CAPTEC NET LEASE REALTY INC, 10-K/A, 1999-04-09

CAPTEC NET LEASE REALTY INC
10-K/A, 1999-04-09
REAL ESTATE INVESTMENT TRUSTS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A

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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

<TABLE>
<S> <C>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER
1045281
</TABLE>

CAPTEC NET LEASE REALTY, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 38-3368333
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
24 FRANK LLOYD WRIGHT DRIVE
ANN ARBOR, MICHIGAN 48106
(Address of Principal Executive Office) (Zip Code)
</TABLE>

(734) 994-5505
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
NAME OF EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
<S> <C>
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:

$125,189,455 based on the average bid price of the
Common Stock on March 1, 1999

The number of shares of Common Stock, par value $.01 per share, outstanding
as of March 1, 1999: 9,508,108
DOCUMENTS INCORPORATED BY REFERENCE:

Part III, Items 10, 11, 12, and 13 are incorporated by reference to the
definitive proxy statement for the Registrant's Annual Meeting of Stockholders
to be held June 3, 1999, to be filed pursuant to Regulation 14A.
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PART I

ITEM 1. BUSINESS

BACKGROUND. 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 and
retailers (the "Lessees"). Triple-net leases generally impose on the lessee
responsibility for all operating costs and expenses of the property, including
the costs of repairs, maintenance, real property taxes, assessments, utilities
and insurance. The Company's 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 the investment
in affiliated partnerships.

The Company completed an 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. 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.

PROPERTIES. As of December 31, 1998, the Company had a portfolio of 163
properties (the "Existing Properties") located in 30 states, with a cost basis
of $229.1 million. The Existing Properties are leased to 41 operators of 27
distinct restaurant concepts such as Bennigan's, Applebee's, and Denny's and 16
retailers such as Athlete's Foot, Blockbuster Video and Office Depot. The
restaurant and retail markets represented approximately 70.9% and 29.1%,
respectively, of the annualized total revenue from the Existing Properties as of
December 31, 1998.

As of December 31, 1998, leases to a single Lessee represent 13.6% of
annualized total revenue from the Existing Properties, and the next highest
single Lessee represents 4.0% of annualized total revenue from the Existing
Properties. As of December 31, 1998, Leases to a Bennigan's operator represented
8.3% of annualized total revenue from the Existing Properties. Any default under
these leases or a material adverse change in the popularity of Bennigan's
restaurants could have a material adverse effect on the financial condition of
the Company.

In addition to the Existing Properties, as of December 31, 1998 the Company
had entered into commitments to acquire 51 properties for an aggregate cost of
$97.0 million (the "Acquisition Properties"). 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 triple-net Lease, the Lessee is responsible for all operating
costs and expenses of the property, including costs of repairs, maintenance,
real property taxes, assessments, utilities and insurance. The Leases generally
provide for minimum rent plus specified fixed periodic rent increases. 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 ADVISOR. The Company has retained Captec Net Lease Realty Advisors,
Inc. ("Captec Advisors"), an affiliate, which, together with Captec Financial
Group, Inc. ("Captec Financial"), an affiliate (Captec Advisors and Captec
Financial are 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
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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 1998, Captec Financial had 82
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 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"). Under the
terms of the Advisory Agreement, the Company pays 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. The Company also pays Captec Advisors an
incentive fee equal to 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 is also subject to cost reimbursements to Captec
Advisors in an amount equal to all costs incurred in the acquisition of
properties. The sum of the incentive fee and the cost reimbursement cannot
exceed 3.0% of the acquisition cost of properties identified by the Advisor and
acquired during the term of the Advisory Agreement. In December 1998 the
Advisory Agreement was amended retroactive to January 1, 1998 (the "Amendment").
The effect of the Amendment was to reduce the management fee to Captec Advisors
by the amount of acquisition fees paid directly to Captec Advisors as a result
of acquisitions made by the Partnerships (see INVESTMENT IN PARTNERSHIPS below)
or Family Realty, Inc. (see INVESTMENTS IN AFFILIATES below).

The Advisory Agreement expires on December 31, 1999, 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. Historically,
the Company has not had a large enough asset base to provide the economies of
scale necessary for the Company to be self-administered and self-managed. As a
result of the Company's historical and anticipated growth, management believes
that the efficiencies derived from being externally advised have diminished.
Consequently, in December 1998 the Company formed a sub-committee of its board
of directors to explore the possibility of becoming self-administered and
self-managed.

INVESTMENTS IN PARTNERSHIPS. In August 1998 the Company purchased the
general partnership interests in Captec Franchise Capital Partners L.P. III, and
Captec Franchise Capital Partners L.P. IV (collectively the "Partnerships"),
which are engaged in substantially the same business as the Company. Pursuant to
the terms outlined in the Amended and Restated Agreement of Limited Partnership
between the Company and the Partnerships, the Company receives an acquisition
fee equal to 5.0% of the aggregate purchase price of properties and an asset
management fee equal to 1.0% of gross rental revenues from the Partnerships'
properties and equipment. In connection with the Amendment, the Amended and
Restated Agreements of Limited Partnership were amended retroactive to January
1, 1998. The effect of the amended agreements is to provide a 2.0% acquisition
fee of the aggregate purchase price of properties to the Company from the
Partnerships and a 3.0% acquisition fee of the aggregate purchase price of
properties to Captec Advisors from the Partnerships, for which the Company
receives an equal reduction in management fee expense to the
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Advisor. Cash flows of the Partnerships are allocated 99.0% to the limited
partners and 1.0% to the Company. Net sale or refinancing proceeds of the
Partnership will be allocated 90.0% to the limited partners and 10.0% to the
Company. The Company will also receive liquidation fees limited to the lesser of
3.0% of the gross sales price or 50.0% of the customary real estate commissions
in the event of a real estate liquidation by the Partnerships. The cash flow,
liquidation fees, and net sale proceeds to the Company are subordinated to an
10.5 and 11.0% preferred return for Captec Franchise Capital Partners L.P. IV
and Captec Franchise Capital Partners L.P. III, respectively, plus return of the
original capital contributions to the limited partners.

INVESTMENTS IN AFFILIATES. Family Realty, Inc. ("Family Realty") was formed
in 1998 to invest in net-leased entertainment-based retail properties, such as
state of the art stadium style seating movie theaters, bowling centers and ice
arenas. These type of entertainment-based properties are being developed to
increase the destination appeal of retail centers and expand consumer traffic by
merging entertainment, restaurant and retail concepts into a single location. As
part of the operations of Family Realty, the freestanding restaurant and retail
properties that are often part of these developments could be separately
acquired by the Company on favorable terms. An institutional investor has
provided $30.0 million of equity capital for Family Realty. Family Realty's
objective is to utilize capital and third party borrowings to acquire up to $100
million in properties. The Company owns a 60.0% non-voting ownership in Family
Realty and will receive a quarterly asset management fee, beginning in 1999,
based on a percentage of Family Realty's portfolio. Family Realty is obligated
to pay acquisition fees of 4.0% to CNLR Development Inc. ("Development"), a
subsidiary of the Company. Captec Advisors earns an advisory fee from
Development up to 50.0% of the acquisition fees earned by Development from
Family Realty, which provides for an equal reduction in management fee expense
to the Company.

OPERATIONS

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. Lessees that are deemed creditworthy
are those Lessees that are most capable of meeting the obligations of a Lease
over the term of the Lease. By acting in tandem with Captec Financial as a
value-added provider of capital to restaurant operators, the Company purchases
properties at below "retail" market value and thus realizes above market
returns.

Acquisitions from Developers. The Company has developed strategies for
property acquisitions in the retail industry principally focused on establishing
alliances with select retail developers. By developing these alliances, the
Company establishes mutually beneficial, rather than competitive, relationships
with developers, which increases the Company's supply of retail acquisition
opportunities and provides the Company with below market purchase prices and
above market lease yields.

Underwriting Restaurant Chains and Retailers. 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
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 it directs 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
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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.

Underwriting Lessee Credit. The Lessees predominantly are experienced,
multi-unit operators of fast-food, family-style and casual dining restaurants
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. Lessees that are deemed
creditworthy are those Lessees that are most capable of meeting the obligations
of a Lease over the term of the Lease. 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 creditworthiness 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) evaluates both the
current and potential alternative use of the property; and (iii) 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. 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. If 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.

All of the Company's operations are conducted in the United States. The
Company's operations historically have not been seasonal.

COMPETITION. The restaurant and retail finance industry is intensely
competitive and fragmented. The Company believes that competition for the
acquisition of restaurant properties is fragmented among large public
corporations, private companies and individuals. The Company competes with other
restaurant and retail finance companies (some of which are REITs), commercial
banks, other financial institutions and certain franchisors that offer financing
services directly to their franchisees. Based upon the knowledge of this

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industry and assessment of other REITs, the Company considers Franchise Finance
Corporation of America, Realty Income Corporation and Commercial Net Lease
Realty, Inc. to be its primary competitors among REITs. The Company believes
that it has several key competitive advantages that enable it to compete
favorably for property acquisitions, including the Company's ability to "bank"
the chain restaurant industry in tandem with Captec Financial. The Company and
its affiliates 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. In addition, the
Company has established alliances with select retail developers which allows the
Company to compete favorably for development contracts directly with certain
retailers, providing retailers with the combination of a nationwide network of
select developers and a complete financing commitment.

ENVIRONMENTAL MATTERS. 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.

EMPLOYEES. Reference is made to Item 10. "Directors and Executive Officers
of the Registrant" for a listing of the Company's Executive Officers. Other than
the persons listed therein, the Company has no employees.

FINANCIAL INFORMATION. See the Company's financial statements included in
this Form 10-K (the "Financial Statements") for a statement of the Company's
revenues, profits and total assets. All of the Company's revenues from external
customers for the fiscal year ended December 31, 1998 may be attributed to, and
all of its long-term assets are located in, the United States.

ITEM 2. PROPERTIES

EXISTING PROPERTIES. As of December 31, 1998 the Company's portfolio
consisted of 163 properties located in 30 states, which were leased to 41
operators of 27 distinct restaurant concepts and 16 retail concepts. The
Existing Properties averaged 5.1 years of age and were subject to Leases with an
average remaining term (excluding renewals) of approximately 17.2 years.
Investments in individual properties ranged from $587,000 to $6.8 million and
the total investment in the Existing Properties (excluding accumulated
depreciation) was $229.1 million. The size of facilities located on the Existing
Properties ranged from 2,400 to 78,400 square feet and the Existing Properties
aggregated approximately 1,009,000 square feet. The Existing Properties include
nine properties which presently are under construction, for which the Company
had invested $12.9 million and had remaining commitments totaling $11.2 million.
The following table sets forth certain information concerning the Existing
Properties as of December 31, 1998.

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<TABLE>
<CAPTION>
ANNUALIZED % OF TOTAL
FACILITY NO. OF NO. OF LOCATION ACQUISITION REVENUE AT ANNUAL
CONCEPT TYPE PROPERTIES LESSEES(1) (STATE) COST DEC. 31, 1998 REVENUE
------- -------- ---------- ---------- -------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES SUBJECT TO OPERATING LEASES:
Bennigan's.............. Restaurant 10 1 CO,CT,FL,IL,MI, $ 18,022,089 $ 2,126,152 8.3%
NC,OK,TX
Boston Market........... Restaurant 13 4 IL,MI,NC,OH,PA,WI 14,907,125 1,610,477 6.3
Red Robin............... Restaurant 4 3 CO,OH,WA 10,590,709 1,559,803 6.1
Steak & Ale............. Restaurant 8 1 FL,IN,OK,TX,VA 11,593,288 1,367,722 5.3
Black Angus............. Restaurant 4 1 MN 9,689,373 1,005,108 3.9
Applebee's.............. Restaurant 5 3 KY,MO,OH,WA 8,801,628 1,128,576 4.4
Denny's................. Restaurant 9 3 AZ,FL,LA,NC,TX 8,980,768 1,030,692 4.0
Arby's.................. Restaurant 10 4 CO,GA,IN,MI, 8,049,844 940,636 3.7
NM,OH,OR
Blockbuster Video....... Retail 8 1 AL,GA,KY,SC,TX 7,683,919 834,379 3.3
Golden Corral........... Restaurant 4 4 FL,NE,TX 7,442,156 836,347 3.3
Keg Steakhouse.......... Restaurant 5 1 OR,WA 6,648,343 806,832 3.1
BMW..................... Auto Dealer 1 1 GA 7,115,013 709,200 2.8
Video Update............ Retail 5 1 AZ,IL,MN,MO,NM 6,080,149 741,135 2.9
Sportmart............... Retail 1 1 IL 6,097,908 654,450 2.6
Jared Jewelers.......... Retail 1 1 VA 2,069,280 261,515 1.0
Carino's................ Restaurant 3 1 TX 5,478,135 630,160 2.5
Carrows................. Restaurant 4 1 CA 4,855,722 603,927 2.4
Stop & Go............... Retail 5 1 TX 4,318,664 532,126 2.1
Circle K................ Retail 3 1 CA,GA 4,064,366 494,449 1.9
Jack In The Box......... Restaurant 4 1 AZ,CA,TX 4,553,993 489,963 1.9
Mountain Jack's......... Restaurant 3 1 MI,OH 4,314,971 506,393 2.0
Hollywood Video......... Retail 4 1 CO,GA,OH 3,199,373 371,483 1.4
Texas Roadhouse......... Restaurant 2 1 CO 3,030,989 376,008 1.5
Nissan.................. Auto Dealer 1 1 GA 3,250,023 323,952 1.3
Babies R Us............. Retail 1 1 MO 3,157,534 335,347 1.3
Claim Jumper............ Restaurant 2 1 AZ 2,990,708 345,427 1.3
Kona Steakhouse......... Restaurant 2 1 TX 2,759,758 332,325 1.3
Office Depot............ Retail 1 1 GA 2,821,785 305,732 1.2
Michael's Crafts........ Retail 1 1 MD 2,770,281 308,871 1.2
Stanford's.............. Restaurant 1 1 CO 2,427,861 316,995 1.2
Edward Bros./Best Buy... Retail 1 1 CA 2,213,144 261,383 1.0
Rite Aid................ Retail 1 1 CA 2,248,750 267,096 1.0
Schlotzsky's Deli....... Restaurant 3 1 AZ 2,621,272 258,968 1.0
Burger King............. Restaurant 2 2 VA,WV 2,095,925 262,700 1.0
East Side Mario's....... Restaurant 1 1 OH 1,820,000 246,823 1.0
Athlete's Foot.......... Retail 1 1 GA 1,691,947 196,588 0.8
Damon's................. Restaurant 1 1 AZ 1,429,445 161,483 0.6
Blockbuster Music....... Retail 1 1 AL 1,526,653 155,402 0.6
Roadhouse Grill......... Restaurant 1 1 NY 1,048,395 149,970 0.6
Perkins................. Restaurant 1 1 FL 956,704 110,999 0.4
Popeye's................ Restaurant 1 1 GA 877,941 101,538 0.4
Hooters................. Restaurant 1 1 FL 1,048,870 71,050 0.3
Whataburger............. Restaurant 1 1 NM 948,067 71,262 0.3
Vacant.................. Restaurant 19 0 FL,GA,IL,IN,MI,NJ, 17,719,001 -- 0.0
NM,OR,PA,TX,WA
--- -- ------------ ----------- -----
160 59 $226,011,869 $24,201,444 94.4%
--- -- ------------ ----------- -----
PROPERTIES SUBJECT TO FINANCING LEASES:
Jared Jewelers.......... Retail 3 1 AZ,FL $ 3,128,824 $ 412,848 1.6%
--- -- ------------ ----------- -----
Total Annualized Rental Revenue..... 163 60 $229,140,693 $24,614,292 96%
=== == ============ =========== =====
Annualized Total
Revenue $25,633,519 100%
=========== =====
</TABLE>

<TABLE>
<CAPTION>
% OF TOTAL ANNUALIZED % OF TOTAL
NO. OF NO. OF NO. OF ACQUISITION ACQUISITION REVENUE AT ANNUALIZED
SEGMENT CONCEPTS PROPERTIES LESSEES(1) COST COST DEC. 31, 1998 REVENUE
------- -------- ---------- ---------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SEGMENT INFORMATION:
Restaurant............... 27 124 41 71.5 $163,883,079 $17,448,335 70.9%
Retail................... 16 39 13 28.5 65,257,614 7,165,957 29.1
------------ --- -- ------------------ ------------ ----------- -----
43 163 54 100.0 $229,140,693 $24,614,292 100.0%
============ === == ================== ============ =========== =====
</TABLE>

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(1) Certain Lessees lease properties under more than one concept, and therefore
the number of Lessees totaled by concept exceeds the number of actual
Lessees (54).
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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. 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.

During the term of a Lease, the Lessee pays the Company rent on a monthly
basis. Leases generally provide for automatic, fixed increases in the rent at
predetermined intervals during the Lease term. As of December 31, 1998, the net
weighted average capitalization rate (annual minimum rent divided by the total
property investment, including acquisition cost) for the Existing Properties was
10.4% and the weighted average annualized rate of automatic fixed increases in
the minimum annual rent was 2.0%. In accordance with generally accepted
accounting principles ("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. As of December 31, 1998, the net
weighted average straight-line capitalization rate (annual straight-line rental
revenue divided by the total property investment, including capitalized
acquisition cost) was 11.9% for the Existing Properties. Under the terms of the
Company's triple-net Leases, the Lessees are responsible for all operating costs
and expenses 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 $0 in 1998 and $5,000 in 1997.

7
<PAGE> 9

The following table sets forth as of December 31, 1998, scheduled Lease
expirations for the Existing Properties. Only 7.8% of the Company's Leases are
scheduled to expire during the next 10 years (assuming no renewals).

<TABLE>
<CAPTION>
NUMBER OF
YEAR OF LEASES TOTAL PERCENTAGE OF
EXPIRATION(1) EXPIRING ANNUAL RENTS(2) TOTAL RENTAL
------------- --------- --------------- -------------
<S> <C> <C> <C>
1999-2003................................. -- $ -- 0.0%
2004...................................... 1 600,000 2.7
2005...................................... 1 78,464 0.4
2006...................................... 3 322,856 1.5
2007...................................... 7 678,310 3.2
2008...................................... -- -- --
2009 and thereafter....................... 151 19,811,206 92.2
--- ----------- -----
Total................................... 163 $21,490,836 100.0%
=== =========== =====
</TABLE>

- -------------------------
(1) Assumes no early termination due to exercise of purchase options, defaults
or otherwise.

(2) Based upon monthly rent as of December 31, 1998, as annualized and without
giving effect to any future rent increases or percentage rent.

OCCUPANCY AND LEASE PERFORMANCE. As of December 31, 1998, 144 of the 163
Existing Properties were subject to Leases which were performing. The 19 vacant
properties, comprised of 14 properties formerly leased to Boston Chicken, Inc.
and its franchisees ("Boston Chicken"), three other properties and two modular
buildings, represent 7.7% of the total investment in the Existing Properties.
The Company is actively remarketing 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. In 1998, the
Company recorded an impairment loss of $445,000 for the two vacant modular
buildings held for sale. Management believes that estimated future cash flows
(undiscounted and without interest charges) from the other vacant properties
will be in excess of the carrying amount of these properties.

In October 1998, Boston Chicken and the majority of its subsidiaries filed
for Chapter 11 bankruptcy protection. As a consequence, 14 of the Company's
Boston Chicken leases were rejected and classified as vacant as of December 31,
1998. Boston Chicken and its affiliates operating in Chapter 11 collectively
agreed to assume the Leases on 12 other properties with slightly modified terms
that will result in no material effect on FFO. The Company has one additional
lease to a Boston Chicken affiliate that is not in bankruptcy and which is fully
performing.

PROPERTY AND LEASE CONCENTRATIONS. The Existing Properties are leased to
operators of 43 distinct restaurant and retail concepts or brands. As of
December 31, 1998, Leases to the franchisor of Bennigan's restaurants represent
8.3% of annualized total revenue from the Existing Properties, and the next
highest "concept concentration" was 6.3%.

The Existing Properties are leased to 54 different Lessees. As of December
31, 1998, leases to S&A Properties, Inc., which operates Bennigan's and Steak &
Ale restaurants, represent 13.6% of annualized total revenue from the Existing
Properties, and the next highest single Lessee represents 4.0% of annualized
total revenue from the Existing Properties. No single property contributed more
than 4.0% of annualized total revenue from the Existing Properties. Of the
Existing Properties, 124 are restaurant properties leased to 41 different
Lessees representing 72.3% of the Company's investment in properties and 39 are
retail properties leased to 13 different Lessees representing 27.7% of the
Company's investment in properties.

The Company invests in restaurant and retail properties throughout the
United States. The Existing Properties generally are well diversified
geographically across 30 states with a maximum "geographic concentration" in
Texas equal to 11.6% of the Company's investment in the Existing Properties. No
other geographic concentrations exceed 10.0% of the Company's investment in the
Existing Properties.

8
<PAGE> 10

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.

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, 1998.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS

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. The following table sets forth the high and low sales prices
per share as quoted on the Nasdaq National Market System and dividends declared
by the Company related to the following quarters of the fiscal years indicated:

<TABLE>
<CAPTION>
SALES PRICES
---------------------- DIVIDENDS
FISCAL 1998 HIGH LOW DECLARED
- ----------- ---- --- ---------
<S> <C> <C> <C>
Fourth Quarter............................................. $15.125 $11.125 $ .375
Third Quarter.............................................. 15.9375 12.00 .375
Second Quarter............................................. 17.125 14.625 .375
First Quarter.............................................. 17.875 17.00 .375
------
$1.50
======
FISCAL 1997
- -----------
Fourth Quarter*............................................ $18.063 $15.50 $ .195
======
</TABLE>

- -------------------------
* In association with the Offering, the Company paid accrued quarterly dividends
on its redeemable preferred stock.

As of March 1, 1999 there were 73 record holders of the Common Stock.

On January 15, 1999, the Company paid a dividend of $0.375 per share to
stockholders of record on January 5, 1999. 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.

ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth selected historical operating and financial
data for the Company as of December 31, 1998, 1997, 1996 and 1995 and for each
of the years then ended and have been derived from the financial statements of
the Company, audited by PricewaterhouseCoopers LLP, independent public
accountants.

The pro forma information included 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.

9
<PAGE> 11

The principal adjustments for the 1996 -- 1997 pro forma financial
information are: (i) the reduction of interest expense based on repayment of
notes payable from the Offering proceeds; (ii) a reduction in management fees to
conform with the terms of the Advisory Agreement negotiated in conjunction with
the Offering; (iii) elimination of the provision for income tax based upon the
Company's qualification 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.

10
<PAGE> 12

The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and the Financial Statements and notes thereto included elsewhere in
this Form 10-K.

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------------- ----------------------- -----------------
PRO FORMA COMBINED(2) PRO FORMA PREDECESSOR PREDECESSOR
--------- ----------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUE:
Rental income........ $ 22,451 $ 11,565 $ 11,565 $ 4,907 $ 4,907 $ 614
Interest and other
income............. 3,235 2,217 1,831 2,480 2,011 1,255
--------- --------- --------- --------- -------- --------
Total revenue.......... 25,686 13,782 13,396 7,387 6,918 1,869
--------- --------- --------- --------- -------- --------
EXPENSES:
Interest............. 6,800 521 5,895 -- 1,977 112
General and
administrative..... 1,616 1,661 2,074 1,436 1,218 329
Provision for
unbilled rent...... 865
Depreciation and
amortization....... 3,069 1,734 1,606 778 649 88
--------- --------- --------- --------- -------- --------
Total expenses......... 12,350 3,916 9,575 2,214 3,844 529
--------- --------- --------- --------- -------- --------
Income before gain on
sale of properties
and income tax....... 13,336 9,866 3,821 5,173 3,074 1,340
Gain (loss) on sale of
properties........... (1,838) 148 148 -- -- --
--------- --------- --------- --------- -------- --------
Income before income
tax.................. 11,498 10,014 3,969 5,173 3,074 1,340
Provision for income
tax.................. -- -- 167 -- 95 457
--------- --------- --------- --------- -------- --------
Net income............. 11,498 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......... $ 11,498 $ 10,014 $ (2,835) $ 5,173 $ (4,517) $ (2,736)
========= ========= ========= ========= ======== ========
Income/(loss) per share
of Common Stock...... $ 1.21 $ 1.05 $ (1.43) $ 0.54 $ (4.61) $ (2.79)
========= ========= ========= ========= ======== ========
Weighted Average number
of shares of Common
Stock outstanding.... 9,508,108 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......... $ 14,885 n/a $ 4,925 n/a $ 3,994 $ 869
Cash flows from
investing
activities......... $ (70,980) n/a $ (78,142) n/a $(53,274) $(39,526)
Cash flows from
financing
activities......... $ 57,055 n/a $ 72,883 n/a $ 51,173 $ 40,626
Funds From Operations
("FFO")(1)......... $ 16,405 $ 11,600 $ 5,260 $ 5,951 $ 3,628 $ 971
FFO per share........ $ 1.73 $ 1.22 n/a $ 0.63 n/a n/a
Total properties (at
end of period)..... 163 112 112 63 63 18
</TABLE>

11
<PAGE> 13

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 4,489 $ 3,528 $ 3,862 $ 1,969
Properties subject to leases, net................... 224,478 152,766 71,137 15,554
Total investments................................... 238,195 166,953 85,735 37,302
Total assets........................................ 252,010 181,702 98,614 42,292
Notes payable....................................... 113,985 42,746 48,160 1,588
Total liabilities................................... 116,403 46,896 49,214 2,121
Redeemable Preferred Stock.......................... -- -- 49,399 40,000
Total stockholders' equity.......................... 135,607 134,806 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 (excludes 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.

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 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 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 the Partnerships.

As of December 31, 1998, the Company owned 163 properties, located in 30
states, subject to long-term net Leases with 54 different Lessees under major
restaurant and retail concepts including Bennigan's, Applebee's, Denny's, Best
Buy, Athlete's Foot, Blockbuster Video, and Office Depot.

HISTORICAL RESULTS OF OPERATIONS -- 1998 TO 1997

Total revenue increased 91.7% to $25.7 million for the year ended December
31, 1998 as compared to $13.4 million for the year ended December 31, 1997.
Rental revenue increased 94.1% to $22.5 million for 1998 as compared to $11.6
million for 1997. The increase in rental revenue resulted principally from the
acquisition of 54 net leased properties, offset by the sale of three net leased
properties, and the benefit of a full period of rental revenue from the 55
properties acquired and leased in the preceding year. Interest and other income
increased to $3.2 million for 1998 as compared to $1.8 million for 1997,
primarily as a result of fee income earned from the Partnerships.

Interest expense increased by 15.4% to $6.8 million for 1998 as compared to
$5.9 million for 1997. The increase was primarily due to higher debt balances in
1998 over comparable time periods in 1997. Additional debt of $71.2 million was
used to fund the acquisition of properties during 1998, offset by the $80.6
million of debt repaid from Offering proceeds in the prior period. General and
administrative expenses, including

12
<PAGE> 14

management fees to affiliates, decreased 22.1% to $1.6 million for 1998 as
compared to $2.1 million for 1997, primarily due to reduced management fee
expenses derived from the amended Advisory Agreement (see Note 9 of the
Financial Statements). Depreciation and amortization increased 91.1% to $3.1
million for 1998 as compared to $1.7 million for 1997, 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.

In October 1998, Boston Chicken and the majority of its operating
subsidiaries filed for Chapter 11 bankruptcy protection. As a consequence, 14 of
the Company's 27 Boston Chicken Leases were rejected. During 1998, the Company
recorded a one-time non-cash charge of $865,000 related to unbilled rents on
properties leased to Boston Chicken and its subsidiaries and affiliates. Monthly
revenue related to the 14 rejected Leases was approximately $135,000, which the
Company anticipates recovering through re-leasing efforts in 1999.

During 1998, the Company sold three real estate properties, disposed of one
direct financing lease, sold a 50% interest in a property under construction to
Family Realty, and reserved for $455,000 of losses expected on the disposition
of two modular building properties. As a result of these transactions, the
Company collected total gross proceeds of $4.8 million and reflected a net loss
on the sale of properties totaling $1.8 million.

Since the Company did not operate as a REIT prior to 1997, a provision for
income tax has been recorded in prior years. 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 was $167,000 for 1997 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. See Note 7
of the Financial Statements.

As a result of the foregoing, the Company's net income before income tax
increased 189.7% to $11.5 million for 1998 as compared to $4.0 million for 1997,
and net income increased 202.4% to $11.5 million for 1998 as compared to $3.8
million for 1997. FFO increased 211.6% to $16.4 million from $5.3 million in
1997. Income attributable to Common Stock was $11.5 million compared to a loss
of $2.8 million in 1997.

PRO FORMA RESULTS OF OPERATIONS -- 1998 TO 1997

Pro forma net income was $10.0 million for the year ended December 31,
1997, compared to historical net income of $3.8 million for the year ended
December 31, 1997. Pro forma revenue increased $385,000 as a result of the
inclusion of revenues from the Partnerships. Pro forma expenses declined $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 pursuant to the 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.

Net income increased 14.7% to $11.5 million for 1998, as compared to pro
forma net income of $10.0 million for 1997, and pro forma FFO increased 41.4% to
$16.4 million for 1998, as compared to pro forma FFO of $11.6 million in 1997.

HISTORICAL RESULTS OF OPERATIONS -- 1997 TO 1996

Total revenue increased 93.6% to $13.8 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 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

13
<PAGE> 15

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 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 did not operate as a REIT prior to 1997, a provision for
income tax was recorded in prior years. 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.

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 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 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.

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 typically have 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, "off-balance sheet" financing
through the formation of joint ventures, and the issuance of additional equity
or debt securities. Although its organizational documents contain no limitation
on the

14
<PAGE> 16

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. 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 other than potential costs
of re-leasing vacant Boston Chicken properties.

At December 31, 1998, the Company had cash and cash equivalents of $4.5
million. For the year ended December 31, 1998, the Company generated cash from
operations of $14.9 million as compared to $5.0 million in 1997. 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 of Common Stock 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, to redeem $40.5 million of the redeemable preferred stock and to pay
$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.

CREDIT FACILITY. In February 1998, the Company entered into a credit
facility (the "Credit Facility"), which is used to provide funds for the
acquisition of properties and working capital, and repaid all amounts
outstanding under a prior credit facility. On December 1, 1998 the Company
amended the Credit Facility to provide up to $125 million of debt which is
secured by the Existing Properties. At December 31, 1998, the Company had $114.0
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
bank'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.

PROPERTY ACQUISITIONS AND COMMITMENTS. During the year ended December 31,
1998, the Company acquired properties for an aggregate acquisition cost of $81.2
million. The gross weighted average capitalization rate (annual rental divided
by the property purchase price) on aggregate 1998 property acquisitions was
10.5% on a cash basis (using annual minimum rents) and 12.26% on a straight-line
basis (using estimated annual revenue under GAAP). The net weighted average
capitalization rate (annual rental divided by the total property investment,
including capitalized acquisition costs) on aggregate 1998 property acquisitions
was 10.37% on a cash basis and 12.03% on a straight-line basis.

As of December 31, 1998, the Company had entered into commitments to
acquire the 51 Acquisition Properties totaling $97 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
15
<PAGE> 17

co-development opportunities. The Company may enter into commitments to acquire
some of these prospective properties in the future. The Company expects to
finance its acquisition commitments through a variety of sources of capital,
including borrowings under the Credit Facility, other long-term secured and
unsecured indebtedness, "off-balance sheet" financing through the formation of
joint ventures and the issuance of additional equity or debt securities.

Property acquisition commitments are expected to generate the primary
demand for additional capital in the future.

DIVIDENDS. During 1998, the Company paid dividends of $12.6 million,
including a partial dividend related to the fourth quarter of 1997 of $0.195 per
share or $1,854,082. In January 1999, the Company declared a fourth quarter
dividend on its Common Stock in the amount of $0.375 per share or $3,565,541.
The dividend was payable to shareholders of record on January 5, 1999 and was
paid on January 15, 1999.

Prior to the Offering, the Company historically accrued 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 intends to pay a regular quarterly dividend on its Common Stock
of $.38 per share (which if annualized would be $1.52 per share) for 1999. The
Company expects to pay future dividends from cash available for distribution.
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.

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. The Company uses derivative financial instruments in the normal
course of business to manage its exposure to fluctuations in interest rates (see
Note 8 of the Financial Statements).

YEAR 2000

The Year 2000 issue is a result of the way computer programs historically
manipulate date information based on a two-digit year ("98" instead of "1998").
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
indicating that the core software systems are currently Year 2000 compliant.

The Company is in the process of identifying key business partners, such as
financial institutions and lessees, to assess their status of 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.

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

16
<PAGE> 18

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.

RECENTLY ISSUED ACCOUNTING STANDARDS

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, 1999 (January 1, 2000 for the Company). The statement
requires that all derivative instruments be 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 has not yet determined the impact the statement will
have on its earnings or financial position.

In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective beginning January 1, 1999 for the Company. This
statement requires start-up activities and organization costs to be expensed as
incurred. In accordance with the provisions of the statement, the Company will
record a $340,000 non-cash charge in the first quarter of 1999 for the balance
of unamortized organization costs.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated Financial Statements and supplementary data are attached
to this Form 10-K. Reference is made to the Index to the Financial Statements on
page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

This information is incorporated by reference under the heading "Election
of Directors" from the Registrant's definitive proxy statement for the Annual
Meeting of Stockholders presently scheduled to be held on June 3, 1999, to be
filed pursuant to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION

This information is incorporated by reference under the heading "Executive
Compensation" from the Registrant's definitive proxy statement for the Annual
Meeting of Stockholders presently scheduled to be held on June 3, 1999, to be
filed pursuant to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This information is incorporated by reference under the heading "Security
Ownership of Certain Beneficial Owners and Management" from the Registrant's
definitive proxy statement for the Annual Meeting of Stockholders presently
scheduled to be held on June 3, 1999, to be filed pursuant to Regulation 14A.

17
<PAGE> 19

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information is incorporated by reference under the heading "Certain
Relationships and Related Transactions" from the Registrant's definitive proxy
statement for the Annual Meeting of Stockholders presently scheduled to be held
on June 3, 1999, to be filed pursuant to Regulation 14A.

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
------- -----------
<C> <S>
3.2 Bylaws of the Company**
3.3 Form of Amended and Restated Certificate of Incorporation**
10.1 Second Amended and Restated Credit Agreement***
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*
10.11 First Amendment to Advisory Agreement***
10.12 First Amendment to Limited Partnership Agreement between the
Company and Captec Franchise Capital Partners L.P. III***
10.13 First Amendment to Limited Partnership Agreement between the
Company and Captec Franchise Capital Partners L.P. IV***
27 Financial Data Schedule***
</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.

*** Previously filed

No reports on Form 8-K were filed during the quarter ended December 31,
1998.

18
<PAGE> 20

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, 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.

19
<PAGE> 21

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 30, 1999 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 30, 1999 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 30, 1999 /s/ W. ROSS MARTIN

--------------------------------------
W. Ross Martin
Director, Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)

March 30, 1999 /s/ H. REID SHERARD

--------------------------------------
H. Reid Sherard
Director

March 30, 1999 /s/ LEE C. HOWLEY, JR.

--------------------------------------
Lee C. Howley, Jr.
Director

March 30, 1999 /s/ RICHARD J. PETERS

--------------------------------------
Richard J. Peters
Director

March 30, 1999 /s/ CREED L. FORD, III

--------------------------------------
Creed L. Ford, III
Director

March 30, 1999 /s/ WILLIAM H. KRUL II

--------------------------------------
William H. Krul, II
Director

March 30, 1999 /s/ WILLIAM J. CHADWICK

--------------------------------------
William J. Chadwick
Director

March 30, 1999 /s/ ALBERT T. ADAMS

--------------------------------------
Albert T. Adams
Director
20
<PAGE> 22

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for the Year Ended
December 31, 1998 and for the Periods October 1, 1997
through December 31, 1997 and January 1, 1997 through
September 30, 1997, and for the Year Ended December 31,
1996...................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Year Ended December 31, 1998 and for the Periods
October 1, 1997 through December 31, 1997 and January 1,
1997 through September 30, 1997, and for the Year Ended
December 31, 1996......................................... F-5
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1998 and for the Periods October 1, 1997
through December 31, 1997 and January 1, 1997 through
September 30, 1997, and for the Year Ended December 31,
1996...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Report of Independent Accountants........................... F-18
Schedule III -- Properties and Accumulated Depreciation as
of December 31, 1998...................................... F-19
</TABLE>

F-1
<PAGE> 23

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Captec Net Lease Realty, Inc.

We have audited the accompanying consolidated balance sheets of Captec Net
Lease Realty, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1997 and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the year ended December 31, 1998 and
for the period October 1 through December 31, 1997. We have also audited the
accompanying statements of operations, changes in stockholders' equity, and cash
flows for the period January 1, 1997 through September 30, 1997 and for the year
ended December 31, 1996 of Captec Net Lease Realty, Inc. (a Michigan corporation
- -the "Predecessor"). 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 consolidated financial position of Captec Net
Lease Realty, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of its operations, changes in stockholders' equity and cash
flows for Captec Net Lease Realty, Inc. and subsidiaries and its Predecessor for
the periods indicated above, in conformity with generally accepted accounting
principles.

/s/ PricewaterhouseCoopers LLP

February 26, 1999

F-2
<PAGE> 24

CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 4,488,565 $ 3,528,129
Investments:
Properties subject to operating leases, net............... 221,349,661 151,491,551
Properties subject to financing leases, net............... 3,128,824 1,274,044
Loans to affiliates, collateralized by mortgage loans..... 8,915,523 13,061,845
Investment in affiliated limited partnerships............. 4,395,000 --
Other loans............................................... -- 703,950
Other loans, related party................................ 405,775 421,920
------------ ------------
Total investments...................................... 238,194,783 166,953,310
Short-term loans to affiliates.............................. 2,505,294 7,449,505
Unbilled rent, net.......................................... 3,710,487 2,271,043
Accounts receivable......................................... 144,642 651,481
Due from affiliates......................................... 1,242,675 186,625
Other assets................................................ 1,724,283 661,875
------------ ------------
Total assets........................................... $252,010,729 $181,701,968
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable............................................. $113,984,988 $ 42,746,189
Accounts payable and accrued expenses..................... 1,428,041 1,434,668
Due to affiliates......................................... 76,513 --
Dividends payable......................................... -- 1,854,082
Federal income tax payable................................ 719,000 719,000
Security deposits held on leases.......................... 194,406 141,892
------------ ------------
Total liabilities...................................... 116,402,948 46,895,831
------------ ------------
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......................................... 801,644 --
------------ ------------
Total stockholders' equity............................. 135,607,781 134,806,137
------------ ------------
Total liabilities and stockholders' equity............. $252,010,729 $181,701,968
============ ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-3
<PAGE> 25

CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PREDECESSOR
------------------------------
FOR THE PERIOD FOR THE PERIOD
OCTOBER 1, JANUARY 1,
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1997 1997 1996
------------ -------------- -------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Rental income........................... $22,451,150 $3,590,602 $ 7,974,798 $ 4,907,324
Interest income on loans to
affiliates........................... 1,817,677 355,716 1,110,375 1,949,097
Interest and other income............... 1,417,009 112,187 251,893 61,930
----------- ---------- ----------- -----------
Total revenue........................ 25,685,836 4,058,505 9,337,066 6,918,351
----------- ---------- ----------- -----------
Expenses:
Interest................................ 6,799,695 1,475,412 4,419,226 1,976,634
Management fees, affiliates............. 193,757 189,412 1,347,086 935,241
General and administrative.............. 1,422,212 72,528 464,769 282,784
Depreciation and amortization........... 3,069,074 530,318 1,076,043 649,347
Provision for unbilled rent............. 865,311 -- -- --
----------- ---------- ----------- -----------
Total expenses....................... 12,350,049 2,267,670 7,307,124 3,844,006
----------- ---------- ----------- -----------
Income before gain (loss) on sale of
properties and income tax.......... 13,335,788 1,790,835 2,029,942 3,074,345
Gain (loss) on sale of properties......... (1,837,524) 206,834 (58,687) --
----------- ---------- ----------- -----------
Income before income tax............. 11,498,264 1,997,669 1,971,255 3,074,345
Provision for income tax.................. -- -- 167,000 95,000
----------- ---------- ----------- -----------
Net income........................... $11,498,264 1,997,669 1,804,255 2,979,345
===========
Redeemable preferred stock dividend
requirements............................ 1,011,986 5,625,000 7,495,902
---------- ----------- -----------
Income (loss) attributable to common
stock.............................. $ 985,683 $(3,820,745) $(4,516,557)
========== =========== ===========
Income (loss) per common share:
Basic.............................. $ 1.21 $ 0.20 $ (3.90) $ (4.61)
=========== ========== =========== ===========
Diluted............................ $ 1.21 $ 0.20
=========== ==========
Weighted average number of common shares
outstanding............................. 9,508,108 4,966,139 980,330 980,330
=========== ========== =========== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-4
<PAGE> 26

CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
PREDECESSOR SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- ------ ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996.......... 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 6)............... -- -- -- (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 6)............... -- -- -- (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 6)......... -- -- (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
Net income........................ -- -- -- 11,498,264 11,498,264
Common stock dividends ($1.125 per
share).......................... -- -- -- (10,696,620) (10,696,620)
--------- ------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998........ 9,508,108 $95,081 $134,711,056 $ 801,644 $135,607,781
========= ======= ============ ============ ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-5
<PAGE> 27

CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PREDECESSOR
------------------------------
FOR THE PERIOD FOR THE PERIOD
OCTOBER 1 JANUARY 1,
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1997 1997 1996
------------ -------------- -------------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $11,498,264 $ 1,997,669 $ 1,804,255 $ 2,979,345
Adjustments to net income:
Depreciation and amortization........................... 3,069,073 530,318 1,076,043 649,347
Amortization of debt issuance costs..................... 439,407 131,250 393,750 437,500
Loss (gain) on sale of property......................... 1,837,524 (206,835) 58,688 (10,351)
Deferred income tax provision........................... -- -- -- 95,000
Increase in unbilled rent............................... (1,439,444) (455,323) (1,193,366) (563,886)
Decrease (increase) in accounts receivable and other
assets................................................ (513,689) (149,697) (288,099) 32,232
Increase (decrease) in accounts payable and accrued
expenses.............................................. (6,627) 300,602 925,522 375,341
----------- ------------ ------------ ------------
Net cash provided by operating activities........... 14,884,508 2,147,984 2,776,793 3,994,528
----------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties subject to operating leases..... (78,116,356) (45,113,200) (32,157,979) (55,879,245)
Acquisition of impaired mortgage loans.................... -- -- -- (171,168)
Advances on loans to affiliates, collateralized by
mortgage loans.......................................... -- (6,458,589) (6,959,526) (10,055,492)
Acquisition of other loans................................ -- -- -- (1,219,305)
Acquisition of properties subject to financing leases..... (3,128,824) -- (370,165) (1,181,900)
Advances on short-term loans to affiliates................ -- (1,812,604) (4,383,416) (9,677,570)
Collections on short-term loans to affiliates............. 4,944,211 -- 5,384,052 5,255,424
Proceeds from the disposition of properties............... 4,797,472 3,503,091 704,723 789,543
Collections on loans to affiliates, collateralized by
mortgage loans.......................................... 4,146,322 5,539,782 3,918,202 18,806,533
Collection of principal on other loans.................... 720,095 21,273 63,289 8,873
Investments in affiliated partnerships.................... (4,395,000) -- -- --
Collection of principal on financing leases............... -- (33,053) (3,127) --
Lease security deposits................................... 52,514 -- 15,123 50,135
----------- ------------ ------------ ------------
Net cash used in investing activities............... (70,979,566) (44,353,300) (33,788,824) (53,274,172)
----------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Redeemable Preferred Stock..................... -- (40,500,000) -- --
Proceeds from the issuance of Redeemable Preferred
Stock................................................... -- -- -- 10,000,000
Dividends paid on common stock............................ (12,550,702) -- -- --
Proceeds from the Offering, net........................... -- 132,085,740 -- --
Borrowings of notes payable............................... 113,984,988 44,842,937 30,342,875 46,607,525
Organization and offering costs........................... -- -- -- (600,000)
Debt issuance costs....................................... (1,632,604) -- -- (1,050,000)
Repayments of notes payable............................... (42,746,189) (80,535,788) (64,066) (34,917)
Dividends paid on redeemable preferred stock.............. -- (10,913,381) (2,375,000) (3,750,000)
----------- ------------ ------------ ------------
Net cash provided by financing activities........... 57,055,493 44,979,508 27,903,809 51,172,608
----------- ------------ ------------ ------------
NET CASH FLOWS............................................ 960,436 2,774,192 (3,108,222) 1,892,964
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 3,528,129 753,937 3,862,159 1,969,196
----------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 4,488,565 $ 3,528,129 $ 753,937 $ 3,862,160
=========== ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................. $ 5,855,889 $ 1,598,871 $ 3,837,000 $ 1,240,620
=========== ============ ============ ============
Cash paid for taxes..................................... $ 12,579
============
Non-cash transfers: From loans to affiliate,
collateralized by mortgage loans to investment in
impaired loans........................................ $ 3,895,000
============
Non-cash transfers: From impaired mortgage loans to
properties subject to operating leases................ $ 788,168 $ 3,278,000
============ ============
Common stock issued for conversion and redemption of
preferred stock....................................... $ 9,500,000
============
Common stock issued in merger and subsequent stock
split................................................. $ 5,161,000
============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-6
<PAGE> 28

CAPTEC NET LEASE REALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

ORGANIZATION: Captec Net Lease Realty, Inc., (the "Company") a Delaware
corporation, was formed in 1997 to continue and expand the acquisition and
investment activities of Captec Net Lease Realty, Inc. ("Net Lease Michigan"), a
Michigan corporation, and Captec Net Lease Realty Advisors, Inc. ("Advisors
Michigan"), a Michigan corporation. 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 qualified 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 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 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 statements of operations and cash flows for the
year ended December 31, 1996, 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:

CONSOLIDATION: The consolidated financial statements include the accounts
of Captec Net Lease Realty, Inc. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

CASH AND CASH EQUIVALENTS: Cash equivalents consists of investments in
government securities money funds purchased with original maturities of less
than 90 days.

PROPERTIES SUBJECT TO OPERATING LEASES: Properties subject to operating
leases are stated at cost, including acquisition and closing costs, less
accumulated depreciation. Buildings are depreciated on the straight-line method
over their estimated useful lives (40 years). 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. If an impairment loss is indicated, the loss is measured as the
amount by which the carrying amount of the asset exceeds the estimated fair
value of the asset (see Note 2).

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.

INVESTMENT IN AFFILIATED PARTNERSHIPS: Investments in general partnership
interests of Captec Franchise Capital Partners L.P. III and Captec Franchise
Capital Partners L.P. IV (collectively the "Partnerships"), represent a 1%
interest in the Partnerships and are accounted for under the equity method.

AMORTIZATION OF ORGANIZATION COSTS: Organization costs are amortized using
the straight-line method over a 5 year period.

F-7
<PAGE> 29
CAPTEC NET LEASE REALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DEBT FINANCING COSTS: Debt financing costs are amortized over the term of
the related note using the effective interest method.

INCOME TAXES: The Company has made an election to be taxed as a REIT
effective September 1, 1997, under sections 856 through 860 of the Internal
Revenue Code of 1986, as amended, and related regulations. The Company generally
will not be subject to federal income taxes on amounts distributed to
stockholders, providing it distributes at least 95 percent of its real estate
investment trust taxable income and meets certain other requirements for
qualifying as a REIT (see Note 7).

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 common shares outstanding. Loss per
common share 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 (see Note 10) 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 1998 and 1997.

DERIVATIVE INSTRUMENTS: Derivative instruments are classified as "held for
purposes other than trading" and are entered into to manage exposures to
fluctuations in interest rates. The differential paid or received on derivative
instruments is recognized on an accrual basis as an adjustment to interest
expense. The instruments used are interest rate swap and interest rate cap
agreements.

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.

RECLASSIFICATIONS: Certain prior period financial statement amounts have
been reclassified to conform to the 1998 presentations.

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, 1999 (January 1, 2000 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 had not yet determined the
impact that the adoption of the statement will have on its 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,"
which is effective beginning January 1, 1999 for the Company. This statement
requires start-up activities and organization costs to be expenses as incurred.
In accordance with the provisions of the statement, the Company will record a
$340,000 non-cash charge in the first quarter of 1999 for the balance of
unamortized organization costs.

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,
1998, 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

F-8
<PAGE> 30
CAPTEC NET LEASE REALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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,
1998 and 1997 includes capitalized acquisition and interest costs totaling
approximately $6,404,000 and $5,032,000, 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,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Land.............................................. $ 81,437,199 $ 59,007,054
Buildings and improvements........................ 131,698,579 90,886,469
Construction draws on properties.................. 12,876,091 3,523,273
------------ ------------
226,011,869 153,416,796
Less accumulated depreciation..................... (4,662,208) (1,925,245)
------------ ------------
Total............................................. $221,349,661 $151,491,551
============ ============
</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, 1998 and 1997, the
Company had approximately $11,228,000 and $4,851,000, respectively, of unfunded
commitments on properties under construction.

Pursuant to the Company's policy for reviewing its real estate portfolio
for impaired properties, the Company recorded an impairment loss of
approximately $445,000, charged to gain/(loss) on sale of properties, on two of
its properties during 1998. Both properties are vacant modular buildings held
for sale. The carrying amount of the properties is approximately $75,000, which
represents the estimated net proceeds that the Company expects to receive. In
addition, 19 properties with an aggregate net cost of approximately $17,000,000
at December 31, 1998 are not currently subject to lease.

The following is a schedule of future minimum lease payments to be received
on the noncancelable operating leases as of December 31, 1998.

<TABLE>
<S> <C>
1999........................................................ $ 20,197,993
2000........................................................ 20,295,782
2001........................................................ 20,657,604
2002........................................................ 21,121,498
2003........................................................ 21,577,665
Thereafter.................................................. 262,223,432
------------
Total....................................................... $366,073,964
============
</TABLE>

Since lease renewal periods are exercisable at the option of the tenant,
the above table only presents future minimum lease payments due during the
initial lease terms.

F-9
<PAGE> 31
CAPTEC NET LEASE REALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. FINANCING LEASES:

The net investment in financing leases as of December 31, 1998 and 1997 is
comprised of the following:

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Minimum lease payments to be received................. $7,854,278 $1,611,881
Estimated residual value.............................. -- 93,400
---------- ----------
Gross investment in financing leases................ 7,854,278 1,705,281
Unearned income....................................... (4,725,454) (431,237)
---------- ----------
Net investment in financing leases.................. $3,128,824 $1,274,044
========== ==========
</TABLE>

The following is a schedule of future minimum lease payments to be received
on financing leases as of December 31, 1998.

<TABLE>
<S> <C>
1999........................................................ $ 308,333
2000........................................................ 370,000
2001........................................................ 370,000
2002........................................................ 370,000
2003........................................................ 370,000
Thereafter.................................................. 6,065,945
----------
Total..................................................... $7,854,278
==========
</TABLE>

4. LOANS TO AFFILIATE, COLLATERALIZED BY MORTGAGE LOANS:

Loans to affiliates, collateralized by mortgage loans consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Loan under a master revolving note, collateralized by a
subordinate interest in a portfolio of loans owned by an
affiliate................................................. $6,996,954 $11,143,276
Promissory note collateralized by a subordinate class
certificate issued in conjunction with an asset-backed
securitization pool of long-term fixed rate mortgage loans
and other collateralized loans............................ 1,918,569 1,918,569
---------- -----------
Total....................................................... $8,915,523 $13,061,845
========== ===========
</TABLE>

The master revolving note bears interest at 10.0 percent per annum and 8.0
percent per annum at December 31, 1998 and 1997, respectively. The promissory
note bears interest at 15.70% per annum at December 31, 1998 and 1997. Both
notes are payable on demand.

5. NOTES PAYABLE:

In February 1998 the Company entered into a credit facility (the "Credit
Facility"), which was used to provide funds for the acquisition of properties
and working capital, and repaid all amounts outstanding under the prior credit
agreement.

On December 1, 1998 the Company amended the Credit Facility to provide a
$125 million facility ($50 million of which is subject to amortization beginning
in December 1999) which is secured by the properties. At December 31, 1998, the
Company had approximately $114 million of aggregate outstanding borrowings under
the Credit Facility. Amounts borrowed under the Company's prior credit agreement
totaled approximately $42.7 million as of December 31, 1997.

F-10
<PAGE> 32
CAPTEC NET LEASE REALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Credit Facility has a three year term and the revolving credit
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 Credit Facility bears interest at an
annual rate of LIBOR plus a spread ranging from 1.25% to 1.75% (effective rate
of 7.29% at December 31, 1998), set quarterly depending on the Company's
leverage ratio, or at the Company's option, the bank's base rate (see Note 8).
In connection with the Credit Facility, the Company is also required to pay an
unused commitment fee ranging from .125% to .20% per annum on the unused amount
of the commitment.

The aggregate maturities of the term facility after December 31, 1998 are
as follows:

<TABLE>
<S> <C>
Year Ending December 31:
1999...................................................... $ 355,306
2000...................................................... 4,564,335
2001...................................................... 45,080,359
-----------
Total..................................................... $50,000,000
===========
</TABLE>

Included in other assets are costs totaling $1.3 million in 1998 and
$103,000 in 1997 (net of accumulated amortization) associated with the issuance
of the notes payable. Amortization of debt issuance costs for the years ended
December 31, 1998 and 1997 amounted to $440,000 and $525,000, respectively,
which is included in interest expense in the accompanying financial statements.

6. REDEEMABLE PREFERRED STOCK:

At December 31, 1996, 50,000 shares of Redeemable Preferred Stock ("RPS")
were authorized, issued, and outstanding. The Company had the right and option
to redeem these shares 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 RPS holders upon receipt of 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. 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 holders of the RPS. RPS dividends paid and accumulated
unpaid dividends through November 19, 1997 (date of redemption) were as follows:

<TABLE>
<CAPTION>
PAID
-------------------------------------------------
RETURN OF CAPITAL TOTAL
FROM RETAINED (REDUCTION OF RPS TOTAL ACCUMULATED DIVIDEND
EARNINGS CARRYING VALUE) 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>

F-11
<PAGE> 33
CAPTEC NET LEASE REALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAX:

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 THROUGH
DECEMBER 31, 1997 SEPTEMBER 30, 1997 1996
----------------- ------------------ ----
<S> <C> <C> <C>
Current.............................. $ 284,000 $167,000 $ --
Deferred............................. (284,000) -- $95,000
--------- -------- -------
Total................................ $ -- $167,000 $95,000
========= ======== =======
</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
SEPTEMBER 30, 1997 1996
------------------ ----
<S> <C> <C>
Federal income taxes at statutory rates........... $ 670,227 $1,045,276
Preferred stock dividends deducted as interest.... (503,500) (947,400)
Other............................................. 273 (2,876)
--------- ----------
Total............................................. $ 167,000 $ 95,000
========= ==========
</TABLE>

The provisions for federal income taxes for the periods before qualifying
as a REIT do not bear the usual relationship to pretax income principally as a
result of the treatment of dividends paid on the Redeemable Preferred Stock as
deductible interest expense for income tax purposes. If deduction is challenged
by the Internal Revenue Service, the Company could be assessed and ultimately
required to pay income taxes aggregating up to approximately $1,700,000 plus
interest for deductions taken through December 31, 1997. The Company has
provided an allowance of approximately $719,000 as of December 31, 1998 and
1997, 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, 1998 or any amount less than the aggregate amounts.

F-12
<PAGE> 34
CAPTEC NET LEASE REALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. FINANCIAL INSTRUMENTS:

The estimated fair value of financial instruments held by the Company at
December 31, 1998 and 1997, and the valuation techniques used to estimate the
fair value, were as follows:

<TABLE>
<CAPTION>
1998 1997
---------------------------- --------------------------
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents............. $ 4,488,565 $ 4,488,565 $ 3,528,129 $ 3,528,129
Loans to affiliate, collateralized by
mortgage loans..................... 8,915,523 8,915,523 13,061,845 13,061,845
Other loans........................... 405,775 405,775 1,125,870 1,125,870
Short-term loans to affiliates........ 2,505,294 2,505,294 7,449,505 7,449,505
Liabilities
Notes payable......................... 113,984,988 113,984,988 42,746,189 42,746,189
Derivative Contracts
Interest rate instruments............. (64,323) (876,264) -- --
</TABLE>

CASH AND CASH EQUIVALENTS. The book value approximates fair value because
of the short maturity of these instruments.

LOANS TO AFFILIATE, 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.

INTEREST RATE INSTRUMENTS. The fair value of interest rate instruments is
the estimated amount that the Company would pay to terminate the instruments at
December 31, 1998 using proprietary models based upon current market values at
December 31, 1998.

The Company uses derivative financial instruments in the normal course of
business to manage its exposure to fluctuations in interest rates. Those
instruments involve, to varying degrees, market risk, as the instruments are
subject to rate and price fluctuations, and elements of credit risk in the event
the counterparty should default. The Company does not enter into derivative
transactions for trading purposes. At December 31, 1998 the Company had an
interest rate swap contract outstanding with a total notional amount of $50
million, and an interest rate cap contract outstanding with a total notional
amount of $25 million. The notional amounts serve solely as a basis for the
calculation of payments to be exchanged and are not a measure of the exposure of
the Company through the use of derivatives. Under the interest rate swap
contract, the Company agrees to pay a fixed rate of 5.8% and the counterparty
agrees to make payments based on 3-month LIBOR. Under the interest rate cap
agreement the counterparty agrees to make payments to the Company if the LIBOR
exceeds 6.5% through July 1, 1999 or 7.5% thereafter. The Company incurred
additional interest expense of $80,000 during 1998 in connection with the
interest rate swap agreement. The interest rate swap contract terminates July
2001 and the interest rate cap contract terminates January 2000.

F-13
<PAGE> 35
CAPTEC NET LEASE REALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. RELATED PARTY TRANSACTIONS AND AGREEMENTS:

In August, 1997 the Company entered into an Advisory Agreement with Captec
Net Lease Advisors, Inc. ("Captec Advisors") an affiliate, which together with
Captec Financial Group, Inc., an affiliate, manages the operations of the
Company and provides it with investment and financial advisory services
pertaining to the acquisition, development, and leasing of properties. According
to the Advisory Agreement, the Company pays to Captec Advisors a management fee
in an amount equal to the lesser of (i) 0.6% per annum 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
is also subject to cost reimbursements to Captec Advisors in an amount equal to
all costs incurred in the acquisition of properties. The sum of the incentive
fee and the cost reimbursement (the "acquisition fee") will not exceed 3.0% of
the acquisition cost of properties identified by the Advisor and acquired during
the term of the Advisory Agreement. In December 1998 the Advisory Agreement was
amended retroactive to January 1, 1998 (the "Amendment"). The effect of the
Amendment was to reduce the management fee to Captec Advisors by the amount of
acquisition fees paid directly to Captec Advisors as a result of acquisitions
made by the Partnerships. During 1998, 1997, and 1996 the Company incurred
$194,000, $1,536,000, and $935,000 respectively, of asset management fees and
approximately $1,123,000, $2,030,000 and $2,630,000 respectively, in acquisition
fees to Captec Advisors. The acquisition fees were capitalized into the
Company's investment in land and buildings subject to operating leases.

In August 1998 the Company purchased the general partnership interests in
the Partnerships, which are engaged in substantially the same business as the
Company. The Company acquired the interests for $4.4 million in the aggregate,
$4.0 million of which was used to offset amounts included in short-term loans to
affiliates. Pursuant to the terms outlined in the Amended and Restated Agreement
of Limited Partnership between the Company and the Partnerships, the Company
receives an acquisition fee equal to 5% of the aggregate purchase price of
properties and an asset management fee equal to 1% of gross rental revenues from
the Partnerships' properties and equipment. In connection with the Amendment,
the Amended and Restated Agreements of Limited Partnership were amended
retroactive to January 1, 1998. The effect of the amended agreements is to
provide a 2% acquisition fee of the aggregate purchase price of properties to
the Company from the Partnerships and a 3% acquisition fee of the aggregate
purchase price of properties to Captec Advisors from the Partnerships, for which
the Company receives an equal reduction in management fee expense to Captec
Advisors. The Company earned $589,000 and $45,000 in acquisition fees and asset
management fees respectively, for the year ended December 31, 1998. In addition,
Captec Advisors earned approximately $884,000 of acquisitions fees resulting in
an equal reduction in the management fee paid by the Company to Captec Advisors.
Summarized combined financial information of the Partnerships for the year ended
December 31, 1998, is set forth below:

<TABLE>
<S> <C>
Investments in property under leases........................ $49,580,732
Total assets................................................ 55,202,947
Notes payable............................................... 12,575,000
Total liabilities........................................... 13,133,308
Partners' capital........................................... 42,069,639
Revenues.................................................... 3,682,707
Net income.................................................. 3,168,534
</TABLE>

Cash flows of the Partnerships are allocated 99% to the limited partners
and 1% to the Company. The Company will also receive liquidation fees limited to
the lesser of 3% of the gross sales price or 50% of the customary real estate
commissions in the event of a real estate liquidation by the Partnerships. Net
sale or

F-14
<PAGE> 36
CAPTEC NET LEASE REALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

refinancing proceeds of the Partnership will be allocated 90% to the limited
partners and 10% to the Company. The cash flow, liquidation fees, and net sale
proceeds to the Company are subordinate to an 10.5% to 11% preferred return
(depending on the Partnership) plus return of the original capital contributions
to the limited partners.

In December of 1998 the Company sold half of its interest in a property
under construction to an affiliate, Family Realty, Inc. ("Family Realty") and
recognized a $226,000 gain on the sale.

Family Realty is obligated to pay acquisition fees of 4% to CNLR
Development Inc. ("Development"), a subsidiary of the Company. During 1998,
Development earned $293,000 of acquisition fees from Family Realty. Captec
Advisors earns an advisory fee from Development up to 50% of the acquisition
fees earned by Development from Family Realty, which provides for an equal
reduction in management fee expense to the Company.

The Company invested in loans to affiliates which were collateralized by
mortgage loans (see Note 4). In addition, the Company had short-term loans to
affiliates of $2,505,294 and $7,449,505 at December 31, 1998 and 1997,
respectively. The short-term loans principally represent demand notes to
affiliates, which were entered into as a short-term investment by the Company.
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 10.0% per annum and
8.0% per annum at December 31, 1998 and 1997, respectively, and are payable on
demand. Interest earned on the loans during 1998, 1997, and 1996 was $1,785,717,
$1,450,207 and $1,871,846, respectively.

As of December 31, 1998, the Company also has a demand loan with a
principal balance of $405,775 collateralized by a first mortgage on a real
estate property to a related party. The loan bears interest at a rate of 9.2
percent per annum. Interest earned on the loan during 1998 and 1997 was
approximately $38,000 and $6,500 respectively.

10. 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 key
employees and independent directors to purchase an aggregate 670,000 shares of
Common Stock at the initial public offering price of $18 per share. During 1998
the Company granted options under the Plan to certain directors to purchase an
aggregate 110,000 shares of common stock at an exercise price of $18 per share.
In addition, as of December 31, 1998 the Plan had reserved 290,000 shares of
Common Stock for issuance.

The options vest ratably over three years for employees and over two years
for directors. 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 options is
granted. The options expire ten years after the date of grant. Eligible
employees and directors of the Company may participate in the Plan, which is
administered by the Compensation Committee

F-15
<PAGE> 37
CAPTEC NET LEASE REALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

of the Board of Directors. The following summarizes transactions in the Plan for
the years ended December 31:

<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
1998 EXERCISE PRICE 1997 EXERCISE PRICE
---- -------------- ---- --------------
<S> <C> <C> <C> <C>
Outstanding, January 1........................... 670,000 $18.00 -- --
New grants....................................... 110,000 18.00 670,000 18.00
------- ------ ------- ------
Outstanding, December 31......................... 780,000 18.00 670,000 18.00
======= ====== ======= ======
Exercisable December 31.......................... 226,667 $18.00 -- $18.00
======= ====== ======= ======
</TABLE>

The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 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 ("APB 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 under the Plan consistent
with SFAS 123, the pro forma effects on the Company's net income and earnings
per share for the year ended December 31, 1998 and for the period October 1,
1997 through December 31, 1997 would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 1, 1997
THROUGH
1998 DECEMBER 31, 1997
---- -----------------
<S> <C> <C>
Net earnings as reported.................................... $11,498,264 $985,683
=========== ========
Pro forma net earnings...................................... $10,644,881 $862,183
=========== ========
Earnings per share as reported:
Basic..................................................... $1.21 $0.20
=========== ========
Diluted................................................... $1.21 $0.20
=========== ========
Pro forma earnings per share:
Basic..................................................... $1.12 $0.17
=========== ========
Diluted................................................... $1.12 $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 for grants in 1998 and 1997: (i) dividend yield of 8.33%, (ii)
expected stock price volatility of 25% and 31% for 1998 grants and 20% for 1997
grants, (iii) risk-free interest rate of 5.6% and 4.6% for 1998 grants and 6.18%
for 1997 grants, and (iv) expected option term of five years. Options
outstanding under the Plan had a weighted average fair value of $3.15 and $3.42
per share at December 31, 1998 and 1997, respectively.

11. PROVISION FOR UNBILLED RENT:

During 1998, Boston Chicken and the majority of its operating subsidiaries
filed for Chapter 11 bankruptcy protection. As a consequence, 14 of the
Company's 27 Boston Chicken leases were rejected and are vacant at December 31,
1998. In September 1998, the Company recorded a one-time non-cash charge of
approximately $865,000 related to unbilled rents on properties leased to Boston
Chicken and its subsidiaries and affiliates.

F-16
<PAGE> 38
CAPTEC NET LEASE REALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. DIRECTORS' DEFERRED COMPENSATION PLAN

The Company sponsors a Directors' Deferred Compensation Plan (the "Deferred
Plan") for the purpose of retaining persons of competence and stature to serve
as Independent Directors by giving them an option to defer receipt of the fees
payable to them by the Company for their services as directors. Expense related
to the Deferred Plan was $103,000 for the year ended December 31, 1998.

13. SUBSEQUENT EVENT

In January 1999, the Company declared dividends to its shareholders of
$3,565,540, or $0.375 per share of common stock, which were paid on January 15,
1999.

* * * * * * *

UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA

(not covered by report of independent accountants)

<TABLE>
<CAPTION>
QUARTER
-------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998
Total revenue............................................... $5,624 $6,413 $7,412 $6,237
Net income.................................................. 3,241 3,440 2,057 2,760
Income/(loss) per common share:
Basic..................................................... $ 0.34 $ 0.36 $ 0.22 $ 0.29
Diluted................................................... $ 0.34 $ 0.36 $ 0.22 $ 0.29
Funds From Operation (FFO).................................. 3,949 4,333 3,774 4,349
FFO per share............................................... $ 0.42 $ 0.46 $ 0.40 $ 0.46
</TABLE>

F-17
<PAGE> 39

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Captec Net Lease Realty, Inc.

In connection with our audit of the consolidated financial statements of
Captec Net Lease Realty, Inc. and subsidiaries as of December 31, 1998 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/ PricewaterhouseCoopers LLP

February 26, 1999

F-18
<PAGE> 40

SCHEDULE III

PROPERTIES AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
COST GROSS AMOUNT
CAPITALIZED AT WHICH
SUBSEQUENT CARRIED AT
TYPE OF STATE INITIAL COST TO CLOSE
CONCEPT PROPERTY LOCATION ENCUMBRANCES TO COMPANY ACQUISITION OF PERIOD
------- -------- -------- ------------ ------------ ----------- ------------
(A)
<S> <C> <C> <C> <C> <C> <C>
PROPERTIES SUBJECT TO OPERATING
LEASES:
COMMENCED LEASES
Golden Corral................... Restaurant TX -- 2,024,425 -- 2,024,425
Roadhouse Grill................. Restaurant NY -- 1,048,395 -- 1,048,395
Vacant.......................... Restaurant NM -- 890,918 -- 890,918
Denny's......................... Restaurant TX -- 662,144 -- 662,144
Popeye's........................ Restaurant GA -- 877,941 -- 877,941
Applebee's...................... Restaurant WA -- 1,986,432 -- 1,986,432
Denny's......................... Restaurant TX -- 898,908 -- 898,908
Denny's......................... Restaurant TX -- 894,042 -- 894,042
Denny's......................... Restaurant NC -- 1,048,663 -- 1,048,663
Denny's......................... Restaurant NC -- 816,140 -- 816,140
Vacant.......................... Restaurant GA -- 1,186,604 -- 1,186,604
Applebee's...................... Restaurant MO -- 2,087,796 -- 2,087,796
Red Robin....................... Restaurant WA -- 3,153,767 -- 3,153,767
Stanford's...................... Restaurant CO -- 2,427,861 -- 2,427,861
Red Robin....................... Restaurant CO -- 3,283,130 -- 3,283,130
Carrows......................... Restaurant CA -- 1,213,931 -- 1,213,931
Carrows......................... Restaurant CA -- 1,213,931 -- 1,213,931
Carrows......................... Restaurant CA -- 1,324,288 -- 1,324,288
Vacant.......................... Restaurant NJ -- 893,894 -- 893,894
Vacant.......................... Restaurant PA -- 827,680 -- 827,680
Boston Market................... Restaurant OH -- 938,037 -- 938,037
Vacant.......................... Restaurant PA -- 717,323 -- 717,323
Vacant.......................... Restaurant WA -- 1,340,841 10,000 1,350,841
Carrows......................... Restaurant CA -- 1,103,573 -- 1,103,573
Blockbuster Video............... Retail TX -- 843,130 1,505 844,635
Blockbuster Video............... Retail TX -- 790,158 1,506 791,664
Denny's......................... Restaurant TX -- 1,213,931 -- 1,213,931
Boston Market................... Restaurant WA -- 940,356 10,000 950,356
Vacant.......................... Restaurant OH -- 767,065 -- 767,065
Boston Market................... Restaurant WI -- 929,882 -- 929,882
Boston Market................... Restaurant MI -- 1,070,466 -- 1,070,466
Boston Market................... Restaurant PA -- 915,966 -- 915,966
Vacant.......................... Restaurant OR -- 1,218,782 10,000 1,228,782
Vacant.......................... Restaurant PA -- 887,273 -- 887,273
Vacant.......................... Restaurant OR -- 1,361,809 10,000 1,371,809
Vacant.......................... Restaurant WA -- 1,050,145 10,000 1,060,145

DATE OF
ACCUMULATED ACQUISITION/ ACQUISITION/
CONCEPT DEPRECIATION CONSTRUCTION CONSTRUCTION DEPRECIATION
------- ------------ ------------ ------------ ------------

<S> <C> <C> <C> <C>
PROPERTIES SUBJECT TO OPERATING
LEASES:
COMMENCED LEASES
Golden Corral................... 92,162 1995 Acquisition 40 Years
Roadhouse Grill................. 35,391 1995 Acquisition 40 Years
Vacant.......................... 17,656 1997 Acquisition 40 Years
Denny's......................... 47,105 1995 Acquisition 40 Years
Popeye's........................ 31,712 1996 Acquisition 40 Years
Applebee's...................... 77,986 1996 Construction 40 Years
Denny's......................... 27,693 1995 Acquisition 40 Years
Denny's......................... 28,181 1995 Acquisition 40 Years
Denny's......................... 43,174 1995 Acquisition 40 Years
Denny's......................... 38,957 1995 Acquisition 40 Years
Vacant.......................... 43,378 1996 Acquisition 40 Years
Applebee's...................... 83,934 1996 Construction 40 Years
Red Robin....................... 124,348 1996 Acquisition 40 Years
Stanford's...................... 112,488 1996 Acquisition 40 Years
Red Robin....................... 117,950 1996 Construction 40 Years
Carrows......................... 50,546 1996 Acquisition 40 Years
Carrows......................... 42,464 1996 Acquisition 40 Years
Carrows......................... 44,668 1996 Acquisition 40 Years
Vacant.......................... 27,621 1996 Acquisition 40 Years
Vacant.......................... 21,814 1997 Acquisition 40 Years
Boston Market................... 32,552 1996 Acquisition 40 Years
Vacant.......................... 16,141 1996 Acquisition 40 Years
Vacant.......................... 48,876 1996 Acquisition 40 Years
Carrows......................... 55,927 1996 Acquisition 40 Years
Blockbuster Video............... 32,192 1996 Acquisition 40 Years
Blockbuster Video............... 39,073 1996 Acquisition 40 Years
Denny's......................... 42,425 1996 Construction 40 Years
Boston Market................... 26,590 1997 Construction 40 Years
Vacant.......................... 24,206 1996 Construction 40 Years
Boston Market................... 19,232 1997 Construction 40 Years
Boston Market................... 30,130 1997 Acquisition 40 Years
Boston Market................... 28,949 1996 Acquisition 40 Years
Vacant.......................... 49,198 1996 Acquisition 40 Years
Vacant.......................... 26,175 1996 Acquisition 40 Years
Vacant.......................... 37,303 1996 Acquisition 40 Years
Vacant.......................... 25,166 1997 Construction 40 Years
</TABLE>

F-19
<PAGE> 41
<TABLE>
<CAPTION>
COST GROSS AMOUNT
CAPITALIZED AT WHICH
SUBSEQUENT CARRIED AT
TYPE OF STATE INITIAL COST TO CLOSE
CONCEPT PROPERTY LOCATION ENCUMBRANCES TO COMPANY ACQUISITION OF PERIOD
------- -------- -------- ------------ ------------ ----------- ------------
(A)
<S> <C> <C> <C> <C> <C> <C>
Boston Market................... Restaurant IL -- 1,880,489 -- 1,880,489
Boston Market................... Restaurant IL -- 887,273 -- 887,273
Vacant.......................... Restaurant IN -- 1,644,324 -- 1,644,324
Boston Market................... Restaurant IL -- 619,105 -- 619,105
Vacant.......................... Restaurant PA -- 726,342 -- 726,342
Vacant.......................... Restaurant TX -- 280,620 (210,170)(b) 70,450
Vacant.......................... Restaurant TX -- 280,620 (235,210)(b) 45,411
Denny's......................... Restaurant LA -- 1,182,368 -- 1,182,368
Mountain Jack's................. Restaurant MI -- 1,533,967 -- 1,533,967
Mountain Jack's................. Restaurant MI -- 1,125,645 -- 1,125,645
Babies R Us..................... Retail MO -- 3,156,219 1,315 3,157,534
Mountain Jack's................. Restaurant OH -- 1,655,360 -- 1,655,360
Boston Market................... Restaurant IL -- 1,909,327 -- 1,909,327
Boston Market................... Restaurant PA -- 1,122,178 -- 1,122,178
Black Angus..................... Restaurant MN -- 2,836,183 -- 2,836,183
Black Angus..................... Restaurant MN -- 2,030,575 -- 2,030,575
Black Angus..................... Restaurant MN -- 2,350,611 -- 2,350,611
Black Angus..................... Restaurant MN -- 2,472,004 -- 2,472,004
Denny's......................... Restaurant FL -- 1,160,681 -- 1,160,681
Golden Corral................... Restaurant FL -- 2,273,361 -- 2,273,361
Michael's Crafts................ Retail MD -- 2,770,281 -- 2,770,281
Burger King..................... Restaurant WV -- 993,425 -- 993,425
Blockbuster Music............... Retail AL -- 1,526,653 -- 1,526,653
Video Update.................... Retail AZ -- 1,098,541 -- 1,098,541
Video Update.................... Retail IL -- 1,330,484 -- 1,330,484
Arby's.......................... Restaurant IN -- 1,093,288 -- 1,093,288
Golden Corral................... Restaurant FL -- 2,111,500 -- 2,111,500
Denny's......................... Restaurant AZ -- 1,103,891 -- 1,103,891
Golden Corral................... Restaurant NE -- 1,032,869 -- 1,032,869
Nissan.......................... Auto Dealer GA -- 3,250,023 -- 3,250,023
BMW............................. Auto Dealer GA -- 7,115,013 -- 7,115,013
Video Update.................... Retail MO -- 1,169,979 -- 1,169,979
Damon's......................... Restaurant AZ -- 1,429,445 -- 1,429,445
Arby's.......................... Restaurant GA -- 752,097 -- 752,097
Schlotzsky's Deli............... Restaurant AZ -- 838,167 7,806 845,973
Schlotzsky's Deli............... Restaurant AZ -- 825,409 25,556 850,966
Schlotzsky's Deli............... Restaurant AZ -- 898,896 25,437 924,333
Blockbuster Video............... Retail SC -- 1,377,353 -- 1,377,353
Whataburger..................... Restaurant NM -- 894,568 53,499 948,067
Hooters......................... Restaurant FL -- 1,048,870 -- 1,048,870
Video Update.................... Retail NM -- 1,344,400 2,005 1,346,405
Video Update.................... Retail MN -- 1,134,740 -- 1,134,740
Burger King..................... Restaurant VA -- 1,102,500 -- 1,102,500
Blockbuster Video............... Retail GA -- 1,033,801 9,475 1,043,276

DATE OF
ACCUMULATED ACQUISITION/ ACQUISITION/
CONCEPT DEPRECIATION CONSTRUCTION CONSTRUCTION DEPRECIATION
------- ------------ ------------ ------------ ------------

<S> <C> <C> <C> <C>
Boston Market................... 63,356 1996 Acquisition 40 Years
Boston Market................... 31,210 1996 Acquisition 40 Years
Vacant.......................... 63,904 1996 Construction 40 Years
Boston Market................... 23,384 1996 Acquisition 40 Years
Vacant.......................... 12,908 1997 Construction 40 Years
Vacant.......................... 21,035 1995 Acquisition 40 Years
Vacant.......................... 21,035 1995 Acquisition 40 Years
Denny's......................... 36,053 1997 Construction 40 Years
Mountain Jack's................. 67,446 1996 Acquisition 40 Years
Mountain Jack's................. 40,220 1996 Acquisition 40 Years
Babies R Us..................... 128,351 1996 Acquisition 40 Years
Mountain Jack's................. 50,979 1997 Construction 40 Years
Boston Market................... 50,365 1997 Construction 40 Years
Boston Market................... 13,521 1997 Construction 40 Years
Black Angus..................... 97,311 1996 Acquisition 40 Years
Black Angus..................... 85,406 1996 Acquisition 40 Years
Black Angus..................... 88,255 1996 Acquisition 40 Years
Black Angus..................... 77,215 1996 Acquisition 40 Years
Denny's......................... 23,122 1997 Construction 40 Years
Golden Corral................... 45,022 1997 Construction 40 Years
Michael's Crafts................ 38,505 1997 Acquisition 40 Years
Burger King..................... 21,914 1997 Construction 40 Years
Blockbuster Music............... 31,516 1997 Acquisition 40 Years
Video Update.................... 30,016 1997 Acquisition 40 Years
Video Update.................... 43,295 1997 Acquisition 40 Years
Arby's.......................... 23,819 1997 Acquisition 40 Years
Golden Corral................... 11,158 1998 Construction 40 Years
Denny's......................... 10,780 1997 Construction 40 Years
Golden Corral................... 9,231 1998 Construction 40 Years
Nissan.......................... 88,384 1997 Acquisition 40 Years
BMW............................. 173,268 1997 Acquisition 40 Years
Video Update.................... 21,872 1997 Acquisition 40 Years
Damon's......................... 23,664 1997 Acquisition 40 Years
Arby's.......................... 11,542 1998 Construction 40 Years
Schlotzsky's Deli............... 27,465 1997 Acquisition 40 Years
Schlotzsky's Deli............... 27,238 1997 Acquisition 40 Years
Schlotzsky's Deli............... 27,408 1997 Acquisition 40 Years
Blockbuster Video............... 22,565 1997 Acquisition 40 Years
Whataburger..................... 17,193 1997 Acquisition 40 Years
Hooters......................... 55,120 1997 Acquisition 40 Years
Video Update.................... 9,364 1997 Acquisition 40 Years
Video Update.................... 20,868 1997 Acquisition 40 Years
Burger King..................... 18,069 1997 Construction 40 Years
Blockbuster Video............... 20,354 1997 Acquisition 40 Years
</TABLE>

F-20
<PAGE> 42
<TABLE>
<CAPTION>
COST GROSS AMOUNT
CAPITALIZED AT WHICH
SUBSEQUENT CARRIED AT
TYPE OF STATE INITIAL COST TO CLOSE
CONCEPT PROPERTY LOCATION ENCUMBRANCES TO COMPANY ACQUISITION OF PERIOD
------- -------- -------- ------------ ------------ ----------- ------------
(A)
<S> <C> <C> <C> <C> <C> <C>
Texas Roadhouse................. Restaurant CO -- 1,365,889 1,181 1,367,070
Texas Roadhouse................. Restaurant CO -- 1,663,919 -- 1,663,919
Carino's........................ Restaurant TX -- 2,070,003 -- 2,070,003
Carino's........................ Restaurant TX -- 1,917,860 -- 1,917,860
Boston Market................... Restaurant MI -- 1,171,769 -- 1,171,769
Vacant.......................... Restaurant MI -- 1,150,607 -- 1,150,607
Boston Market................... Restaurant IL -- 1,602,747 -- 1,602,747
Vacant.......................... Restaurant IL -- 1,293,062 -- 1,293,062
Arby's.......................... Restaurant MI -- 787,500 -- 787,500
Carino's........................ Restaurant TX -- 1,490,273 -- 1,490,273
Keg Steakhouse.................. Restaurant WA -- 907,322 -- 907,322
Keg Steakhouse.................. Restaurant WA -- 1,782,822 -- 1,782,822
Keg Steakhouse.................. Restaurant WA -- 1,854,922 -- 1,854,922
Keg Steakhouse.................. Restaurant WA -- 1,236,922 -- 1,236,922
Keg Steakhouse.................. Restaurant OR -- 866,356 -- 866,356
Blockbuster Video............... Retail AL -- 874,125 -- 874,125
Blockbuster Video............... Retail AL -- 874,125 -- 874,125
Sportmart....................... Retail IL -- 6,097,908 -- 6,097,908
Stop & Go....................... Retail TX -- 841,278 1,607 842,885
Circle K........................ Retail GA -- 1,229,616 -- 1,229,616
Stop & Go....................... Retail TX -- 635,643 -- 635,643
Circle K........................ Retail CA -- 1,417,579 -- 1,417,579
Circle K........................ Retail CA -- 1,417,171 -- 1,417,171
Stop & Go....................... Retail TX -- 1,003,882 10,711 1,014,593
Stop & Go....................... Retail TX -- 991,496 -- 991,496
Stop & Go....................... Retail TX -- 834,047 -- 834,047
Athlete's Foot.................. Retail GA -- 1,691,947 1,691,947
Applebee's...................... Restaurant KY -- 1,730,400 -- 1,730,400
Boston Market................... Restaurant PA -- 909,531 -- 909,531
East Side Mario's............... Retail OH -- 1,820,000 -- 1,820,000
Vacant.......................... Restaurant FL -- 502,469 -- 502,469
Red Robin....................... Restaurant CO -- 2,179,000 -- 2,179,000
Applebee's...................... Restaurant OH -- 1,225,000 -- 1,225,000
Boston Market................... Restaurant NC -- 1,104,000 -- 1,104,000
Applebee's...................... Restaurant MO -- 1,772,000 -- 1,772,000
Kona Steakhouse................. Restaurant TX -- 1,728,621 -- 1,728,621
Office Depot.................... Retail GA -- 2,821,785 -- 2,821,785
Blockbuster Video............... Retail AL -- 1,115,598 -- 1,115,598
Arby's.......................... Restaurant OH -- 685,139 -- 685,139
Blockbuster Video............... Retail GA -- 763,143 -- 763,143
Jack In The Box................. Restaurant KY -- 893,417 -- 893,417
Jack In The Box................. Restaurant KY -- 1,351,798 -- 1,351,798
Jack In The Box................. Restaurant TX -- 1,119,945 -- 1,119,945
Jack In The Box................. Restaurant CA -- 1,188,833 -- 1,188,833

DATE OF
ACCUMULATED ACQUISITION/ ACQUISITION/
CONCEPT DEPRECIATION CONSTRUCTION CONSTRUCTION DEPRECIATION
------- ------------ ------------ ------------ ------------

<S> <C> <C> <C> <C>
Texas Roadhouse................. 26,851 1997 Acquisition 40 Years
Texas Roadhouse................. 11,014 1998 Construction 40 Years
Carino's........................ 37,270 1997 Acquisition 40 Years
Carino's........................ 43,585 1997 Acquisition 40 Years
Boston Market................... 19,777 1997 Acquisition 40 Years
Vacant.......................... 18,116 1997 Acquisition 40 Years
Boston Market................... 22,888 1997 Acquisition 40 Years
Vacant.......................... 20,377 1997 Acquisition 40 Years
Arby's.......................... 16,844 1997 Acquisition 40 Years
Carino's........................ 7,456 1998 Construction 40 Years
Keg Steakhouse.................. 12,128 1997 Acquisition 40 Years
Keg Steakhouse.................. 16,248 1997 Acquisition 40 Years
Keg Steakhouse.................. 22,299 1997 Acquisition 40 Years
Keg Steakhouse.................. 19,878 1997 Acquisition 40 Years
Keg Steakhouse.................. 2,735 1997 Acquisition 40 Years
Blockbuster Video............... 14,868 1997 Acquisition 40 Years
Blockbuster Video............... 14,539 1997 Acquisition 40 Years
Sportmart....................... 102,073 1997 Acquisition 40 Years
Stop & Go....................... 16,467 1997 Acquisition 40 Years
Circle K........................ 18,907 1998 Acquisition 40 Years
Stop & Go....................... 9,366 1997 Acquisition 40 Years
Circle K........................ 25,987 1997 Acquisition 40 Years
Circle K........................ 21,427 1997 Acquisition 40 Years
Stop & Go....................... 17,097 1997 Acquisition 40 Years
Stop & Go....................... 17,287 1997 Acquisition 40 Years
Stop & Go....................... 50,793 1997 Acquisition 40 Years
Athlete's Foot.................. 22,366 1998 Construction 40 Years
Applebee's...................... 27,553 1997 Acquisition 40 Years
Boston Market................... 18,163 1997 Construction 40 Years
East Side Mario's............... 32,305 1998 Acquisition 40 Years
Vacant.......................... 6,188 1998 Acquisition 40 Years
Red Robin....................... 42,491 1998 Acquisition 40 Years
Applebee's...................... 22,356 1998 Acquisition 40 Years
Boston Market................... 15,456 1998 Acquisition 40 Years
Applebee's...................... 21,264 1998 Acquisition 40 Years
Kona Steakhouse................. 5,805 1998 Construction 40 Years
Office Depot.................... 48,527 1998 Acquisition 40 Years
Blockbuster Video............... 11,732 1998 Acquisition 40 Years
Arby's.......................... 5,680 1998 Construction 40 Years
Blockbuster Video............... 10,507 1998 Acquisition 40 Years
Jack In The Box................. 8,624 1998 Acquisition 40 Years
Jack In The Box................. 2,281 1998 Acquisition 40 Years
Jack In The Box................. 9,150 1998 Acquisition 40 Years
Jack In The Box................. 5,380 1998 Acquisition 40 Years
</TABLE>

F-21
<PAGE> 43
<TABLE>
<CAPTION>
COST GROSS AMOUNT
CAPITALIZED AT WHICH
SUBSEQUENT CARRIED AT
TYPE OF STATE INITIAL COST TO CLOSE
CONCEPT PROPERTY LOCATION ENCUMBRANCES TO COMPANY ACQUISITION OF PERIOD
------- -------- -------- ------------ ------------ ----------- ------------
(A)
<S> <C> <C> <C> <C> <C> <C>
Arby's.......................... Restaurant TX -- 772,500 -- 772,500
Arby's.......................... Restaurant AZ -- 927,000 -- 927,000
Arby's.......................... Restaurant NM -- 745,720 -- 745,720
Arby's.......................... Restaurant NM -- 721,000 -- 721,000
Arby's.......................... Restaurant NM -- 978,500 -- 978,500
Arby's.......................... Restaurant CO -- 587,100 -- 587,100
Hollywood Video................. Retail OH -- 781,834 -- 781,834
Perkins......................... Restaurant FL -- 956,704 -- 956,704
Bennigan's...................... Restaurant CO -- 1,844,419 -- 1,844,419
Bennigan's...................... Restaurant CT -- 1,611,591 -- 1,611,591
Bennigan's...................... Restaurant FL -- 1,596,500 -- 1,596,500
Steak & Ale..................... Restaurant FL -- 1,461,163 -- 1,461,163
Bennigan's...................... Restaurant FL -- 1,892,325 -- 1,892,325
Steak & Ale..................... Restaurant FL -- 1,381,597 -- 1,381,597
Bennigan's...................... Restaurant IL -- 2,678,000 -- 2,678,000
Steak & Ale..................... Restaurant IN -- 1,461,163 -- 1,461,163
Steak & Ale..................... Restaurant IN -- 1,245,581 -- 1,245,581
Bennigan's...................... Restaurant MI -- 1,588,434 -- 1,588,434
Bennigan's...................... Restaurant NC -- 1,662,617 -- 1,662,617
Bennigan's...................... Restaurant OK -- 2,034,250 -- 2,034,250
Steak & Ale..................... Restaurant OK -- 1,588,434 -- 1,588,434
Steak & Ale..................... Restaurant TX -- 1,461,163 -- 1,461,163
Bennigan's...................... Restaurant TX -- 1,700,698 -- 1,700,698
Steak & Ale..................... Restaurant VA -- 1,700,698 -- 1,700,698
Steak & Ale..................... Restaurant TX -- 1,293,488 -- 1,293,488
Bennigan's...................... Restaurant FL -- 1,413,256 -- 1,413,256
Jared Jewelers.................. Retail VA -- 2,069,280 -- 2,069,280
----------- ----------- ------------ -----------
SUBTOTAL -- COMMENCED LEASES -- 213,389,553 (253,775.23) 213,135,778
----------- ----------- ------------ -----------
CONSTRUCTION DRAWS ON LEASES
Claim Jumper.................... Restaurant AZ -- 1,061,658 -- 1,061,658
Claim Jumper.................... Restaurant AZ -- 1,929,050 -- 1,929,050
Rite Aid........................ Retail CA -- 2,248,750 -- 2,248,750
Red Robin....................... Restaurant OH -- 1,974,812 -- 1,974,812
Edward Bros. / Best Buy......... Retail CA -- 2,213,144 -- 2,213,144
Kona Steakhouse................. Restaurant TX -- 1,031,138 -- 1,031,138
Hollywood Video Retail GA -- 836,130 -- 836,130
Hollywood Video................. Retail CO -- 546,407 -- 546,407

DATE OF
ACCUMULATED ACQUISITION/ ACQUISITION/
CONCEPT DEPRECIATION CONSTRUCTION CONSTRUCTION DEPRECIATION
------- ------------ ------------ ------------ ------------

<S> <C> <C> <C> <C>
Arby's.......................... 6,412 1998 Acquisition 40 Years
Arby's.......................... 9,521 1998 Acquisition 40 Years
Arby's.......................... 9,637 1998 Acquisition 40 Years
Arby's.......................... 1,112 1998 Construction 40 Years
Arby's.......................... 11,605 1998 Acquisition 40 Years
Arby's.......................... 7,060 1998 Acquisition 40 Years
Hollywood Video................. 3,255 1998 Acquisition 40 Years
Perkins......................... -- 1998 Acquisition 40 Years
Bennigan's...................... 15,755 1998 Acquisition 40 Years
Bennigan's...................... 8,759 1998 Acquisition 40 Years
Bennigan's...................... 11,555 1998 Acquisition 40 Years
Steak & Ale..................... 10,694 1998 Acquisition 40 Years
Bennigan's...................... 12,826 1998 Acquisition 40 Years
Steak & Ale..................... 7,755 1998 Acquisition 40 Years
Bennigan's...................... 16,390 1998 Acquisition 40 Years
Steak & Ale..................... 12,690 1998 Acquisition 40 Years
Steak & Ale..................... 12,647 1998 Acquisition 40 Years
Bennigan's...................... 12,774 1998 Acquisition 40 Years
Bennigan's...................... 10,959 1998 Acquisition 40 Years
Bennigan's...................... 16,132 1998 Acquisition 40 Years
Steak & Ale..................... 13,302 1998 Acquisition 40 Years
Steak & Ale..................... 12,638 1998 Acquisition 40 Years
Bennigan's...................... 13,843 1998 Acquisition 40 Years
Steak & Ale..................... 12,439 1998 Acquisition 40 Years
Steak & Ale..................... 11,662 1998 Acquisition 40 Years
Bennigan's...................... 10,610 1998 Acquisition 40 Years
Jared Jewelers.................. -- 1998 Construction 40 Years
---------
SUBTOTAL -- COMMENCED LEASES 4,662,208
---------
CONSTRUCTION DRAWS ON LEASES
Claim Jumper.................... -- 1998 Construction --
Claim Jumper.................... -- 1998 Construction --
Rite Aid........................ -- 1998 Construction --
Red Robin....................... -- 1998 Construction --
Edward Bros. / Best Buy......... -- 1998 Construction --
Kona Steakhouse................. -- 1998 Construction --
Hollywood Video -- 1998 Construction --
Hollywood Video................. -- 1998 Construction --
</TABLE>

F-22
<PAGE> 44
<TABLE>
<CAPTION>
COST GROSS AMOUNT
CAPITALIZED AT WHICH
SUBSEQUENT CARRIED AT
TYPE OF STATE INITIAL COST TO CLOSE
CONCEPT PROPERTY LOCATION ENCUMBRANCES TO COMPANY ACQUISITION OF PERIOD
------- -------- -------- ------------ ------------ ----------- ------------
(A)
<S> <C> <C> <C> <C> <C> <C>
Hollywood Video................. Retail CO -- 1,035,003 -- 1,035,003
----------- ----------- ------------ -----------
SUBTOTAL -- CONSTRUCTION DRAWS -- 12,876,091 -- 12,876,091
----------- ----------- ------------ -----------
TOTAL -- PROPERTIES SUBJECT TO
OPERATING LEASES -- 226,265,644 (253,775.23) 226,011,869
=========== =========== ============ ===========
PROPERTIES SUBJECT TO FINANCING LEASES:
Jared Jewelers.................. Retail FL -- 1,179,620 -- 1,179,620
Jared Jewelers.................. Retail AZ -- 1,087,808 -- 1,087,808
Jared Jewelers.................. Retail AZ -- 861,396 -- 861,396
----------- -- ----------- ----------- ------------ -----------
TOTAL -- PROPERTIES SUBJECT TO
FINANCING LEASES -- 3,128,824 -- 3,128,824
=========== =========== ============ ===========

DATE OF
ACCUMULATED ACQUISITION/ ACQUISITION/
CONCEPT DEPRECIATION CONSTRUCTION CONSTRUCTION DEPRECIATION
------- ------------ ------------ ------------ ------------

<S> <C> <C> <C> <C>
Hollywood Video................. -- 1998 Construction --
---------
SUBTOTAL -- CONSTRUCTION DRAWS --
---------
TOTAL -- PROPERTIES SUBJECT TO
OPERATING LEASES 4,662,208
=========
PROPERTIES SUBJECT TO FINANCING
Jared Jewelers.................. (c) 1998 Construction (c)
Jared Jewelers.................. (c) 1998 Construction (c)
Jared Jewelers.................. (c) 1998 Construction (c)
--------- ---- ------------ --------
TOTAL -- PROPERTIES SUBJECT TO
FINANCING LEASES --
=========
</TABLE>

- -------------------------

(a) Property is encumbered as part of the Company's $114 million note payable.

(b) The Company determined to record an impairment loss during 1998.

(c) The Company owns only the building for this property. The land is subject to
a ground lease between the tenant and an unrelated third party. For
financial reporting purposes, the lease for the building has been recorded
as a financing lease; therefore, depreciation is not applicable.

The changes in total properties for the years ended December 31, 1998 and
1997 are as follows:

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of year.................................. $153,416,796 $ 70,729,019
Acquisitions................................................ 78,116,356 81,337,347
Increase in historical recorded value resulting from
merger.................................................... 5,161,000
Dispositions and other...................................... (5,521,283) (3,810,570)
------------ ------------
Balance, end of year........................................ 226,011,869 153,416,796
============ ============
</TABLE>

The changes in accumulated depreciation for the years ended December 31,
1998 and 1997 are as follows:

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of year.................................. $1,925,245 $ 553,988
Depreciation expense........................................ 2,897,294 1,436,361
Dispositions and other...................................... (160,331) (65,104)
---------- ----------
Balance, end of year........................................ 4,662,208 1,925,245
========== ==========
</TABLE>

F-23