, Affiliates 189,412 1,347,086
General and administrative 72,528 464,769
Depreciation and amortization 530,318 1,076,043
--------------- -----------------
Total expenses 2,267,670 7,307,124
--------------- -----------------
Income before gain on sale of properties
and income tax 1,790,835 2,029,942
Gain (loss) on sale of properties 206,834 (58,687)
-------------- -----------------
Income before income tax 1,997,669 1,971,255
Provision for income tax - 167,000
-------------- -----------------
Net income 1,997,669 1,804,255
Redeemable Preferred Stock dividend requirements 1,011,986 5,625,000
--------------- -----------------
Income (loss) attributable to common stock $ 985,683 $ (3,820,745)
=============== =================
Income (loss) per common share:
Basic $ 0.20 $ (3.90)
=============== =================
Diluted $ 0.20
===============
Weighted average number of common shares
outstanding 4,966,139 980,330
=============== =================
<CAPTION>
Predecessor
--------------------------------------
Year Ended December 31,
--------------------------------------
1996 1995
---- ----
<S> <C> <C>
Revenue:
Rental income $ 4,907,324 $ 614,166
Interest income on loans to Affiliates 1,646,950 526,621
Interest income on short-term loans to Affiliates 302,147 713,772
Interest and other income 61,930 14,737
---------------- ----------------
Total revenue 6,918,351 1,869,296
---------------- ----------------
Expenses:
Interest 1,976,634 112,091
Management fees, Affiliates 935,241 329,496
General and administrative 282,784 -
Depreciation and amortization 649,347 88,117
---------------- ----------------
Total expenses 3,844,006 529,704
---------------- ----------------
Income before gain on sale of properties
and income tax 3,074,345 1,339,592
Gain (loss) on sale of properties - -
---------------- ----------------
Income before income tax 3,074,345 1,339,592
Provision for income tax 95,000 457,000
---------- ----------------
Net income 2,979,345 882,592
Redeemable Preferred Stock dividends 7,495,902 3,618,493
---------------- ----------------
Income (loss) attributable to common stock $ (4,516,557) $ (2,735,901)
=============== ================
Income (loss) per common share:
Basic $ (4.61) $ (2.79)
=============== ================
Diluted
Weighted average number of common shares
outstanding 980,330 980,330
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 37
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Stock Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
----------- ---------- ------------- ------------ -----------------
PREDECESSOR
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 - - - -
Issuance of 1,000 shares of Common Stock 1,000 $ 1,000 - - $ 1,000
Net Income - - $ 882,592 882,592
Redeemable Preferred Stock dividends paid from
retained earnings (Note 8) - - - (713,000) (713,000)
----------- --------- ------------- ------------ --------------
BALANCE, DECEMBER 31, 1995 1,000 1,000 - 169,592 170,592
Net Income - - - 2,979,344 2,979,344
Redeemable Preferred Stock dividends paid from
retained earnings (Note 8) - - - (3,148,936) (3,148,936)
----------- --------- ------------- ------------ --------------
BALANCE, DECEMBER 31, 1996 1,000 1,000 - - 1,000
Net income - - - 1,804,255 1,804,255
Redeemable Preferred Stock dividends paid
from retained earnings (Note 8) - - - (1,804,255) (1,804,255)
Common stock issued in merger and
subsequent stock split, net 979,330 8,803 5,152,197 - 5,161,000
----------- --------- ------------- ------------ --------------
BALANCE, SEPTEMBER 30, 1997 980,330 $ 9,803 $ 5,152,197 $ - $ 5,162,000
=========== ========= ============= ============ ==============
BALANCE, OCTOBER 1, 1997 980,330 $ 9,803 $ 5,152,197 $ - $ 5,162,000
Net income - - - 1,997,669 1,997,669
Common stock issued in initial public offering 8,000,000 80,000 132,005,740 - 132,085,740
Common stock issued for conversion of
Redeemable Preferred Stock 527,778 5,278 9,494,722 - 9,500,000
Redeemable Preferred Stock dividends paid (Note 8) - - (11,073,204) (1,011,986) (12,085,190)
Common stock dividends ($0.195 per share) - - (868,399) (985,683) (1,854,082)
----------- --------- ------------- ------------ --------------
BALANCE, DECEMBER 31, 1997 9,508,108 $ 95,081 $ 134,711,056 $ - $ 134,806,137
=========== ========= ============= ============ ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 38
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Predecessor
--------------
For the
For the Period Period
October 1 January 1,
Through Through
December 31, September 30,
1997 1997
----------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,997,669 $ 1,804,255
Adjustments to net income:
Depreciation and amortization 530,318 1,076,043
Amortization of debt issuance costs 131,250 393,750
Loss (gain) on sale of properties (206,835) 58,688
Deferred income tax provision - -
Increase in unbilled rent (455,323) (1,193,366)
(Decrease) increase in receivables and other assets (149,697) (288,099)
Increase in payables 300,602 925,522
-------------- -------------
Net cash provided by operating activities 2,147,984 2,776,793
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties (45,113,200) (32,157,979)
Acquisition of impaired mortgage loans - -
Advances on loans to Affiliates, collateralized by mortgage loans (6,458,589) (6,959,526)
Acquisition of other loans - -
Acquisition of financing leases - (370,165)
Advances on short-term loans to Affiliates (1,812,604) (4,383,416)
Collections on short-term loans to Affiliates - 5,384,052
Proceeds from the sale of leased properties 3,503,091 704,723
Collections on loans to Affiliates, collateralized by mortgage loans 5,539,782 3,918,202
Collection of principal on other loans 21,273 63,289
Collection of principal on financing leases (33,053) (3,127)
Change in lease security deposits - 15,123
------------- -------------
Net cash used in investing activities (44,353,300) (33,788,824)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Redeemable Preferred Stock (40,500,000) -
Proceeds from the issuance of Redeemable Preferred Stock - -
Proceeds from the issuance of Common Stock - -
Proceeds from the Offering, net 132,085,740 -
Proceeds from the issuance of notes payable 44,842,937 30,342,875
Organization and offering costs - -
Debt issuance costs - -
Principal payments of notes payable (80,535,788) (64,066)
Dividends paid on Redeemable Preferred Stock (10,913,381) (2,375,000)
------------- -------------
Net cash provided by financing activities 44,979,508 27,903,809
------------- -------------
NET CASH FLOWS 2,774,192 (3,108,222)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 753,937 3,862,159
-------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,528,129 $ 753,937
============== =============
<CAPTION>
Predecessor
--------------------------------
For the Years Ended
December 31,
------------------------
1996 1995
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,979,345 $ 882,592
Adjustments to net income:
Depreciation and amortization 649,347 88,117
Amortization of debt issuance costs 437,500 -
Loss (gain) on sale of properties (10,351) -
Deferred income tax provision 95,000 189,000
Increase in unbilled rent (563,886) (58,468)
(Decrease) increase in receivables and other assets 32,232 (500,042)
Increase in payables 375,341 268,203
------------- ------------
Net cash provided by operating activities 3,994,528 869,402
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties (55,879,245) (41,281,845)
Acquisition of impaired mortgage loans (171,168) -
Advances on loans to Affiliates, collateralized by mortgage loans (10,055,492) -
Acquisition of other loans (1,219,305) -
Acquisition of financing leases (1,181,900) -
Advances on short-term loans to Affiliates (9,677,570) (2,215,391)
Collections on short-term loans to Affiliates 5,255,424 -
Proceeds from the sale of leased properties 789,543 -
Collections on loans to Affiliates, collateralized by mortgage loans 18,806,533 3,894,773
Collection of principal on other loans 8,873 -
Collection of principal on financing leases - -
Change in lease security deposits 50,135 76,634
------------ ------------
Net cash used in investing activities (53,274,172) (39,525,829)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Redeemable Preferred Stock - -
Proceeds from the issuance of Redeemable Preferred Stock 10,000,000 40,000,000
Proceeds from the issuance of Common Stock - 1,000
Proceeds from the Offering, net - -
Proceeds from the issuance of notes payable 46,607,525 1,617,845
Organization and offering costs (600,000) (250,000)
Debt issuance costs (1,050,000) -
Principal payments of notes payable (34,917) (30,222)
Dividends paid on Redeemable Preferred Stock (3,750,000) (713,000)
------------ ---------
Net cash provided by financing activities 51,172,608 40,625,623
------------ ------------
NET CASH FLOWS 1,892,964 1,969,196
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,969,196 -
------------ ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,862,160 $ 1,969,196
============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 39
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:
Captec Net Lease Realty, Inc., a Delaware corporation ("Captec" or the
"Company"), was formed in 1997 to continue and expand the acquisition and
investment activities of Captec Net Lease Realty, Inc., a Michigan
corporation ("Net Lease Michigan"), and Captec Net Lease Realty Advisors,
Inc., a Michigan corporation ("Advisors Michigan"). Net Lease Michigan
was formed in October 1994 for the purpose of investing in long-term net
leased restaurant and retail real estate and commenced operations in
February 1995. Advisors Michigan was formed in October 1994 for the
purpose of providing certain advisory services to Net Lease Michigan and
also commenced operations in February 1995. The Company completed its
initial public offering (the "Offering") on November 19, 1997 and has
subsequently operated as a real estate investment trust ("REIT").
In connection with the Offering, Net Lease Michigan and Advisors Michigan
were merged into the Company effective September 3, 1997 in exchange for
1,315,440 shares of the Company's common stock, par value $.01 per share
(the "Common Stock") and 50,000 shares of Redeemable Preferred Stock.
Subsequently, a reverse split of .745249 shares for each share of Common
Stock was effected, resulting in 980,330 shares outstanding. The
accompanying financial statements account for the merger as a purchase of
Net Lease Michigan by Advisors Michigan in accordance with Accounting
Principles Board Opinion No. 16. Accordingly, the cost of the acquisition
was $5,161,000 (318,607 split adjusted shares issued to the shareholders
of Advisors Michigan at an assumed fair value of $16.20) and the assets
acquired and liabilities assumed of Net Lease Michigan were recorded at
their estimated fair values (resulting in an increase to historical
recorded value of properties subject to operating leases of $5,161,000).
In addition, as the principal business activities of the continuing
Company consist of the activities previously performed by Net Lease
Michigan, Net Lease Michigan is deemed to be the "Predecessor" company for
financial reporting purposes and the accompanying balance sheet as of
December 31, 1996 and the statements of operations and cash flows for the
years ended December 31, 1996 and 1995, and for the period January 1, 1997
through September 30, 1997, are of Net Lease Michigan.
Following is a summary of the Company's significant accounting policies:
A. CASH AND CASH EQUIVALENTS: Cash equivalents consists of investments in
government securities money funds purchased with original maturities of
less than 90 days.
B. PROPERTIES SUBJECT TO OPERATING LEASES: Properties subject to operating
leases are stated at cost less accumulated depreciation. Buildings are
depreciated on the straight-line method over their estimated useful lives
(40 years).
F-7
<PAGE> 40
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
c. RENTAL INCOME FROM OPERATING LEASES: The Company's operating leases have
scheduled rent increases which occur at various dates throughout the lease
terms. The Company recognizes the total rent, as stipulated by the lease
agreement, as income on a straight-line basis over the term of each lease.
To the extent rental income on the straight-line basis exceeds rents
billable per the lease agreement, an amount is recorded as unbilled rent.
d. IMPAIRED MORTGAGE LOANS: Investments in impaired mortgage loans have been
recorded at the lower of the current balance due or the estimated fair
value of the collateral.
e. AMORTIZATION OF ORGANIZATION COSTS: Organization costs are amortized
using the straight-line method over a 5 year period.
f. INCOME TAXES: Deferred taxes are determined based on the difference
between the financial statement and tax bases of assets and liabilities.
Such differences arise principally from varying methods of depreciating
buildings and cash basis accounting for tax purposes. Deferred tax
liabilities and assets are recognized for the expected future tax
consequences of events that have been included in the financial statements
or tax returns, measured at the current tax rates. Deferred tax expense
or benefit represents the change in the deferred tax asset or liability
balance.
g. INCOME/(LOSS) PER COMMON SHARE: Income/(Loss) per common share is based
on net income (loss) reduced by redeemable preferred stock dividend
requirements, divided by the weighted average number of shares of Common
Stock outstanding. Loss per share of Common Stock for the periods prior
to October 1, 1997 was calculated as if the 980,330 split adjusted shares
had been outstanding. Stock options currently outstanding (Note 12) were
excluded from the computation of diluted earnings per share because their
exercise price was in excess of the average market price of the Company's
Common Stock during 1997.
h. ESTIMATES: The preparation of 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 and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
I. RECLASSIFICATIONS: Certain prior period financial statement amounts have
been reclassified to conform to the 1997 presentations.
F-8
<PAGE> 41
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTIES SUBJECT TO OPERATING LEASES:
The Company's real estate portfolio is leased to tenants under long-term
net operating leases. The lease agreements generally provide for monthly
rents based upon a percentage of the property's cost. The initial term of
the leases typically ranges from 15 to 20 years, although the Company in
certain cases will enter into leases with terms that are shorter or
longer. As of December 31, 1997, the initial terms of the Company's
leases extend through August 31, 2025. Most leases also provide for one
or more five-year renewal options. In addition, certain leases provide
the tenant one or more options to purchase the properties at a
predetermined price, generally only during stated periods during the fifth
to seventh lease years.
Net investment in properties subject to operating leases at December 31,
1997 and 1996 includes capitalized acquisition and interest costs totaling
approximately $5,032,000 and $3,250,000, respectively, which costs have
been allocated between land and buildings and improvements on a pro rata
basis. The net investment in properties subject to operating leases is
comprised of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Land $ 59,007,054 $ 25,647,078
Buildings and improvements 90,886,469 39,010,252
Construction draws on properties (including
land of $2,457,838 and $4,861,012 in 1997 and
1996, respectively) 3,523,273 6,071,689
--------------- ---------------
153,416,796 70,729,019
Less accumulated depreciation (1,925,245) (553,988)
-------------- ---------------
Total $ 151,491,551 $ 70,175,031
============== ===============
</TABLE>
The Company periodically invests in properties under construction. All
construction draws are subject to the terms of a standard lease
agreement with the Company which fully obligates the tenant to the
long-term lease of all amounts advanced under construction draws. At
December 31, 1997 and 1996, the Company had approximately $4,851,000
and $4,543,000, respectively, of unfunded commitments on properties
under construction.
F-9
<PAGE> 42
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following is a schedule of future minimum lease payments to be
received on the noncancelable operating leases as of December 31, 1997.
This schedule excludes additional rents due under unfunded commitments
on properties under construction which are estimated to be equal to an
additional $7,931,000 in aggregate.
<TABLE>
<S> <C>
1998 $ 15,215,689
1990 15,435,802
2000 15,580,146
2001 15,843,550
2002 16,215,232
Thereafter 193,890,519
-------------
Total $ 272,180,938
=============
</TABLE>
3. LOANS TO AFFILIATES, COLLATERALIZED BY MORTGAGE LOANS:
Loans to affiliates, collateralized by mortgage loans consist of:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
Loan under master revolving note collateralized
by a subordinate interest in a portfolio of loans
owned by an affiliate $ 10,235,997 $ 3,826,838
Loan under a master revolving note, collateralized
by a senior interest in a portfolio of loans under an
assignment of contracts agreement 907,279 3,274,876
Promissory note collateralized by a subordinate
class certificate issued in conjunction with an
asset-backed sec uritization pool of long-term fixed
rate mortgage loans and other collateralized loans 1,918,569 2,000,000
----------- ----------
Total $13,061,845 $ 9,101,714
=========== ===========
</TABLE>
The master revolving note bears interest at 8.0% per annum at December
31, 1997 and 1996. The promissory note bears interest at 15.74% per
annum at December 31, 1997 and 1996. Both notes are payable on demand.
F-10
<PAGE> 43
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. IMPAIRED MORTGAGE LOANS:
At December 31, 1996, the Company's investment in foreclosed mortgage
loans was comprised of five mortgage loans to a single restaurant
obligor. The loans bore fixed rates of interest ranging from 10.41% to
10.67% per annum and mature 15 years from the dates of origination.
These loans were purchased by the Company in 1996 from an affiliate at
the then outstanding balance, in anticipation of a settlement agreement
with respect to the loans which resulted in the titles to the
underlying properties being transferred to the Company by deeds in lieu
of foreclosure. The properties were leased to new tenants under
long-term operating leases and the balances were reclassified to
properties subject to operating leases in the December 31, 1997 balance
sheet.
5. OTHER LOANS:
The Company is the holder of a subordinated note with a principal
balance of $703,950 and $788,512 as of December 31, 1997 and 1996,
respectively bearing interest at a rate of 12.5% per annum. The note
is currently collateralized by a subordinate interest in 16 real estate
properties, which are operated under the terms of long-term net leases
to a single tenant. The properties are being offered for sale to third
parties during a 24 month period. Monthly lease payments and proceeds
from the sale of individual properties will be used to pay both
principal and interest on the loan. The note also provides for a
participation interest in the proceeds from the sale of individual
properties which could result in a return on the note in excess of the
stated note rate. The Company also has a net investment totaling
$9,034,273 as of December 31, 1997, in four land and building
properties subject to operating leases with the same tenant.
As of December 31, 1997, the Company also has made a demand loan of
$421,920 collateralized by a first mortgage on a real estate property
to a related party. The loan bears interest at a rate of 9.2% per
annum.
6. FINANCING LEASES:
The net investment in financing leases as of December 31, 1997 and 1996
is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ----------------
<S> <C> <C>
Minimum lease payments to be received $ 1,661,881 $ 1,555,846
Estimated residual value 93,400 109,252
---------- ----------
Gross investment in financing leases 1,705,281 1,665,098
Unearned income (431,237) (483,198)
----------- -----------
Net investment in financing leases $ 1,247,044 $ 1,181,900
=========== ===========
</TABLE>
F-11
<PAGE> 44
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following is a schedule of future minimum lease payments to be
received on financing leases as of December 31, 1997.
<TABLE>
<S> <C>
1998 $ 98,866
1999 88,816
2000 88,816
2001 88,816
2002 1,246,567
-----------
Total $ 1,611,881
===========
</TABLE>
The entire investment in financing leases is comprised of a single
lease to an entity which is 50.0% owned by an affiliate.
7. NOTES PAYABLE:
In February, 1996, the Company entered into a $100 million revolving
credit agreement, which is used to provide funds for the acquisition of
properties. In June, 1997, the credit facility was increased to $150
million. Amounts borrowed under the Company's revolving credit
facility totaled $42,746,189 and $46,607,525 as of December 31, 1997
and 1996, respectively.
Borrowings under the revolving credit facility are secured by a first
mortgage in the properties financed. The credit agreement contains
covenants which, among other restrictions, require the Company to
maintain a capitalization, as defined in the agreement, of $40 million,
liquid assets equal to the greater of $2 million or 5.0% of the
outstanding borrowings under the facility, and a loan-to-value ratio of
not more than 75.0% on the properties financed under the credit
facility. During 1996, the credit facility required monthly
installments of interest only at LIBOR plus 2.318%. Subsequent to the
Offering, the monthly interest rate was reduced to LIBOR plus 1.75%.
The agreement provided for commitment fees and closing expenses of
$1,050,000, which were paid in February 1996 and capitalized in other
assets. These capitalized fees and expenses are being amortized and
treated as interest expense on a straight-line basis over the initial
term of the facility. Amortization during 1997 totaled $525,000.
On February 26, 1998 the Company entered into a new $175 million credit
facility, which will be used to provide funds for the acquisition of
properties (the "New Credit Facility"), and repaid all amounts
outstanding under the then existing credit facility.
The New Credit Facility has a three year term and borrowings are
subject to certain borrowing base restrictions. The New Credit Facility
contains covenants which, among other restrictions, require the Company
to maintain a minimum net worth, a maximum leverage ratio, and
specified interest coverage and fixed charge coverage ratios. The New
Credit Facility bears interest at an annual rate of LIBOR plus a spread
ranging from 1.25% to 1.50%, set quarterly depending on the Company's
leverage ratio.
F-12
<PAGE> 45
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company had two notes payable to a financial institution with a
principal balance of $1,552,706 as of December 31, 1996. These two
notes were paid in November, 1997 with the proceeds from the Offering.
These notes bore interest at fixed rates per annum of 9.85% and 10.35%
and were collateralized by mortgages in two of the Company's real
estate investments.
8. REDEEMABLE PREFERRED STOCK:
At December 31, 1996, 50,000 shares of Redeemable Preferred Stock
("RPS") were authorized, issued, and outstanding. The RPS had provided
for mandatory redemption on December 31, 1999 at a price of $1,000 per
share plus all accrued dividends, whether or not then payable, and any
unpaid dividends. The Company had the right and option to redeem these
shares on or after December 31, 1996 at a price of $1,000 per share
plus all accrued and unpaid dividends. In connection with the Offering
40,500 preferred shares were redeemed for cash and 9,500 preferred
shares were exchanged for Common Stock at the mandatory redemption
value of $1,000 per share. In addition, $10,913,381 in accrued
dividends were paid to the RPS holder from the Offering proceeds.
The RPS provided for a cumulative, non-compounded dividend at the rate
of $37.50 per share per quarter, proportionally adjusted for any shares
issued and outstanding for less than a full calendar year. The
preferred shareholder had preferential liquidation rights which
required the payment of all accrued and unpaid dividends prior to the
payment of any dividends or liquidation payments to the common
shareholders. Dividends were paid as declared by the Company's Board
of Directors based upon results of Company operations. Any dividend
paid in excess of retained earnings has been accounted for as a return
of capital to the holder of the RPS. RPS dividends paid and
accumulated unpaid dividends through November 19, 1997 (date of
redemption) were as follows:
<TABLE>
<CAPTION>
Return of Capital
From Retained (Reduction of RPS Accumulated Total Dividend
Earnings Carrying Value) Total Paid Unpaid Requirements
------------- ----------------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995 $ 713,000 $ -- $ 713,000 $2,905,493 $ 3,618,493
Year ended December 31, 1996 3,148,936 601,064 3,750,000 3,745,902 7,495,902
January 1, 1997 to September 30, 1997 1,804,255 570,745 2,375,000 3,250,000 5,625,000
October 1, 1997 to November 19, 1997 1,011,986 9,901,395 10,913,381 (9,901,395) 1,011,986
----------- ------------ ------------ ----------- -----------
$ 6,678,177 $ 11,073,204 $ 17,751,381 -- $17,751,381
=========== ============ ============ =========== ===========
</TABLE>
Accumulated unpaid dividends were $6,651,395 and $2,905,493 as of
December 31, 1996 and 1995, respectively.
9. INCOME TAX:
The Company will elect to be taxed as a REIT effective for its taxable
period beginning September 1, 1997 and ending December 31, 1997 under
the Internal Revenue Code of 1986, as amended (the "Code"). As a
result, the Company generally will not be subject to federal income
taxation at the corporate level to the
F-13
<PAGE> 46
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
extent it distributes annually at least 95.0% of its REIT taxable
income, as defined in the Code, to its stockholders and satisfies
certain other requirements.
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
For the Period For the Period
October 1, 1997 January 1, 1997
through December through December 31,
31, September 30, -------------------------------
1997 1997 1996 1995
------------------- ----------------- ------------ -------------
<S> <C> <C> <C> <C>
Current $ 284,000 $ 167,000 $ --- $ 268,000
Deferred (284,000) --- 95,000 189,000
------------- ---------- --------- ---------
Total $ - $ 167,000 $ 95,000 $ 457,000
============= ========== ========= =========
</TABLE>
The reconciliation of the federal income tax provision to the amount
computed by applying the statutory federal income tax rate to income
before federal income taxes is summarized as follows:
<TABLE>
<CAPTION>
For the period January
1, 1997 through December 31,
September 30, ---------------------------
1997 1996 1995
-------- ----------- -----------
<S> <C> <C> <C>
Federal Income taxes at
statutory rates $ 670,227 $ 1,045,276 $ 455,461
Preferred Stock dividends
deducted as interest (503,500) (947,400) ---
Other 273 (2,876) 1,539
---------- ----------- ----------
Total $ 167,000 $ 95,000 $ 455,000
========== =========== ==========
</TABLE>
The provision for federal income taxes does not bear the usual
relationship to pretax income for the periods ended September 30, 1997
and December 31, 1996 principally as a result of the treatment of
dividends paid on the Redeemable Preferred Stock as deductible
interest expense for income purposes. If deduction as interest is
challenged by the Internal Revenue Service, the Company could be
assessed and ultimately required to pay taxes aggregating up to
approximately $3,700,000 and $2,500,000 for deductions taken through
September 30, 1997 and December 31, 1996, respectively. The Company
has provided an allowance of
F-14
<PAGE> 47
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
approximately $719,000 and $570,000 as of December 31, 1997 and
December 31, 1996, respectively, to reflect its estimate of the minimum
settlement of this matter, should a claim be asserted by the Internal
Revenue Service. There is no assurance that if any claim is asserted,
it could be settled for the amounts provided as of December 31, 1997 or
any amount less than the aggregate amounts.
The components of net deferred taxes consisted of the following:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------
Asset Liability
----- ---------
<S> <C> <C>
Net operating loss carryforward $ 602,000 $ -
Other - 583,000
Less, valuation allowance (303,000) -
--------- ---------
Total deferred income taxes $ 299,000 $ 583,000
========= =========
</TABLE>
10. FINANCIAL INSTRUMENTS:
The estimated fair value of financial instruments held by the Company
at December 31, 1997 and 1996, and the valuation techniques used to
estimate the fair value, were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ---------------------------
Estimated Estimated
Book Value Fair Value Book Value Fair Value
---------- ---------- ---------- ----------
Assets
------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 3,528,129 $ 3,528,129 $ 3,862,129 $ 3,862,159
Impaired mortgage loans - - 4,066,168 4,066,168
Loans to affiliate,
collateralized by mortgage
loans 13,061,845 13,061,845 9,101,714 9,101,714
Other loans 1,125,870 1,125,870 1,210,432 1,210,432
Short-term loans to affiliates 7,449,505 7,449,505 6,637,537 6,637,537
Liabilities
-----------
Notes payable 42,746,189 42,746,189 48,160,231 48,267,687
</TABLE>
CASH AND CASH EQUIVALENTS. The book value approximates fair value
because of the short maturity of these instruments.
IMPAIRED MORTGAGE LOANS. The fair value of the investment in impaired
mortgage loans is estimated to be equal to the current balance due on
the loans since title to the real property collateralizing these loans
is in the process of being transferred to the Company and the estimated
value of the property exceeds the loan balances.
F-15
<PAGE> 48
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LOANS TO AFFILIATES, COLLATERALIZED BY MORTGAGE LOANS. The book value
approximates fair value because the fixed interest rates charged under
these investments approximate market interest rates commensurate with
this type of instrument and due to the short maturity of these loans.
OTHER LOANS. The book value approximates fair value because the fixed
interest rates charged under these investments approximate market
interest rates commensurate with this type of instrument.
SHORT-TERM LOANS TO AFFILIATES. The book value approximates fair value
because the fixed interest rate charged under these investments
approximates market interest rates commensurate with this type of
instrument and due to the short maturity of these loans.
NOTES PAYABLE. The fair value of floating rate debt approximates the
book value due to the short maturity of the pricing mechanism for this
debt. The fair value of fixed rate debt is estimated by discounting
future cash flows using an estimated discount rate which reflects the
rate at which the Company currently borrows under its credit facility.
11. RELATED PARTY TRANSACTIONS AND AGREEMENTS:
Captec Financial Group, Inc. and Captec Net Lease Advisors, Inc.
("Captec Advisors"), both affiliates of the Company, provide management
and financial advisory services to the Company. During 1997, 1996, and
1995 the Company incurred $1,536,000, $935,000, and $330,000
respectively, of asset management fees and approximately $2,030,000,
$2,630,000, and $654,000 respectively, in acquisition fees to
affiliates. The acquisition fees were capitalized into the Company's
investment in land and building subject to operating leases.
In August, 1997 the Company entered into an Advisory Agreement with
Captec Advisors whereby the Company will pay to Captec Advisors a
management fee of the lesser of (i) 0.6% of the aggregate capitalized
cost (excluding accumulated depreciation) of all assets in the
Company's portfolio, or (ii) 5.0% of the Company's revenues. Under the
Advisory Agreement, the Company may pay Captec Advisors an incentive
fee, which will equal 15.0% of the amount by which any increase in
annual Funds From Operations ("FFO") per share exceeds a 7.0% annual
increase in FFO per share multiplied by the weighted average number of
shares of Common Stock outstanding. The Company will also pay to
Captec Advisors an amount equal to all costs incurred in the
acquisition of properties. The sum of the incentive fee and the cost
reimbursement will not exceed 3.0% of the acquisition cost of
properties identified by the Advisor and acquired during the term of
the Advisory Agreement.
The Company invested in loans to affiliates which were collateralized
by mortgage loans (see Note 3). In addition, the Company had the
following short-term loans to affiliates at December 31, 1997 and 1996:
F-16
<PAGE> 49
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Captec Financial Group, Inc. $ 7,253,972 $ 6,442,004
Others 195,533 195,533
----------- ----------
Total $ 7,449,505 $ 6,637,537
=========== ===========
</TABLE>
The above loans principally represent demand notes to affiliates, which
were entered into as a short-term investments by the Company. In
particular, the proceeds of the loans to Captec Financial Group, Inc.
are principally used as short-term warehouse financing for Captec
Financial Group's lending and leasing activities. These loans bear
interest at the rate of 8.0% per annum and are payable on demand.
At December 31, 1997, the Company was owed interest accrued on the
loans to affiliates, collateralized by mortgage loans, and the
investment in short-term loans totaling approximately $608,000, which
was offset by approximately $421,000 of amounts payable to such
affiliates, resulting in a net balance due from affiliates of
approximately $187,000. Interest earned on the loans during 1997 and
1996 was $1,450,207 and $1,871,846, respectively.
In connection with the Offering, the Company has agreed to acquire in
early 1998 the general partnership interests of Captec Franchise
Capital Partners L.P. III, a Delaware limited partnership, and Captec
Franchise Capital Partners L.P. IV, a Delaware limited partnership,
which are affiliated limited partnerships. The Company has agreed to
acquire these general partnership interests from wholly-owned
subsidiaries of Captec Financial Group, Inc. and an executive of the
Company for $3.3 million in the aggregate. The acquisition by the
Company of the general partnership interest in each affiliated
partnership is contingent on the approval of a majority of the limited
partners' interests of each affiliated partnership.
12. STOCK OPTION PLANS
The Company established the Long-Term Incentive Plan (the "Plan") to
promote the long-term growth and profitability of the Company by
enabling it to attract, retain and reward key employees of the Company
and to strengthen the mutuality of interest between such key employees
and the Company's stockholders. Grants of share options, restricted
shares, share appreciation rights, other share-based awards or any
combination thereof, may be made under the Plan. In connection with
the Offering, the Company granted options under the Plan to officers to
purchase an aggregate 650,000 shares of Common Stock at the initial
public offering price of $18.00 per share. The options vest ratably
over three years and expire 10 years after the date of grant.
In addition, the Company has reserved 400,000 shares of Common Stock
for issuance under the Plan. The exercise price of share options
granted under the Plan may not be less than the fair market value of
the shares on the date the option is granted. Eligible employees of
the Company may participate in the Plan, which is administered by the
Compensation Committee of the Board of Directors.
F-17
<PAGE> 50
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" but elected to continue to measure compensation cost
using the intrinsic value method, in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost for stock options has been recognized. If
compensation cost had been determined based on the estimated fair value
of options granted in 1997, $3.42 per share, the pro forma effects on
the Company's net income and earnings per share for the period October
1, 1997 through December 31, 1997 would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
As Reported Pro Forma
----------- ---------
<S> <C> <C>
Income attributable to common stock $ 985,683 $ 862,183
Income per share $ 0.20 $ 0.17
</TABLE>
The fair value per share of each option granted was estimated at the
date of the grant using the Black-Scholes option-pricing model using
the following assumptions: dividend yield of 8.33%; expected stock
price volatility of 20%; risk-free interest rate of 6.18%; and an
expected option term of five years.
13. ADDITIONAL FINANCIAL INFORMATION
Additional information with respect to cash flows is as follows (in
thousands):
<TABLE>
<CAPTION>
For the
period For the period
October 1, January 1, 1997
1997 through through September December 31,
December 31, 30, --------------------
1997 1997 1996 1995
------------- --------------- -------- --------
<S> <C> <C> <C> <C>
Cash paid for interest $ 1,599 $ 3,837 $ 1,241 $ 112
Cash paid for taxes - - 13 -
Non-cash transfers: From loans to
affiliate, collateralized by mortgage
loans to investment in impaired loans 3,895
Non-cash transfers: From impaired
mortgage loans to properties subject
to operating leases $ 788 $ 3,278
Common stock issued for conversion
and redemption of preferred stock
$ 9,500
Common stock issued in merger and
subsequent stock split $ 5,161
</TABLE>
F-18
<PAGE> 51
CAPTEC NET LEASE REALTY, INC.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The pro forma financial information set forth on the accompanying
schedule is presented as if the Offering and application of proceeds
therefrom occurred on January 1, 1996. The pro forma financial
information is not audited and is not necessarily indicative of the
results which actually would have occurred if the transactions had been
consummated on the dates described, nor does it purport to represent
the Company's future financial position or results of operations.
The principal adjustments to the pro forma financial information are:
(i) the reduction of interest expense based on repayment of notes
payable; (ii) a reduction in management fees to conform with the terms
of the new advisory agreement negotiated in conjunction with the
Offering; (iii) elimination of the provision for income tax based upon
the intent of the Company to qualify as a REIT; and (iv) elimination of
preferred stock dividend requirements, the aggregate effects of which
were offset in part by an increase in general and administrative
expenses to reflect the commencement of salaries and benefits and other
incremental costs related to operating as a public REIT and an increase
in depreciation expense to reflect the increase in recorded values of
properties subject to operating leases.
F-19
<PAGE> 52
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
PRO FORMA STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Revenue:
Rental income $ 11,565,400 $ 4,907,324
Interest income on loans to Affiliates 988,129 1,646,950
Interest income on investments 158,578 44,420
Interest income on short-term loans to Affiliates 477,962 302,147
Other 591,442 486,510
---------------- -----------------
Total revenue 13,781,511 7,387,351
---------------- -----------------
Expenses:
Interest 520,729 -
Management fees, Affiliates 639,412 316,241
General and administrative 1,021,808 1,119,784
Depreciation and amortization 1,734,361 778,347
---------------- -----------------
Total expenses 3,916,310 2,214,372
---------------- -----------------
Income before gain on sale of properties 9,865,201 5,172,979
Gain on sale of properties 148,147 -
---------------- -----------------
Net income $ 10,013,348 $ 5,172,979
================ =================
Net Income per share $ 1.05 $ 0.54
================ =================
Gain on sale of properties (148,147) -
Depreciation and amortization 1,734,361 778,347
---------------- -----------------
Funds From Operations ("FFO") $ 11,599,562 $ 5,951,326
================ =================
FFO per share $ 1.22 $ 0.63
================ =================
Weighted average shares outstanding 9,508,108 9,508,108
================ =================
</TABLE>
F-20
<PAGE> 53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Captec Net Lease Realty, Inc.
In connection with our audit of the financial statements of Captec Net Lease
Realty, Inc. as of December 31, 1997 and for the period October 1 through
December 31, 1997, which financial statements are included in this Form 10-K,
we have also audited the financial statement schedule listed in the index to
Financial Statements contained in this Form 10-K.
In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Detroit, Michigan
March 16, 1998
S-1
<PAGE> 54
SCHEDULE III
PROPERTIES AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
GROSS
COST AMOUNT
CAPITALIZED AT WHICH
INITIAL SUBSEQUENT CARRIED AT
TYPE OF STATE COST TO CLOSE ACCUMULATED
CONCEPT PROPERTY LOCATION ENCUMBRANCES TO COMPANY ACQUISITION OF PERIOD DEPRECIATION
------- -------- -------- ------------ ---------- ----------- --------- ------------
COMMENCED LEASES
----------------
<S> <C> <C> <C> <C> <C> <C> <C>
TACO CABANA RESTAURANT NV - 1,562,844 - 1,562,844 79,971
GOLDEN CORRAL RESTAURANT TX - 2,024,425 - 2,024,425 53,037
ROADHOUSE GRILL RESTAURANT NY - 1,048,395 - 1,048,395 24,929
KENNY ROGERS RESTAURANT NM - 890,557 - 890,557 -
ROASTERS
DENNY'S RESTAURANT TX - 662,144 - 662,144 32,491
POPEYE'S RESTAURANT GA - 877,941 - 877,941 20,261
APPLEBEE'S RESTAURANT WA - 1,986,432 - 1,986,432 44,635
DENNY'S RESTAURANT TX - 898,908 - 898,908 15,721
DENNY'S RESTAURANT TX - 894,042 - 894,042 16,070
DENNY'S RESTAURANT NC - 1,048,663 - 1,048,663 26,929
DENNY'S RESTAURANT NC - 816,140 - 816,140 26,951
TACO CABANA RESTAURANT GA - 1,067,838 - 1,067,838 28,046
TACO CABANA RESTAURANT GA - 1,186,604 - 1,186,604 26,862
APPLEBEE'S RESTAURANT MO - 2,087,796 - 2,087,796 48,067
RED ROBIN RESTAURANT WA - 3,153,767 - 3,153,767 74,361
STANFORD'S RESTAURANT CO - 2,427,861 - 2,427,861 71,226
RED ROBIN RESTAURANT CO - 3,283,130 - 3,283,130 59,900
CARROWS RESTAURANT CA - 1,213,931 - 1,213,931 33,317
CARROWS RESTAURANT CA - 1,213,931 - 1,213,931 27,822
CARROWS RESTAURANT CA - 1,324,288 - 1,324,288 28,886
BOSTON MARKET RESTAURANT NJ - 893,894 - 893,894 17,018
BOSTON MARKET RESTAURANT PA - 827,680 - 827,680 10,572
BOSTON MARKET RESTAURANT OH - 938,037 - 938,037 20,460
BOSTON MARKET RESTAURANT PA - 717,323 - 717,323 9,823
BOSTON MARKET RESTAURANT WA - 1,340,841 - 1,340,841 30,751
CARROWS RESTAURANT CA - 1,103,573 - 1,103,573 34,900
BLOCKBUSTER VIDEO RETAIL TX 535,000 843,130 - 843,130 20,562
BLOCKBUSTER VIDEO RETAIL TX 537,000 790,158 - 790,158 24,344
DENNY'S RESTAURANT TX 825,000 1,213,931 - 1,213,931 21,531
BOSTON MARKET RESTAURANT WA - 940,356 - 940,356 12,904
BOSTON MARKET RESTAURANT OH - 767,065 - 767,065 12,252
BOSTON MARKET RESTAURANT WI - 929,213 - 929,213 8,846
BOSTON MARKET RESTAURANT MI - 1,070,466 - 1,070,466 13,341
BOSTON MARKET RESTAURANT PA - 915,966 - 915,966 17,538
BOSTON MARKET RESTAURANT OR - 1,218,782 - 1,218,782 29,996
BOSTON MARKET RESTAURANT PA - 887,273 - 887,273 14,496
BOSTON MARKET RESTAURANT OR - 1,361,809 - 1,361,809 20,039
BOSTON MARKET RESTAURANT WA - 1,050,145 - 1,050,145 12,148
BOSTON MARKET RESTAURANT IL - 1,880,489 - 1,880,489 36,948
BOSTON MARKET RESTAURANT IL - 887,273 - 887,273 16,900
BOSTON MARKET RESTAURANT IN - 1,644,324 - 1,644,324 32,512
BOSTON MARKET RESTAURANT IL - 619,105 - 619,105 13,680
BOSTON MARKET RESTAURANT PA - 726,342 - 726,342 4,198
JACK IN THE BOX RESTAURANT CA - 1,035,703 - 1,035,703 12,892
RED LINE BURGERS RESTAURANT TX - 280,620 - 280,620 14,020
RED LINE BURGERS RESTAURANT TX - 280,620 - 280,620 14,040
DENNY'S RESTAURANT LA - 1,182,368 - 1,182,368 13,056
MOUNTAIN JACK'S RESTAURANT MI - 1,533,967 - 1,533,967 36,711
MOUNTAIN JACK'S RESTAURANT MI - 1,125,645 - 1,125,645 21,788
BABIES R US RETAIL MO - 3,156,219 - 3,156,219 69,695
BOSTON MARKET RESTAURANT PA - 909,531 - 909,531 5,922
MOUNTAIN JACK'S RESTAURANT OH - 1,655,360 - 1,655,360 23,770
BOSTON MARKET RESTAURANT IL - 1,909,327 - 1,909,327 23,382
BOSTON MARKET RESTAURANT PA - 1,122,178 - 1,122,178 1,075
BLACK ANGUS RESTAURANT MN 1,931,250 2,836,183 - 2,836,183 52,659
BLACK ANGUS RESTAURANT MN 1,380,000 2,030,575 - 2,030,575 46,444
BLACK ANGUS RESTAURANT MN 1,597,500 2,350,611 - 2,350,611 47,868
BLACK ANGUS RESTAURANT MN 1,683,750 2,472,004 - 2,472,004 42,595
DENNY'S RESTAURANT FL 825,000 1,160,681 - 1,160,681 3,281
<CAPTION>
DATE OF
ACQUISITION/ ACQUISITION/
CONCEPT CONSTRUCTION CONSTRUCTION DEPRECIATION
------- ------------ ------------ ------------
COMMENCED LEASES
----------------
<S> <C> <C> <C>
TACO CABANA 1994 ACQUISITION 40 YEARS
GOLDEN CORRAL 1995 ACQUISITION 40 YEARS
ROADHOUSE GRILL 1995 ACQUISITION 40 YEARS
KENNY ROGERS 1997 ACQUISITION 40 YEARS
ROASTERS
DENNY'S 1995 ACQUISITION 40 YEARS
POPEYE'S 1996 ACQUISITION 40 YEARS
APPLEBEE'S 1996 CONSTRUCTION 40 YEARS
DENNY'S 1995 ACQUISITION 40 YEARS
DENNY'S 1995 ACQUISITION 40 YEARS
DENNY'S 1995 ACQUISITION 40 YEARS
DENNY'S 1995 ACQUISITION 40 YEARS
TACO CABANA 1995 ACQUISITION 40 YEARS
TACO CABANA 1996 ACQUISITION 40 YEARS
APPLEBEE'S 1996 CONSTRUCTION 40 YEARS
RED ROBIN 1996 ACQUISITION 40 YEARS
STANFORD'S 1996 ACQUISITION 40 YEARS
RED ROBIN 1996 CONSTRUCTION 40 YEARS
CARROWS 1996 ACQUISITION 40 YEARS
CARROWS 1996 ACQUISITION 40 YEARS
CARROWS 1996 ACQUISITION 40 YEARS
BOSTON MARKET 1996 ACQUISITION 40 YEARS
BOSTON MARKET 1997 ACQUISITION 40 YEARS
BOSTON MARKET 1996 ACQUISITION 40 YEARS
BOSTON MARKET 1996 ACQUISITION 40 YEARS
BOSTON MARKET 1996 ACQUISITION 40 YEARS
CARROWS 1996 ACQUISITION 40 YEARS
BLOCKBUSTER VIDEO 1996 ACQUISITION 40 YEARS
BLOCKBUSTER VIDEO 1996 ACQUISITION 40 YEARS
DENNY'S 1996 CONSTRUCTION 40 YEARS
BOSTON MARKET 1997 CONSTRUCTION 40 YEARS
BOSTON MARKET 1996 CONSTRUCTION 40 YEARS
BOSTON MARKET 1997 CONSTRUCTION 40 YEARS
BOSTON MARKET 1997 ACQUISITION 40 YEARS
BOSTON MARKET 1996 ACQUISITION 40 YEARS
BOSTON MARKET 1996 ACQUISITION 40 YEARS
BOSTON MARKET 1996 ACQUISITION 40 YEARS
BOSTON MARKET 1996 ACQUISITION 40 YEARS
BOSTON MARKET 1997 CONSTRUCTION 40 YEARS
BOSTON MARKET 1996 ACQUISITION 40 YEARS
BOSTON MARKET 1996 ACQUISITION 40 YEARS
BOSTON MARKET 1996 CONSTRUCTION 40 YEARS
BOSTON MARKET 1996 ACQUISITION 40 YEARS
BOSTON MARKET 1997 CONSTRUCTION 40 YEARS
JACK IN THE BOX 1996 ACQUISITION 40 YEARS
RED LINE BURGERS 1995 ACQUISITION 40 YEARS
RED LINE BURGERS 1995 ACQUISITION 40 YEARS
DENNY'S 1997 CONSTRUCTION 40 YEARS
MOUNTAIN JACK'S 1996 ACQUISITION 40 YEARS
MOUNTAIN JACK'S 1996 ACQUISITION 40 YEARS
BABIES R US 1996 ACQUISITION 40 YEARS
BOSTON MARKET 1997 CONSTRUCTION 40 YEARS
MOUNTAIN JACK'S 1997 CONSTRUCTION 40 YEARS
BOSTON MARKET 1997 CONSTRUCTION 40 YEARS
BOSTON MARKET 1997 CONSTRUCTION 40 YEARS
BLACK ANGUS 1996 ACQUISITION 40 YEARS
BLACK ANGUS 1996 ACQUISITION 40 YEARS
BLACK ANGUS 1996 ACQUISITION 40 YEARS
BLACK ANGUS 1996 ACQUISITION 40 YEARS
DENNY'S 1997 CONSTRUCTION 40 YEARS
</TABLE>
S-2
<PAGE> 55
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
GOLDEN CORRAL RESTAURANT FL 1,650,000 2,273,361 - 2,273,361 9,188
MICHAEL'S CRAFTS RETAIL MD 2,380,000 2,770,281 - 2,770,281 2,953
BURGER KING RESTAURANT WV - 993,425 - 993,425 5,479
BLOCKBUSTER MUSIC RETAIL AL 1,036,500 1,526,653 - 1,526,653 13,024
VIDEO UPDATE RETAIL AZ - 1,098,541 - 1,098,541 9,900
VIDEO UPDATE RETAIL IL - 1,330,484 - 1,330,484 18,171
ARBY'S RESTAURANT IN - 1,093,288 - 1,093,288 8,558
DENNY'S RESTAURANT AZ - 1,103,891 - 1,103,891 2,242
NISSAN AUTO DEALER GA - 3,250,023 - 3,250,023 34,565
BMW AUTO DEALER GA - 7,115,013 - 7,115,013 67,580
VIDEO UPDATE RETAIL MO - 1,169,979 - 1,169,979 3,119
DAMON'S RESTAURANT AZ - 1,429,445 - 1,429,445 3,375
KENNY ROGERS RESTAURANT AZ - 838,167 - 838,167 5,220
ROASTERS
KENNY ROGERS RESTAURANT AZ - 825,409 - 825,409 5,054
ROASTERS
KENNY ROGERS RESTAURANT AZ - 898,896 - 898,896 4,934
ROASTERS
BLOCKBUSTER VIDEO RETAIL SC - 1,377,353 - 1,377,353 3,220
WHATABURGER RESTAURANT NM - 894,568 - 894,568 6,631
HOOTERS RESTAURANT FL - 1,048,870 - 1,048,870 38,729
VIDEO UPDATE RETAIL NM 1,310,308 1,344,400 - 1,344,400 22,337
VIDEO UPDATE RETAIL MN 1,102,000 1,134,740 - 1,134,740 -
BURGER KING RESTAURANT VA 892,500 1,102,500 - 1,102,500 2,581
BLOCKBUSTER VIDEO RETAIL GA - 1,033,801 - 1,033,801 2,904
TEXAS ROADHOUSE RESTAURANT CO - 1,365,889 - 1,365,889 3,828
CARINO'S RESTAURANT TX - 2,070,003 - 2,070,003 10,852
CARINO'S RESTAURANT TX - 1,917,860 - 1,917,860 12,701
BOSTON MARKET RESTAURANT MI - 1,171,769 - 1,171,769 1,733
BOSTON MARKET RESTAURANT MI - 1,150,607 - 1,150,607 1,601
BOSTON MARKET RESTAURANT IL - 1,602,747 - 1,602,747 2,819
BOSTON MARKET RESTAURANT IL - 1,293,062 - 1,293,062 1,801
ARBY'S RESTAURANT MI - 787,500 - 787,500 2,406
KEG STEAKHOUSE RESTAURANT WA 2,285,125 906,400 - 906,400 -
KEG STEAKHOUSE RESTAURANT WA 1,244,100 1,781,900 - 1,781,900 -
KEG STEAKHOUSE RESTAURANT WA 1,347,775 1,854,000 - 1,854,000 -
KEG STEAKHOUSE RESTAURANT WA 900,900 1,236,000 - 1,236,000 -
KEG STEAKHOUSE RESTAURANT OR 672,100 865,200 - 865,200 -
BLOCKBUSTER VIDEO RETAIL AL 747,150 874,125 - 874,125 2,124
BLOCKBUSTER VIDEO RETAIL AL 733,550 874,125 - 874,125 2,077
SPORTMART RETAIL IL 4,340,050 6,096,913 - 6,096,913 7,836
STOP & GO RETAIL TX 826,278 841,278 - 841,278 1,263
CIRCLE K RETAIL GA 1,197,637 1,227,637 - 1,227,637 -
STOP & GO RETAIL TX 620,643 635,643 - 635,643 -
CIRCLE K RETAIL CA 1,386,987 1,416,987 - 1,416,987 -
CIRCLE K RETAIL CA 1,386,641 1,416,641 - 1,416,641 -
STOP & GO RETAIL TX 988,882 1,003,882 - 1,003,882 -
STOP & GO RETAIL TX 976,496 991,496 - 991,496 -
STOP & GO RETAIL TX 819,047 834,047 - 834,047 -
APPLEBEE'S RESTAURANT KY 1,680,000 1,730,400 - 1,730,400 -
--------- --------- ---------- ------------ ------------
SUBTOTAL - COMMENCED LEASES 39,839,169 149,877,604 - 149,877,604 1,925,245
----------- ----------- ---------- ------------ ------------
<CAPTION>
<S> <C> <C> <C>
GOLDEN CORRAL 1997 CONSTRUCTION 40 YEARS
MICHAEL'S CRAFTS 1997 ACQUISITION 40 YEARS
BURGER KING 1997 CONSTRUCTION 40 YEARS
BLOCKBUSTER MUSIC 1997 ACQUISITION 40 YEARS
VIDEO UPDATE 1997 ACQUISITION 40 YEARS
VIDEO UPDATE 1997 ACQUISITION 40 YEARS
ARBY'S 1997 ACQUISITION 40 YEARS
DENNY'S 1997 CONSTRUCTION 40 YEARS
NISSAN 1997 ACQUISITION 40 YEARS
BMW 1997 ACQUISITION 40 YEARS
VIDEO UPDATE 1997 ACQUISITION 40 YEARS
DAMON'S 1997 ACQUISITION 40 YEARS
KENNY ROGERS 1997 ACQUISITION 40 YEARS
ROASTERS
KENNY ROGERS 1997 ACQUISITION 40 YEARS
ROASTERS
KENNY ROGERS 1997 ACQUISITION 40 YEARS
ROASTERS
BLOCKBUSTER VIDEO 1997 ACQUISITION 40 YEARS
WHATABURGER 1997 ACQUISITION 40 YEARS
HOOTERS 1997 ACQUISITION 40 YEARS
VIDEO UPDATE 1997 ACQUISITION 40 YEARS
VIDEO UPDATE 1997 ACQUISITION 40 YEARS
BURGER KING 1997 CONSTRUCTION 40 YEARS
BLOCKBUSTER VIDEO 1997 ACQUISITION 40 YEARS
TEXAS ROADHOUSE 1997 ACQUISITION 40 YEARS
CARINO'S 1997 ACQUISITION 40 YEARS
CARINO'S 1997 ACQUISITION 40 YEARS
BOSTON MARKET 1997 ACQUISITION 40 YEARS
BOSTON MARKET 1997 ACQUISITION 40 YEARS
BOSTON MARKET 1997 ACQUISITION 40 YEARS
BOSTON MARKET 1997 ACQUISITION 40 YEARS
ARBY'S 1997 ACQUISITION 40 YEARS
KEG STEAKHOUSE 1997 ACQUISITION 40 YEARS
KEG STEAKHOUSE 1997 ACQUISITION 40 YEARS
KEG STEAKHOUSE 1997 ACQUISITION 40 YEARS
KEG STEAKHOUSE 1997 ACQUISITION 40 YEARS
KEG STEAKHOUSE 1997 ACQUISITION 40 YEARS
BLOCKBUSTER VIDEO 1997 ACQUISITION 40 YEARS
BLOCKBUSTER VIDEO 1997 ACQUISITION 40 YEARS
SPORTMART 1997 ACQUISITION 40 YEARS
STOP & GO 1997 ACQUISITION 40 YEARS
CIRCLE K 1997 ACQUISITION 40 YEARS
STOP & GO 1997 ACQUISITION 40 YEARS
CIRCLE K 1997 ACQUISITION 40 YEARS
CIRCLE K 1997 ACQUISITION 40 YEARS
STOP & GO 1997 ACQUISITION 40 YEARS
STOP & GO 1997 ACQUISITION 40 YEARS
STOP & GO 1997 ACQUISITION 40 YEARS
APPLEBEE'S 1997 ACQUISITION 40 YEARS
SUBTOTAL - COMMENCED LEASES
</TABLE>
<TABLE>
<CAPTION>
CONSTRUCTION DRAWS ON LEASES
----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GOLDEN CORRAL RESTAURANT FL 1,008,000 947,884 - 947,884 -
GOLDEN CORRAL RESTAURANT NE 980,000 316,170 - 316,170 -
ARBY'S RESTAURANT GA - 661,431 - 661,431 -
TEXAS ROADHOUSE RESTAURANT CO - 552,371 - 552,371 -
CARINO'S RESTAURANT TX 806,400 599,477 - 599,477 -
ATHLETE'S FOOT RETAIL GA - 461,858 - 461,858 -
---------- -------- --------- -------- -------
SUBTOTAL - CONSTRUCTION DRAWS 2,794,400 3,539,191 - 3,539,192 -
---------- ---------- --------- ---------- --------
GRAND TOTAL - ALL REAL ESTATE LEASES 42,633,569 153,416,795 - 153,416,796 1,925,245
----------- ---------- --------- ------------ ----------
<CAPTION>
CONSTRUCTION DRAWS ON LEASES
----------------------------
<S> <C> <C> <C>
GOLDEN CORRAL 1997 CONSTRUCTION -
GOLDEN CORRAL 1997 CONSTRUCTION -
ARBY'S 1997 CONSTRUCTION -
TEXAS ROADHOUSE 1997 CONSTRUCTION -
CARINO'S 1997 CONSTRUCTION -
ATHLETE'S FOOT 1997 CONSTRUCTION -
SUBTOTAL - CONSTRUCTION DRAWS
GRAND TOTAL - ALL REAL ESTATE LEASES
</TABLE>
S-3
<PAGE> 56
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
PROPERTIES AND ACCUMULATED DEPRECIATION (CONTINUED)
Notes:
The changes in total properties for the years ended December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Balance, beginning of year $ 70,729,019 $ 15,639,317
Acquisitions 81,337,347 55,879,245
Increase in historical recorded value resulting
from merger 5,161,000
Dispositions and other (3,810,570) (789,543)
----------- ---------
Balance, end of year $153,416,796 $ 70,729,019
============ ============
</TABLE>
The changes in accumulated depreciation for the years ended December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance, beginning of year $ 553,988 $ 84,992
Depreciation expense 1,436,361 479,347
Dispositions and other (65,104) (10,351)
-------- --------
Balance, end of year $ 1,925,245 $ 553,988
=========== =========
</TABLE>
S-4
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 OCT-01-1997
<PERIOD-END> DEC-31-1997 SEP-30-1997 DEC-31-1997
<CASH> 3,528,129 753,937 3,528,129
<SECURITIES> 0 0 0
<RECEIVABLES> 22,475,326 19,393,663 22,475,326
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 25,299,505 19,422,377 25,299,505
<PP&E> 153,416,796 110,938,718 153,416,796
<DEPRECIATION> 1,925,245 1,564,772 1,925,245
<TOTAL-ASSETS> 181,701,968 134,424,189 181,701,968
<CURRENT-LIABILITIES> 4,149,642 1,994,958 4,149,642
<BONDS> 42,746,189 78,439,040 42,746,189
0 0 0
0 48,828,191 0
<COMMON> 95,081 9,803 95,081
<OTHER-SE> 134,711,056 5,152,197 134,711,056
<TOTAL-LIABILITY-AND-EQUITY> 181,701,968 134,424,189 181,701,968
<SALES> 0 0 0
<TOTAL-REVENUES> 13,543,718 9,278,379 4,265,339
<CGS> 0 0 0
<TOTAL-COSTS> 3,142,859 2,423,129 719,730
<OTHER-EXPENSES> 537,297 464,769 72,528
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 5,894,638 4,419,226 1,475,412
<INCOME-PRETAX> 3,968,924 1,971,255 1,997,669
<INCOME-TAX> 167,000 167,000 0
<INCOME-CONTINUING> 3,801,924 1,804,255 1,997,669
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,801,924 1,804,255 1,997,669
<EPS-PRIMARY> 1.92 0 0.20
<EPS-DILUTED> 1.92 0 0.20
</TABLE>
