<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to__
Commission file number: 1045281
CAPTEC NET LEASE REALTY, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
38-3368333
(IRS Employer Identification Number)
24 Frank Lloyd Wright Drive, Ann Arbor, Michigan 48106
(Address of principal executive offices, including zip code)
(734) 994-5505
(Registrant's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last year)
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 filing requirements
for the past 90 days. Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the registrant's classes of common equity, as of the
latest practicable date.
9,508,108 share of Common Stock, $.01 par value, outstanding as of
August 13, 1999.
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CAPTEC NET LEASE REALTY, INC.
AND SUBSIDIARIES
CONTENTS
ITEM NO. PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Consolidated Notes to Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II OTHER INFORMATION
Other Information 13 - 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, DECEMBER 31,
1999 1998
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,008,360 $ 4,488,565
Investments:
Properties subject to operating leases, net 219,507,442 221,349,661
Properties subject to financing leases, net 4,329,925 3,128,824
Loans to affiliates, collateralized by mortgage loans 4,466,588 8,915,523
Investment in joint venture 2,712,000 -
Investment in affiliated limited partnerships 4,395,000 4,395,000
Other loans, related party 398,322 405,775
------------ ------------
Total investments 235,809,277 238,194,783
Short-term loans to affiliates 6,954,229 2,505,294
Unbilled rent, net 5,013,950 3,710,487
Accounts receivable 184,952 144,642
Due from affiliates 774,080 1,242,675
Other assets 1,568,924 1,724,283
------------ ------------
Total assets $251,313,772 $252,010,729
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $114,550,582 $113,984,988
Accounts payable and accrued expenses 463,509 1,428,041
Due to affiliates - 76,513
Federal income tax payable 719,000 719,000
Security deposits held on leases 280,906 194,406
------------ ------------
Total liabilities 116,013,997 116,402,948
------------ ------------
Stockholders' Equity:
Common stock, ($.01 par value) authorized: 40,000,000
shares; issued and outstanding: 9,508,108 95,081 95,081
Paid in capital 134,711,056 134,711,056
Retained earnings 493,638 801,644
------------ ------------
Total stockholders' equity 135,299,775 135,607,781
------------ ------------
Total liabilities and stockholders' equity $251,313,772 $252,010,729
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Rental income from operating leases $ 6,214,835 $ 5,442,628 $ 12,219,913 $ 10,262,098
Earned income from financing leases 163,339 - 315,546 47,880
Interest income on loans to affiliates 311,016 459,914 630,371 937,860
Other income 359,337 510,077 918,328 788,385
------------ ------------ ------------ ------------
Total revenue 7,048,527 6,412,619 14,084,158 12,036,223
------------ ------------ ------------ ------------
Expenses:
Interest 2,243,787 1,344,283 4,483,667 2,414,604
Management fees, affiliates, net (7,515) 287,796 (75,528) 541,111
General and administrative 294,130 447,587 725,035 797,952
Depreciation and amortization 848,666 687,500 1,682,075 1,348,619
------------ ------------ ------------ ------------
Total expenses 3,379,068 2,767,166 6,815,249 5,102,286
------------ ------------ ------------ ------------
Net income before loss on sale of
properties and accounting change 3,669,459 3,645,453 7,268,909 6,933,937
Loss on sale of properties (10,446) (205,581) (61,419) (253,169)
------------ ------------ ------------ ------------
Net income before accounting change 3,659,013 3,439,872 7,207,490 6,680,768
Cummulative effect of accounting change - - (336,875) -
------------ ------------ ------------ ------------
Net Income $ 3,659,013 $ 3,439,872 $ 6,870,615 $ 6,680,768
============ ============ ============ ============
Basic and Diluted EPS:
Income before accounting change $ 0.38 $ 0.36 $ 0.76 $ 0.70
============ ============ ============ ============
Accounting change $ - $ - $ (0.04) $ -
============ ============ ============ ============
Net Income $ 0.38 $ 0.36 $ 0.72 $ 0.70
============ ============ ============ ============
Weighted average number of common shares
outstanding 9,508,108 9,508,108 9,508,108 9,508,108
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(unaudited)
<TABLE>
<CAPTION>
Total
Common Stock Paid-In Retained Stockholders'
-----------------------------
Shares Amount Capital Earnings Equity
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 9,508,108 $ 95,081 $ 134,711,056 $ 801,644 $ 135,607,781
Net Income - - - 6,870,615 6,870,615
Common stock dividends - - - (7,178,621) (7,178,621)
------------- ------------- ------------- ------------- -------------
BALANCE, JUNE 30, 1999 9,508,108 $ 95,081 $ 134,711,056 $ 493,638 $ 135,299,775
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,870,615 $ 6,680,768
Adjustments to net income:
Depreciation and amortization 1,682,075 1,348,619
Accounting change 336,875 -
Amortization of debt issuance costs 295,977 176,480
Loss on sale of property 61,419 253,169
Increase in unbilled rent (1,303,463) (1,045,532)
Decrease (increase) in accounts receivable and other assets (178,763) 226,463
Decrease in accounts payable and accrued expenses (964,532) (1,098,354)
------------ ------------
Net cash provided by operating activities 6,800,203 6,541,613
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties subject to operating leases (6,219,165) (66,468,325)
Acquisition of properties subject to financing leases, net (1,153,037) -
Advances on short-term loans to affiliates (4,448,935) (4,530,359)
Proceeds from the transfer of properties to
joint venture 3,385,972 -
Proceeds from the disposition of properties 2,936,896 1,093,613
Collections on loans to affiliates, collateralized by
mortgage loans 4,448,935 4,530,359
Collection of principal on other loans 7,453 712,975
Investment in corporate joint venture (2,712,000) -
Lease security deposits 86,500 52,514
------------ ------------
Net cash used in investing activities (3,667,381) (64,609,223)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock (7,178,621) (5,419,622)
Borrowings of notes payable 565,594 104,984,988
Debt issuance costs - (1,438,954)
Repayments of notes payable - (42,746,189)
------------ ------------
Net cash (used in) provided by financing activities (6,613,027) 55,380,223
------------ ------------
NET CASH FLOWS (3,480,205) (2,687,387)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,488,565 3,528,129
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,008,360 $ 840,742
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 4,848,712 $ 2,403,133
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION: Captec Net Lease Realty, Inc., a Delaware corporation
(the "Company"), which operates as a real estate investment trust
("REIT"), was formed in August 1997 to invest in high-quality
freestanding properties leased principally on a long-term triple-net
basis to national and regional and franchised restaurants and
retailers. The Company completed its initial public offering in
November 1997 and has subsequently operated as a REIT.
UNAUDITED INTERIM FINANCIAL INFORMATION: The consolidated balance sheet
as of June 30, 1999 and the consolidated statements of operations and
cash flows for the three and six months ended June 30, 1999 and 1998
have not been audited. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been reflected therein. Results of operations
for the interim periods are not necessarily indicative of results for
the full year. These unaudited financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Company's Annual Report for the year ended December 31, 1998 as
filed with the United States Securities and Exchange Commission on
March 30, 1999.
INVESTMENT IN CORPORATE JOINT VENTURE: During 1999 the Company has
invested in a 22.6% membership interest in FC Venture I, LLC ("FC
Venture"). The investment is accounted for under the equity method.
NEW PRONOUNCEMENTS: In June 1998 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
is effective for all quarters of all fiscal years beginning after June
15, 2000 (January 1, 2001 for the Company). The statement requires that
all derivative instruments be recorded at fair value on the balance
sheet with changes in fair value recorded each period in current
earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Management of the Company has not yet
determined the impact that the adoption of the statement will have on
the Company's earnings or statement of financial position.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". This statement requires start-up activities and
organization costs to be expensed as incurred. In accordance with the
provisions of the statement, the Company has recorded a $337,000
non-cash charge during the three months ended March 31, 1999 for the
balance of unamortized organization costs.
RECLASSIFICATIONS: Certain prior period financial statement amounts
have been reclassified to conform to the 1999 presentations.
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. 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 window periods during
the fifth to seventh lease years.
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's investment in real estate includes capitalized
acquisition and interest costs which have been allocated between land
and buildings and improvements on a pro rata basis. The net investment
in properties subject to operating leases as of June 30, 1999 is
comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Land $ 82,446,330
Buildings and improvements 134,133,488
Construction draws on properties 9,178,109
--------------
225,757,927
Less accumulated depreciation (6,250,485)
--------------
Total $ 219,507,442
==============
</TABLE>
The Company periodically invests in properties under construction. All
construction draws are subject to the terms of standard lease
agreements with the Company which fully obligates the tenant to the
long-term lease for all amounts advanced under construction draws. At
June 30, 1999 the Company had approximately $2.6 million of unfunded
commitments on properties under construction.
3. FINANCING LEASES:
The net investment in financing leases as of June 30, 1999 is comprised
of the following:
<TABLE>
<CAPTION>
<S> <C>
Minimum lease payments to be received $ 10,432,037
Estimated residual value -
------------
Gross investment in financing leases 10,432,037
Unearned income (6,102,112)
Net investment in financing leases $ 4,329,925
============
</TABLE>
4. NOTES PAYABLE:
The Company's credit facility, as amended (the "Credit Facility"),
provides up to $125 million for the acquisition of properties and
working capital. The Credit Facility has a three year term and is
subject to certain borrowing base restrictions. The Company had
approximately $114.6 million of aggregate outstanding borrowings under
the Credit Facility at June 30, 1999.
5. EARNINGS PER SHARE:
Stock options currently outstanding under the Company's Long-Term
Incentive Plan were excluded from the computation of diluted earnings
per share because their exercise price was in excess of the average
market price of the Common Stock during the three months ended June 30,
1999.
6. RELATED PARTY TRANSACTIONS:
The Company is party to an Advisory Agreement with Captec Net Lease
Realty Advisors, Inc. ("Captec Advisors") an affiliate, whereby the
Company pays to Captec Advisors a management fee. In December 1998 the
Advisory Agreement was amended to reduce the management fee to Captec
Advisors by the amount of acquisition and other fees paid directly to
Captec Advisors as a result of acquisitions made by affiliates of the
Company (which acquisition fees were previously paid to the Company).
During the six months ended June 30, 1999 the Company incurred
approximately $605,000 in management fees prior to reductions. Captec
Advisors earned approximately $680,000 of fees resulting in an equal
reduction in the management fee paid by the Company to Captec Advisors.
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUBSEQUENT EVENTS:
In July 1999, the Company declared dividends to its shareholders of
$3,613,081, or $0.38 per share of Common Stock, which was paid on July
15, 1999.
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ITEM 2. 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
responsibility for all operating costs and expense of the property,
including the costs of repairs, maintenance, real property taxes,
assessments, utilities and insurance. The Company's triple-net leases
(the "Leases") typically provide for minimum rent plus specified fixed
periodic rent. Other revenues are derived primarily from interest
income on loans to affiliates and fee income earned from affiliates.
As of June 30, 1999, the Company owned 160 properties, located in 30
states, subject to long-term net Leases with 55 different lessors (the
"Lessees") under major restaurant and retail concepts including
Bennigan's, Applebee's, Denny's, Best Buy, Athlete's Foot, Blockbuster
Video, and Office Depot.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999. During the three months ended June
30, 1999 (the "Quarter") total revenue increased 10% to $7.0 million as
compared to $6.4 million for the three months ended June 30, 1998 (the
"1998 Quarter"). Rental revenue from operating leases for the Quarter
increased 14% to 6.2 million as compared to $5.4 million for the 1998
Quarter primarily from the benefit of a full period of rental revenue
from properties acquired and leased in preceeding periods, offset by
the elimination of rental revenues related to vacant properties. Earned
income from financing Leases for the Quarter increased to $163,000 as
compared to $0 for the 1998 Quarter as a result of the addition of
four financing leases that began lease payments on January 1, 1999.
Interest income on loans to affiliates decreased 32% to $311,000 for
the Quarter as compared to $459,000 for the 1998 Quarter as a result of
principal payments received on loans to affiliates in preceeding
periods. Interest and other income decreased 30% to $359,000 for the
Quarter as compared to $510,000 for the 1998 Quarter primarily due to
offsetting reductions in management fees paid to Captec Advisors (see
Note 6 of the Financial Statements).
Interest expense for the Quarter increased 67% to $2.2 million as
compared to $1.3 million for the 1998 Quarter. The increase was
principally due to the increased borrowings under the Credit Facility
used to fund the acquisition and development of properties. General and
administrative expenses, including management fees to affiliates,
decreased 61% to $287,000 for the Quarter as compared to $735,000 for
the 1998 Quarter primarily due to offsetting reductions in management
fees to affiliates due to acquisitions and other fees earned by Captec
Advisors (see Note 6 of the Financial Statements). Depreciation and
amortization increased 23% to $849,000 for the Quarter as compared to
$688,000 for the 1998 Quarter, 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 preceeding periods.
The Company sold two properties during the Quarter, collecting gross
proceeds of $2.5 million and reflecting a loss of $10,000 on the sale
of these properties.
As result of the foregoing, the Company's net income increased 6% to $
3.7 million for the Quarter as compared to $3.4 million for the 1998
Quarter.
SIX MONTHS ENDED JUNE 30, 1999. During the six months ended June 30,
1999 total revenue increased 17% to $14.1 million as compared to $12.0
million for the six months ended June 30, 1998. Rental revenue from
operating leases for the six months ended 1999 increased 19% to 12.2
million as compared to $10.2 million for the six months ended 1998
primarily from the benefit of a full period of rental revenue from
properties acquired and leased in preceeding periods, offset by the
elimination of rental revenues related to vacant properties. Earned
income from financing leases for the six months ended 1999 increased to
$316,000 as compared to $48,000 for the six months
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ended 1998 as a result of the addition of four financing leases that
began lease payments on January 1, 1999. Interest income on loans to
affiliates decreased 33% to $630,000 for 1999 as compared to $938,000
for 1998 as a result of principal payments received on loans to
affiliates in preceeding periods. Interest and other income increased
16% to $918,000 for the six months ended 1999 as compared to $788,000
for the six months ended 1998 primarily due to fee income earned from
affiliates.
Interest expense for the six months ended 1999 increased 86% to $4.5
million as compared to $2.4 million for the six months ended 1998. The
increase was principally due to the increased borrowings under the
Company's Credit Facility used to fund the acquisition and development
of properties. General and administrative expenses, including
management fees to affiliates, decreased 49% to $650,000 for the six
months ended 1999 as compared to $1.3 million for the six months ended
1998 primarily due to offsetting reductions in management fees to
affiliates due to acquisitions and other fees earned by Captec Advisors
(see Note 6 of the Financial Statements). Depreciation and amortization
increased 25% to $1.7 million for the six months ended 1999 as compared
to $1.3 million for the six months ended 1998, 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
preceeding periods.
The Company sold three properties during the six months ended 1999,
collecting gross proceeds of $2.9 million and reflecting a loss of
$61,000 on the sale of these properties.
As result of the foregoing, the Company's net income before accounting
change increased 8% to $7.2 million for the six months ended 1999 as
compared to $6.7 million for the six months ended 1998.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". This statement requires start-up activities and
organization costs to be expensed as incurred. In accordance with the
provisions of the statement, the Company has recorded a $336,875
non-cash charge during the three months ended March 31, 1999 for the
balance of unamortized organization costs which resulted in net income
for the six months ended 1999 of $6.9 million.
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. The Company anticipates
that cash flows from operating activities will continue to provide
adequate capital for interest expense, operating expenses and dividend
payments in accordance with REIT requirements. Property acquisition and
development has been typically funded out of proceeds from borrowings
available under the Credit Facility. The Company expects to obtain the
necessary capital to achieve continued growth (principally property
development and acquisition) through cash on hand, borrowings available
under the Credit Facility, as well as other debt and equity
alternatives, including joint venture capital.
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
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 properties other than
potential costs of re-leasing vacant properties.
At June 30, 1999 the Company had cash and cash equivalents of $1.0
million. For the six months ended June 30, 1999 the Company generated
cash from operations of $6.8 million as compared to $6.5 million for
the same period in 1998. Cash generated from operations provides funds
for interest expense, operating expenses and distributions to
shareholders in the form of quarterly dividends. Any excess cash from
operations may also be used for investment in properties.
CREDIT FACILITY. In February 1998, the Company entered into the Credit
Facility, which is used to provide funds for the acquisition and
development of properties and working capital, and repaid all amounts
outstanding
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under a prior credit facility. On December 1, 1998 the Credit Facility
was amended to provide up to $125 million of debt which is secured by
the Company's properties. At June 30, 1999 the Company had $114.6
million of aggregate outstanding borrowings under the Credit Facility.
The Credit Facility has a three year term and the revolving credit
borrowings are subject to borrowing base restrictions. The Credit
Facility is subject to 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
Credit Facility bears interest at an annual rate of LIBOR plus a spread
ranging from 1.25% to 1.75%, set quarterly depending on the Company's
leverage ratio, or at the Company's option, the lender's base rate. In
connection with the Credit Facility the Company incurred issuance costs
of $1.7 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 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.
JOINT VENTURE. In April 1999, the Company , through a wholly-owned
subsidiary, formed a joint venture with an affiliate of Fidelity
Management Trust Company ("Fidelity"). The joint venture was formed to
acquire and develop net-leased restaurant and retail properties similar
to those which the Company acquires and develops. The Company and
Fidelity have committed to provide $7 million and $24 million,
respectively, in equity capital for the joint venture. The joint
venture's objective is to leverage its capital through borrowing to
acquire and develop up to $100 million in properties. At June 30, 1999
the Company had contributed $2.7 million in equity capital.
PROPERTY ACQUISITIONS AND COMMITMENTS. During the six months ended June
30, 1999 the Company invested $7.4 million to acquire and develop its
properties and transferred to the joint venture as part of the initial
capital contribution two properties with costs of $3.4 million. As of
June 30, 1999, the Company had entered into commitments to acquire or
develop 74 properties totaling $160 million. The commitments are
subject to various conditions to closing which are described in the
contracts or letters of intent relating to these properties. In
addition, in the ordinary course of business the Company is in
negotiations regarding the proposed acquisition of other properties and
related co-development opportunities. The Company may enter into
commitments to acquire or develop some of these prospective properties
in the future. The Company expects to finance its acquisition and
development commitments through cash on hand, borrowings under the
Credit Facility as well as other debt and equity alternatives,
including joint venture capital.
Property acquisition commitments are expected to generate the primary
demand for additional capital in the future.
DIVIDENDS. The Company intends to pay a regular quarterly dividend on
its common stock of $.38 per share (which if annualized would be $1.52
per share). Dividends of $3,613,081 were paid on July 15, 1999 related
to the second quarter declared dividend. The Company expects to pay
future dividends from cash available for distributions. The Company
believes that cash from operations will be sufficient to allow the
Company to make distributions necessary to enable the Company to
continue to qualify as a REIT.
YEAR 2000
The Year 2000 issue is a result of the way computer programs manipulate
date information based on a two-digit year ("99" instead of "1999").
The issue is that the "00" year designation can potentially cause
miscalculations or failures within the computer system if "00" is
misinterpreted as the year 1900 instead of the year 2000. These
failures could potentially lead to temporary disruption of operations
and the inability to conduct normal business activities.
The Company predominantly uses standard application software supported
by third party vendors. Information has been obtained from key
third-party financial software vendors that comprise the core business
applications
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indicating the core software systems are currently Year 2000 compliant.
The Company is in the process of obtaining Year 2000 compliance updates
from its key business partners, such as financial institutions and
Lessees, to assess their Year 2000 readiness. Upon completion of the
assessment process, a strategy on how to address each partner will be
developed based on the relative importance of each relationship.
Documentation regarding the state of readiness of business partners
will be compiled as the assessment progresses.
The Company's major software applications are currently Year 2000
compliant, and the core computing infrastructure including personal
computers and network server hardware and software are all compliant.
Therefore, the Company does not anticipate the total cost of Year 2000
compliance will have a material adverse effect on the Company's
business or results of operations. The Company has incurred minimal
costs to date related to Year 2000 compliance.
The failure to identify and correct material Year 2000 problems
adequately could result in an interruption to or failure of certain
normal business activities or operations. These interruptions or
failures could adversely affect the Company's financial condition;
however, the extent of the impact can not presently be determined. The
Company is dependent upon the Year 2000 readiness information provided
by its vendors and external business partners, and their ability to
achieve Year 2000 compliance with their computer systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting of shareholders (the "Meeting") on
June 3, 1999. The Company's shareholders elected Patrick L. Beach, W.
Ross Martin, H. Reid Sherard, Richard J. Peters, Creed L. Ford, III,
William H. Krul, II, Lee C. Howley, Albert T. Adams and William J.
Chadwick (collectively, the "Nominees") to the Company's Board of
Directors. The following lists the number of shares of Common Stock
voted for and withheld from each of the Nominees.
<TABLE>
<CAPTION>
VOTES
NOMINEES VOTES FOR WITHHELD
<S> <C> <C>
Patrick L. Beach 8,464,159 50,067
W. Ross Martin 8,464,159 50,067
H. Reid Sherard 8,464,159 50,067
Richard J. Peters 8,464,159 50,067
Creed L. Ford, II 8,464,159 50,067
William H. Krul, II 8,464,159 50,067
Lee C. Howley 8,464,159 50,067
Albert T. Adams 8,464,159 50,067
William J. Chadwick 8,464,159 50,067
</TABLE>
13
<PAGE> 14
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 10.14 FC Venture I, LLC Limited
Liability Company Agreement*
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Registrant filed the following Current Reports on Form
8-K during the three months ended June 30, 1999:
Current Report on Form 8-K dated April 12, 1999 included
information regarding the formation of a joint venture, FC
Venture I, LLC, with an affiliate of Fidelity Management
Trust Company.
---------------
* Incorporated by reference from the Company's Current Report
on Form 8-K filed with the Commission on April 22, 1999.
FORWARD LOOKING STATEMENTS
This Form 10-Q 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, plans, growth
and strategies. Any statements contained in this Form 10-Q 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," intend," "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.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CAPTEC NET LEASE REALTY, INC.
August 13, 1999 By: /s/ Patrick L. Beach
---------------------
Patrick L. Beach
Chief Executive
Officer and President
August 13, 1999 By: /s/ W. Ross Martin
---------------------
W. Ross Martin
Chief Financial
Officer and Executive
Vice President
15
<PAGE> 16
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
10.14 FC Venture I, LLC Limited Liability Company
Agreement*
27.1 Financial Data Schedule
- -----------
* Incorporated by reference from the Company's Current Report on Form 8-K filed
with the Commission on April 22, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,008,360
<SECURITIES> 0
<RECEIVABLES> 12,778,171
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,921,621
<PP&E> 225,757,927
<DEPRECIATION> (6,250,485)
<TOTAL-ASSETS> 251,313,772
<CURRENT-LIABILITIES> 744,415
<BONDS> 114,550,582
0
0
<COMMON> 95,081
<OTHER-SE> 135,204,694
<TOTAL-LIABILITY-AND-EQUITY> 251,313,772
<SALES> 0
<TOTAL-REVENUES> 14,084,158
<CGS> 0
<TOTAL-COSTS> 2,331,582
<OTHER-EXPENSES> 61,419
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,483,667
<INCOME-PRETAX> 7,207,490
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,207,490
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (336,875)
<NET-INCOME> 6,870,615
<EPS-BASIC> .72
<EPS-DILUTED> .72
</TABLE>
