<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to__
Commission file number: 1045281
CAPTEC NET LEASE REALTY, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
38-3368333
(IRS Employer Identification Number)
24 Frank Lloyd Wright Drive, Ann Arbor, Michigan 48106
(Address of principal executive offices, including zip code)
(734) 994-5505
(Registrant's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the registrant's classes of common equity, as of the
latest practicable date.
9,508,108 shares of Common Stock, $.01 par value, outstanding as
of May 15, 2000.
1
<PAGE> 2
CAPTEC NET LEASE REALTY, INC.
AND SUBSIDIARIES
CONTENTS
ITEM NO. PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Consolidated Notes to Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Report on Form 8-K 15
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS (unaudited)
Cash and cash equivalents $ 941,645 $ 1,035,607
Investments:
Properties subject to operating leases, net 215,494,495 217,615,654
Properties subject to financing leases, net 4,442,545 4,407,195
Loans to affiliates, collateralized by mortgage loans 5,855,548 10,979,804
Investment in joint venture 7,456,436 7,305,894
Investment in affiliated limited partnerships, net 4,218,613 4,251,568
Other loans, related party 382,152 390,520
------------- -------------
Total investments 237,849,789 244,950,635
Short-term loans to affiliates 5,499,097 398,471
Unbilled rent, net 6,527,182 6,027,221
Accounts receivable 518,971 491,052
Due from affiliates 1,813,158 1,326,307
Other assets 2,111,971 1,292,399
------------- -------------
Total assets $ 255,261,813 $ 255,521,692
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 116,284,834 $ 116,921,555
Accounts payable and accrued expenses 3,151,655 2,672,529
Federal income tax payable 719,000 719,000
Security deposits held on leases 272,943 272,943
------------- -------------
Total liabilities 120,428,432 120,586,027
------------- -------------
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 27,244 129,528
------------- -------------
Total stockholders' equity 134,833,381 134,935,665
------------- -------------
Total liabilities and stockholders' equity $ 255,261,813 $ 255,521,692
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
<S> <C> <C>
Revenue:
Rental income from operating leases $ 6,138,749 $ 6,005,078
Earned income from financing leases 156,849 152,207
Interest income on loans to affiliates 316,061 322,705
Other income, principally affiliated ventures 1,019,705 555,641
----------- -----------
Total revenue 7,631,364 7,035,631
----------- -----------
Expenses:
Interest 2,546,192 2,239,880
Management fees, affiliates, net -- (68,013)
General and administrative 342,596 430,905
Depreciation and amortization 864,968 833,409
Non-recurring merger costs 1,143,000 --
----------- -----------
Total expenses 4,896,756 3,436,181
----------- -----------
Net income before equity in joint venture,
gain/(loss) on sale of properties
and accounting change 2,734,608 3,599,450
Equity in net income of joint venture 150,542 --
Gain/(loss) on sale of properties 625,647 (50,973)
----------- -----------
Net income before accounting change 3,510,797 3,548,477
Cummulative effect of accounting change -- (336,875)
----------- -----------
Net Income $ 3,510,797 $ 3,211,602
=========== ===========
Basic and Diluted EPS:
Income before accounting change $ 0.37 $ 0.37
=========== ===========
Accounting change $ -- $ (0.03)
=========== ===========
Net Income $ 0.37 $ 0.34
=========== ===========
Weighted average number of common shares
outstanding 9,508,108 9,508,108
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(unaudited)
<TABLE>
<CAPTION>
Common Stock Total
----------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
------ ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 2000 9,508,108 $ 95,081 $ 134,711,056 $ 129,528 $ 134,935,665
Net Income - - - 3,510,797 3,510,797
Common stock dividends ($0.38 per share) - - - (3,613,081) (3,613,081)
--------- -------- ------------- ---------- -------------
BALANCE, MARCH 31, 2000 9,508,108 $ 95,081 $ 134,711,056 $ 27,244 $ 134,833,381
========= ======== ============= ========== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,510,797 $ 3,211,602
Adjustments to net income:
Depreciation and amortization 864,968 833,409
Accounting change -- 336,875
Amortization of debt issuance costs 198,990 142,160
Equity in net income of joint venture (150,542) --
(Gain)/loss on sale of property (625,647) 50,973
Increase in unbilled rent (499,961) (645,679)
Increase in accounts receivable and other assets (1,530,406) (454,920)
Increase (decrease) in accounts payable and accrued expenses 479,126 (573,422)
----------- -----------
Net cash provided by operating activities 2,247,325 2,900,998
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties subject to operating leases (3,954,479) (3,446,346)
Acquisition of properties subject to financing leases -- (1,115,570)
Advances on short-term loans to affiliates, net (5,100,626) (658,434)
Proceeds from the disposition of properties 5,866,346 454,594
Collections on loans to affiliates, collateralized by
mortgage loans 5,124,256 658,434
Collection of principal on other loans 8,368 4,930
Collection of principal on financing leases (35,350) (40,291)
Lease security deposits -- 86,500
----------- -----------
Net cash provided by (used in) investing activities 1,908,515 (4,056,183)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock (3,613,081) (3,565,540)
Borrowings of notes payable 7,000,000 2,500,000
Repayments of notes payable (7,636,721) --
----------- -----------
Net cash used in financing activities (4,249,802) (1,065,540)
----------- -----------
NET CASH FLOWS (93,962) (2,220,725)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,035,607 4,488,565
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 941,645 $ 2,267,840
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,704,879 $ 2,782,887
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 7
CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION: The Company, which has operated as a REIT since November
1997, 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 national 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 increases
OTHER INFORMATION: On December 20, 1999 the Company executed an Omnibus
Agreement and Plan of Merger by and among the Company, Captec
Acquisition, Inc., a wholly-owned subsidiary of the Company, Captec
Financial Group, Inc., and Captec Advisors. The merger agreement
provided for the merger of Captec Acquisition with and into Financial
Group and of Captec Advisors with and into the Company. Upon
consummation of the merger, Financial Group would have become a
wholly-owned subsidiary of the Company and the separate corporate
existence of Captec Advisors would have terminated. Financial Group and
Captec Advisors are affiliates of the Company.
The merger agreement contained numerous customary and transaction
specific representations, warranties, covenants and conditions to
closing. Although the Delaware General Corporation Law did not require
that the merger be approved by stockholders of the Company, the merger
agreement provided that the merger be subject to the affirmative vote
of a majority of the shares of the common stock, excluding shares of
the common stock owned by officers, directors or affiliates of the
Company who or that are also officers, directors or affiliates of
Financial Group or Captec Advisors.
On May 1, 2000 all parties to the merger mutually agreed to terminate
the merger agreement and the Company effectively withdrew the related
preliminary proxy statement that had been filed with the United States
Securities and Exchange Commission.
UNAUDITED INTERIM FINANCIAL INFORMATION: The consolidated balance sheet
as of March 31, 2000 and the consolidated statements of operations,
stockholders' equity and cash flows for the three months ended March
31, 2000 and 1999 have not been audited. In the opinion of management,
all adjustments (including normal recurring adjustments) considered
necessary for a fair presentation have been reflected therein. Results
of operations for the interim periods are not necessarily indicative of
results for the full year. These unaudited financial statements should
be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 filed with the United States Securities and Exchange
Commission on March 30, 2000.
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 the first quarter of the first fiscal year beginning
after June 15, 2000 (January 1, 2001 for the Company). The statement
requires that all derivative instruments be recorded at fair value on
the balance sheet with changes in fair value recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Management of the Company has not yet
determined the impact that the adoption of the statement will have on
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". This statement requires start-up activities and
organization costs to be expensed as incurred. In accordance with the
provisions of the statement, the Company has recorded a $337,000
non-cash charge during the three months ended March 31, 1999 for the
balance of unamortized organization costs.
7
<PAGE> 8
CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS: Certain prior period financial statement amounts
have been reclassified to conform to the 2000 presentations.
2. PROPERTIES SUBJECT TO OPERATING LEASES:
Properties subject to operating leases represent various properties
leases to tenants under long-term net operating leases. The lease
agreements generally provide for monthly rents based upon a percentage
of the property's cost. The initial term of the leases typically ranges
from 15 to 20 years, although the Company in certain cases will enter
into leases with terms that are shorter or longer. Most leases also
provide for one or more five year renewal options. In addition, certain
leases provide the tenant one or more options to purchase the
properties at a predetermined price, generally only during stated
periods during the fifth to seventh lease years.
The Company's investment in properties subject to operating leases
includes capitalized acquisition and interest costs which have been
allocated between land and buildings and improvements on a pro rata
basis. The net investment in properties subject to operating leases is
comprised of the following as of March 31:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Land $ 86,363,926 $ 82,415,699
Buildings and improvements 136,030,293 132,302,561
Construction draws on properties 1,259,727 14,226,708
------------ ------------
223,653,946 228,944,968
Less accumulated depreciation (8,159,451) (5,485,448)
------------ ------------
Total $215,494,495 $223,459,520
============ ============
</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 to all construction related costs advanced through
construction draws, including interest during the construction period.
Upon completion of construction and when the tenant lease payments
begin, the construction draws are then capitalized as land and
building. At March 31, 2000 the Company had approximately $1.9 million
of unfunded commitments on properties under construction.
3. FINANCING LEASES:
Properties subject to financing leases is comprised of four properties
whereby the Company owns only the building and the land is subject to a
ground lease between the tenant and an unrelated third party. The net
investment in financing leases is comprised of the following as of
March 31:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Minimum lease payments to be received $10,027,037 $10,519,387
Estimated residual value - -
----------- -----------
Gross investment in financing leases 10,027,037 10,519,387
Unearned income (5,584,492) (6,234,702
----------- -----------
Net investment in financing leases $ 4,442,545 $ 4,284,685
=========== ===========
</TABLE>
8
<PAGE> 9
CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT IN JOINT VENTURE:
In 1999 the Company invested $7.1 million for a 22.6% membership
interest in FC Venture I, LLC. The investment is accounted for under
the equity method. Summarized financial information of the Company's
joint venture investment as of and for the three months ended March 31,
2000 is set forth below:
<TABLE>
<S> <C>
Investment in properties subject to leases, net $40,530,058
Total assets 42,863,730
Notes payable 9,111,594
Total liabilities 10,819,340
Members' equity 32,044,390
Revenues 997,257
Net income 666,113
</TABLE>
5. NOTES PAYABLE:
The Company's credit facility, as amended December 1, 1998, provides up
to $125 million for the acquisition and development of properties and
working capital. The credit facility has a three year term and is
subject to certain borrowing base restrictions. The Company had
approximately $116.3 million of aggregate outstanding borrowings under
the credit facility at March 31, 2000.
6. EARNINGS PER SHARE:
Stock options currently outstanding 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
the three months ended March 31, 2000 and 1999.
7. NON-RECURRING MERGER COSTS:
As described in Note 1 above, the Company terminated a merger agreement
on May 1, 2000 that resulted in the Company recognizing expense of $1.1
million in non-recurring merger costs in the three month period ended
March 31, 2000. Merger costs of approximately $700,000 which represent
services that have near term potential benefit are included in other
assets as of March 31, 2000.
8. RELATED PARTY TRANSACTIONS:
The Company is party to an advisory agreement, as amended, with Captec
Net Lease Realty Advisors, Inc., an affiliate, whereby the Company pays
to Captec Advisors a management fee and earns a reduction in management
fees paid to Captec Advisors based on the acquisition levels of Family
Realty, Inc. and Family Realty II, Inc. each of which the Company owns
a 60% non-voting common stock. During the three months ended March 31,
2000 the Company incurred approximately $377,000 in management fees and
received an equal reduction in the management fees from Captec
Advisors.
In 1999 Family Realty II, Inc. was formed and as a result the Company
received $100,000 for formation costs incurred during the three months
ended March 31, 2000. In addition, the Company received $100,000 in
management fees from Family Realty II during the three months ended
March 31, 2000. Both the formation cost and management fee have been
record in other income.
9
<PAGE> 10
CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS:
In April 2000, the Company declared dividends to its shareholders of
$3,613,081, or $0.38 per share of common stock, which was paid on April
18, 2000.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company, which operates as a REIT, acquires, develops and owns
freestanding properties which are leased on a long-term triple-net
basis to operators of national and regional chain restaurants and
retailers. The Company's 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 fee income earned from
affiliates and interest income on loans to affiliates.
As of March 31, 2000, the Company owned 160 properties, located in 28
states, subject to long-term net leases with 62 different lessees under
major restaurant and retail concepts including Bennigan's, Applebee's,
Denny's, Best Buy, Athlete's Foot, Blockbuster Video, and Jared
Jewelers.
RESULTS OF OPERATIONS
During the three months ended March 31, 2000 total revenue increased
8.5% to $7.6 million as compared to $7.0 million for the three months
ended March 31, 1999. Rental revenue from operating leases for the
three months ended March 31, 2000 increased 2.2% to $6.1 million as
compared to $6.0 million for the three months ended March 31, 1999,
primarily from the benefit of a full period of rental revenue from
properties acquired and leased in preceeding periods. Earned income
from financing leases for the three months ended March 31, 2000
increased 3.0% to approximately $157,000 for the three months ended
March 31, 2000 as compared to approximately $152,000 for the three
months ended March 31, 1999. The increase is the result of one
financing lease commencing in February 1999 resulting in only two
months of income in 1999 as compared to three months of income in 2000.
Interest income on loans to affiliates decreased 2.1% to approximately
$316,000 for the three months ended March 31, 2000 as compared to
approximately $323,000 for the three months ended March 31, 1999 as a
result of principal payments received on loans to affiliates in
preceeding periods. Other income increased 83.5% to $1.0 million for
the three months ended March 31, 2000 as compared to $556,000 for the
three months ended March 31, 1999 due to fees earned for the
acquisition, development and management of properties on behalf of its
affiliated ventures.
Total expenses increased 42.5% to $4.9 million for the three months
ended March 31, 2000 as compared to $3.4 million for the three months
ended March 31, 1999. Interest expense increased 13.7% to $2.5 million
for the three months ended March 31, 2000 as compared to $2.2 million
for the three months ended March 31, 1999. The increase was due to a
$2.1 million increase in the average outstanding borrowings under the
Company's credit facility used to fund the acquisition and development
of properties and a 64 basis point increase in the weighted average
interest rate. General and administrative expenses, including
management fees to affiliates, decreased 5.6% to approximately $343,000
for the three months ended March 31, 2000 as compared to approximately
$363,000 for the three months ended March 31, 1999 as a result of minor
general cost savings. Depreciation and amortization increased 3.8% to
approximately $865,000 for the three months ended March 31, 2000 as
compared to approximately $833,000 for the three months ended March 31,
1999. The increase is 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 periods. Non-recurring
merger costs increased to $1.1 million during the three months ended
March 31, 2000 as a result of the termination of the merger agreement.
In 1999 the Company invested $7.1 million in a 22.6% membership
interest in FC Venture I, LLC, a joint venture. During the three months
ended March 31, 2000 the Company recorded approximately $151,000 as its
portion of FC Venture's equity earnings.
The Company sold three properties during the three months ended March
31, 2000, collecting total net proceeds of $5.9 million and reflected a
gain totaling approximately $625,400 on the sale of these properties.
11
<PAGE> 12
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". This statement requires start-up activities and
organization costs to be expensed as incurred. In accordance with the
provisions of the statement, the Company recognized a $336,875 non-cash
charge during the three months ended March 31, 1999 for the balance of
unamortized organization costs which resulted in net income for the
three months ended March 31, 1999 of $3.2 million.
As a result of the foregoing, the Company's net income after accounting
change increased 9.3% to $3.5 million for the three months ended March
31, 2000 as compared to $3.2 million for the three months ended March
31, 1999.
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 acquisition and development have been
typically funded out of proceeds from borrowings. The Company expects
to meet its liquidity requirements, which are principally property
acquisition and development and scheduled debt maturities, through a
variety of future sources of capital, including long-term
collateralized and uncollateralized indebtedness, the issuance of
additional equity or debt securities and "off-balance sheet" financing
through the formation of joint ventures.
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
properties other than potential costs of re-leasing vacant Boston
Chicken properties which it anticipates not exceeding $300,000.
At March 31, 2000 the Company had cash and cash equivalents of
approximately $942,000. For the three months ended March 31, 2000, the
Company generated cash from operations of $2.2 million as compared to
$2.9 million for the three months ended March 31, 1999. Cash generated
from operations provides funds for dividends. Any excess cash from
operations may also be used for investment in properties. For the three
months ended March 31, 2000 the Company generated $1.9 million from
investing activities as compared to using $4.0 million during the three
months ended March 31, 1999. The Company used $4.2 million in financing
activities during the three months ended March 31, 2000 as compared to
using $1.1 million during the three months ended March 31, 1999.
CREDIT FACILITY. In February 1998, the Company entered into a
syndicated credit facility with First Union National Bank, as agent, to
provide funds for the acquisition and development 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 $125.0 million of debt which is
collateralized by the properties. At March 31, 2000 the Company had
$116.3 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. At
March 31, 2000 the Company is in compliance with all debt covenants.
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.
12
<PAGE> 13
The credit facility expires in February 2001 and may be renewed 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 collateralized by individual
properties or groups of properties, by uncollateralized private or
public debt offerings or by additional equity offerings. No assurances
can be made that the company will be able to refinance such debt.
PROPERTY ACQUISITIONS AND COMMITMENTS. During the three months ended
March 31, 2000 the Company acquired properties for an aggregate
acquisition cost of $4.0 million. As of March 31, 2000, the Company had
entered into commitments to acquire 90 properties totaling $196.7
million. The commitments are subject to various conditions to closing
which are described in the contracts or letters of intent relating to
these properties. In addition, in the ordinary course of business the
Company is in negotiations regarding the proposed acquisition of other
properties and related co-development opportunities. The Company may
enter into commitments to acquire 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 collateralized
and uncollateralized 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 demand for additional capital in the future.
DIVIDENDS. During the three months ended March 31, 2000 the Company
paid dividends of $3,613,081. In April 2000, the Company declared a
first quarter dividend on its common stock in the amount of $0.38 per
share or $3,613,081. The dividend was payable to shareholders of record
on April 11, 2000 and was paid on April 18, 2000. 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.
YEAR 2000
As a result of the Company's Year 2000 efforts and the timely
completion of all related projects, the Company did not experience any
disruption in its business operations in January 2000. In addition, the
Company was not adversely affected by any of its key business vendors,
lessees or other partners not being Year 2000 ready.
The Company will continue to monitor its own operations, and the
operations of third parties that are critical to the Company's
operations, for potential Year 2000-related problems. However, the
Company does not anticipate that it will discover any future Year 2000
issues that will have a material impact on its business, results of
operations, or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents a risk of loss arising from adverse changes in
market prices and interest rates. The Company's market risk arises from
interest rate risk inherent in its financial instruments. The Company
is not subject to foreign currency exchange rate risk or commodity
price risk.
The Company monitors and manages interest rate exposure as an integral
part of its overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the
potentially adverse effect on its results. At March 31, 2000
approximately 100% of the Company's debt bears interest at variable
rates of LIBOR rate plus 1.25% to 1.75%.
13
<PAGE> 14
The following table presents certain information on the Company's
assets and liabilities which are sensitive to interest rate changes at
March 31, 2000:
<TABLE>
<CAPTION>
MATURITY
------------------------------------------
0 TO 3 1 TO 5
MONTHS YEARS TOTAL
----------- ------------- -------------
<S> <C> <C> <C>
Assets:
Cash and cash equivalents........................................... $ 941,645 $ -- $ 941,645
Properties subject to operating leases, net(1)...................... -- 1,259,727 1,259,727
----------- ------------- -------------
Total assets..................................................... $ 941,645 $ 1,259,727 $ 2,201,372
=========== ============= =============
Liabilities
Notes payable....................................................... $ -- $ 116,284,834 $ 116,284,834
=========== ============= =============
Reprice difference.................................................. $ 941,645 $(115,025,107)
Cumulative gap...................................................... $ 941,645 $(114,083,462)
</TABLE>
(1) Represents leases that are under construction and sensitive to
interest rate fluctuations.
A 1% increase in the variable interest rate for the three months ended
March 31, 2000 would have resulted in additional interest expense of
approximately $174,000.
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
March 31, 2000 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 $31.5
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 interest rate swap contract terminates July
2001 and the interest rate cap contract terminates January 2001.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 2000.
---------------
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain "forward-looking statements" which represent the
Company's expectations or beliefs, including, but not limited to, statements
concerning industry performance and the Company's operations, performance,
financial condition, plans, growth and strategies. Any statements contained in
this Form 10-Q which are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "expect," "anticipate," 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.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CAPTEC NET LEASE REALTY, INC.
May 15, 2000 By: /s/ Patrick L. Beach
--------------------------------
Patrick L. Beach
Chief Executive Officer and President
May 15, 2000 By: /s/ W. Ross Martin
--------------------------------
W. Ross Martin
Chief Financial Officer and
Executive Vice President
16
<PAGE> 17
Exhibit Index
Exhibit No. Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 941,645
<SECURITIES> 0
<RECEIVABLES> 14,068,926
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,772,871
<PP&E> 223,653,946
<DEPRECIATION> (8,159,451)
<TOTAL-ASSETS> 255,261,813
<CURRENT-LIABILITIES> 3,151,655
<BONDS> 116,284,834
0
0
<COMMON> 95,081
<OTHER-SE> 134,738,300
<TOTAL-LIABILITY-AND-EQUITY> 255,261,813
<SALES> 0
<TOTAL-REVENUES> 7,631,364
<CGS> 0
<TOTAL-COSTS> 2,350,564
<OTHER-EXPENSES> (625,647)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,546,192
<INCOME-PRETAX> 3,510,797
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,510,797
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,510,797
<EPS-BASIC> 0.37
<EPS-DILUTED> 0.37
</TABLE>
