<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] PRELIMINARY PROXY STATEMENT [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
CAPTEC NET LEASE REALTY, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CAPTEC NET LEASE REALTY, INC.
(NAME OF PERSON(S) FILING PROXY STATEMENT)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
AGGREGATE
NUMBER OF PER UNIT PRICE PROPOSED
SECURITIES TO OR OTHER MAXIMUM
TITLE OF EACH CLASS OF WHICH UNDERLYING AGGREGATE AMOUNT OF
SECURITIES TO WHICH TRANSACTION VALUE OF VALUE OF FILING
TRANSACTION APPLIES APPLIES(1) TRANSACTION(1) TRANSACTION(1) FEE(1)(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock............................... 4,749,505 $7.438 $35,326,818.19 7,065.37
Cash Consideration......................... -- -- $ 2,504,950.00 501.00
Total...................................... -- -- $37,831,768.19 7,566.37
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the filing fee
pursuant to Rule 0-11 under the Securities Exchange Act of 1934, as amended.
(2) The fee was computed in accordance with Rule 0-11(c)(1)(i) based upon the
market value of a share of Common Stock on January 4, 2000.
[ ] Fee paid previously with preliminary materials:
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $7,566.37
(2) Form, Schedule or Registration Statement No.: Schedule 14A
(3) Filing Party: CAPTEC NET LEASE REALTY, INC.
(4) Date Filed: January 7, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
[CAPTEC NET LEASE REALTY, INC. LETTERHEAD]
[DATE]
Dear Fellow Stockholder:
I address you not only as the Chairman of the Board of Directors and
President and Chief Executive Officer of Captec, but as a fellow investor, who
like you has a significant investment in Captec and wishes to see that
investment increase in value.
The Board of Directors and management of Captec Net Lease Realty, Inc. are
proposing to you a significant and important change in the structure and
direction of Captec. The reasons for these proposals are described for you in
the enclosed proxy statement.
You are invited to attend a special meeting of the stockholders of Captec
on , 2000, at local time, at . At the special
meeting we will seek your approval of our proposed merger with Captec Financial
Group, Inc. and Captec Net Lease Realty Advisors, Inc.
As a result of the merger, Captec will become a full-service, specialty
commercial finance company providing a significantly expanded line of finance
products to its customers and will be able to expand into additional business
opportunities currently unavailable to it. The merger will result in the
discontinuance of Advisors, the termination of the existing management agreement
with Advisors and Captec becoming internally managed in all respects. Further,
Captec will cease to be a real estate investment trust for tax purposes,
effective as of January 1, 2000.
Financial Group is a specialty commercial finance company that delivers
structured finance solutions to the franchise and chain restaurant, and retail
petroleum and convenience store markets and offers a creative, entrepreneurial
approach to providing growth capital to its customers. The companies have worked
in tandem to become a value-added and customer-driven financial resource to our
shared customer base.
<PAGE> 3
The merger is conditioned upon, among other things, the affirmative vote of
the holders of a majority of the shares of common stock other than stockholders
who are officers, directors or affiliates of Captec, Financial Group or
Advisors. J.C. Bradford & Co. has rendered an opinion to a special committee of
the Board of Directors of Captec consisting of all of the non-management
directors that the consideration to be paid by Captec in consideration of the
merger is fair to Captec from a financial point of view.
AFTER CAREFUL CONSIDERATION OF THIS FAIRNESS OPINION AND OTHER FACTORS, THE
SPECIAL COMMITTEE, WHICH CONSISTS OF ALL NON-MANAGEMENT DIRECTORS, HAS
UNANIMOUSLY APPROVED THE MERGER. THE SPECIAL COMMITTEE BELIEVES THAT THE MERGER
IS FAIR TO, AND IN THE BEST INTERESTS OF, CAPTEC AND ITS STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE MERGER PROPOSAL.
At the special meeting, stockholders of Captec also will be asked to
consider and vote upon an amendment to Captec's certificate of incorporation to
change the name of Captec to Captec Financial Group, Inc. which we believe will
better identify Captec and its new strategic direction following the merger.
The merger and other matters referred to previously are more completely
described in the accompanying proxy statement. I urge you to review carefully
the proxy statement and accompanying Appendices which describe the merger and
the name change proposal in more detail. A copy of the merger agreement and the
fairness opinion of J.C. Bradford & Co. are attached as Appendix A and Appendix
B, respectively, to the proxy statement.
The special committee has unanimously recommended that our stockholders
vote in favor of the merger proposal. We appreciate the support of our
stockholders as we pursue our goal of making Captec a leader in the specialty
commercial finance industry. I hope that after reading the accompanying
materials you will continue to support the objectives of Captec by voting FOR
the merger and the name change proposal.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. Failure
to return your proxy card or vote at the special meeting will have the same
effect as a vote against the merger and the name change proposal. Please
complete, date and sign the enclosed proxy card and return it in the
accompanying postage paid envelope even if you plan to attend the special
meeting. If you attend the special meeting, you may withdraw your proxy and vote
in person.
ADDITIONAL COPIES OF OUR PROXY MATERIALS AND OTHER INFORMATION RELEVANT TO
THE MERGER AND THE SPECIAL MEETING CAN BE OBTAINED FROM OUR INTERNET WEB SITE AT
HTTP://WWW.CAPTEC.COM.
QUESTIONS AND REQUESTS FOR ASSISTANCE IN VOTING YOUR SHARES CAN BE DIRECTED
TO GEORGESON SHAREHOLDER COMMUNICATIONS, WHICH IS ASSISTING CAPTEC WITH THE
SOLICITATION OF PROXIES, TOLL FREE AT 1-800-223-2064.
Sincerely,
Patrick L. Beach
Chairman of the Board of Directors
President and Chief Executive Officer
<PAGE> 4
CAPTEC NET LEASE REALTY, INC.
24 FRANK LLOYD WRIGHT DRIVE
LOBBY L, 4TH FLOOR
ANN ARBOR, MICHIGAN 48106
------------------------
NOTICE OF SPECIAL MEETING TO BE HELD ON
, 2000
------------------------
To the Stockholders of
Captec Net Lease Realty, Inc.:
We will hold a special meeting of stockholders on , 2000,
a.m., local time, at , for the following purposes:
1. to approve an Omnibus Agreement and Plan of Merger, dated as of
December 20, 1999, as amended, pursuant to which Captec Acquisition, Inc.,
a Michigan corporation, will merge with and into Captec Financial Group,
Inc., a Michigan corporation and Captec Net Lease Realty Advisors, Inc., a
Delaware corporation, will merge with and into Captec Net Lease Realty,
Inc.;
2. to amend our certificate of incorporation to change our name to
Captec Financial Group, Inc.; and
3. to transact such other business as may properly come before the
special meeting or any adjournments or postponements thereof.
THE NAME CHANGE PROPOSAL IS CONDITIONED UPON THE CONSUMMATION OF THE MERGER. IF
THE MERGER IS NOT CONSUMMATED, CAPTEC'S CERTIFICATE OF INCORPORATION WILL NOT BE
AMENDED AND CAPTEC'S NAME WILL NOT BE CHANGED.
Both of the proposals are more fully described in the accompanying proxy
statement and appendices that are part of this notice.
During the special meeting, management will report on our current
activities and comment on our future plans. A discussion period is planned so
that stockholders will have an opportunity to ask questions and make comments.
Representatives of PricewaterhouseCoopers LLP, our independent accountants, will
be present at the special meeting and will have the opportunity to make a
statement and respond to appropriate questions.
The Board of Directors has fixed the close of business on , 2000
as the record date for the determination of stockholders entitled to notice of,
and to vote at, the special meeting or any adjournments or postponements
thereof. Only stockholders of record as of , 2000 will be entitled to
notice of, and to vote at, the special meeting or any adjournments or
postponements thereof. A list of stockholders of record as of , 2000
will be available for inspection at our offices at 24 Frank Lloyd Wright Drive,
Lobby L, 4th Floor, Ann Arbor, Michigan 48106 at least ten days prior to the
special meeting.
<PAGE> 5
If you plan to attend the special meeting, please notify the undersigned so
that identification can be prepared for you. Whether or not you plan to attend
the special meeting, please execute, date and promptly return the enclosed
proxy. A return envelope is enclosed for your convenience and requires no
postage for mailing in the United States. If you attend the special meeting, you
may withdraw your proxy and vote in person. Thank you for your interest and
consideration.
Sincerely,
Edward G. Ptaszek
Secretary
, 2000
YOUR VOTE IS IMPORTANT. TO VOTE YOUR SHARES, PLEASE COMPLETE, SIGN AND DATE THE
ENCLOSED PROXY AND MAIL IT IN THE ENCLOSED RETURN ENVELOPE.
<PAGE> 6
CAPTEC NET LEASE REALTY, INC.
24 FRANK LLOYD WRIGHT DRIVE
LOBBY L, FOURTH FLOOR
ANN ARBOR, MICHIGAN 48106
SPECIAL MEETING OF STOCKHOLDERS
, 2000
PROXY STATEMENT
------------------------
At the special meeting of stockholders on , 2000 a.m., local
time, stockholders of record as of the close of business on , 2000
will be asked to consider and vote upon a proposal to approve the merger of
Captec Acquisition, Inc., a Michigan corporation and a wholly-owned subsidiary
of Captec, with and into Captec Financial Group, Inc., a Michigan corporation
and of Captec Net Lease Realty Advisors, Inc., a Delaware corporation, with and
into Captec. As a result of the merger, Financial Group will become our
wholly-owned subsidiary, our current advisory agreement with Advisors will be
terminated, and Captec will become self-managed in all respects. In
consideration of the merger, we will issue an aggregate 2,749,505 shares of
Captec common stock to the security holders of Financial Group and Advisors.
Security holders of Financial Group will receive 2,189,505 shares of Captec
common stock, which is the equivalent of approximately 45.71 shares of Captec
common stock for each share of common stock, preferred stock, option or
participating warrant of Financial Group. Common stockholders of Advisors will
receive an aggregate 560,000 shares of Captec common stock, which is the
equivalent of 560 shares of Captec common stock for each share of Advisors
common stock. Financial Group stockholders and option holders also may receive
up to an additional 2.0 million shares of Captec common stock based upon
Captec's consolidated financial performance in 2000 and 2001. Based upon the
$ closing price of Captec common stock on Nasdaq on , 2000, the
value of Captec common stock to be issued to the Financial Group stockholders
and option holders is $ , including all potential earnout shares, and the
value of the Captec common stock to be issued to Advisors stockholders is
$ . Princap Leasing Company, L.P., which is the sole preferred stockholder
of Financial Group, also will receive registration rights for Captec common
stock it receives in the merger. Captec will make cash payments of $451,620,
$1,376,350, and $676,980, respectively, to The Public Institution for Social
Security, Prudential Securities Credit Corporation and Abbas Al-Qattan as
consideration for the termination of warrants that such parties hold to acquire
shares of Financial Group stock. These payments are the equivalent of a per
share price of $10.00.
Following the merger, Captec will be operated so that it will no longer
qualify as a real estate investment trust (REIT) for federal income tax purposes
and no longer will be required to distribute any of its net income to its
stockholders. It is anticipated that, as a result of the merger, Captec will
record approximately $17.5 million of goodwill on its financial statements.
Financial Group and Advisors are privately held and there is no established
trading market from which stockholders can assess the value of their respective
securities.
Patrick L. Beach, Captec's President, Chief Executive Officer and Chairman
of the Board of Directors, W. Ross Martin, Captec's Executive Vice President and
Chief Financial Officer and a Director, and H. Reid Sherard, Captec's Senior
Vice President -- Sales & Marketing and a Director, in the aggregate
beneficially own approximately 41.8% of Financial Group and approximately 91.1%
of Advisors, respectively. As of February 1, 2000, Mr. Beach, Mr. Martin and Mr.
Sherard, in the aggregate, were the beneficial owners of approximately 13.7% of
Captec common stock. Mr. Beach, Mr. Martin and Mr. Sherard, in the aggregate,
will be the beneficial owners of approximately 28.8% of Captec common stock
immediately following the merger and approximately 34.9% of Captec common stock
assuming the issuance of all earnout shares.
Because the merger involves affiliates of Captec, and Mr. Beach, Mr. Martin
and Mr. Sherard have conflicts of interest in connection with the merger, the
Board of Directors established a special committee consisting of all of the
non-management directors to consider and negotiate the merger and the merger
agreement. For a description of these conflicts, see "Risk Factors -- Conflicts
of Interest."
Stockholders also will be asked to consider and vote upon a proposal to
amend Captec's certificate of incorporation to change the name of Captec to
Captec Financial Group, Inc.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 31 FOR A DISCUSSION OF MATERIAL RISKS
WHICH SHOULD BE CONSIDERED IN EVALUATING THE MERGER.
------------------------
THE DATE OF THIS PROXY STATEMENT IS , 2000.
<PAGE> 7
WHERE YOU CAN FIND MORE INFORMATION
Captec is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, pursuant to which it files reports and other
information with the United States Securities and Exchange Commission. These
reports and other information may be inspected and copied at public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at 13th
Floor, 7 World Trade Center, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies may be obtained
at prescribed rates from the Public Reference Section of the SEC at its
principal office in Washington, D.C. The SEC also maintains an internet web site
that contains periodic and other reports, proxy and information statements and
other information regarding registrants, including Captec, that file
electronically with the SEC. The address of the SEC's web site is
http://www.sec.gov.
None of Financial Group, Advisors or Acquisition is subject to the
informational requirements of the Exchange Act.
We have not authorized anyone to give any information or make any
representation about the merger, our company, Financial Group or Advisors that
is different from, or in addition to, that contained in this proxy statement.
Therefore, if anyone does give you information of this sort, you should not rely
on it. This proxy statement is dated , 2000. You should not assume
that the information contained in this document is accurate as of any other date
unless the information specifically indicates that another date applies.
IF YOU WOULD LIKE ADDITIONAL COPIES OF THIS PROXY STATEMENT OR HAVE
QUESTIONS ABOUT THE MERGER, YOU SHOULD CONTACT:
GEORGESON SHAREHOLDER COMMUNICATION INC.
WALL STREET PLAZA
NEW YORK, NY 10005
(800) 223-2064
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION
SUMMARY..................................................... 1
FORWARD-LOOKING STATEMENTS.................................. 18
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS................................................ 19
HISTORICAL, PRO FORMA AND EQUIVALENT PER SHARE DATA......... 26
COMPARATIVE PER SHARE MARKET INFORMATION.................... 27
THE SPECIAL MEETING......................................... 28
General................................................... 28
Matters to be Considered.................................. 28
Recommendations of the Special Committee.................. 28
Record Date; Shares Entitled to be Voted; Quorum.......... 28
Proxies; Proxy Solicitation............................... 28
Vote Required............................................. 29
Effect of Abstentions and Broker Non-Votes................ 30
RISK FACTORS................................................ 31
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 38
THE MERGER.................................................. 39
Background................................................ 39
Opinion of the Financial Advisor to the Special
Committee.............................................. 46
Reasons for the Merger; Recommendations of the Special
Committee.............................................. 51
Conflicts of Interest..................................... 56
Management of Captec Following the Merger................. 58
Regulatory Approval....................................... 59
Registration Rights Agreement............................. 60
Effect of the Merger on the Rights of Existing
Stockholders........................................... 60
Accounting Treatment...................................... 61
THE MERGER AGREEMENT........................................ 61
Terms of the Merger....................................... 61
Earnout Shares............................................ 62
Indemnification........................................... 64
Effective Time of the Merger.............................. 65
Representations and Warranties............................ 65
Covenants................................................. 67
Conditions to Consummation of the Merger.................. 68
Amendment; Waiver; Termination............................ 69
Resale of Shares of Common Stock Issued in the Merger..... 70
Survival of Representations, Warranties and Covenants..... 71
Expenses and Fees......................................... 71
FEDERAL INCOME TAX CONSIDERATIONS........................... 72
General................................................... 72
Tax Treatment of the Merger............................... 72
</TABLE>
i
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROPOSAL TWO
CHANGING THE NAME OF CAPTEC NET LEASE REALTY................ 73
CERTAIN TRANSACTIONS AND RELATIONSHIPS...................... 73
CAPTEC NET LEASE REALTY..................................... 78
SELECTED FINANCIAL DATA..................................... 87
MANAGEMENT'S DISCUSSION AND ANALYSES OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 90
INDEPENDENT ACCOUNTANTS..................................... 103
OTHER MATTERS............................................... 103
ANNUAL REPORT AND FORM 10-K................................. 103
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING............... 103
INDEX TO FINANCIAL STATEMENTS............................... F-1
MERGER AGREEMENT............................................ A-1
FAIRNESS OPINION OF J.C. BRADFORD & CO...................... B-1
</TABLE>
ii
<PAGE> 10
SUMMARY
The following is a summary of material information contained elsewhere in
this proxy statement. This summary does not purport to be complete and is
qualified in its entirety by, and is subject to, the more detailed information
contained elsewhere in this proxy statement and the appendices hereto.
Stockholders are urged to read the proxy statement and appendices in their
entirety before voting on the proposals described herein.
THE SPECIAL MEETING
Date, Time and Place.......... The special meeting will be held on
, 2000, a.m., local time,
at . See "The Special
Meeting -- General."
Record Date................... Only holders of record of Captec common stock
as of the close of business on ,
2000 are entitled to notice of, and to vote at,
the special meeting. On that date, 9,508,108
shares of Captec common stock were outstanding,
each of which is legally entitled to one vote
on each matter to be acted upon or which may
properly come before the special meeting. The
merger agreement provides that shares of Captec
common stock beneficially owned by any
executive officer, director or affiliate of
Captec who is also an executive officer,
director or affiliate of Financial Group and/or
Advisors may not be voted on the merger
proposal. As a result of this restriction,
Patrick L. Beach, Captec's President, Chief
Executive Officer and Chairman of the Board of
Directors, W. Ross Martin, Captec's Executive
Vice President, Chief Financial Officer and a
Director and H. Reid Sherard, Captec's Senior
Vice President -- Sales & Marketing and a
Director, are precluded from voting their
shares of Captec common stock on the merger
proposal. As of , 2000 178,159
shares of Captec common stock were owned by
affiliates of Financial Group and/or Advisors
who are not affiliates of Captec and may be
voted on the merger proposal. See "The Special
Meeting -- Record Date; Shares Entitled to be
Voted."
Matters to be Considered...... At the special meeting, stockholders of Captec
will be asked to consider and vote upon:
- the merger agreement;
- the name change proposal; and
- such other business as may properly come
before the special meeting or any
adjournments or postponements thereof.
Implementation of the name change proposal is
conditioned upon consummation of the merger. If
the merger is not consummated, Captec's name
will not be changed. See "The Special
Meeting -- Matters to be Considered."
Vote Required................. None of the Delaware General Corporation Law or
Captec's certificate of incorporation or bylaws
require Captec to obtain stockholder approval
of the merger proposal. Nasdaq rules require
stockholder approval of the merger because the
merger involves the potential issuance of in
excess of 20.0% of the currently issued and
outstanding shares of Captec common stock and
because of the level of ownership of Mr. Beach,
Mr. Martin and Mr. Sherard in
1
<PAGE> 11
Financial Group and Advisors. The merger
agreement provides that the standard for
approving the merger proposal is the
affirmative vote of a majority of the
outstanding shares of Captec common stock
legally entitled to be voted on the merger
proposal at the special meeting, which is the
standard that would be applicable if
stockholder approval of the merger proposal
were required by Delaware law, excluding shares
of Captec common stock beneficially owned by
officers, directors or affiliates of both
Captec and Financial Group or Advisors. As of
, 2000, 9,508,108 shares of
Captec common stock were issued and
outstanding, 862,056 shares of which were
beneficially owned in the aggregate by Mr.
Beach, Mr. Martin and Mr. Sherard who, as a
result of being officers, directors and
principal stockholders of Financial Group
and/or Advisors, are precluded by the merger
agreement from voting their shares at the
special meeting. In accordance with the merger
agreement, the affirmative vote of 4,323,027
shares of Captec common stock is required to
approve the merger proposal. The percentage
beneficial ownership of each of Mr. Beach, who
is Captec's President, Chief Executive Officer
and Chairman of the Board of Directors, Mr.
Martin, Captec's Executive Vice President,
Chief Financial Officer and a Director, and Mr.
Sherard, a Director of Captec, in Financial
Group and Advisors respectively, is as follows:
<TABLE>
<CAPTION>
MR. BEACH MR. MARTIN MR. SHERARD
--------- ---------- -----------
<S> <C> <C> <C>
Financial Group........ 67.8% 19.2% 4.0%
Advisors............... 60.0% 25.0% 6.1%
</TABLE>
Advisors has five employees, including Mr.
Beach and Mr. Martin, its executive officers.
Under Delaware law, the standard for approving
the name change proposal is the affirmative
vote of a majority of the issued and
outstanding shares of Captec common stock
entitled to be voted at the special meeting.
The merger agreement contains no restriction on
voting for the name change proposal and the
shares of Captec common stock owned by Mr.
Beach, Mr. Martin and Mr. Sherard are not
precluded from being voted on the name change
proposal. The name change proposal will not be
implemented unless the merger is consummated,
in which case Captec's name will be changed to
"Captec Financial Group, Inc." and Financial
Group's name will be changed to "CFG, Inc." See
"The Special Meeting -- Vote Required."
Conflicts of Interests........ Mr. Beach, Mr. Martin, and Mr. Sherard have
interests in the merger that are in addition
to, and conflict with, those of Captec and its
stockholders and have abstained from the vote
of the Board of Directors relating to the
merger. In addition to the shares of Captec
common stock they will receive at the closing
of the merger, Mr. Beach, Mr. Martin and Mr.
Sherard will be eligible to receive up to an
additional 1,469,524 shares of Captec common
stock in the aggregate contingent upon the
consolidated performance of Captec in 2000 and
2001. Following the merger, Mr. Beach, Mr.
Martin and Mr. Sherard will continue to have
2
<PAGE> 12
substantial influence over the management of
Captec and may be subject to continuing
conflicts of interest with respect to their
management activities in that their interest in
receiving these earnout shares may cause them
to seek to maximize Captec's consolidated
financial results in 2000 and 2001 to the
potential detriment of Captec's longer term
business interests. Based on the Nasdaq closing
price of Captec common stock on , 2000,
the aggregate value of the Captec common stock
to be issued to Mr. Beach, Mr. Martin and Mr.
Sherard is $ , assuming the issuance of all
earnout shares. Prior to the consummation of
the merger, and as permitted by the merger
agreement, Advisors will distribute one-half of
its available cash to the Advisors
stockholders. The amount of the distribution is
estimated at $145,000 as of December 31, 1999.
Mr. Beach, Mr. Martin and Mr. Sherard will
receive 60.0%, 25.0%, and 6.1%, respectively,
of the amount of cash actually distributed to
the Advisors stockholders. See "The Merger
Agreement -- Covenants -- Business of Financial
Group and Advisors Pending the Merger." See
"Risk Factors -- Conflicts of Interest" and
"Conflicts of Interest."
Based on the capitalization of Captec as of
February 1, 2000, the executive officers and
directors of Captec in the aggregate
beneficially owned approximately 14.3% of the
issued and outstanding shares of Captec common
stock including options exercisable within
sixty days. As of February 1, 2000, Mr. Beach,
Mr. Martin and Mr. Sherard beneficially owned
in the aggregate approximately 13.7% of the
issued and outstanding shares of Captec common
stock, including options exercisable within
sixty days. Based on the capitalization of
Captec as of February 1, 2000 and assuming
consummation of the merger, Mr. Beach, Mr.
Martin and Mr. Sherard will beneficially own,
in the aggregate, approximately 28.8% of the
issued and outstanding shares of Captec common
stock immediately following the merger and
34.9% of the issued and outstanding shares of
Captec common stock, assuming the issuance of
all earnout shares. See "Security Ownership of
Certain Beneficial Owners and Management." For
a discussion of Mr. Beach's, Mr. Martin's and
Mr. Sherard's employment with Captec following
the merger. See "-- Management of Captec
Following the Merger" and "The
Merger -- Management of Captec Following the
Merger."
Prudential Securities Incorporated has provided
financial advisory services to Financial Group
and Captec in connection with the merger and
otherwise and, as a result of the merger, will
be paid a fee of $3.0 million, all of which is
contingent on consummation of the merger, by
Captec for the financial advisory services it
has rendered to Captec and Financial Group.
Prudential Securities loaned $1,583,400 in the
aggregate to Mr. Beach, Mr. Martin and Gary A.
Bruder, an officer, director and option holder
of Financial Group and a director and principal
stockholder of Advisors. Prudential Securities
Credit Corporation, an affiliate of Prudential
Securities, provides a $250.0 million warehouse
credit facility, to Financial Group and will
receive a cash payment from Captec of
$1,376,350 in consideration of the termination
of warrants to
3
<PAGE> 13
acquire shares of Financial Group common stock,
which warrants were issued to it in connection
with the establishment of the Financial Group
warehouse credit facility. As a result of these
relationships, Prudential Securities has
conflicts of interest with respect to the
proposed transaction. These conflicts could
cause Prudential Securities to advise
management of Financial Group to pursue the
mergers in order to generate its substantial
advisory fee and payment to its affiliate in
consideration of the termination of the
warrants to acquire Financial Group common
stock held by its affiliate. See "Risk Factors"
and "Certain Transactions and Relationships --
Financial Group."
PROPOSAL ONE -- THE MERGER
Captec Financial Group,
Inc........................... Financial Group is an affiliate of both Captec
and Advisors and is a privately owned,
specialty commercial finance company founded in
1981 that provides a diverse line of financing
products, including mortgage and business
enterprise loans, equipment leases and loans
and construction financing to the franchise and
chain restaurant, and retail petroleum and
convenience store markets. For a description of
the values being assigned to the assets and
liabilities of Financial Group to be acquired
by Captec in the merger, see Unaudited Pro
Forma Condensed Consolidated Financial
Statements. Mr. Beach, Mr. Martin and Mr.
Sherard are principal stockholders, officers
and directors of Financial Group. Financial
Group also assists Advisors in providing
advisory services and administrative support to
Captec. Financial Group's offices are located
at 24 Frank Lloyd Wright Drive, Lobby L, Fourth
Floor, Ann Arbor, Michigan 48106 and its
telephone number is (734) 994-5505.
Captec Net Lease Realty
Advisors, Inc................. Advisors is an affiliate of both Captec and
Financial Group. Pursuant to an August 29, 1997
Advisory Agreement, as amended, Advisors
provides administrative support, management,
investment and financial advisory services to
Captec in connection with the acquisition and
development of properties. Advisors' principal
asset immediately prior to the consummation of
the merger will be its interest in the advisory
agreement. The principal asset being acquired
by Captec pursuant to the Advisors merger is
the advisory agreement. Upon consummation of
the merger, the advisory agreement will be
terminated, which will result in Captec
becoming self-managed in all respects and
eliminate the need for Captec to incur
substantial fees for advisory and other
management services being paid to Advisors. Mr.
Beach, Mr. Martin and Mr. Sherard are principal
stockholders, officers and directors of
Advisors. Advisors has five employees,
including Mr. Beach and Mr. Martin, its
executive officers. Advisors' offices are
located at 24 Frank Lloyd Wright Drive, Lobby
L, 4th Floor, Ann Arbor, Michigan 48106 and its
telephone number is (734) 994-5505.
Captec Acquisition, Inc....... Acquisition is a wholly-owned subsidiary of
Captec created solely to facilitate the merger
with Financial Group and has not engaged in any
other activity.
4
<PAGE> 14
REASONS FOR THE MERGER
General....................... Upon the consummation of the merger, Financial
Group will become a wholly-owned subsidiary of
Captec, and Advisors will merge with and into
Captec. Following the merger, Captec will be
operated so that it will no longer qualify as a
real estate investment trust (REIT) under the
Internal Revenue Code of 1986, as amended, for
federal income tax purposes effective as of
January 1, 2000. See "Federal Income Tax
Considerations."
As a result of the merger, Captec will become a
fully-integrated, specialty commercial finance
company that will provide an expanded line of
finance products in response to the growing
needs of the markets it serves and will be able
to exploit additional business opportunities
currently unavailable to it as a REIT. The
merger also will result in the termination of
the separate corporate existence of Advisors
and the termination of the advisory agreement
and allow Captec to become self-managed in all
respects. See "The Merger -- Background" and
"-- Reasons for the Merger; Recommendations of
the Special Committee." Following the merger,
the current employees of Financial Group will
become employees of Captec. Patrick L. Beach,
the President and Chief Executive Officer of
Captec, and W. Ross Martin, the Executive Vice
President and Chief Financial Officer of
Captec, will continue to hold those positions
with Captec. H. Reid Sherard, a Director of
Captec, will become the Senior Vice
President -- Sales & Marketing of Captec.
Recommendations of the Special
Committee................... Because the merger is among affiliates and Mr.
Beach, Mr. Martin and Mr. Sherard have
conflicts of interest in connection with the
merger, the Board of Directors established the
special committee consisting of the directors
of Captec who are not members of management or
employees of Captec, Acquisition, Financial
Group or Advisors, to consider the proposed
merger. Albert T. Adams is chairman of the
special committee. Mr. Adams is a partner of
Baker & Hostetler LLP, which represents Captec,
but not the special committee, with respect to
the merger and otherwise, and serves as counsel
to Financial Group in other matters. Baker &
Hostetler LLP was paid fees of $19,000 and
$293,000 by Captec and Financial Group,
respectively, in 1999. The special committee
retained J.C. Bradford & Co. as its financial
advisor to assist in its deliberations. See
"The Merger -- Opinion of the Financial Advisor
to the Special Committee." The special
committee believes the merger to be fair to,
and in the best interests of, Captec and its
stockholders and unanimously approved the
merger agreement and recommends that Captec's
stockholders vote FOR the merger. The special
committee's recommendation constitutes the
recommendation of the Board of Directors. See
"The Merger -- Reasons for the Merger;
Recommendations of the Special Committee."
In reaching its recommendation that the
stockholders approve the merger, the special
committee considered the following material
factors:
5
<PAGE> 15
- The opportunities to be derived from
consolidating operations of Captec and
Financial Group into a fully-integrated,
specialty commercial finance company serving
all aspects of the franchise and chain
restaurant, retail petroleum and convenience
store and specialty retail markets;
- The efficiencies arising from a self-managed
structure, including the elimination of
management fees, which were $1.3 million for
the year ended December 31, 1999 duplicative
processes and reporting requirements and a
potentially accretive effect on Captec's
earnings per share;
- The fact that senior management would be
present in a single, fully-integrated entity,
eliminating potential conflicts of interest
and investor concerns with respect to
conflicting demands in the time and effort
Mr. Beach, Mr. Martin and Mr. Sherard, who
serve as senior management and/or directors
of Captec, Financial Group and/or Advisors,
and the elimination of the inherent conflicts
that arise from the current internal advisory
structure and the overlapping business of
Financial Group and Captec;
- The benefits associated with the acquisition
of all assets of Financial Group including,
among other things, workforce in place,
business books and records, operating
systems, proprietary business methodologies,
contract rights and information databases and
systems;
- The ownership by Captec of all rights to the
name "Captec Financial Group" and the
associated goodwill;
- The elimination of the substantial
restrictions on new business activity
resulting from Captec's REIT status;
- The elimination of REIT dividend requirements
and the resulting ability to retain and
reinvest earnings in operations to finance
growth of existing, and expansion into new,
lines of business;
- The ability of Captec to generate capital
needed for future growth through operations
and the sale of appreciated properties and
loans rather than relying principally upon
the public and private equity and debt
capital markets to which Captec's access is
limited by its REIT status and prevailing
market conditions;
- Certain alternatives to the merger, including
the direct and indirect relative costs and
benefits of continuing to be an
externally-advised REIT;
- The opportunity to operate utilizing
increased levels of debt capital while
staying within the accepted range of debt to
total capital ratios for specialty commercial
finance companies;
- The expansion into other industry sectors of
the net lease market and the ability to offer
new lending products;
- The terms and conditions of the merger
agreement, including the consideration to be
paid by Captec in the merger;
- The fact that a significant amount of the
consideration to be paid in the merger is in
the form of an earnout that is conditioned on
Captec achieving specified financial
performance targets in the future;
6
<PAGE> 16
- The procedural safeguards and mechanisms
included in the merger agreement, providing
that shares of Captec common stock
beneficially owned by an officer, director or
affiliate of Captec who is also an officer,
director or affiliate of Financial Group
and/or Advisors may not be voted on the
merger proposal;
- The fact that Mr. Beach, Mr. Martin and Mr.
Sherard were seeking to transfer control of
Financial Group and the possibility that
Captec could lose the services of such senior
management if they decided to stay affiliated
with Financial Group rather than remain with
Captec;
- The potential improvement in return on equity
projected to range from 15.0% to 17.0%
annually for 2000 through 2002;
- The potential improvement in both basic and
diluted earnings per share, that was
projected to range from 17.0% to 21.0%
annually for 2000 through 2002, and the
resulting accretive effect on earnings per
share through 2002 and thereafter;
- The presentations by management, Prudential
Securities and J.C. Bradford regarding the
financial conditions, results of operations,
business and prospects of Captec, Financial
Group and Advisors.
- The financial analyses performed by J.C.
Bradford and its written opinion provided to
the special committee on December 17, 1999,
that, on such date and subject to certain
assumptions, qualifications and limitations
stated therein, the consideration to be paid
by Captec in the merger is fair to Captec
from a financial point of view.
The special committee also considered the
following material factors which could, as a
result of the merger, adversely affect Captec
and its stockholders:
- The conflicts of interest of Mr. Beach, Mr.
Martin and Mr. Sherard in connection with the
terms of the merger and the consideration to
be paid to them and thereafter with respect
to their potential use of their management
positions to maximize the issuance of earnout
shares to themselves;
- The issuance to Mr. Beach, Mr. Martin and Mr.
Sherard of Captec common stock which will
result in Mr. Beach, Mr. Martin and Mr.
Sherard beneficially owning, in the
aggregate, approximately 34.9% of the issued
and outstanding Captec common stock;
- The elimination of REIT status and the
requirement to distribute substantially all
REIT net income to stockholders, and the
anticipated short term decline in the public
trading price of Captec common stock upon the
announcement that Captec would cease to be a
REIT;
- The potential liabilities associated with the
direct employment of personnel of Financial
Group, including workers' disability and
compensation claims, labor disputes and other
employee-related grievances;
7
<PAGE> 17
- The potential risks associated with Captec's
expansion into the specialty commercial
finance business, including the associated
risks of substantial increase of leverage
following the merger, greater dependence on
borrowing and the resulting increased
sensitivity to fluctuations in interest rates
and dependence on securitization programs;
- That based upon the Unaudited Pro Forma
Condensed Consolidated Financial Statements
for the year ended December 31, 1999, the
merger would result in immediate dilution of
$0.66 to Captec's earnings per share;
- That Captec would incur immediate dilution of
$1.84 to Captec's book value per share as of
December 31, 1999;
- That, as a result of the merger, Captec would
incur additional debt and the risk that
Financial Group's debt will mature in the
near future and that Captec would have to
raise capital from other sources, refinance
such debt, or sell assets to produce proceeds
sufficient to pay such debt obligations;
- The potential additional expenses expected to
be incurred by Captec in connection with the
merger and the approximately $17.5 million of
goodwill expected to be recorded by Captec as
a result of the merger;
- The substantial increase in Captec's ratio of
total liabilities to total assets from
0.47:1.00 prior to the merger to 0.72:1.00
following the merger as indicated in the
Unaudited Pro Forma Condensed Consolidated
Balance Sheet as of December 31, 1999.
The discussion of the information and factors
considered by the special committee is not
intended to be exhaustive, but includes
material factors considered by the special
committee. The special committee did not
undertake a separate analysis of each of the
factors discussed above nor did the special
committee reach a separate conclusion with
respect to each such factor in its
determination to approve the merger and adopt
the merger agreement. In view of the above, and
the variety of factors considered by the
special committee in reaching its conclusion to
approve the merger and the merger agreement,
the special committee did not find it
practicable, and did not quantify or otherwise
assign relative or specific weights, to the
specific factors considered by the special
committee in reaching its determination and
individual directors may have given differing
weights to different factors. As a general
matter, however, the special committee believed
that the positive factors heretofore described
supported its decision to approve the merger
and the merger agreement and outweighed the
potentially negative factors described above.
The special committee is unanimous in its
recommendation that Captec stockholders vote
for approval of the merger agreement and
related matters.
Opinion of Financial
Advisor....................... J.C. Bradford has served as financial advisor
to the special committee in connection with the
proposed merger and has given an opinion to the
special committee that, as of December 17,
1999, which was the business day prior to the
date of the special
8
<PAGE> 18
committee's vote on the merger [and updated as
of this proxy statement], the consideration
that Captec will pay in the merger is fair to
Captec from a financial point of view. The day
prior to its presentation to the special
committee and the issuance of its opinion, J.C.
Bradford was advised by counsel to the special
committee that as part of the final
negotiations with regard to the merger
agreement, the share consideration to be paid
in consideration of the merger excluding the
earnout shares, had been reduced from 3,000,000
shares to approximately 2,750,000 shares of
Captec common stock and that a cash payment in
the aggregate amount of approximately $2.5
million would be made to The Public Institution
for Social Security, Prudential Securities
Credit Corporation and Abbas Al-Qattan in
consideration of the termination of their
warrants to acquire Financial Group common
stock. J.C. Bradford and the special committee
considered these changes to be immaterial to
J.C. Bradford's analyses and the conclusions
summarized herein. A copy of J.C. Bradford's
opinion is attached to this proxy statement as
Appendix B. Stockholders should read the
opinion completely to understand the
assumptions made, matters considered and
limitations of the review undertaken by J.C.
Bradford in providing this opinion. See "The
Merger -- Opinion of the Financial Advisor to
the Special Committee." Captec has agreed to
pay $550,000 to J.C. Bradford, $100,000 of
which is contingent upon the closing of the
merger.
TERMS OF THE MERGER
Share Consideration........... In consideration of the merger, Captec will
issue an aggregate of 2,749,505 shares of
Captec common stock to the security holders of
Financial Group and Advisors. Security holders
of Financial Group will receive an aggregate
2,189,505 shares of Captec common stock, which
is the equivalent of approximately 45.71 shares
of Captec common stock for each share of common
stock, preferred stock, option or participating
warrant of Financial Group. Common stockholders
of Advisors will receive an aggregate 560,000
shares of Captec common stock, which is the
equivalent of 560 shares of Captec common stock
for each share of Advisors common stock. See
"The Merger Agreement -- Terms of the Merger."
The Financial Group common stockholders and
option holders also subsequently may receive up
to an additional aggregate 2,000,000 shares of
Captec common stock based upon the consolidated
financial performance of Captec in 2000 and
2001. For 2000, the earnout participants will
receive:
- 200,000 shares of Captec common stock if
consolidated basic earnings per share (EPS)
is at least $1.80 in 2000; and
- 200,000 shares of Captec common stock for
each additional $0.05 increment of
consolidated EPS achieved in 2000 up to a
maximum of 1.0 million additional shares of
Captec common stock if consolidated EPS is at
least $2.00 in 2000.
Consolidated EPS for 2000 will be calculated
assuming the effective time of the merger is
January 1, 2000. Earnout shares not
9
<PAGE> 19
earned in 2000 will be carried over and added
to the earnout shares eligible to be earned in
2001 as follows:
- if consolidated EPS in 2000 is greater than,
or equal to, $1.60, all unissued earnout
shares will be carried over;
- if consolidated EPS in 2000 is greater than,
or equal to, $1.40 and less than $1.60, fifty
percent (50.0%) of the unissued earnout
shares will be carried over; and
- if consolidated EPS in 2000 is less than
$1.40, there will be no unissued earnout
shares carried over.
For 2001 the earnout participants will receive:
- 111,000 shares of Captec common stock plus
11.0% of any earnout shares carried over from
2000 if Captec achieves consolidated EPS of
at least $2.00 in 2001; and
- 111,000 shares of Captec common stock plus
11.0% of any earnout shares carried over from
2000 for each additional $0.05 increment of
consolidated EPS achieved in 2001 up to a
maximum of 1.0 million shares of Captec
common stock, plus any earnout shares carried
over from 2000, if Captec achieves
consolidated EPS of at least $2.40 in 2001.
Mr. Beach, Mr. Martin and Mr. Sherard will be
eligible to participate in the earnout shares
in 2000 and 2001 in the following percentages:
<TABLE>
<S> <C> <C>
Mr. Beach 52.8%
Mr. Martin 15.3%
Mr. Sherard 5.3%
Total 73.4%
</TABLE>
Earnout participants also will receive a cash
payment of 3.33% of the value of any earnout
shares received for 2000 and a cash payment of
6.66% of the value of any earnout shares
received for 2001 to offset partially any
federal, state or local income tax liability
that the recipients of the earnout shares may
incur as a result of the issuance of the
earnout shares. For purposes of determining the
earnout shares, if any, to be issued,
consolidated EPS will be Captec's basic
earnings per share calculated in accordance
with generally accepted accounting principles
(GAAP) and reported on its consolidated audited
annual financial statements filed with the SEC
pursuant to the Securities Exchange Act of
1934, as amended, excluding, among other
things, the costs or expenses of the merger,
extraordinary or nonrecurring gains or losses,
fundamental accounting changes and the effects
of material acquisitions and dispositions
described in the merger agreement. Captec's
earnings per share for 1998 was $1.21 and $1.44
for 1999. See "The Merger Agreement -- Earnout
Shares."
The aggregate amount of shares of Captec common
stock to be received by the Financial Group and
Advisors security holders is based upon
negotiations among those security holders and
Captec. The special committee and J.C. Bradford
analyzed the merger on a combined Financial
Group/Advisors basis and did not ascribe any
value to Financial Group and Advisors
separately. Based on the
10
<PAGE> 20
Nasdaq closing price of Captec common stock on
, 2000, the aggregate value of
Captec common stock to be issued to the
security holders of Financial Group is $ ,
assuming the issuance of all earnout shares,
and to stockholders of Advisors is $ .
Cash Payment.................. In connection with the merger, Captec will make
cash payments of $451,620, $1,376,350 and
$676,980, respectively, to The Public
Institution for Social Security, Prudential
Securities Credit Corporation and Abbas
Al-Qattan in consideration of the termination
of their warrants to purchase in the aggregate
5,480 shares of Financial Group common stock.
The Public Institution for Social Security has
provided $30.0 million of equity capital and
subordinated debt financing for each of Family
Realty Inc. and Family Realty II, Inc. Captec
owns 60.0% of the non-voting common stock and
Abbas Al-Qattan owns the remaining 40.0% of the
non-voting common stock in each of Family
Realty and Family Realty II. See "Certain
Transactions and Relationships -- Captec Net
Lease Realty." The amount payable to these
warrant holders for the termination of their
warrants is the result of negotiations among
them, Financial Group and Captec in which these
warrant holders requested, and Captec agreed to
pay, $10.00 per share of Captec common stock
that would have been issued in exchange for
Financial Group common stock had these warrant
holders exercised the warrants. Prudential
Securities Credit Corporation received its
warrants in connection with the establishment
of a $250.0 million warehouse credit facility
to Captec Financial Corporation, an affiliate
of Financial Group. Prudential Securities
Credit Corporation is an affiliate of
Prudential Securities, which has provided
investment advisory services to Financial Group
and Captec in connection with the merger and
other matters. Prior to consummation of the
merger, Advisors will distribute one-half of
its available cash to its stockholders, Mr.
Beach, Mr. Martin and Mr. Sherard which
distribution is estimated to be $145,000 as of
December 31, 1999. See "Certain Transactions
and Relationships -- Financial Group."
Effective Time of the
Merger........................ Promptly following the satisfaction or waiver,
where permissible, of the conditions to the
merger, the merger will be consummated and
become effective on the date and at the time
the required certificates of merger are filed
with the Secretary of State of Delaware, with
respect to the Advisors merger, and filed with
the Administrator of the Michigan Department of
Consumer and Industry Services, Corporations,
Securities and Land Development Bureau, with
respect to the Financial Group merger, or such
later date and time, not more than five
business days thereafter, as may be specified
in the certificates of merger. See "The Merger
Agreement -- Effective Time of the Merger."
Captec anticipates that, if approved by the
stockholders, the merger will become effective
on or about , 2000.
Conditions to the Merger...... The merger is subject to the satisfaction or
waiver, where permissible, on or prior to the
closing date of the merger of certain
conditions set forth in the merger agreement
including:
11
<PAGE> 21
- approval by the stockholders of Captec;
- termination or expiration of the
Hart-Scott-Rodino waiting period, which has
occurred;
- the fulfillment by each of the parties of
their obligations under the merger agreement;
- the absence of any court order, injunction or
legal restraint prohibiting the merger or
legal proceedings seeking to prohibit the
merger;
- that J.C. Bradford has not withdrawn,
modified or revoked its fairness opinion; and
- receipt of any material third-party consents.
Any of the conditions to the merger may be
waived by the mutual agreement of the parties
or with the consent of the parties for whose
benefit the condition is intended. Captec does
not intend to resolicit stockholder approval in
the event any of the conditions to the merger
are waived. See "The Merger
Agreement -- Conditions to Consummation of the
Merger."
Termination................... The merger agreement may be terminated at any
time prior to the effective time of the merger,
whether before or after approval of the merger
by Captec's stockholders, by mutual written
consent of Captec, Acquisition, Financial Group
and Advisors or by either Captec or
Acquisition, or Financial Group or Advisors:
- if the required vote of Captec's stockholders
is not obtained;
- if the effective time of the merger has not
occurred on or before June 30, 2000; or
- under other circumstances specified in the
merger agreement.
See "The Merger Agreement -- Amendment; Waiver;
Termination."
Indemnification............... Captec and Acquisition, and the Financial Group
common stockholders and option holders and the
Advisors stockholders, have agreed, subject to
limitations set forth in the merger agreement,
to indemnify each other for damages arising
from certain matters from and after the
effective time of the merger. See "The Merger
Agreement -- Indemnification."
Tax Treatment of the Merger... Captec believes that the merger will constitute
a tax-free reorganization for federal income
tax purposes under Section 368(a) of the
Internal Revenue Code. Following the merger,
Captec will be operated so that it no longer
will qualify as a REIT under the Internal
Revenue Code effective as of January 1, 2000.
See "Federal Income Tax Considerations."
Accounting Treatment.......... The Financial Group merger will be accounted
for under the purchase method of accounting as
a purchase by Captec of Financial Group with
the assets acquired and liabilities assumed
recorded at their fair values and goodwill
recorded to the extent that the consideration
attributable to the Financial Group merger,
including certain acquisition and closing
costs, exceeds the fair value of the Financial
Group net assets acquired. The Advisors merger
will be accounted for as an acquisition and
termination of
12
<PAGE> 22
the advisory agreement with the fair value of
the share consideration attributable to the
Advisors merger, including certain acquisition
and closing costs, treated as an expense in the
period in which the transaction closes. See
"Unaudited Pro Forma Condensed Consolidated
Financial Statements."
Restrictions on Resale and
Registration Rights........... Captec common stock issued in consideration of
the merger will not be registered under the
Securities Act of 1933, as amended, and will
not be publicly tradable. These shares must be
held indefinitely unless:
- the distribution thereof is registered under
the Securities Act;
- they are sold in compliance with Rule 144
under the Securities Act; or
- another exemption from registration is
available.
See "The Merger Agreement -- Resale of Shares
of Common Stock Issued in the Merger."
In connection with the merger, Captec and
Princap Leasing Company, L.P., which is the
sole holder of the Financial Group preferred
stock, will enter into a registration rights
agreement, pursuant to which Princap Leasing
Company, among other things, may on one
occasion at any time following the merger
require Captec to register under the Securities
Act all 721,866 shares of Captec common stock
to be issued to Princap Leasing Company in the
merger, subject to limitations described in the
registration rights agreement. The registration
rights agreement also will provide Princap
Leasing Company with unlimited piggy-back
registration rights. See "The
Merger -- Registration Rights."
Business of Financial Group
and Advisors Pending the
Merger...................... Each of Financial Group and Advisors has agreed
that, prior to the effective time of the merger
or the earlier termination of the merger
agreement, except as permitted by the merger
agreement, it will pursue its business in the
ordinary course and will not engage in actions
specifically prohibited in the merger
agreement. Prior to the consummation of the
merger, and as permitted by the merger
agreement, Advisors will distribute one-half of
its available cash to the Advisors
stockholders. The amount of the distribution is
estimated at $145,000 as of December 31, 1999.
Mr. Beach, Mr. Martin and Mr. Sherard will
receive 60.0%, 25.0%, and 6.1%, respectively,
of the amount of cash actually distributed to
the Advisor's stockholders. See "The Merger
Agreement -- Covenants -- Business of Financial
Group and Advisors Pending the Merger."
Management of Captec Following
the Merger.................... There will be no change in the Board of
Directors of Captec as a result of the merger.
Mr. Beach will continue to serve as the
President and Chief Executive Officer of
Captec, Mr. Martin will continue to serve as
the Executive Vice President and Chief
Financial Officer of Captec and Mr. Sherard
will continue to serve as the Senior Vice
President -- Sales & Marketing of Captec; Mr.
Bruder will become the Senior Vice
President -- General Counsel
13
<PAGE> 23
of Captec; and Thomas W. Moir, Jr. will become
the Senior Vice President -- Net Lease
Investments of Captec. Messrs. Beach, Martin,
Sherard, Bruder and Moir currently hold similar
positions with Financial Group. It is
anticipated that, following the merger, Mr.
Beach's and Mr. Martin's employment agreements
with Captec will be amended to provide for
annual base salaries of $450,000 and $325,000,
respectively, which are less than Mr. Beach's
and Mr. Martin's current aggregate annual base
salaries from Captec and Financial Group of
$525,000 and $375,000, respectively. In
addition, Mr. Beach's and Mr. Martin's
employment agreements will be amended to change
the criteria on which their annual bonuses are
based from growth in funds from operations per
share to growth in consolidated earnings per
share. See "Certain Transactions and
Relationships."
Management of Financial Group
Following the Merger........ Following the merger, Financial Group will be a
wholly-owned subsidiary of, and controlled by,
Captec. See "The Merger Agreement -- Terms of
the Merger."
Regulatory Matters............ The merger is subject to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, which
requires that pre-merger notification be
provided to the United States Federal Trade
Commission and Department of Justice and that
the merger not be consummated until the
expiration or early termination of the
applicable waiting period, which has occurred.
No other material regulatory approvals are
required in order to effect the merger. See
"The Merger -- Regulatory Approval."
Termination of REIT Status.... As a result of the termination of REIT status,
Captec will have the ability to generate
capital for future growth through retention and
reinvestment of earnings and the sale of
properties and loans, rather than principally
relying on access to the public and private
equity and debt capital markets. Presently REIT
regulations restrict Captec from becoming a
dealer in properties that it has owned for less
than four years and from acquiring properties
for sale in the ordinary cause of business by
imposing a 100.0% tax on the net income of such
transactions subject only to limited
exceptions. Captec no longer will be required
to distribute at least 95.0% of its REIT net
income to stockholders, which dividends
equalled $1.50 per share in 1998 and $1.52 per
share in 1999. Captec will be required to pay
federal income taxes on its taxable income at
regular corporate rates as a result of the
termination of its REIT status. Upon
consummation of the merger, Captec will
recognize a deferred tax asset of approximately
$2.88 million that Captec will be able to
utilize to reduce future income tax liability.
Risk Factors.................. See "Risk Factors" for factors that should be
considered in evaluating the merger.
Appraisal Rights.............. Under Delaware law, holders of shares of Captec
common stock are not entitled to appraisal
rights in connection with the merger.
14
<PAGE> 24
The following charts illustrate the corporate organization and
relationship of Captec, Financial Group and Advisors both prior to,
and following consummation of, the merger.
PRE-MERGER
[CAPTEC FLOW CHART]
15
<PAGE> 25
POST-MERGER
[CAPTEC FLOW CHART]
16
<PAGE> 26
PROPOSAL TWO
CHANGING THE NAME OF CAPTEC NET LEASE REALTY
Stockholders will be asked to approve an amendment to Captec's certificate
of incorporation changing Captec's name to "Captec Financial Group, Inc." We
believe the name Captec Financial Group will better reflect the nature of
Captec's business as a fully-integrated, specialty commercial finance company.
Effectuation of the name change proposal is contingent upon consummation of the
merger. If the merger is not consummated, Captec's certificate of incorporation
will not be amended and its name will not be changed. If the merger is
consummated, the name of Financial Group will be changed to CFG, Inc. See
"Proposal Two -- Changing the Name of Captec Net Lease Realty."
17
<PAGE> 27
FORWARD-LOOKING STATEMENTS
This proxy statement contains "forward-looking statements" which represent
Captec's expectations or beliefs, including, but not limited to, statements
concerning industry performance and Captec's operations, performance, financial
condition, plans, growth and strategies, which include, without limitation:
- statements concerning implementation of Captec's business plan following
the merger;
- statements concerning Captec's financial performance following the
merger;
- statements concerning Captec's anticipated dividend policy following the
merger;
- statements concerning the anticipated financial and other benefits of the
merger;
- statements concerning the operating efficiencies or synergies,
competitive positions and growth opportunities expected to be achieved
following the merger;
- statements concerning the plans and objectives of management following
the merger;
- statements concerning the market for Captec common stock following the
merger;
- statements concerning the estimated cost savings resulting from the
merger;
- statements concerning the fluctuations in interest rates, the inability
to hedge certain risks economically, changes in consumer spending and
other habits, as well as the impact of tax and other legislation and
other regulations following the merger;
- statements concerning Captec's degree of financial leverage following the
merger;
- statements preceded or followed by or that include the words "may,"
"will," "expect," "anticipate," "intend," "could," "estimate," or
"continue" or the negative or other variations thereof or comparable
terminology;
- the matters discussed in "Risk Factors" beginning on page 31; and
- other risks referenced from time to time in Captec's filings with the
SEC.
Any statements contained in this proxy statement that are not statements of
historical fact may be deemed to be forward-looking statements.
These statements by their nature involve substantial risks and
uncertainties, some of which are beyond Captec's control, and actual results may
differ materially depending on a variety of important factors, many of which are
also beyond Captec's control. You should not place undue reliance on these
forward-looking statements, which speak only as of the date of this proxy
statement. Captec undertakes no obligation to publicly update or release any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this proxy statement or to reflect the occurrence of
unanticipated events.
18
<PAGE> 28
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Consolidated Financial
Statements are based on the historical financial statements of Captec, Financial
Group and Advisors and have been prepared to illustrate the effect of the
merger. The Unaudited Pro Forma Condensed Consolidated Balance Sheet assumes the
effective time of the merger was December 31, 1999. The Unaudited Pro Forma
Condensed Consolidated Statements of Operations for the year ended December 31,
1999, assumes that the effective time of the merger was January 1, 1999.
The Unaudited Pro Forma Condensed Consolidated Financial Statements should
be read in conjunction with the historical financial statements of Captec as of
and for the fiscal year ended December 31, 1999 and the historical financial
statements of Financial Group for the fiscal year ended March 31, 1999 and the
nine months ended December 31, 1999, all of which are included in this proxy
statement.
The Financial Group merger will be accounted for under the purchase method
of accounting. Under the purchase method of accounting, assets acquired and
liabilities assumed are recorded at their fair values. Goodwill is generated to
the extent that the consideration attributable to the Financial Group merger,
including certain acquisition and closing costs, exceeds the fair value of net
assets acquired. Based on the December 31, 1999 financial position of Financial
Group, the merger is expected to generate initially approximately $17.5 million
of goodwill and this goodwill will be amortized on a straight-line basis over 20
years. Goodwill arising from the Financial Group merger will be based on the
consideration attributable to the Financial Group merger, including the share
consideration attributable to the Financial Group merger, the cash payments to
The Public Institution for Social Security, Prudential Securities Credit
Corporation and Abbas A1-Qattan and certain acquisition and closing costs, and
the fair value of the assets and liabilities of Financial Group on the date the
merger is consummated. No assurance can be given that the actual goodwill amount
arising from the Financial Group merger will not vary from the amount currently
contemplated in the Unaudited Pro Forma Condensed Consolidated Financial
Statements.
The Advisors merger will result in a current period expense for the cost of
acquiring and terminating the advisory agreement. This expense will be
recognized as an operating expense on Captec's consolidated statement of
operations immediately following the merger. Due to the non-recurring nature of
this transaction, this expense has been excluded from the accompanying pro forma
statements of operations; however, the weighted average shares outstanding have
been adjusted to reflect issuance of the shares.
The Unaudited Pro Forma Condensed Consolidated Financial Statements have
been prepared based on a number of assumptions, estimates and uncertainties
including, but not limited to, estimates of the fair values of assets acquired
and liabilities assumed and estimated acquisition and closing costs. As a result
of these assumptions, estimates and uncertainties, the accompanying Unaudited
Pro Forma Condensed Consolidated Financial Statements do not purport to predict
the actual financial condition or results of operations that would have been
achieved had the merger occurred on December 31, 1999 or January 1, 1999, nor do
they purport to predict Captec's consolidated financial condition or results of
operations following the effective time of the merger. The pro forma financial
information does not reflect any potential effects related to the new strategic,
financial and operating strategies of Captec as a result of the merger, such as
the impact of increases in property sales, growth in the lending business of
Financial Group, new opportunities to cross-sell products to the combined
company's customers and to expand into new related markets and potential
reductions in cost of debt capital or savings in general and administrative
expenses.
19
<PAGE> 29
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
FINANCIAL ------------------------------------------ PRO FORMA
COMPANY GROUP DEBIT CREDIT TOTAL COMPANY
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........ $ 1,035,607 $ 1,670,076 -- $ 2,705,683
Investments in Properties........ 217,615,654 -- 217,615,654
Investment in financing leases... 4,407,195 21,737,067 -- 26,144,262
Investment in mortgage loans..... 226,331,075 -- 226,331,075
Retained interest in mortgage
loans sold...................... 14,502,031 -- 14,502,031
Accounts receivable.............. 491,052 594,385 -- 1,085,437
Accounts receivable from
affiliates...................... 1,326,307 635,290 -- 1,961,597
Notes receivable from
affiliates...................... 11,768,795 3,063,169 11,378,275 (11,378,275)(a) 3,453,689
Property and equipment, net...... 878,190 -- 878,190
Unbilled rent.................... 6,027,221 -- 6,027,221
Investments in Affiliated LP's
and JV's........................ 11,557,482 -- 11,557,462
Deferred tax assets.............. 660,605 2,882,000 2,882,000(b)(c) 3,542,605
Goodwill......................... 17,466,365 17,466,365(c) 17,466,365
Advances, prepaid expenses and
other assets.................... 1,292,399 6,138,530 -- 7,430,929
------------ ------------ ------------ ------------
Total assets.................. $255,521,692 $276,210,418 $ 8,970,090 $540,702,200
============ ============ ============ ============
LIABILITIES & STOCKHOLDERS'
EQUITY
Liabilities:
Notes payable
Recourse...................... $116,921,555 $238,884,831 $ 387,213 387,213(e) $356,193,599
Affiliates.................... 15,378,374 11,378,275 (11,378,275)(a) 4,000,099
Nonrecourse................... 1,090,463 -- 1,090,463
Notes payable, other............ 1,023,868 -- 1,023,888
Notes payable, shareholders..... 1,405,539 277,861 277,861(e) 1,683,400
Accounts payable and accrued
liabilities................... 2,672,529 7,925,252 6,400,000 6,400,000(c) 16,997,781
1,000,000 1,000,000(d) 1,000,000
Accounts payable to
affiliates.................... -- 58,557 -- 58,557
Federal Income taxes payable.... 719,000 -- -- 719,000
Lease deposits and deferred
fees.......................... 272,943 1,210,785 -- 1,483,728
------------ ------------ ------------ ------------
120,586,027 266,977,669 (3,313,201) 384,250,495
Subordinated debt................ -- 4,424,000 576,000 576,000(e) 5,000,000
------------ ------------ ------------ ------------ ------------
Total liabilities............. 120,586,027 271,401,669 (2,737,201) 389,250,495
------------ ------------ ------------ ------------
Stockholders' equity:
Class A convertible preferred
stock......................... 3,882,210 (3,882,210)(c) --
Common stock.................... 95,081 21,813 (21,813)(c) 95,081
21,895(f) 21,895
5,600(d)(f) 5,600
Paid-in capital................. 134,711,056 2,525,288 (2,525,288)(c) 134,711,056
17,494,145(f) 17,494,145
4,474,400(d)(f) 4,474,400
Accumulated other comprehensive
income........................ 3,129 (3,129)(c) --
Retained earnings (deficit)..... 129,528 (1,488,874) 7,980,000 1,488,874(c) 129,528
(5,480,000)(d) (5,480,000)
Notes receivable from
shareholder................... (134,817) 134,817(c) --
------------ ------------
Total stockholders' equity.... 134,935,665 4,808,749 7,980,000 -- 11,707,291 151,451,705
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity........ $255,521,692 $276,210,418 $ 8,970,090 $540,702,200
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the Unaudited Pro Forma Condensed
Consolidated Financial Statements.
20
<PAGE> 30
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
FINANCIAL
ADVISORS GROUP
----------- -----------
PRO FORMA FINANCIAL PRO FORMA
COMPANY ADVISORS ADJUSTMENTS COMBINED GROUP ADJUSTMENTS
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Rental and lease income........ $25,209,297 $25,209,297 $ 1,873,360
Mortgage loan income........... -- 15,011,360
Gain on sales of loans and loan
hedging gains................. -- 4,736,173
Gain (loss) on sales of
properties and equipment...... (850,056) (850,056) 215,099
Management fees and other
related party income.......... 2,763,886 $1,757,249 $(1,757,249)(a1) 2,763,886 1,374,042 $ (431,782)(a3)
Other interest and dividend
income........................ 1,270,732 1,270,732 2,501,363 (967,998)(b)
Other.......................... -- -- -- -- 2,384,078 --
----------- ---------- ----------- ----------- ----------- -----------
Total revenues................. 28,383,859 1,757,249 (1,757,249) 28,393,859 28,095,476 1,399,780
----------- ---------- ----------- ----------- ----------- -----------
EXPENSES
Interest....................... 9,272,453 9,272,453 14,278,996 (967,998)(b)
-- (1,037,871)(c)
Fees to affiliates............. -- --
Salaries, wages and benefits... 209,437 209,437 6,517,432
General and administrative..... 1,566,515 662,708 2,229,223 3,249,194
Commission and selling......... 431,782 (431,782)(a2) -- 2,885,943
Provision for losses........... -- -- 810,450
Amortization of debt
discount...................... -- --
Depreciation and
amortization.................. 3,485,349 -- -- 3,485,349 249,430 --
----------- ---------- ----------- ----------- ----------- -----------
Total expenses................. 14,324,317 1,303,927 (431,782) 15,196,462 27,991,445 (2,005,869)
----------- ---------- ----------- ----------- ----------- -----------
INCOME BEFORE ACCOUNTING
CHANGE........................ 14,069,542 453,322 (1,325,467) 13,197,397 104,031 606,089
Cumulative effect of accounting
change........................ (336,875) -- -- (336,875) -- --
----------- ---------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX....... 13,732,667 453,322 (1,325,467) 12,860,522 104,031 606,089
Provision for income tax....... --
-----------
NET INCOME..................... $13,732,667
===========
Basic earnings per share....... $ 1.44
Diluted earnings per share..... $ 1.44
Weighted-average basic shares
outstanding................... 9,509,108
Weighted-average diluted shares
outstanding................... 9,508,108
<CAPTION>
OTHER
-----------
PRO FORMA PRO FORMA
ADJUSTMENTS COMPANY
----------- -----------
<S> <C> <C>
REVENUES
Rental and lease income........ $27,082,657
Mortgage loan income........... 15,011,360
Gain on sales of loans and loan
hedging gains................. 4,736,173
Gain (loss) on sales of
properties and equipment...... (634,957)
Management fees and other
related party income.......... 3,706,146
$ (120,000)(d) (120,000)
1,325,467(e) 1,325,467
725,350(f) 725,350
Other interest and dividend
income........................ 2,804,097
Other.......................... -- 2,384,078
---------- -----------
Total revenues................. 2,050,817 57,020,372
---------- -----------
EXPENSES
Interest.......................
21,545,580
Fees to affiliates............. --
Salaries, wages and benefits... 6,726,869
General and administrative..... (120,000)(d) 5,358,417
Commission and selling......... 2,885,943
Provision for losses........... 810,450
Amortization of debt
discount...................... --
Depreciation and
amortization.................. 873,318(g) 4,608,097
---------- -----------
Total expenses................. 753,318 41,935,356
---------- -----------
INCOME BEFORE ACCOUNTING
CHANGE........................ 1,297,499 15,085,016
Cumulative effect of accounting
change........................ 338,875(h) --
---------- -----------
INCOME BEFORE INCOME TAX....... 1,634,374 15,085,016
Provision for income tax....... 5,505,625(i)
-----------
NET INCOME..................... $ 9,579,390
===========
Basic earnings per share....... $ 0.78
Diluted earnings per share..... $ 0.78
Weighted-average basic shares
outstanding................... 12,257,613(j)
Weighted-average diluted shares
outstanding................... 12,257,613(j)
</TABLE>
The accompanying notes are an integral part of the Unaudited Pro Forma Condensed
Consolidated
Financial Statements.
21
<PAGE> 31
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. ADJUSTMENTS TO PRO FORMA BALANCE SHEET
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of December 31, 1999 as if the mergers were consummated on such date.
(a) To reflect the elimination of intercompany debt between entities.
<TABLE>
<S> <C>
Notes receivable from Financial Group, Inc.................. $11,378,275
</TABLE>
(b) Reflects additional deferred tax assets resulting from Financial
Group's previously unrecognized net operating loss carry-forward for
which financial Group had recorded a valuation allowance (refer to
(c)).
(c) Reflects the purchase accounting for the Financial Group merger
consideration including certain acquisition and closing costs, over
the estimated fair value of net assets acquired (i.e., goodwill).
Merger consideration represents 2,189,505 shares of Captec common
stock, approximately $2,500,000 in cash for the Financial Group
merger, plus estimated transaction cost of $3,900,000. Captec common
stock has been valued at $8.00 per share, based on the market price of
the securities over a reasonable period of time (defined as a few
days) before and after the terms of the acquisition were agreed to and
announced.
<TABLE>
<S> <C> <C>
Share consideration(f)........................... $17,516,040
Cash consideration............................... $ 2,500,000
Transaction costs................................ 3,900,000 6,400,000
----------- -----------
Costs incurred acquiring Financial Group, Inc.... 23,916,040
Estimated fair value of net assets acquired:
Net book value at December 31, 1999............ 4,808,749
Increase in the fair value of debt(e).......... (1,241,074)
Increase in the fair value of deferred tax
asset(b).................................... 2,882,000 6,449,675
----------- -----------
Goodwill......................................... $17,466,365
===========
</TABLE>
Goodwill will be amortized over its estimated useful life of 20 years.
Captec considered various factors in determining the estimated useful
life including, but not limited to, the synergies created through the
workforce, the lessee/borrower relationships, the established delivery
system, the benefits of operating as a full-service specialty
commercial finance company and the resulting expected long term growth.
Note: Up to an additional 2,000,000 shares of Captec common stock
constituting the earnout shares may be issued based upon the
consolidated performance of Captec in 2000 and 2001. If the
contingencies related to the earnout shares are resolved based on the
financial performance of Captec as outlined in the merger agreement,
the cost of the additional shares will be accounted for as an
adjustment to the purchase price, approximately $16.0 million, and
amortized over the remaining useful life of the goodwill.
(d) Reflects the estimated issuance of Captec common stock to Advisors
stockholders. Consideration represents 560,000 shares of Captec common
stock for the Advisors merger utilizing a valuation price of $8.00 per
Captec common stock (refer to (c)) plus estimated transaction costs.
The Advisors merger will be accounted for as a current period expense
for the costs incurred in acquiring and terminating the advisory
agreement. Advisors has not been deemed to qualify as a "business" for
purposes of applying APB Opinion No. 16 "Business Combinations." Since
the intent of the accompanying pro forma statements is to reflect the
expected continuing impact of the merger on Captec, the adjustment for
the purchase of the advisory agreement has been excluded from the
22
<PAGE> 32
pro forma statements of operations. Upon consummation of the Advisors merger,
this expense, which is estimated at $5,480,000 includes share consideration of
$4,480,000 and estimated transaction costs of $1,000,000 will be recorded as an
operating expense on Captec's statement of operations immediately
following the merger.
(e) Components of the increase in fair value of Financial Group's debts
due to the debt discount recorded on Financial Group related to
issuance of warrants in conjunction with borrowings on the warehouse
facility, subordinated debt, and officer notes which are being
eliminated in the merger.
<TABLE>
<S> <C>
The Public Institution for Social Security subordinated debt
warrant................................................... $ 576,000
Prudential Securities Credit Corporation warrant............ 387,213
Officer notes warrants...................................... 277,861
----------
Increase in the fair value of debt adjustment(refer to
(c))................................................. $1,241,074
</TABLE>
(f) Summary of Captec common stock issued and additional paid in capital
related to the merger of Financial Group and Advisors is as follows:
<TABLE>
<CAPTION>
CAPTEC COMMON ACCUMULATED
CAPTEC COMMON CAPTEC PRICE TOTAL SHARES ISSUED PAID IN
SHARES ISSUED PER SHARE CONSIDERATION @ PAR CAPITAL
------------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Financial Group Merger... 2,189,505 $8.00 $17,516,040 $21,895 $17,494,145
Advisors Merger.......... 560,000 8.00 4,480,000 5,600 4,474,400
--------- ----------- ------- -----------
Total........... 2,749,505 $21,996,040 $27,495 $21,968,545
</TABLE>
2. ADJUSTMENTS TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
Financial Group and Advisors have common management and some stockholders
of Captec are also stockholders of Financial Group and Advisors. The adjustments
to the pro forma statements of operations are limited to adjustments to
eliminate the historical effects of transactions between Captec, Financial Group
and Advisors, which would have otherwise been eliminated in consolidation if the
companies had been merged prior to those historical periods, to reflect the
impact on operations of any merger related adjustments and to reflect the change
to C-corporation tax status. These adjustments do not reflect any pro forma
effects related to the new strategic, financial and operating strategies of
Captec as a result of the merger, such as the impact of increases in property
sales, growth in the lending business of Financial Group, new opportunities to
cross-sell products to the combined company's customers and to expand into new
related markets, and potential reductions in cost of debt capital and savings in
general and administrative expenses.
(a) The adjustment represents the elimination of acquisition and advisory
fee income.
a(1) -- Adjustment reflects the elimination of acquisition and advisory
fee income earned by Advisors from Captec, CNLR Development Inc.
(CNLRD), a non-qualified REIT subsidiary of Captec, and affiliated
limited partnerships.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Advisory fee revenue from Captec directly................... $ --
Advisory fee revenues from Captec paid through the
assignment of Captec fees earned from affiliated limited
partnerships**............................................ 129,985
Acquisition fee revenues from CNLRD*........................ 1,195,985
Acquisition fee revenue from Captec***...................... 431,782
----------
1,757,249
</TABLE>
-----------------------
* CNLRD receives non-REIT acquisition fee income from
affiliates that would otherwise be paid directly to Captec.
Approximately 50.0% of these acquisition fees are paid to
Advisors by CNLRD and passed on to Captec by Advisors in the
form of a reduction of the advisory fee Advisors charges
Captec.
23
<PAGE> 33
** The advisory fee paid directly to the Advisors by the
affiliated limited partnerships. is also passed on to Captec
in the form of an advisory fee reduction.
*** The acquisition fee income from Captec recognized by
Advisors represents charges to Advisors from Financial Group
(refer to a(2) for the elimination of the expense and to
a(3) for the elimination of the revenue recognize by
Financial Group).
The following represents a summary of Captec advisory and acquisition fee
expenses that were paid through the fee reductions described above.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Advisory fee revenue of Advisors from Captec directly....... $ --
Advisory fee revenues from affiliated limited
partnerships.............................................. 129,985
Acquisition fee revenues from CNLRD......................... 1,195,482
----------
$1,325,467
Less:
Advisory fee reductions due to affiliated limited
partnerships revenue...................................... 129,985
Acquisition fee reductions due to CNLRD revenue............. 1,325,467
----------
Fees to affiliates........................................ $ --
</TABLE>
a(2) -- Adjustment reflects the elimination of Advisors acquisition fee
expense that was charged by Financial Group (refer to a(1)) and
recorded as an expense by Advisors. Financial Group records this
acquisition fee as revenue (refer to a(3)).
YEAR ENDED
DECEMBER 31, 1999
$431,782
a(3) -- Adjustment reflects the elimination of Financial Group
acquisition fee revenue (refer to a(2)) that was charged to Advisors by
Financial Group.
YEAR ENDED
DECEMBER 31, 1999
$431,782
(b) Reflects the reduction in interest income and interest expense related
to the inter-company loans between Financial Group and Captec.
(c) Reflects the elimination of debt discount amortization expense for
Financial Group related to warrants issued in conjunction with
borrowings which the warrants are being cancelled in the merger.
(d) Adjustment reflects the elimination of management fees paid by
Financial Group. Financial Group recorded this as management fee
revenue and Advisors recorded this as management fee expense.
(e) Reflects the acquisition fees that Captec would have received directly
from affiliates during the periods if the merger had occurred on
January 1, 1999.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Acquisition fee revenues from affiliated limited
partnerships(a(1))........................................ $ 129,985
Acquisition fee revenues from CNLRD(a(1))................... 1,195,482
----------
Amounts received in the form of acquisition fee
reductions........................................... $1,325,467
</TABLE>
24
<PAGE> 34
(f) Reflects the tax expense incurred by CNLRD. Subsequent to the merger,
CNLRD would become a wholly-owned subsidiary of Captec and accordingly
the separate tax expense, which reduced the equity income, is being
eliminated and considered in adjustment(e).
(g) Reflects the amortization of goodwill resulting from the merger. The
goodwill will be amortized on a straight-line basis over 20 years.
(h) Reflects the elimination of the non-recurring charge for the cumulative
effect of a change in accounting principle.
(i) Reflects income tax expense since Captec will elect to be taxed as a
C-corporation rather than as a REIT. The adjustment to the tax
provision was determined based on the estimated combined tax rate of
34.5% of earnings before income tax and amortization of goodwill for
the year ended December 31, 1999.
(j) Weighed average pro forma shares were determined as follows:
<TABLE>
<S> <C>
Weighed Average basic and diluted shares outstanding before
the merger................................................ 9,508,108
Shares issued attributable to the Financial Group merger.... 2,189,505
Share issued attributable to the Advisors merger............ 560,000
----------
Weighted Average basic diluted shares outstanding after the
merger.................................................... 12,257,613
==========
</TABLE>
Note that up to an additional 2,000,000 shares of Captec common stock
constituting the earnout shares subsequently may be issued based upon
the consolidated performance of the Captec in 2000 and 2001.
25
<PAGE> 35
HISTORICAL, PRO FORMA AND EQUIVALENT PER SHARE DATA
The following table reflects (a) the historical net income and book value
per share of Captec common stock in comparison with the pro forma net income and
book value per share after giving effect to the proposed Financial Group merger
using the purchase method of accounting; (b) the historical net income and book
value per share of the Financial Group common stock in Captec's comparison with
the equivalent pro forma net income and book value per share attributable to
approximately 45.71 shares of Captec common stock which will be received for
each share of Financial Group; and (c) the actual cash dividends per share
compared in the case of Financial Group with the equivalent pro forma 45.71
times the cash dividend paid on each share of Captec common stock.
The data presented below is not necessarily indicative of the results which
would have actually been attained if the merger had been consummated in the past
or the results that may be attained in the future. The pro forma financial data
does not reflect any potential effects related to the new strategic financial
and operating strategies of Captec as a result of the merger, such as the impact
of increases in property sales, growth in the lending business of Financial
Group, new opportunities to cross-sell products to the combined company's
customers and to expand into new related markets and potential reductions in
cost of debt capital and savings in general and administrative expenses. The per
share data included in the following table should be read in conjunction with
the Unaudited Pro Forma Condensed Consolidated Financial Statements of Captec
and Financial Group included elsewhere in this proxy statement.
<TABLE>
<CAPTION>
YEAR-END
DECEMBER 31, 1999
-----------------
<S> <C>
CAPTEC NET LEASE REALTY, INC.
- ------------------------------------------------------------
Net Income per common share
Historical................................................ $ 1.44
Pro forma................................................. 0.78
Dividends per common share
Historical................................................ 1.13
Pro forma................................................. 0.44
Book value per common share
Historical................................................ 14.19
Pro forma................................................. 12.36
CAPTEC FINANCIAL GROUP, INC.
- ------------------------------------------------------------
Net Income/(loss) per common share
Historical -- Basic....................................... (4.40)
Historical -- Diluted..................................... (1.80)
Equivalent Pro forma -- Basic(1).......................... 27.43
Equivalent Pro forma -- Diluted(1)........................ 27.43
Dividends per common share
Historical -- Basic....................................... 9.17
Historical -- Diluted..................................... 3.75
Equivalent Pro forma -- Basic(2).......................... 51.65
Equivalent Pro forma -- Diluted(2)........................ 51.65
Book value per common share
Historical -- Basic....................................... 220.45
Historical -- Diluted..................................... 90.09
Equivalent Pro forma -- Basic(1).......................... 564.78
Equivalent Pro forma -- Diluted(1)........................ 564.78
</TABLE>
- ---------------
(1) Pro forma amounts for Captec multiplied by 45.71 (the ratio of exchange).
(2) Historical amounts for Captec multiplied by 45.71 (the ratio of exchange).
Note that the ratio of exchange was determined by dividing the equivalent Captec
common stock by diluted Financial Group common shares.
26
<PAGE> 36
COMPARATIVE PER SHARE MARKET INFORMATION
Captec common stock currently is listed for quotation on Nasdaq under the
symbol "CRRR" and began trading on Nasdaq in November 1997. The table below sets
forth, for the fiscal periods indicated, the high and low sale prices per share
of Captec common stock on Nasdaq and the dividends declared during such periods.
<TABLE>
<CAPTION>
PRICE PER SHARE OF
COMMON STOCK
------------------ DECLARED
HIGH LOW DIVIDENDS
------- ------- ---------
<S> <C> <C> <C>
1999
First Quarter................................. $13.500 $12.250 $ 0.38
Second Quarter................................ 13.813 11.875 0.38
Third Quarter................................. 13.563 10.063 0.38
Fourth Quarter................................ 11.00 6.25 0.38
1998
First Quarter................................. 17.875 17.00 0.375
Second Quarter................................ 17.125 14.625 0.375
Third Quarter................................. 15.875 12.00 0.375
Fourth Quarter................................ 15.125 11.125 0.375
</TABLE>
On December 17, 1999, the last full trading day prior to announcement of
the proposed merger, the last reported Nasdaq sale price per share of Captec
common stock was $9.6875. On , the last reported sale price per
share of Captec common stock was $ .
Holders of Captec common stock are entitled to receive distributions when,
as and if declared by the Board of Directors out of any assets legally available
for payment. In order to maintain its status as a REIT under the Internal
Revenue Code, Captec currently is required to distribute annually to
stockholders at least 95.0% of its "REIT Net Income," which is generally defined
as taxable income from operations net of depreciation deductions and excluding
gains from the sale of properties. These distributions equaled $1.50 per share
in 1998 and $1.52 per share in 1999. Following the merger, Captec will be
operated so that it no longer will qualify as a REIT under the Internal Revenue
Code effective as of January 1, 2000. Upon failure to qualify as a REIT, Captec
no longer will be required to make any distributions to stockholders and any
future distributions to stockholders will be at the sole discretion of the Board
of Directors.
Captec's Board of Directors has announced an intended policy following the
merger of paying an annual dividend of $0.44 per share. This dividend policy was
determined based upon the expectation that it would represent a significant
reduction in Captec's future earnings payout ratios, a review of the long-term
benefits to Captec resulting from reinvesting a significantly greater portion of
its earnings in operations to finance growth, and a comparison of the dividend
policies of other specialty finance companies. As under current circumstances,
there is no assurance that Captec will be able to pay any dividend in the
future, or that once implemented, any dividend policy will be maintained. See
"Federal Income Tax Consequences -- Termination of REIT Status."
FINANCIAL GROUP/ADVISORS
There is no public market for the Financial Group stock or the Advisors
stock.
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<PAGE> 37
THE SPECIAL MEETING
GENERAL
This proxy statement is being furnished to holders of Captec common stock
in connection with the solicitation of proxies by Captec's Board of Directors
for use at the special meeting to be held on 2000, a.m., local
time, at , and at any adjournments or postponements thereof. This proxy
statement, the attached notice of the special meeting and the accompanying proxy
card are first being mailed to stockholders of Captec on or about ,
2000.
MATTERS TO BE CONSIDERED
At the special meeting, holders of record of shares of Captec common stock
on , 2000 will consider and vote upon:
- the merger of Advisors with and into Captec and the merger of Acquisition
with and into Financial Group, pursuant to which Financial Group will
become a wholly-owned subsidiary of Captec;
- an amendment to Captec's certificate of incorporation changing Captec's
name to Captec Financial Group, Inc.; and
- such other business as may properly come before the special meeting or
any adjournment or postponement thereof.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE
The special committee, acting as the Board of Directors, has unanimously
approved the merger and the merger agreement, having concluded that the merger
and the merger agreement are fair to, and in the best interests of, Captec and
its stockholders. The special committee unanimously recommends that stockholders
vote for the merger proposal. See "Proposal One -- The Merger -- Reasons for the
Merger; Recommendations of the Special Committee." The Board of Directors also
recommends a vote for the amendment to the certificate of incorporation changing
the name of Captec to Captec Financial Group, Inc. See "Proposal Two -- Changing
the Name of Captec Net Lease Realty."
Representatives of PricewaterhouseCoopers LLP, Captec's independent
accountants, will be present at the special meeting and will have the
opportunity to make a statement and respond to appropriate questions.
RECORD DATE; SHARES ENTITLED TO BE VOTED; QUORUM
The Board of Directors has fixed the close of business on , 2000 as
the record date for determining the holders of shares of Captec common stock who
are entitled to notice of and to vote at the special meeting. As of ,
2000, 9,508,108 shares of Captec common stock were issued and outstanding and
held of record by approximately stockholders. The holders of
record on , 2000 of shares of Captec common stock are entitled to one
vote per share of Captec common stock. Captec has determined that, pursuant to
Delaware law and its bylaws, the presence of the holders of shares representing
a majority of the outstanding shares of Captec common stock entitled to be
voted, whether in person or by properly executed proxy, is necessary to
constitute a quorum for the transaction of business at the special meeting.
Under Delaware law, abstentions and "broker non-votes," which are proxies from
brokers or nominees indicating that such persons have not received instructions
from the beneficial owner or other persons entitled to vote shares as to a
matter with respect to which the brokers or nominees do not have discretionary
power to vote, will be treated as present for purposes of determining the
presence of a quorum.
PROXIES; PROXY SOLICITATION
Shares of Captec common stock represented by properly executed proxies
received at or prior to the special meeting that have not been revoked will be
voted at the special meeting in accordance with the instructions indicated on
the proxies. Shares of Captec common stock represented by properly executed
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<PAGE> 38
proxies for which no instruction is given will be voted FOR approval of the
merger proposal and the name change proposal. Stockholders are requested to
complete, sign, date and promptly return the enclosed proxy card in the
postage-prepaid envelope provided for this purpose to ensure that their shares
are voted.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by:
- filing with the Secretary of Captec, at or before the taking of the vote
at the special meeting, a written notice of revocation bearing a later
date than the proxy;
- executing a later dated proxy relating to the same shares of common stock
and delivering it to the Secretary of Captec, including by facsimile,
before the taking of the vote at the special meeting; or
- attending the special meeting and voting in person.
Attendance at the special meeting will not, in and of itself, revoke a
proxy. Any written revocation or subsequent proxy should be sent so as to be
delivered to Captec Net Lease Realty, Inc., 24 Frank Lloyd Wright Drive, Lobby
L, 4th Floor, Ann Arbor, Michigan 48106, Attention: Corporate Secretary, or hand
delivered to the Secretary of Captec or his representative at or before the
taking of the vote at the special meeting.
If the special meeting is postponed or adjourned, at any subsequent
reconvening of the special meeting all proxies will be voted in the same manner
as such proxies would have been voted at the original convening of the special
meeting, except for any proxies that previously have been revoked or withdrawn
effectively, and notwithstanding that they may have been effectively voted on
the same or any other matter at a previous meeting. Proxies voting against the
proposals will not be used to vote for a proposal to adjourn the meeting in
order to permit further solicitation of proxies.
Captec will bear the cost of soliciting proxies from its stockholders.
Captec will pay Georgeson Shareholder Communications Inc. a fee of $20,000 plus
reimbursement of out of pocket expenses and $4.50 for each telephone
solicitation for its services in soliciting the return of proxies. In addition
to solicitation by mail, directors, officers and employees of Captec may solicit
proxies by telephone, facsimile transmission, or otherwise. Directors, officers
and employees of Captec will not be additionally compensated for any such
solicitation, but may be reimbursed for out-of-pocket expenses incurred in
connection therewith. Brokerage firms, fiduciaries and other custodians who
forward soliciting material to the beneficial owners of shares of Captec common
stock held of record by them will be reimbursed for their reasonable expenses
incurred in forwarding such material.
VOTE REQUIRED
The Merger Proposal. None of Delaware law or Captec's certificate of
incorporation or bylaws requires Captec to obtain stockholder approval of the
merger proposal. Nasdaq rules require stockholder approval of the merger because
the merger would result in the issuance of in excess of 20.0% of issued and
outstanding Captec common stock and because of the level of ownership of Mr.
Beach, Mr. Martin and Mr. Sherard in Financial Group and Advisors. Captec has
determined to submit the merger proposal to stockholders for approval since the
merger is among affiliates, and directors and executive officers of Captec have
conflicts of interest in connection with the merger. Pursuant to the merger
agreement, the standard for approving the merger proposal is the affirmative
vote of a majority of the outstanding shares of Captec common stock entitled to
be voted on the merger proposal, which is the standard that would be applicable
if stockholder approval of the merger proposal were required by Delaware law,
excluding shares of Captec common stock beneficially owned by executive
officers, directors or affiliates of Captec who are also executive officers,
directors or affiliates of Financial Group or Advisors, including Mr. Beach, Mr.
Martin and Mr. Sherard. This is the standard that would be applicable if
stockholder approval of the merger proposal were required by Delaware law. Mr.
Beach, Mr. Martin and Mr. Sherard are executive officers, directors and/or
stockholders of Financial Group and Advisors and in the aggregate beneficially
own 862,056 issued and outstanding shares of Captec common stock, which pursuant
to the merger agreement, are not entitled to be voted on the merger
29
<PAGE> 39
proposal at the special meeting. The affirmative vote of 4,323,027 shares of
Captec common stock entitled to be voted on the merger proposal at the special
meeting is required to approve the merger proposal. As of , 2000,
178,159 shares of Captec common stock were owned by affiliates of Financial
Group and/or Advisors who are not affiliates of Captec and may be noted on the
merger proposal. If the stockholders approve the merger and the transaction
subsequently is challenged, Captec may be entitled under Delaware law to assert
stockholder approval as a defense.
The Name Change Proposal. Under Delaware law, the name change proposal
requires an amendment to Captec's certificate of incorporation that must be
approved by the affirmative vote of a majority of the outstanding shares of
Captec common stock entitled to be voted at the special meeting. Shares of
Captec common stock owned by Mr. Beach, Mr. Martin and Mr. Sherard are entitled
to be voted on the name change proposal. Implementation of the name change
proposal is contingent upon consummation of the merger. If the merger is not
consummated because the merger proposal is not approved by the stockholders or
otherwise, Captec's certificate of incorporation will not be amended and
Captec's name will not be changed. If the name change proposal is implemented,
Financial Group's name will be changed to "CFG, Inc."
EFFECT OF ABSTENTIONS AND BROKER NON-VOTES
For purposes of determining approval of any of the proposals to be
presented at the special meeting, abstentions will be deemed present for
purposes of constituting a quorum and entitled to vote and will have the same
legal effect as a vote "against" a matter presented at the special meeting. With
respect to the merger proposal and the name change proposal, broker non-votes
will have the same effect as a vote "against" such proposal.
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<PAGE> 40
RISK FACTORS
The following factors should be considered carefully by stockholders of
Captec in voting upon the merger proposal and the transactions contemplated
thereby.
MR. BEACH, MR. MARTIN AND MR. SHERARD HAVE CONFLICTS OF INTEREST IN
CONNECTION WITH THE MERGER.
Mr. Beach, Mr. Martin and Mr. Sherard also are officers, directors and/or
principal stockholders of Financial Group and Advisors and have interests in the
merger that conflict with those of Captec and its stockholders. Mr. Beach, the
Chairman of the Board of Directors and the President and Chief Executive Officer
of Captec, is a principal stockholder, and the Chairman of the Board of
Directors, President and Chief Executive Officer of each of Financial Group and
Advisors. Mr. Martin, a Director and the Executive Vice President and Chief
Financial Officer of Captec, is a principal stockholder, Director and Senior
Vice President and Chief Financial Officer of each of Financial Group and
Advisors. Mr. Sherard, the Senior Vice President -- Sales & Marketing and a
Director of Captec, is a principal stockholder, Director and/or officer of each
of Financial Group and Advisors.
The following table sets forth information concerning the beneficial
ownership of Captec common stock by Mr. Beach, Mr. Martin, Mr. Sherard and
Captec's officers and directors as a group as of February 1, 2000 and as
adjusted to give effect to the issuance of the share consideration on the merger
including the earnout shares:
<TABLE>
<CAPTION>
STOCKHOLDER AS OF FEBRUARY 1, 2000 ADJUSTED FOR MERGER
- ----------- ---------------------- -------------------
<S> <C> <C>
Mr. Beach............................................... 872,456 3,824,806
Mr. Martin.............................................. 385,295 1,044,543
Mr. Sherard............................................. 71,639 272,816
All Captec officers and directors....................... 1,439,024 5,340,946
</TABLE>
See "Security Ownership of Certain Beneficial Owners and Management." These
conflicts of interest, and the substantial consideration to be paid to them if
the merger is consummated, may have caused Mr. Beach, Mr. Martin and Mr. Sherard
to have pursued the merger notwithstanding the best interests of Captec and its
stockholders. Pursuant to the terms of the merger agreement, the shares of
Captec common stock owned by Mr. Beach, Mr. Martin and Mr. Sherard may not be
voted on the merger proposal. See "The Special Meeting -- Vote Required."
MR. BEACH, MR. MARTIN AND MR. SHERARD WILL CONTINUE TO HAVE CONFLICTS OF
INTEREST FOLLOWING THE MERGER IN CONNECTION WITH THEIR ELIGIBILITY TO RECEIVE
EARNOUT SHARES.
Following the merger, Mr. Beach, Mr. Martin and Mr. Sherard and other
earnout participants will be eligible to receive earnout shares based upon
Captec's consolidated EPS in 2000 and 2001. Although in the merger agreement the
earnout participants acknowledge that the Board of Directors will have complete
control over the business affairs of Captec with respect to matters that could
adversely affect consolidated EPS and the ability of the earnout participants to
receive the earnout shares, Mr. Beach as the Chairman of the Board of Directors,
President and Chief Executive Officer of Captec, Mr. Martin as a Director and
the Executive Vice President and Chief Financial Officer of Captec and Mr.
Sherard as a Director and the Senior Vice President -- Sales & Marketing of
Captec will have substantial influence over the management of Captec following
the merger and will be subject to conflicts of interest with respect to their
management activities arising from their interest in receiving the earnout
shares in that this interest in receiving the earnout shares may cause them to
seek to maximize Captec's consolidated financial results in 2000 and 2001 to the
potential detriment of Captec's longer term business interests. For example, Mr.
Beach, Mr. Martin and Mr. Sherard could attempt to cause Captec to sell
appreciated property in order to increase consolidated EPS in 2000 and 2001. The
merger agreement limits the maximum pre-tax gain from the sale of assets owned
by Captec prior to December 31, 1999 that can be included in the calculation of
consolidated EPS to $9,771,000 for 2000 and $15,750,000 for 2001. All of the
approximately $50.0 million of appreciated properties identified by management
to be offered for sale following the merger were owned by Captec prior to
December 31, 1999 and are subject to these limitations of the merger agreement.
Any pre-tax gain from the sale of any of these or
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<PAGE> 41
other properties in 2000 or 2001 will be included in the calculation of
consolidated EPS for the year in which sale occurs up to the amount of the
applicable limitation in the merger agreement for 2000 and 2001. See "The
Merger -- Conflicts of Interest."
PRUDENTIAL SECURITIES HAS PROVIDED FINANCIAL ADVISORY SERVICES TO CAPTEC
AND FINANCIAL GROUP AND HAS CONFLICTS OF INTEREST IN CONNECTION WITH THE MERGER.
Pursuant to a December 15, 1998 engagement letter between Prudential
Securities and Financial Group, Prudential Securities has provided financial
advisory services to Financial Group including the development and execution of
hedging strategies and in connection with the merger. Prudential Securities also
has provided financial advisory services to Captec both in connection with the
merger and including exploring equity and debt financing alternatives,
acquisitions, mergers, sales, the formation of joint ventures and
recapitalizations since August 25, 1998. Prudential Securities acted as
financial advisor to Financial Group when Financial Group's management
considered but ultimately rejected acquisition proposals for Financial Group in
January 1999 through April 1999. Prudential Securities Credit Corporation, an
affiliate of Prudential Securities, provides Financial Group's $250.0 million
warehouse credit facility, which Financial Group utilizes to finance its
origination and purchase of loans pending securitization. The warehouse credit
facility, upon which Financial Group is dependent in order to conduct its
business, expires on June 30, 2000 and must be repaid, renegotiated or
refinanced at that time. In connection with the establishment of the Financial
Group warehouse credit facility, Prudential Securities Credit Corporation was
issued warrants to purchase 3,011 shares of Financial Group common stock, and
will receive a cash payment from Captec of $1,376,350 in consideration of the
termination of its warrants upon consummation of the merger. As of December 31,
1999, Mr. Beach, Mr. Martin and Mr. Bruder were indebted to Prudential
Securities in the aggregate principal amount of $1,583,400, which amounts were
reloaned by Mr. Beach, Mr. Martin and Mr. Bruder to Financial Group and for
which Financial Group remains indebted to them. Upon consummation of the merger,
Captec will pay Prudential Securities a fee of $3.0 million, which is contingent
upon consummation of the merger, for the financial advisory services it has
rendered to Captec and Financial Group. See "Certain Transactions and
Relationships -- Financial Group."
As a result of these relationships, Prudential Securities is subject to
conflicts of interest with respect to the financial advice it has provided to
Captec and Financial Group. These conflicts could have caused Prudential
Securities to advise management of Financial Group to propose and pursue the
merger in order to generate its substantial advisory fee and payment to its
affiliate in consideration of the termination of the warrants to acquire
Financial Group common stock held by its affiliate. Prudential Securities also
may have been more able to influence Financial Group management than a financial
advisor that did not have these additional relationships with its client because
of the dependence of Financial Group on the $250.0 million warehouse credit
facility provided to Financial Group by Prudential Securities Credit Corporation
and the substantial personal indebtedness of Messrs. Beach, Martin and Bruder to
Prudential Securities.
FINANCIAL GROUP'S LOAN PORTFOLIO IS COLLATERALIZED BY SUBSTANTIAL AMOUNTS
OF PERSONAL PROPERTY WHICH IS SUBJECT TO A GREATER RISK OF DEPRECIATION THAN
REAL PROPERTY.
While there exist substantial similarities between the business of Captec
and the business of Financial Group, there also exist substantial differences
that will subject Captec to the following new and additional business risks upon
consummation of the merger. Captec's asset portfolio currently consists almost
entirely of real property that Captec acquires, develops and owns to be leased
primarily on a long-term triple net basis to national and regional chain and
franchise restaurants and retailers. Financial Group is a specialty commercial
finance company that provides a more comprehensive line of financing products,
including mortgage loans, business enterprise loans, equipment leases and loans
and construction financing to the franchise and chain restaurant, and the retail
petroleum and convenience store markets. A material amount, approximately 30.0%
during 1999, of Financial Group's loan portfolio is collateralized by interests
in tangible and/or intangible personal property as opposed to real property.
Investment in loans collateralized by personal property is subject to certain
greater risks than investment in loans collateralized by real property. Real
property is more likely to retain its value or increase in value over time,
thereby providing a lessee or lender with greater security with respect to its
investment in the event of a default by a lessee or borrower. Personal property
typically
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<PAGE> 42
depreciates rapidly in value exposing a lender or lessor to greater risk of loss
in the event of a default on the underlying obligation. While greater rents,
interest rates and/or other finance charges are charged to reflect the greater
risk of a lender collateralized by, or lessor of, personal property, in the
event of a default of the underlying obligation it may be more difficult for
Captec to recover its investment thereby exposing Captec to greater risk of
financial loss than with a lease of, or loan collateralized by, real property.
Security interests in intangible property such as contractual rights are subject
to further risk with respect to difficulties of seizure, foreclosure and
realization of value following foreclosure. Historically, Financial Group has
managed this risk in part through securitization programs. Securitization is a
widely utilized form of financing effected by selling a pool of loans and leases
into a special purpose entity that simultaneously issues securities backed by
the pool of loans and leases. When Financial Group securitizes its loans and
leases, it passes the risk of loss from defaults of the underlying loans and
leases to the holders of the securities issued in the securitization, subject to
contingent risks. These contingent risks include that actual delinquency,
default and prepayment experience will differ from Financial Group's assumptions
for the securitization, thereby substantially reducing the carrying value of the
subordinate interests retained by Financial Group and that Financial Group will
be required to repurchase or replace loans and leases which do not conform in a
material and adverse respect to representations and warranties made by Financial
Group at the time of sale. Financial Group uses securitization to reduce the
period of time during which it bears the entire risk of a default by a borrower
or lessee generally to the initial 6 to 12 months of the loan or lease term.
Upon consummation of the merger, approximately 85.0% to 90.0% of Captec's
consolidated assets will consist of mortgage and equity interests in real
property and approximately 10.0% to 15.0% of Captec's consolidated outstanding
leases and loans will be collateralized by, or related to, interests in personal
property. As a result, following the merger Captec will be subject to all of the
foregoing additional and greater risk of loss associated with the ownership and
management of a portfolio collateralized by substantial amounts of personal
property and new lines of business. The inability of Captec's management to
manage these risks effectively could result in a material adverse effect on
Captec's financial condition and results of operations.
ON A PRO FORMA BASIS, THE MERGER RESULTS IN SUBSTANTIAL DILUTION TO
CAPTEC'S EARNINGS PER SHARE AND SUBSTANTIAL ACCRETION TO FINANCIAL GROUP'S AND
ADVISORS' EARNINGS PER SHARE.
Based upon the Unaudited Pro Forma Condensed Consolidated Financial
Statements for the year ended December 31, 1999 included in this proxy
statement, the merger would have resulted in immediate and substantial dilution
of $0.66 to Captec's earnings per share, and immediate and substantial accretion
to earnings per share of Financial Group and Advisors.
FOLLOWING THE MERGER CAPTEC WILL BE OPERATED SO THAT IT NO LONGER WILL
QUALIFY AS A REIT UNDER THE INTERNAL REVENUE CODE AND NO LONGER WILL BE REQUIRED
TO DISTRIBUTE AT LEAST 95.0% OF ITS TAXABLE INCOME TO STOCKHOLDERS.
Following the merger, Captec will be operated so that it no longer will
qualify as a REIT under the Internal Revenue Code effective as of January 1,
2000, at which time it will be subject to federal corporate income taxation as a
subchapter C-corporation under the Internal Revenue Code and no longer will be
required to make distributions to stockholders of at least 95.0% of the REIT net
income, which were $1.50 per share in 1998 and $1.52 per share in 1999. As a
result of the termination of REIT status, Captec will have the ability to
generate capital for future growth through the sale of properties and loans,
rather than relying principally on access to the public and private equity and
debt capital markets. Additionally, results of operations will bear the cost of
federal income taxes on its taxable income at regular corporate rates, including
taxes on any gains from the sale of properties and loans. Future distributions
to stockholders, if any, will be at the sole discretion of the Board of
Directors subject only to the requirements of Delaware law with respect to the
payment of dividends. Although Captec has announced an intended policy to pay an
annual cash dividend of $0.44 per share following the merger, as under current
circumstances, there is no assurance that Captec will be able to pay any
dividend in the future or that once implemented, any dividend policy will be
maintained. As a result, following the merger, Captec's annual dividend to
stockholders will be significantly reduced to $0.44 per share and could be
eliminated at any time.
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<PAGE> 43
FOLLOWING THE MERGER CAPTEC WILL BE MORE DEPENDENT ON BORROWING.
Financial Group's commercial finance business depends upon warehouse credit
facilities with financial institutions or institutional lenders to finance
Financial Group's origination and purchase of loans, typically for less than one
year, pending sale or securitization. Implementation of Financial Group's growth
strategy requires continued availability of warehouse credit facilities and may
either require increases in the capacity of warehouse credit facilities or
execution of a securitization transaction to repay its warehouse credit
facilities. Commercial finance companies, such as Financial Group, typically are
substantially more leveraged than companies that operate as publicly traded
REITs. Captec, as a specialty commercial finance company following the merger,
will be more heavily dependent on borrowing to execute its business plan. The
Financial Group warehouse credit facility expires on June 30, 2000, Financial
Group has no commitments for additional borrowings and there can be no assurance
that Financial Group will be successful in consummating any such future
financing transactions on satisfactory terms, if at all. Following the merger,
the inability of Financial Group to obtain additional warehouse credit
facilities or to extend or replace existing warehouse credit facilities upon
expiration would have a material adverse effect on Captec's business, financial
condition and results of operations. Factors which could affect Financial
Group's access to the capital markets, or the costs of such capital, include
changes in interest rates, general economic conditions and the perception in the
capital markets of Financial Group's business, results of operations, leverage,
financial condition and business prospects, each of which is subject to
economic, financial and competitive factors beyond Financial Group's control. In
addition, covenants under Financial Group's future debt securities and credit
facilities may restrict Financial Group's ability to incur additional
indebtedness. Financial Group's existing $250.0 million warehouse credit
facility imposes limits upon Financial Group's ability to finance loans and
leases under the warehouse credit facility in excess of stated concentration
limits including indebtedness incurred with respect to:
- any single obligor or group of four obligors;
- collateralized principally by mortgages or tangible or intangible
personal property;
- a particular franchise or retail concept; and
- construction projects.
Financial Group's ability to repay its outstanding indebtedness at maturity
or execute its business strategy in the future may depend on its ability to
refinance such indebtedness, which could be adversely affected if Financial
Group does not have access to the capital markets for the sale of additional
debt or equity securities through public offerings or private placements on
reasonably acceptable terms. The inability of Financial Group to obtain
borrowings on acceptable terms, or at all, would have a material adverse effect
on its financial condition and results of operations.
FOLLOWING THE MERGER CAPTEC WILL BE MORE SENSITIVE TO INTEREST RATE
FLUCTUATIONS.
Since certain of Financial Group's borrowings, including borrowings under
the Financial Group warehouse credit facility, are at variable rates of
interest, Financial Group's income from the difference between the yield to
Financial Group on loans and leases held pending sale and the interest paid by
Financial Group for funds borrowed under the Financial Group warehouse credit
facility or otherwise may be adversely impacted by increases in interest rates.
In addition, the value of its interest-earning assets and liabilities may be
directly affected by the level of, and fluctuations in, interest rates. Although
Financial Group monitors the interest rate environment and employs hedging
strategies designed to mitigate the impact of changes in interest rates, there
can be no assurance that the profitability of Financial Group would not be
adversely affected during a period of changes in interest rates. A substantial
and sustained increase in interest rates could adversely affect the ability of
Financial Group to originate loans and reduce the gains recognized by Financial
Group upon their securitization and sale. Inverse or flattened interest yield
curves could have an adverse impact on the earnings of Financial Group because
the loans pooled and sold by Financial Group have long-term rates while the
senior interest in the related trusts are priced on the basis of intermediate
rates. Specialty commercial finance companies such as Financial Group typically
are substantially more leveraged than companies that operate as publicly traded
REITs. Captec, as a specialty commercial finance company
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<PAGE> 44
following the merger, will be more heavily dependent on borrowing to execute its
business plan and more sensitive to the potential adverse consequences of
significant interest rate increases. Currently, Financial Group can borrow up to
$250.0 million under the Financial Group warehouse credit facility and, as of
March 1, 2000, had outstanding approximately $61.0 million of indebtedness under
this warehouse credit facility at a variable interest rate equal to 30 day LIBOR
plus 1.10%. As a result of Financial Group's sensitivity to interest rate
fluctuations, following the merger Captec will be more sensitive to the
potential adverse effects of interest rate fluctuations and such fluctuations
could have a material adverse effect on Captec's financial condition and results
of operations.
FOLLOWING THE MERGER, CAPTEC WILL BE MORE HIGHLY LEVERAGED.
At December 31, 1999, Captec's ratio of total liabilities to total assets
was 0.47:1.00 and Financial Group's ratio of total liabilities to total assets
was 0.98:1.00. Financial Group's leverage ratio changes significantly as a
result of the impact of selling loans through securitization. Captec's credit
facility requires Captec to maintain a minimum net worth of $125.0 million, a
maximum leverage ratio of 60.0%, an interest coverage ratio of greater than
2.25:1.00 and a fixed charge coverage ratio of greater than 1.75:1.00. Following
the merger, Captec intends to renegotiate the terms of its credit facility to
provide it the flexibility management believes will be required to operate as a
specialty commercial financial company. There is no assurance that Captec will
be able to renegotiate its credit facility on acceptable terms, or at all. If
Captec is unable to renegotiate its credit agreement it will be required to
comply with the current terms of the credit facility. Under Captec's proposed
new strategic plan, after consummation of the merger, Captec intends to operate
at a higher leverage rate commensurate with other specialty commercial finance
companies and to do so by taking advantage of Financial Group's warehouse credit
facilities, which have lower borrowing costs than Captec's existing credit
facility. As indicated in the Unaudited Pro Forma Condensed Consolidated Balance
Sheet, at December 31, 1999 the combined company's pro forma ratio of total
liabilities to total assets was 0.72:1.00. The Financial Group warehouse credit
facility is collateralized by investment in direct financing leases and mortgage
loans. The use of leverage, while intended to provide a greater rate of return
by permitting the borrower to acquire income producing assets of greater cost
than otherwise would be possible, also increases the risk of loss and
foreclosure on the assets which have been pledged to collateralize the
indebtedness.
FINANCIAL GROUP'S RELIANCE ON SECURITIZATIONS COULD ADVERSELY AFFECT ITS
RESULTS OF OPERATIONS IF THE SECONDARY MARKET FOR SUCH LOANS ADVERSELY CHANGES.
Financial Group is heavily dependent upon its ability to securitize loans
and leases by pooling and subsequently selling them in the secondary market to
generate revenues, earnings and cash flows and to repay its warehouse credit
facilities to enable it to continue originating new loans and leases. Adverse
changes in the secondary market for such loans and leases could impair Financial
Group's ability to originate, purchase and sell loans and leases on a favorable
or timely basis and changes affecting Financial Group's ability to originate
loans and leases meeting securitization standards could have a material adverse
effect on Financial Group's business and results of operations.
FINANCIAL GROUP IS SUBJECT TO A NUMBER OF RISKS AS A RESULT OF ITS
SECURITIZATION OF THE LOANS AND LEASES IT ORIGINATES.
Pending the securitization of its loans and leases, Financial Group is
subject to the various business risks associated with the lending business,
which business risks include:
- obligor default in payment or any other material obligations;
- failure to obtain the priority of lien or security interest required by
the loan documents;
- unenforceability of lease or loan provisions; and
- failure of leases or loans to qualify for inclusion in securitization.
When Financial Group securitizes its loans and leases it passes the risk of
losses from defaults of the underlying loans and leases to the holders of the
securities issued in the securitization subject to certain contingent risks.
Financial Group retains some contingent credit risk as a result of retaining a
residual interest
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<PAGE> 45
in the securitization, which interest is subordinated in right of payment of
funds from the securitized loan pool to all other securities issued in the
securitization and as a result of making representations and warranties at the
time of securitization. After the sale of loans, if actual delinquency, default
and prepayment experience differs from Financial Group's performance assumptions
for its securitizations, the carrying value of the residual and subordinate
interests retained by Financial Group in connection with the securitizations
could be substantially reduced. In addition, documents governing Financial
Group's securitization programs require Financial Group to commit to repurchase
or replace loans and leases which do not conform in a material and adverse
respect to the representations and warranties made by Financial Group at the
time of sale. As of December 31, 1999 Financial Group held approximately $8.2
million in subordinated securities issued in connection with its securitization
programs. Financial Group has not recorded any loss with respect to such
retained interests. Any future losses from the subordinated securities which
Financial Group retains from its securitization or requirements to replace or
refund loans or leases sold as securitizations could have a material adverse
effect on Financial Group's financial condition and results of operations.
FINANCIAL GROUP MAY RECOGNIZE LOSSES IN CONNECTION WITH FUTURE HEDGING
TRANSACTIONS.
Financial Group has in the past, and may in the future, enter into interest
rate or currency financial instruments used for hedging purposes. While intended
to reduce the effects of volatility in interest rate or currency price
movements, such transactions may not adequately insulate Financial Group against
such volatility and also could cause Financial Group to recognize losses
depending on the terms of the instrument and interest rate movements. Financial
Group hedges its mortgage loan and direct financing lease portfolio as part of
its credit sector and interest rate risk management strategy. Financial Group
uses forward sales of FNMA mortgage-backed securities, U.S. Treasury securities
and Treasury futures to hedge the credit sector and interest rate risk on its
portfolio. Financial Group implements its hedging strategies in conjunction with
Prudential Securities, which assists Financial Group in developing these
strategies, and is further responsible for executing hedges. At the time
Financial Group places a loan, Prudential Securities executes a related hedge
transaction. Mr. Martin, as Chief Financial Officer of Financial Group, is
charged with the overall responsibility for reviewing and approving the hedging
strategies recommended by Prudential Securities. Authority to execute hedge
approvals within the parameters approved by Mr. Martin is delegated to the
Finance Department and the Vice President of Operations of Financial Group.
While intended to reduce the effects of volatility in interest rate or currency
price movements, such transactions may not adequately insulate Financial Group
against such volatility and also could cause Financial Group to realize losses
depending on the terms of the instrument and the interest rate or currency price
movements. Financial Group's use of hedging instruments involve credit and
interest rate risks. Credit risk would be the result of nonperformance by the
other parties to the financial instruments. All financial instruments have been
entered into with major financial institutions which are expected to perform
under the terms of the agreements, thereby mitigating the credit risk from the
transactions, although there can be no assurance that any such institutions will
perform their obligations. Interest rate risks relate to changes in interest
rates and the resulting impact on earnings. Financial Group seeks to mitigate
interest rate risk through the simultaneous nature of placing a loan and
executing a related hedge transaction.
FINANCIAL GROUP MAY BE ADVERSELY AFFECTED BY FUTURE TERMINATION OF
SERVICING OF SECURITIZATIONS.
Financial Group's securitization documents typically permit the removal of
Financial Group as servicer for the securitization if certain delinquency or
loss rates exceed those specified in the documents. As servicer of its
securitizations, Financial Group provides billing, collection and financial
reporting services on behalf of the security holders, and makes advances of
principal and interest shortfalls, and receives monthly servicing fees in return
for those services. Financial Group's servicing fee receipts for 2000 are
approximately $2.3 million. If Financial Group's servicing rights were
terminated for any of the stated reasons, Financial Group's results of
operations and financial condition could be materially adversely affected.
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<PAGE> 46
FINANCIAL GROUP'S QUARTERLY OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, DUE
TO A NUMBER OF FACTORS, INCLUDING:
- its ability to execute securitization transactions;
- the interest rates on the securities issued in connection with Financial
Group's securitization transactions;
- variations in the volume of loans and leases originated by Financial
Group;
- differences between Financial Group's cost of funds and the yield to
Financial Group on its loans and leases prior to being securitized or
otherwise sold;
- the effectiveness of Financial Group's hedging strategy;
- the degree to which Financial Group encounters competition in its
markets; and
- general economic conditions.
As a result of these fluctuations, results for any quarter should not be
relied upon as being indicative of performance in future quarters.
FINANCIAL GROUP'S LOAN PORTFOLIO IS SUBJECT TO MATERIAL LEVELS OF
CONCENTRATION WITH RESPECT TO SPECIFIC BORROWERS, GEOGRAPHIC REGIONS AND/OR
FRANCHISE OR BUSINESS CONCEPTS.
From time to time Financial Group's loan portfolio is subject to material
levels of concentration with respect to aggregate indebtedness outstanding to
specific borrowers, borrowers located in specific regions of the country and/or
borrowers operating a specific franchised or chain business concept. Depending
upon these levels of concentration at any time, a default by a material
borrower, a regional economic downturn or a decline in the popularity of a
franchised or chain concept, could have a material adverse effect on Financial
Group. Financial Group's loan portfolio at December 31, 1999, including all
loans which have been securitized, includes the following material levels of
concentration:
- 132 loans representing 9.3% of total outstanding indebtedness, with
Florida borrowers;
- 113 loans representing 8.0% of total outstanding indebtedness, with
California borrowers;
- 391 loans representing 27.4% of total outstanding indebtedness, with
operators of the Taco Bell concept; and
- 349 loans representing 24.5% of total outstanding indebtedness, with
operators of the Arby's concept.
Additionally, approximately 93.0% of Financial Group's loans and leases are
concentrated in the franchise and chain restaurant industry. To the extent that
the economic or regulatory conditions prevalent in this market, or economic
conditions generally, change, the ability of Financial Group's borrowers and
lessees to honor their obligations may be adversely impacted. As a result, any
significant decline in the economy of California or Florida, or any other state
or geographic region where Financial Group may maintain a material level of
concentration in the future or in the popularity of Arby's, Taco Bell or any
other concept in which Financial Group may maintain a material level of
concentration in the future, could have a material adverse effect on the ability
of Financial Group's borrowers and lessees in those jurisdictions or operating
those concepts to fulfill their lease or loan obligations to Financial Group and
could materially adversely affect Captec's financial condition and results of
operations.
FOLLOWING THE MERGER, CAPTEC WILL BE REQUIRED TO AMORTIZE GOODWILL OVER 20
YEARS.
As a result of the merger, Captec will record on its financial statements a
significant amount of goodwill, currently estimated to be approximately $17.5
million, or approximately 4.0% percent of the total combined assets and
approximately 12.0% of stockholders equity, plus additional goodwill potentially
resulting from the issuance of the earnout shares. Any goodwill resulting from
the merger will be recognized and amortized into income by Captec over 20 years
thereby reducing Captec's earnings and amounts available for distribution to
stockholders. If the estimated economic useful life of goodwill is lowered in
the future or if goodwill is determined to be impaired in the future, the
increased amortization or change would have a material adverse effect on
Captec's financial condition and results of operations.
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<PAGE> 47
FOLLOWING THE MERGER, CAPTEC WILL BE SUBJECT TO LIABILITIES AS A RESULT OF
A SUBSTANTIAL INCREASE IN ITS NUMBER OF EMPLOYEES.
At present, Captec's only employees are its four executive officers, and
Captec does not maintain any benefit or retirement plans, or rent office space
or equipment. As a result of the merger, Captec will directly employ
approximately ninety current employees of Financial Group and will assume
certain retirement and other employee benefit plans. As such an employer, Captec
will be subject to those potential liabilities that are commonly faced by
employers, such as workers' disability and compensation claims, potential labor
disputes, equal opportunity and anti-discrimination claims and other
employee-related grievances that could result in a material expense to Captec.
These expenses, if substantial, could materially adversely affect Captec's
financial condition and results of operations.
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<PAGE> 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
owners of Captec common stock as of February 1, 2000, and as adjusted to give
effect to the issuance of all share consideration in the merger, by:
(a) Captec's directors; (b) each other person who is known by Captec to own
beneficially more than 5.0% of the outstanding shares of Captec common stock;
(c) Captec's executive officers; and (d) Captec's executive officers and
directors as a group.
Unless otherwise stated, the following beneficial owners have sole voting power
and sole investment power for all shares of Captec common stock set forth
opposite their names.
<TABLE>
<CAPTION>
FEBRUARY 1, 2000 AS ADJUSTED FOR MERGER(11)
------------------------------- -------------------------------
SHARES BENEFICIALLY PERCENT SHARES BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED(1) OF CLASS OWNED OF CLASS
- ---------------- ------------------- -------- ------------------- --------
<S> <C> <C> <C> <C>
Patrick L. Beach(2)..................... 872,456 8.9% 3,824,806(12) 26.2%
W. Ross Martin(3)....................... 385,295 4.0% 1,044,543 7.2%
H. Reid Sherard(4)...................... 71,639 * 272,816 1.9%
Ronald Max(5)........................... 38,334 * 38,334 *
Richard J. Peters(6).................... 13,800 * 13,800 *
Creed L. Ford, III(6)................... 8,500 * 8,500 *
William H. Krul, II(6).................. 8,500 * 8,500 *
Lee C. Howley(6)........................ 20,500 * 20,500 *
Albert T. Adams(6)...................... 12,500 * 10,000 *
William J. Chadwick(6).................. 42,500 * 35,000 *
Gary A. Bruder(7)....................... 20,086 * 110,223 *
The Public Institution For Social
Security.............................. 527,778 5.2% 527,778 3.6%
Boston Partners Asset Management
L.P.(8)............................... 480,000 5.0% 480,000 3.4%
Solomon Smith Barney Holdings,
Inc.(9)............................... 983,850 9.7% 983,850 %
Marsh & McLennan Companies, Inc.(10).... 496,374 5.2% 496,374 3.5%
All officers and directors as a group... 1,494,024 14.7% 5,340,946 36.1%
</TABLE>
- ---------------
* Less than 1.0%
(1) Excludes shares of Captec common stock subject to options not exercisable
within 60 days.
(2) Includes options exercisable within 60 days to purchase 286,667 shares of
Captec common stock. Includes 99,273 shares of Captec common stock owned by
Family Realty, Inc. Mr. Beach owns all of the voting stock and an economic
interest of one-half of one percent (0.5%) in Family Realty. Excludes
14,700 shares of Captec common stock owned by George Beach, Mr. Beach's
father.
(3) Includes options exercisable within 60 days to purchase 143,334 shares of
Captec common stock.
(4) Includes options exercisable within 60 days to purchase 38,333 shares of
Captec common stock.
(5) Includes options exercisable within 60 days to purchase 38,334 shares of
Captec common stock.
(6) Includes options exercisable within 60 days to purchase 7,500 shares of
Captec common stock.
(7) Mr. Bruder is a stockholder, executive officer and/or a director of each of
Financial Group and Advisors and will become an executive officer of Captec
following the merger.
(8) According to a Schedule 13G, dated February 9, 1998, filed with the SEC by
Boston Partners Asset Management, L.P. (BPAM), an investment advisory firm,
BPAM beneficially owns 480,000 shares of Captec common stock. BPAM
disclosed in its Schedule 13G that (a) it has shared dispositive and voting
power for all 480,000 shares of Captec common stock with Boston Partners,
Inc., the sole general partner of BPAM and Desmond John Heathwood, the
principal stockholder of Boston Partners; and (b) each of BPAM, Boston
Partners and Mr. Heathwood may be deemed to own beneficially all 480,000
shares of Captec common stock. BPAM also disclosed in its Schedule 13G that
it holds all
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<PAGE> 49
480,000 shares of Captec common stock under management for its clients,
none of whom owns more than 5.0% of Captec common stock according to the
Schedule 13G.
(9) According to a Schedule 13G/A, dated May 10, 1999, filed with the SEC by
Salomon Smith Barney Holdings, Inc., a holding company ("SSB Holdings"),
its wholly-owned subsidiaries Salomon Brothers Holding Company, Inc.
("SBHC") and SSBC Fund Management, Inc., formerly Mutual Management Corp.
("SSBC"), Salomon Brothers Asset Management, Inc., a wholly-owned
subsidiary of SBHC ("SBAM"), and Citigroup Inc., the sole stockholder of
SSB Holdings ("Citigroup"), and a Schedule 13G/A dated September 9, 1999,
filed with the SEC by Citigroup, these reporting companies in the aggregate
beneficially own shares of Captec common stock as follows: (a) SSB
Holdings -- 983,850 shares, shared voting and dispositive power -- 983,850
shares; (b) SBHC -- 503,850 shares, shared voting and dispositive
power -- 503,850 shares; (c) SSBC -- 480,000 shares, shared voting and
dispositive power -- 480,000 shares; (d) SBAM -- 480,000 shares, shared
voting and dispositive power -- 480,000 shares; (e) Citigroup -- 300,650
shares, shared voting and dispositive power -- 300,650 shares.
(10) According to a Schedule 13G/A, dated February 4, 1999, filed with the SEC
by Marsh & McLennan Companies, Inc., a holding company, its wholly-owned
subsidiary Putnam Investments, Inc. ("PII") and PII's wholly-owned
subsidiaries, The Putnam Advisory Company, Inc. ("PACI"), and Putnam
Investment Management, Inc. ("PIMI"), and the Putnam Capital Appreciation
Fund ("PCAF"), such parties in the aggregate beneficially own shares of
Captec common stock as follows: (a) PII -- 496,374 shares, shared voting
power -- 10,674 shares, shared dispositive power -- 496,374 shares); (b)
PIMI -- 485,700 shares, shared dispositive power -- 485,700 shares; (c) PAC
10,674 shares, shared voting and dispositive power -- 10,674 shares; and
(d) PCAF -- 485,700 shares, shared dispositive power -- 485,700 shares.
(11) Assumes the issuance of all consideration, including share consideration
and earnout shares, as of the effective time of the merger and includes
shares of Captec common stock subject to options exercisable as of January
31, 2000.
(12) Includes 721,866 shares of Captec common stock to be issued to Princap
Leasing Company, L.P., the sole preferred stockholder of Financial Group,
and the general partner of which is a partnership of which Mr. Beach is a
54.6% partner and will have an economic interest in 64,573 of those shares
of Captec common stock. Excludes 459,081 shares of the Captec common stock
to be issued to George Beach, Mr. Beach's father, in consideration of the
merger, including earnout shares.
PROPOSAL ONE
THE MERGER
BACKGROUND
Captec, which currently qualifies and operates as a REIT, was formed in
August 1997 to acquire, develop and own high quality, free-standing properties
to be leased principally on a long-term, triple-net basis to national and
regional chain and franchised restaurants and retailers. Advisors, which is
privately owned, also was formed in August 1997 to provide Captec with
administrative support and external investment and financial advisory services
in connection with the acquisition and development of properties. These services
have been provided to Captec by Advisors pursuant to the advisory agreement.
Such an external advisor relationship is sometimes utilized in the REIT
industry. Financial Group, which is also privately owned, is a specialty
commercial finance company founded in 1981 that provides a diverse line of
financing products, including mortgage loans, business enterprise loans,
equipment leases and loans and construction financing, to the franchise and
chain restaurant and the retail petroleum and convenience store markets.
Financial Group also assists Advisors in providing external advisory services
and administrative support to Captec.
On August 25, 1998, Captec, as part of its ongoing business activities,
engaged Prudential Securities to provide financial advisory services to Captec
on an ongoing basis, including such services as exploring equity and debt
financing alternatives, acquisitions, mergers, sales, the formation of joint
ventures and recapitalizations. For a description of fees to be paid to
Prudential Securities, and a description of Captec's relationship
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<PAGE> 50
with Prudential Securities Credit Corporation, an affiliate of Prudential
Securities, see "Certain Transactions and Relationships -- Financial Group" and
"-- Conflicts of Interest."
In December 1998, recognizing the potential strategic advantages and other
benefits of eliminating its external advisory structure, Captec began exploring
the possibility of becoming a self-advised REIT so as to control key functions
important to the growth of its business. These potential benefits included
elimination of actual and perceived conflicts of interest arising from the
externally advised structure, the resulting enhanced profile of Captec, and the
expansion of Captec's financial and other internal resources. In furtherance of
this objective, and because the proposed transaction was between affiliates and
subjected Mr. Beach, Mr. Martin and Mr. Sherard to conflicts of interest, the
Board of Directors formed a special committee consisting of Albert T. Adams,
William J. Chadwick and Lee C. Howley to explore the possibility of a merger
with Advisors. On December 17, 1998, Captec issued a press release announcing
the formation of this committee to examine a possible merger with Advisors. This
committee subsequently retained Brown, Gibbons, Lang & Company, L.P. to provide
financial advisory services to it in connection with a potential merger with
Advisors.
During the period from February 1999 to March 1999, Brown Gibbons conducted
due diligence and held discussions with the management of Captec and Advisors
with respect to Captec's relationship with Advisors and the proposed
transaction. In early March 1999, Brown Gibbons made a presentation to the
members of the special committee regarding the potential transaction with
Advisors and certain alternatives. Subsequently, the special committee requested
Brown Gibbons to perform additional financial analyses relating to the
transaction. On April 15, 1999, Brown Gibbons delivered a written report to the
special committee regarding the financial analyses performed by Brown Gibbons.
On May 24, 1999, the special committee and Brown Gibbons had a conference call
to discuss the report and various issues related to the transaction, including
the pro forma impact of an acquisition of Advisors on Captec's forecasted
financial results. As part of the call, a possible transaction was discussed
whereby the shareholders of Advisors would receive approximately $6.0 million of
Captec common stock on a non-contingent basis and an additional approximately
$4.2 million of Captec common stock would be issued to such shareholders
contingent upon the satisfaction of certain financial criteria. Subsequently, in
discussions between Brown Gibbons and the special committee, a transaction was
discussed whereby the shareholders of Advisors would receive $5.2 million of
Captec common stock on a non-contingent basis, with a potential earnout of an
additional $3.8 million over three years.
In exploring the elimination of its external advisory structure, and with a
view to continuing the operations of the business, the special committee
reviewed several alternatives to a merger transaction with Advisors, such as
terminating or re-negotiating the existing agreement, and hiring new external
advisors for the REIT. The special committee did not consider other strategic
alternatives for Captec at the time, or the liquidation of Captec. During this
period, representatives of the special committee, Brown, Gibbons and Mr. Beach
and Mr. Martin met on several occasions to negotiate the financial terms of a
proposed transaction.
After considering such a transaction and relying on the advice of its
financial advisor, on June 3, 1999, the committee, and subsequently all the
non-management directors of Captec, approved in principle a merger of Advisors
with and into Captec in an all stock transaction in which approximately $5.2
million of Captec common stock would be issued at the closing on a
non-contingent basis, and an additional approximately $3.8 million of Captec
common stock would be issued subsequent to the closing contingent upon
satisfaction of financial performance criteria over a three-year period.
In exploring the possibility of a transaction whereby Advisors would be
merged into Captec, the Board of Directors and management recognized that, while
such a merger would be beneficial, it also would not result in Captec becoming
fully integrated, since Captec would continue to rely on Financial Group for
significant services, including credit underwriting, management consulting,
property acquisition consulting, acquisition diligence and documentation,
billing and collection services, information systems and physical facilities.
Concurrently with the special committee's deliberations concerning a merger with
Advisors, and prior to the preparation and negotiation of definitive
documentation for, and consummation of, such a merger as authorized by the Board
of Directors, and prior to delivery of a fairness opinion with respect to the
proposed transaction involving Advisors, it became apparent to management that
Captec would not be able to meet all of its clients' net lease financing needs,
capitalize on potentially significant new business opportunities with
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<PAGE> 51
existing or new clients, or expand into additional related areas of business as
a result of its limited capital and its inability to raise new public equity
capital under then-prevailing market conditions. It also was recognized that,
because of restrictions placed on it as a REIT and then-prevailing conditions in
the REIT public equity market, Captec could not generate growth capital through
such traditional financing means as retaining earnings, increasing borrowings
and/or selling appreciated properties. Management concluded that these factors,
and the resulting effect on Captec's market valuation, could potentially impact
Captec's results of operations and its ability to refinance its credit facility
that is due to expire in February 2001.
During the period January 1999 to April 1999, while the foregoing
transaction between Captec and Advisors was under review and the foregoing
matters were being considered, Prudential Securities was exploring the
possibility of a sale of Financial Group. Prudential Securities, separate and
apart from its engagement by Captec, had been engaged by Financial Group on
December 15, 1998 to advise as to the possible disposition of Financial Group.
For a description of fees to be paid to Prudential Securities for its services
to Financial Group, see "Certain Transactions and Relationships -- Financial
Group."
In response to its initial efforts with regard to a possible sale of
Financial Group, Prudential Securities received preliminary indications of
interest from more than 15 potential third party purchasers. Representatives of
Financial Group subsequently engaged in preliminary discussions with five such
interested parties, each of which conducted preliminary due diligence. Two such
interested parties then expressed indications of interest. Party A orally
offered $20.0 million-$30.0 million in non-contingent consideration payable at
closing with the ability for management to earn an additional $10.0
million-$15.0 million based upon the financial performance of Financial Group.
Party B orally offered $50.0 million in non-contingent consideration payable at
closing with the ability for management to earn unlimited performance-based
bonuses for a period of three years. These bonuses were valued at $28.0 million
based on management's financial projections for this period. If management were
to exceed its three year projections, the $28.0 million bonus pool would
increase proportionately. These terms were orally conveyed to Prudential
Securities as a revision to a non-binding letter of intent submitted by Party B
on March 29, 1999. Because of the superiority of Party B's expression of
interest, Financial Group discontinued discussions with Party A and pursued
further discussions with Party B. Subsequently, Financial Group discontinued
discussions with Party B because its offer was contingent upon Mr. Beach and Mr.
Martin devoting their full time and attention to the business of Financial
Group. Mr. Beach and Mr. Martin were unwilling to agree to this condition, which
would have required them to cease serving as officers of Captec, because they
believed it was contrary to their commitment to Captec and its stockholders.
Subsequently, in June 1999, at the suggestion of Prudential Securities,
management of Captec, Financial Group and Advisors and Prudential Securities
began considering the strategic benefits of a more comprehensive business
combination among Captec, Financial Group and Advisors that would result in
Captec becoming a fully-integrated, specialty commercial finance company. It was
also contemplated that, in conjunction with such a possible transaction, Captec
would voluntarily cease to be a REIT. In ensuing discussions with Captec
management, representatives of Prudential Securities, which as noted above had
been engaged as Captec's financial advisor, observed that Captec's then-current
stock price, the depressed market prices of REIT stocks generally, and the
scarcity of private equity capital focusing on the sector would make it unlikely
that Captec could raise capital by selling stock at prices that would not be
dilutive to Captec's stockholders. Taking into account the then-current market
conditions, Prudential Securities advised Captec management that it believed
that the financial and strategic benefits to Captec resulting from a business
combination among Captec, Financial Group and Advisors were superior to other
strategic alternatives and represented an opportunity for Captec to generate
substantial growth in earnings without raising additional equity while
eliminating its external advisory structure and fully integrating its management
and operations. As a result, while other strategic alternatives were generally
considered in evaluating the transaction that was under consideration, this
comprehensive business combination was the only strategic option considered in
detail by Captec at the time.
Thereafter, at a special meeting of the Board of Directors on August 11,
1999, Mr. Beach and Mr. Martin disclosed to the Board of Directors the terms of
a proposed transaction to combine Financial Group and Advisors with Captec. At
the meeting, Mr. Beach and Mr. Martin provided to the special committee a
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presentation prepared by Prudential Securities concerning the potential merger
of Captec and Financial Group. These presentation materials described the
rationale of such a proposed transaction, and included an overview of the
strategic, financial, management team, and capital markets benefits of the
proposed transaction. The presentation also included an overview of the proposed
strategy for the new company and included a summary of the overall strategy, the
property strategy, the finance strategy, and the expected results with regard to
the proposed transaction. Also included in the presentation was a proposed term
sheet on combining Financial Group with Captec. The term sheet included the form
of the transaction, a proposed procedure for executing the transaction, a
description of the new business strategy, the transaction rationale, the
consideration to be used to complete the transaction and the accounting
treatment to be applied to the transaction. The valuation portion of the
presentation contained a comparable company analysis, a comparable transaction
analysis, and a model projecting future earnings of the new combined company. In
addition, Party B's initial written indication of interest in Financial Group
that had been submitted some five months earlier in March 1999, which was
subsequently increased orally as indicated above, was included in these
materials.
This initial proposal, which incorporated in part the terms upon which
Captec's Board of Directors previously had agreed in principle to the merger of
Advisors into Captec, provided for the acquisition by Captec of Financial Group
for 4.0 million shares of Captec common stock and the acquisition of Advisors
for 562,500 shares of Captec common stock, all of which stock was to be
non-contingent and issued at closing.
Because the proposed transaction was among affiliates and subjected Mr.
Beach, Mr. Martin and Mr. Sherard to conflicts of interest, at the August 11,
1999 meeting the Board of Directors reconstituted the special committee that had
previously been formed, and formed a special committee consisting of Albert T.
Adams, as Chairman, William J. Chadwick, Creed L. Ford, III, Lee C. Howley,
William H. Krul, II and Richard J. Peters to consider the materials and proposal
that had been provided by Mr. Beach and Mr. Martin. The special committee
consists of all of Captec's non-management directors. Mr. Adams is a partner of
Baker & Hostetler LLP, which currently represents Captec, but not the special
committee, with respect to the merger and serves as counsel to Financial Group
in other matters. For a description of fees paid to Baker & Hostetler LLP in
1999, see "Certain Transactions and Relationships -- Captec Net Lease Realty."
The special committee subsequently retained J.C. Bradford as its financial
advisor on August 31, 1999 and Brown & Wood LLP as its legal counsel on
September 10, 1999.
Between late August 1999 and early October 1999, Prudential Securities,
acting on behalf of Financial Group, provided financial and operational
information with respect to Financial Group and Advisors to J.C. Bradford, J.C.
Bradford conducted due diligence, and J.C. Bradford and Prudential Securities
conducted a number of discussions with respect to such matters and the proposed
transaction. J.C. Bradford and Prudential Securities also reviewed Financial
Group's businesses and financial condition. During this period, on September 16,
1999, the special committee held a meeting attended by all the members of the
special committee. At this meeting, which was attended in part by
representatives of J.C. Bradford, J.C. Bradford updated the special committee as
to its due diligence efforts and the special committee agreed in principle that
it would be advantageous to combine Captec, Financial Group and Advisors
assuming such a transaction could be accomplished on terms acceptable to Captec.
Thereafter, J.C. Bradford continued its ongoing due diligence investigation and
Mr. Adams, on behalf of the special committee, consulted with J.C. Bradford from
time to time to discuss due diligence matters and financial aspects of the
proposed business combination.
On October 8, 1999, the special committee met to consider further the
transaction that had been initially proposed by Financial Group and Advisors.
This meeting was attended by Mr. Adams, Mr. Chadwick, Mr. Howley, Mr. Krul, and
Mr. Peters as well as by representatives of the special committee's financial
advisor and legal counsel. The special committee also invited representatives of
Prudential Securities to attend part of the meeting.
At the meeting, Prudential Securities made a presentation to the special
committee concerning the proposed merger of Captec and Financial Group and
Advisors. As part of its presentation, Prudential Securities expressed its views
as to why the merger would be advantageous to Captec, and summarized certain
advantages and disadvantages of the following alternative options available to
Captec: maintaining the status quo, merging with or acquiring another triple
net-lease REIT, merging with or acquiring a retail REIT,
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entering into a going-private transaction, and selling Captec to a third party.
Prudential Securities also noted that, given the then-prevailing circumstances,
the depressed market for REITs in general and net lease REITs in particular, the
cross-interests of management, the REIT regulations disallowing the active
purchase and sale of properties as a dealer, and the inability of Captec to
raise capital from the public markets in a REIT format, the merger was the most
advantageous course of action for Captec. Prudential Securities also highlighted
the lack of growth prospects of Captec given its current REIT status and the
possible marketplace perception of Captec having a part-time management team. In
addition, Prudential Securities reviewed with the special committee the possible
stock market reaction to an announcement by Captec that it was terminating its
status as a REIT, and reviewed the strategic benefits involved in combining the
three entities. Prudential Securities also presented its financial and strategic
assessment of Captec, discussed what in its view was the appropriate valuation
methodology to be used with respect to the proposed transaction, and reviewed
certain recent similar transactions and recent financing activities in the REIT
sector. Prudential Securities also reviewed with the special committee the
results of earlier efforts to sell Financial Group to third parties. Included in
the presentation were the pro forma valuation analyses derived by Prudential
Securities for the new company to be formed from the merger.
Also at the meeting, J.C. Bradford provided the special committee with
results of its due diligence review, advised the special committee as to aspects
of the presentation by Prudential Securities, and J.C. Bradford and Prudential
Securities discussed with the special committee financial data with respect to
the proposed transaction, including Captec's historical results and management's
financial projections for Financial Group and the combined company. At this
meeting, the special committee considered the strategic benefits of combining
Captec, Financial Group and Advisors, and J.C. Bradford also presented the
special committee with various financial analyses related to the proposed
transaction. In discussing with the representatives of Prudential Securities the
terms of the initial transaction that Mr. Beach and Mr. Martin had proposed, the
special committee indicated to the representatives of Prudential Securities
that, in view of Captec's historical results and management's financial
projections, an earnout payment should be included as part of any total
consideration to be paid in a possible transaction.
In recognition of the significant potential benefits to Captec of becoming
self-advised and fully-integrated and the opportunity to become a full-service,
specialty commercial finance company, at the October 8, 1999 meeting the special
committee proposed a transaction pursuant to which the stockholders of Financial
Group and Advisors would be paid approximately 2.67 million non-contingent
shares of Captec common stock, with an additional 1.2 million shares to be paid
in each of the two subsequent years contingent upon Captec's achieving financial
performance criteria to be agreed upon. The special committee instructed J.C.
Bradford to work with Prudential Securities to develop terms which, taking into
account the historical and projected financial performance of Financial Group,
would condition a significant portion of the consideration to be paid by Captec
on the achievement of financial performance criteria to be agreed upon between
the parties. The special committee further directed that, consistent with a
transaction that would result in Captec, Financial Group and Advisors becoming
fully-integrated, any earnout provision should be based on the financial results
of the consolidated company and not just on the results of Financial Group. The
special committee also indicated that any transaction that might be approved
would be subject to the issuance by J.C. Bradford of a fairness opinion that the
consideration to be paid by Captec for the entire transaction is fair from a
financial point of view. The special committee also instructed J.C. Bradford to
take into account that the then-prevailing price of Captec common stock, which
was $10.31 per share on October 7, 1999, reflected a discount of approximately
28.0% from Captec's estimated book value and a discount of approximately 41.0%
from Captec's estimated net asset value, which J.C. Bradford did in rendering
its subsequently issued fairness opinion.
Subsequent to October 8, 1999, and in keeping with the request of the
special committee to have an earnout based on the performance of the combined
company, Prudential Securities, on behalf of Financial Group and Advisors, and
J.C. Bradford, on behalf of the special committee, held discussions on the
structure and timing of a possible earnout component of the proposed
transaction, including performance targets and criteria upon which shareholders
of Financial Group and Advisors would be eligible to receive contingent
consideration in the merger. During these discussions, in mid-October Prudential
Securities proposed a
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transaction in which the stockholders of Financial Group and Advisors would
receive 3.5 million non-contingent shares of Captec common stock and up to an
additional 1.2 million shares of Captec common stock if Captec achieved
financial performance results in the first year following the consummation of
the transaction, with the specific performance targets yet to be negotiated. In
response to the proposal from Prudential Securities, and after consultations
between Mr. Adams, as chairman of the special committee, and J.C. Bradford, Mr.
Adams informed Mr. Beach, Mr. Martin and Prudential Securities that, given the
historical performance of Financial Group, the special committee favored a
transaction in which a smaller proportion of shares would be issued on a
non-contingent basis, and a larger proportion of shares would be issued
contingent upon achievement of future financial performance of the combined
company as compared to the latest transaction that had been proposed.
Thereafter, the parties instructed their respective financial advisors to
continue discussions along these lines. During this period, Mr. Adams, as
chairman of the special committee, consulted regularly with representatives of
J.C. Bradford as to the discussions between the parties' respective financial
advisors.
In late October 1999, as a result of these ongoing discussions and
negotiations, Prudential Securities proposed a transaction whereby the
stockholders of Financial Group and Advisors would receive 3.0 million
non-contingent shares of Captec common stock at the closing, with the potential
to receive an additional 1.0 million shares of Captec common stock in each of
the two years following the transaction if certain to-be-agreed-upon financial
performance goals were achieved. Subsequently, between late October and late
November 1999, at the further request of the respective parties, their
respective financial advisors continued to conduct discussions and negotiations
regarding the proposed terms of an earnout formula that might be mutually
acceptable to Captec and the stockholders of Financial Group and Advisors.
During this period, Mr. Adams, as chairman of the special committee, consulted
with J.C. Bradford to discuss the terms that were the subject of the ongoing
discussions between the parties' respective financial advisors. During this
period, management of Financial Group and Advisors proposed that 560,000 shares
of the non-contingent shares of Captec common stock to be issued in
consideration of the merger be attributed to the consideration for the Advisors
merger. This proposal by management of Financial Group and Advisors was based
upon the approximately $5.2 million in value which had been ascribed to the
non-contingent portion, and a present value of the $3.7 million in value which
had been ascribed to the contingent portion, of the consideration for the
proposed transaction between Captec and Advisors in June, 1999. The special
committee agreed to this proposal subject to the issuance by J.C. Bradford of
its fairness opinion that the consideration to be paid by Captec for Advisors
and Financial Group, taken as a whole, is fair to Captec from a financial point
of view.
During this period, on November 12, 1999, the special committee held a
meeting attended by Mr. Adams, Mr. Chadwick, Mr. Howley, Mr. Krul and Mr. Peters
as well as by representatives of the special committee's financial advisor and
legal counsel to review the status of the ongoing discussions that had been
occurring between the parties' respective financial advisors with respect to the
financial aspects of the proposed transaction, including the elements of an
earnout formula. At the meeting, the special committee authorized its financial
advisors and legal counsel to continue negotiations on the basis of the
then-current proposal.
Thereafter, at the special committee's instruction, the special committee's
outside counsel began to prepare the documentation for a possible transaction
involving the three entities, subject to resolution of the financial terms of
the proposed transaction. In late November, the special committee's outside
counsel began to negotiate the terms of such documentation with counsel for
Financial Group and Advisors. Discussions and negotiations between the parties'
respective financial and legal advisors continued through mid-December 1999.
During this period, on December 3, 1999, the special committee held a
meeting attended by Mr. Adams, Mr. Chadwick, Mr. Howley, Mr. Krul and Mr. Peters
to discuss with the committee's financial advisor and legal counsel the status
of the discussions and negotiations that had been ongoing between the parties.
At the meeting, the committee's financial advisor summarized the discussions and
negotiations that had been occurring regarding the terms of the earnout. Counsel
to the committee also summarized the key terms of the proposed merger agreement
that were under discussion with representatives of Financial Group and Advisors,
including, among other items, the terms of certain representations, warranties
and covenants, the request of Captec to be indemnified in certain circumstances,
the parties that would provide such indemnification and the levels and terms of
such indemnification, the different forms of consideration that, at the request
of
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<PAGE> 55
Financial Group and Advisors, would be paid to common and preferred stockholders
of Financial Group and Advisors and to warrant holders and option holders of
Financial Group, including the payment of cash to the institutional warrant
holders of Financial Group (with the exact amount of such consideration to be
determined), the request that Financial Group's preferred stockholder be party
to a registration rights agreement, the different parties that would participate
in earnout payments, and certain technical terms related to the earnout. At the
meeting, the special committee instructed its financial advisor and legal
counsel to continue negotiations with their counterparts.
Thereafter, throughout early to mid-December, further discussions and
negotiations between the parties' respective financial and legal advisors
continued with respect to financial and legal aspects of the proposed
transaction and the terms of the proposed merger agreement. During this period,
the terms of the earnout were further negotiated to increase the financial
performance criteria that would need to be obtained in certain circumstances in
order for the earnout consideration to be paid.
On December 14, 1999, all the members of the special committee met in Ann
Arbor, Michigan, immediately prior to a regularly scheduled meeting of Captec's
Board of Directors. At this meeting, the special committee had a telephone
discussion with its legal counsel concerning the status of the definitive
documentation for the transaction and the resolution of related legal issues.
The special committee also had a separate telephone discussion with a
representative of J.C. Bradford, concerning the status of discussions regarding
the financial terms of the proposed transaction. During this telephone
conference, the special committee again instructed J.C. Bradford that, as part
of J.C. Bradford's assessment of the fairness from a financial point of view of
the consideration to be paid in the merger, J.C. Bradford should take into
account that the then prevailing price of Captec common stock, which was $10.19
per share on December 13, 1999, reflected a discount from Captec's estimated
book value and estimated net asset value. J.C. Bradford reconfirmed to the
special committee in this conference call that J.C. Bradford, in accordance with
the instructions of the special committee, would take into account the
substantial discount from Captec's net asset value and book value represented by
the then current trading price of the Captec common stock in rendering its
fairness opinion.
Also during this period, on December 16, 1999, counsel to Financial Group
informed counsel to the special committee that the transaction contemplated that
the institutional warrant holders of Financial Group were to be paid up to
approximately $2.5 million in cash rather than receive shares of Captec common
stock. Throughout this period, Mr. Adams, as chairman of the special committee,
consulted regularly with the special committee's financial advisor and legal
counsel as to the ongoing discussions between the parties.
On December 17, 1999, the special committee held a meeting attended by Mr.
Adams, Mr. Chadwick, Mr. Howley, Mr. Krul and Mr. Peters. At the meeting, the
special committee's financial and legal advisors summarized the financial and
other terms of the proposed transaction, including the terms of the proposed
merger agreement and the terms of an earnout formula that had been under
negotiation. Also at that meeting, J.C. Bradford informed the special committee
orally that it had concluded that, in its opinion, the proposed consideration to
be paid by Captec in the merger was fair to Captec from a financial point of
view and that it was prepared to deliver a written opinion to that effect. See
"Opinion of the Financial Advisor to the Special Committee."
On December 20, 1999, the special committee held a further meeting to
consider the proposed merger, which meeting was attended by Mr. Adams, Mr.
Chadwick, Mr. Howley, Mr. Krul and Mr. Peters. Prior to this meeting, J.C.
Bradford delivered its written fairness opinion to the special committee. After
discussion and consideration of such factors as the consideration to be paid in
the merger and the terms of the merger agreement, the special committee
determined the merger to be in the best interests of Captec and its stockholders
and unanimously approved the merger agreement and the merger, and recommended
that Captec stockholders approve the merger. In the event that the parties to
the merger agreement were to consider a material amendment to the merger
agreement, the special committee would, depending on the nature of such
amendment, and in consultation with its financial and legal advisors, determine
whether a revised fairness opinion should be obtained. There has been no such
amendment to the merger agreement.
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On December 20, 1999, the merger agreement was executed and delivered by
Captec, Acquisition, Financial Group and Advisors. Also on December 20, 1999, a
joint press release announcing the execution of the merger agreement was issued
by Captec, Financial Group and Advisors.
Subsequent to the announcement of the merger, a research analyst for J.C.
Bradford changed his rating on Captec common stock from a "strong buy" to a
"sell". According to the report such analyst disseminated at the time, J.C.
Bradford's analyst changed his recommendation because the analyst's coverage was
restricted to REITs and because the analyst believed investors relying on his
investment advice had purchased the Captec common stock because it had been
undervalued and paid a dividend. J.C. Bradford's analyst did not evaluate the
operational and strategic merit of the proposed merger and noted that, while the
proposed merger may present operational and strategic benefits, the proposed
change in business direction warranted the changes in his investment
recommendation for the foregoing reasons. J.C. Bradford has not modified or
withdrawn its fairness opinion as a result of the actions of its research
analyst.
On January 5, 2000, Captec received a letter from a law firm on behalf of
Party X offering to enter into negotiations to acquire, on an all-cash basis,
the completed properties of Captec for approximately $6.50 per share and the
payment of all outstanding indebtedness of Captec. This submission was
conditioned on Captec entering into a 30-day standstill period during which
Captec could not market any properties, and during which Captec would be
required to defer the merger and its decision to cease to be a REIT while it
allowed this entity to perform due diligence and attempt to negotiate a
definitive agreement. After considering the merits of this submission, the Board
of Directors of Captec, including those members who serve on the special
committee, determined that the sale of Captec at this time was not consistent
with Captec's long-term business strategy, and representatives of Party X that
Captec was not for sale. On January 25, Captec received further correspondence
from Party X's law firm reiterating such party's interest in purchasing all of
Captec's completed properties as well as expressing its possible interest in
discussing the purchase of a smaller number of completed properties.
Subsequently, the Board of Directors of Captec, including those members who
serve on the special committee, considered the merits of such correspondence and
based on the same determination as set forth above, representatives of Party X
were notified that Captec was not for sale. On January 31, 2000, Captec received
a letter from Party Y indicating its interest in acquiring all of the
outstanding shares of Captec and expressing its belief that, subject to
completion of due diligence and obtaining definitive financing, it could offer
at least $12.00 per share in a merger transaction. Thereafter, the authority
that initially had been granted to the special committee was expanded so that,
pending consummation of the merger, the special committee is authorized to
receive, evaluate, and make recommendations to the Captec Board of Directors
with respect to acquisition inquiries that Captec may receive. Thereafter, the
special committee considered the merits of the proposal from Party Y and, based
on the same determination as set forth above with regard to the proposal from
Party X, Party Y was notified that Captec was not for sale.
On April 6, 2000 Captec, Captec Acquisition, Financial Group, and Advisors
amended, among other provisions of the merger agreement, that provision of the
agreement that allowed any party to the merger agreement to terminate the
agreement after March 30, 2000, and substituted June 30, 2000 for such date.
OPINION OF THE FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE
At the request of the special committee, J.C. Bradford delivered an oral
opinion to the special committee on December 17, 1999, followed by a written
opinion as of the same date, [which written opinion has been updated as of the
date of this proxy statement,] that, based upon the assumptions and
qualifications contained therein, the consideration to be paid by Captec in the
merger is fair to Captec from a financial point of view.
J.C. Bradford's opinion is directed only to the fairness from a financial
point of view of the merger consideration to be paid by Captec and does not
constitute a recommendation to any stockholder as to whether such stockholder
should vote in favor of the merger. J.C. Bradford's opinion does not address
Captec's election to terminate its REIT status or the likely tax consequences of
the merger or the transactions contemplated thereby, including the decision to
terminate its REIT status, to any stockholder. In addition, J.C. Bradford was
not asked to consider, and its opinion does not address, the relative merits of
the merger as compared to any alternative business strategies that might exist
for Captec or the effect of any other transactions in which Captec might engage.
J.C. Bradford did not make independent appraisals of the assets and liabilities
of Captec, Advisors or Financial Group or any of their respective subsidiaries
or affiliates. J.C. Bradford's opinion
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assumes that the merger will qualify as a tax-free reorganization for United
States federal income tax purposes. Captec has not obtained an opinion of
counsel that the merger will qualify as a tax-free reorganization. Based upon
the advice of its counsel, Baker & Hostetler LLP, of which Mr. Adams, the
chairman of the special committee is a partner, Captec has concluded that there
is no potential material adverse consequence to Captec or its stockholders if
the merger fails to qualify as a tax-free reorganization. For a description of
fees paid to Baker & Hostetler LLP by Captec and Financial Group respectively in
1999 see "Certain Transactions and Relationships -- Captec Net Lease Realty."
The full text of J.C. Bradford's opinion is attached to this proxy
statement as Appendix B and sets forth the assumptions made by J.C. Bradford in
arriving at its opinion as well as certain qualifications to the opinion. This
summary of the J.C. Bradford opinion is qualified in its entirety by reference
to the full text of the J.C. Bradford opinion, which stockholders of Captec
should read in its entirety.
[In accordance with Captec's engagement letter with J.C. Bradford, the
special committee may request that J.C. Bradford subsequently update its opinion
to the special committee immediately prior to the mailing of the proxy
statement, which update will necessarily consider any such subsequent events
that may occur.] For purposes of the opinion, J.C. Bradford relied upon and
assumed the accuracy, completeness, and fairness of the financial and other
information made available to it and did not assume responsibility for
independent verification of such information. J.C. Bradford has assumed, and the
management of Captec, Advisors and Financial Group, respectively, have
represented, that the information provided by their companies had a reasonable
basis and reflected the best currently available estimates and judgments of
Captec's, Advisor's, and Financial Group's respective management groups as to
the recent and likely future performance of their respective companies. No
limitations were imposed by the special committee on the scope of J.C.
Bradford's investigation or the procedures to be followed in rendering its
opinion.
In preparing its report to the special committee, J.C. Bradford performed a
variety of financial and comparative analyses, which are described below. In
arriving at its opinion, J.C. Bradford did not attribute any particular weight
to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, J.C. Bradford believes that its analyses must be considered as a
whole and that selecting portions of its analyses and the factors considered by
it, without considering all analyses and factors, could create a misleading or
incomplete view of the processes underlying such analyses and its opinion. With
respect to the comparable company analyses summarized below, no company utilized
as a comparison is identical to the respective companies involved in the merger
and such analyses necessarily involve complex considerations and judgments
concerning the differences in financial and operating characteristics of the
companies involved and other factors that could affect the acquisition or public
trading values of Captec. The analyses performed by J.C. Bradford are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of the parties or their respective
advisors, neither Captec nor J.C. Bradford nor any other person assumes
responsibility if future results are materially different from those forecast.
The transaction was proposed by management of Captec which also serves as
management of Financial Group and Advisors and negotiated by the special
committee on a combined Financial Group/Advisors basis only, and the special
committee was not offered, nor did it request, the opportunity to analyze the
acquisition of one company without the other. Accordingly, with the special
committee's permission, J.C. Bradford analyzed the merger on a combined
Financial Group/Advisors basis and was not asked, nor did J.C. Bradford attempt,
to analyze the fairness to Captec of the consideration payable to the Financial
Group security holders versus the consideration payable to the Advisors security
holders.
The day prior to its presentation to the special committee and the issuance
of its opinion, J.C. Bradford was advised by counsel to the special committee
that, as part of the final negotiations, with regard to the merger agreement,
the share consideration, excluding the earnout shares, had been reduced to
approximately 2,750,000 shares of Captec common stock and that a cash payment in
the amount of approximately $2.5 million would be made to the institutional
warrantholders of Financial Group, which are The Public
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Institution for Social Security, Prudential Securities Credit Corporation and
Abbas Al-Qattan, in consideration of the termination of warrants that such
parties hold to acquire common stock of Financial Group. J.C. Bradford and the
special committee considered these changes to be immaterial to J.C. Bradford's
analyses and the conclusions summarized herein. Accordingly, unless the context
otherwise requires, references in this summary to the equity values implied by
the transaction or to the consideration to be paid in the merger are to the
issuance of between 3,000,000 and 5,000,000 shares of Captec common stock.
In rendering the opinion, J.C. Bradford took into account the then-current
trading price of Captec common stock, the closing price of which was $9.53 on
December 15, 1999, which reflected a discount of approximately 33.0% from
Captec's estimated book value and a discount of approximately 45.0% from
Captec's estimated net asset value.
The following is a summary of the material portions of the analyses
performed in connection with J.C. Bradford's opinion:
(a) PRO FORMA MERGER ANALYSIS. Based on information provided by Captec,
Financial Group and Advisors, J.C. Bradford compared Captec's projected
earnings per share both before and after the proposed merger through
fiscal year 2002. For Captec's stand-alone projected earnings per
share, J.C. Bradford relied primarily on analysts' consensus estimates
for 2000, which were $1.74 per share, and assumed growth in earnings
per share of 8.0% over 2000 for 2001 to $1.88 per share, which
approximated the projected EPS growth rate of 2000 over 1999 and was
consistent with analysts' projections of 8.0% growth in funds from
operations for the same period. J.C. Bradford used consensus estimates
because management's estimates for Captec's stand-alone projected
earnings for 2000 included gains on the sale of properties. The
analysts' consensus estimates did not take such potential gains into
account. Moreover, because it is not uncommon for REIT analysts to
disregard gains from sales of properties, J.C. Bradford believed it was
appropriate to analyze accretion by reference to the public's
expectations of stand-alone earnings per share. J.C. Bradford's
analysis concluded that pro forma earnings per share, assuming the
earnout shares were outstanding for the entire year, which were
projected to be $1.88 in 2000 and $2.23 in 2001 would be accretive to
Captec's stand-alone earnings per share by 7.9% in 2000 and 18.8% in
2001. J.C. Bradford noted that management's projected earnings per
share, on a fully diluted GAAP basis, were $2.07 in 2000 and $2.39 in
2001. J.C. Bradford also noted that the stand-alone Captec projections
for 2000 and 2001 earnings per share are untaxed because of Captec's
REIT status and the projected pro forma earnings per share for 2000 and
2001 have been taxed at a rate of 34.0% because of the post-merger
status of Captec as a subchapter C corporation. The pro forma merger
analysis also assumed that 4.0 million shares of the share
consideration, 3.0 million initial shares plus 1.0 million of the
earnout shares, would be outstanding on January 1, 2000 and an
aggregate of 5.0 million shares of the share consideration, or 3.0
million initial shares and 2.0 million earnout shares, would be
outstanding for all of 2001. In addition, the ranges at which any
earnout shares become issuable are triggered only when Captec's
projected stand-alone per share earnings have been exceeded in 2000 and
in 2001, after giving effect to the issuance of the earnout shares.
J.C. Bradford noted, however, that the earnout shares begin to be
issuable at levels of pro forma earnings per share that are less than
what management has projected for the combined company. J.C. Bradford
also noted that the transaction would dilute Captec's stand-alone book
value per share by over 25.0%, which amount after dilution was still in
excess of the $9.53 per share market price of Captec common stock on
December 15, 1999.
(b) TOTAL RETURNS ANALYSIS. J.C. Bradford also performed a total returns
analysis that calculated the pre- and post-transaction total return,
taking into account projected dividend yield, reinvestment of dividends
and appreciation in stock price, based on stand-alone and pro forma
projections provided by management of Captec and Financial Group. The
total return before giving effect to the transaction, assuming a
dividend yield of approximately 15.0%, which is the approximate
dividend yield prior to the announcement of the merger, and assuming a
4.9x multiple of funds from operations, which was Captec's current
trading multiple on projected 1999 funds from operations, was projected
to be 65.2% through 2002. The total return after giving effect to the
merger, assuming a dividend yield of approximately 3.0% and a 7.0x
multiple of earnings per share, which is a discount of 12.5% to the
comparable commercial finance company median trading multiple of 8.0x
1999
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earnings per share, but a 27.3% premium to Captec's current trading
multiple of 5.5x 1999 earnings per share, was projected to be 131.2%
through 2002.
(c) DISCOUNTED CASH FLOW ANALYSIS. Using a discounted cash flow analysis,
based solely on financial information projected by the senior
management of Financial Group, J.C. Bradford discounted to present
value the future cash flows that Financial Group and Advisors were
projected to generate through 2002 under various circumstances. J.C.
Bradford calculated terminal values at the 2002 fiscal year-end for
Financial Group and Advisors combined by applying multiples of 6.5x to
7.5x net income in fiscal year 2002, which multiples were consistent
with trading multiples for comparable public commercial finance
companies. The cash flow streams and terminal values were then
discounted to present values using discount rates of 19.0% to 21.0%,
which discount rates were chosen to reflect J.C. Bradford's estimates
of the required rates of return for a hypothetical holder of Captec
common stock following the merger. Based on the above-described
analysis, the implied value of Financial Group and Advisors on a
combined basis ranged from $106.4 million to $125.1 million, which
compared favorably to the equity values implied by the transaction of
between $28.6 million and $47.7 million, based on the aggregate merger
consideration of 3,000,000 (with a portion of such securities being
paid in cash to certain securityholders of Financial Group) to
5,000,000 shares of Captec common stock valued for these purposes at
$9.53 per share, which was the closing sale price on December 15, 1999.
The comparable companies for the purpose of this analysis were the
commercial finance companies described under Comparable Company
Analysis for Financial Group.
(d) COMPARABLE COMPANY ANALYSIS FOR FINANCIAL GROUP. Using publicly
available information, J.C. Bradford reviewed certain financial and
operating data for several publicly traded companies engaged in
businesses with characteristics similar to Financial Group. For
purposes of this analysis, the comparable commercial finance companies
include:
- Allied Capital Corp.
- Amresco, Inc.
- Capital Trust, Inc.
- Carey Diversified LLC
- CB Richard Ellis Services
- Franchise Finance Corp.
- Imperial Credit Industries, Inc.
- LNR Property Corp.
- PMC Capital, Inc.
- PMC Commercial Trust
- Resource America, Inc.
- WMF Group, Ltd.
The table below compares the ranges of multiples at which the
comparable companies were trading on December 15, 1999 to the multiples
of the equity value implied by the transaction, assuming the issuance of
3.0 million (with a portion of such securities being paid in cash to
certain
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securityholders of Financial Group) to 5.0 million shares at a price of
$9.53 per share, which was the closing sale price of Captec common stock
on December 15, 1999.
<TABLE>
<CAPTION>
RANGE FOR MEDIAN FOR MERGER
MULTIPLE OF COMPARABLE COMPANIES COMPARABLE COMPANIES CONSIDERATION
----------- -------------------- -------------------- -------------
<S> <C> <C> <C>
LTM Earnings(1)............... 5.6-13.0x 9.5x NM(2)
2000 Earnings................. 4.5- 9.4x 6.5x 2.5- 4.2x
2001 Earnings................. 3.9- 8.6x 5.4x 1.8- 3.0x
Book Value.................... 0.1- 1.9x 1.0x 6.4-10.7x
</TABLE>
-----------------------
(1) Earnings for the latest twelve months.
(2) Not meaningful because of the absence of latest twelve months'
earnings for Financial Group.
(e) COMPARABLE TRANSACTION ANALYSIS. Using comparable transaction
analysis, J.C. Bradford calculated the multiples paid in acquisitions
of companies engaged in the commercial finance business since January
1, 1997. J.C. Bradford calculated the aggregate equity consideration
paid for each acquired company as a multiple of the latest twelve
months net income, forward twelve months net income and book value. In
addition, J.C. Bradford highlighted for the special committee the March
1999 acquisition of Franchise Mortgage Acceptance Corp. (FMAC) by Bay
View Capital. J.C. Bradford believes that the BayView-FMAC merger is
most comparable to the merger primarily because the transaction is so
recent and FMAC, like Financial Group, is particularly focused on the
restaurant franchise industry and is dependent on the securitization
market for growth financing. The table below compares the ranges of
multiples at which comparable companies, including FMAC, were acquired
to the multiples of the equity values implied by the transaction,
assuming the issuance of 3.0 million (with a portion of such securities
being paid in cash to certain securityholders of Financial Group) to
5.0 million shares at a price of $9.53 per share, which was the closing
sale price of the Captec common stock on December 15, 1999.
<TABLE>
<CAPTION>
RANGE OF MEDIAN OF BAY VIEW -
MULTIPLE OF COMPARABLE TRANSACTIONS COMPARABLE TRANSACTIONS FMAC MERGER
----------- ----------------------- ----------------------- ---------- ---------
<S> <C> <C> <C> <C>
LTM Earnings(1)...... 14.4-50.2x 26.6x 34.0x NM(2)
Forward Earnings(3).. 8.9-26.7x 15.4x 8.9x 2.5- 4.2x
Book Value........... 1.1- 4.9x 3.4x 2.0x 6.4-10.7x
</TABLE>
----------------------
(1) Earnings for latest twelve months preceding the dates of relevant
transactions.
(2) Not meaningful because of the absence of trailing Financial Group
earnings.
(3) Projected earnings for the twelve months following the announcement
dates of relevant transactions.
J.C. Bradford noted in the foregoing two analyses that Financial
Group's absence of historical earnings and lack of substantial book
value created unfavorable comparisons on those measures, but that the
significant discount to comparable earnings multiples for 2000 and
2001, which J.C. Bradford believes to be the most relevant multiples
represented by the equity values implied by the transaction, outweighed
such unfavorable measures. J.C. Bradford also noted that the emphasis
placed on future multiples in J.C. Bradford's analysis was further
supported by the structure of the transaction in that a substantial
portion of the merger consideration is contingent on future earnings
performance.
(f) ANALYSIS OF THE COMMON STOCK. J.C. Bradford reviewed and analyzed the
historical trading volume and prices at which Captec common stock had
traded over the prior two years as compared to the historical trading
volume and prices for relevant comparable companies. For purposes of
this analysis the comparable freestanding retail REITs include:
- Commercial Net Lease Realty, Inc.
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<PAGE> 61
- Franchise Finance Corporation of America
- One Liberty Properties, Inc.
- Realty Income Corporation
- U.S. Restaurant Properties, Inc.
J.C. Bradford also compared the historical and current trading prices of
Captec common stock to Captec's historical and current per share book values and
net asset values estimated by management. J.C. Bradford also analyzed certain
publicly traded REIT stocks generally. Based on such analyses, J. C. Bradford
noted that Captec common stock was currently trading at a multiple of 6.6x
projected earnings per share as compared to a multiple of 8.4x projected
earnings per share for freestanding retail REIT stocks. J.C. Bradford noted that
Captec's discount could be a result of a number of factors including, among
others, the unfavorable climate for small capitalization companies; the market
perception of conflicts of interest caused by Financial Group affiliations;
Captec's externally advised status; and Captec's limited access to capital to
fund growth.
Captec has agreed to pay $550,000 to J.C. Bradford, of which $100,000 is
contingent upon the closing of the merger. The fee was determined by arms length
negotiations between J.C. Bradford and representatives of the special committee.
In addition, Captec agreed to reimburse J.C. Bradford for its reasonable
out-of-pocket expenses incurred in connection with J.C. Bradford's activity
under its engagement, and to indemnify J.C. Bradford and certain related persons
against certain liabilities relating to or arising out of its engagement,
including certain liabilities under the federal securities laws. No material
relationship existed between Bradford and any of Prudential Securities,
Financial Group, Advisors or Captec during the past two years and no such
relationship is mutually understood to be contemplated.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE SPECIAL COMMITTEE
THE SPECIAL COMMITTEE BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST
INTERESTS OF, CAPTEC AND CAPTEC'S STOCKHOLDERS. ACCORDINGLY, THE SPECIAL
COMMITTEE HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT CAPTEC'S STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER
AGREEMENT AND THE RELATED MATTERS.
The special committee believes the opportunities created by the merger to
increase the value of Captec common stock more than offset the foreseeable risks
inherent in the merger. In reaching this decision, the special committee, acting
as the Board of Directors of Captec, evaluated the information at its disposal,
consulted with Captec management and the special committee's outside advisors,
and considered a variety of factors, including the following:
- The benefits to be derived from consolidating operations of Captec and
Financial Group and Advisors into a fully-integrated, specialty
commercial finance company serving all aspects of the franchise and chain
restaurant, retail petroleum and convenience store and specialty retail
markets;
- The efficiencies arising from a self-managed structure, including the
elimination of management fees, which were approximately $1.3 million for
the year ended December 31, 1999, duplicative processes and reporting
requirements with a corresponding positive effect on Captec's earnings
per share;
- The fact that senior management would be present in a single,
fully-integrated entity eliminating potential conflicts of interest and
investor concerns with respect to conflicting demands on the time and
effort of Mr. Beach, Mr. Martin and Mr. Sherard who serve as senior
management and/or directors of Captec, Financial Group and/or Advisors,
and the elimination of the inherent conflicts that arise from the current
external advisory structure and the overlapping business of Financial
Group and Captec;
- The benefits associated with the acquisition of all assets of Financial
Group including, among other things, a workforce in place, business books
and records, operating systems, proprietary business methodologies,
contract rights and information databases and systems;
- The ownership by Captec of all rights to the name "Captec Financial
Group" and the associated goodwill;
52
<PAGE> 62
- The elimination of the substantial restrictions on new business activity
because of Captec's REIT status;
- The elimination of REIT dividend requirements and the resulting ability
to retain and reinvest earnings in operations to finance growth of
existing, and the expansion into new lines of business;
- The ability of Captec to generate capital needed for future growth
through operations and the sale of appreciated properties and loans
rather than relying principally upon the public and private equity and
debt capital markets;
- Certain alternatives to the merger, including the direct and indirect
relative costs and benefits of continuing to be an externally-advised
REIT;
- The opportunity to operate utilizing increased levels of debt capital
while staying within the accepted range of debt to total capital ratios
for specialty commercial finance companies;
- The expansion into other industry sectors of the net lease market and the
ability to offer sophisticated new lending products;
- The terms and conditions of the merger agreement, including the
consideration to be paid by Captec in the merger;
- The fact that a significant amount of the consideration to be paid in the
merger is in the form of an earnout that is conditioned on Captec
achieving specified financial performance targets in the future;
- The procedural safeguards and mechanisms included in the merger agreement
providing that shares of Captec common stock beneficially owned by an
officer, director or affiliate of Captec who is also an officer, director
or affiliate of Financial Group and/or Advisors may not be voted on the
merger proposal;
- The fact that Mr. Beach, Mr. Martin and Mr. Sherard were seeking to
transfer control of Financial Group and the possibility that Captec could
lose the services of such senior managers if such parties decided to stay
affiliated with Financial Group rather than remain with Captec;
- The potential improvement in return on equity that was projected by
management to range from 15.0% to 17.0% annually for 2000 through 2002;
- The potential improvement in both basic and diluted earnings per share
that was projected by management to range from 17.0% to 21.0% annually
for 2000 through 2002;
- The presentations by management, Prudential Securities, and J.C. Bradford
regarding the financial conditions, results of operations, business and
prospects of Captec, Financial Group, and Advisors;
- The financial analyses performed by J.C. Bradford and its written opinion
provided to the special committee, dated December 17, 1999 [and updated
as of the date of this proxy statement], that, on such date and subject
to certain assumptions, qualifications and limitations stated therein,
the consideration to be paid by Captec in the merger is fair to Captec
from a financial point of view. See "Opinion of Financial Advisor to the
Special Committee."
In considering many of the factors described above, the special committee
and J.C. Bradford utilized financial projections that were different from the
Unaudited Pro Forma Condensed Consolidated Financial Statements included herein.
The Unaudited Pro Forma Condensed Consolidated Financial Statements and the
Historical, Pro Forma and Equivalent Per Share Data were prepared by making pro
forma adjustments that were limited to adjustments to eliminate the historical
effects of transactions between Captec, Financial Group and Advisors, which
would have been eliminated in consolidation if the companies had been merged
prior to those historical periods, to reflect the impact on operations of any
merger-related adjustments and to reflect the change to C-corporation tax
status. The pro forma financial data does not attempt to reflect any potential
future financial performance related to the new strategic, financial and
operating strategies of Captec as a result of the merger. However, the financial
projections utilized by the special committee and J.C. Bradford do reflect
certain of the future effects of these new strategies.
53
<PAGE> 63
The special committee also considered the following factors which could, as
a result of the merger, adversely affect Captec and its stockholders:
- The conflicts of interest of Mr. Beach, Mr. Martin and Mr. Sherard in
connection with the terms of the merger and the consideration to be paid
to them at closing consisting of 1,620,386 shares of Captec common stock
and thereafter with respect to their ability to use their management
positions to maximize the issuance of up to 1,469,524 earnout shares to
themselves, which would result in Mr. Beach, Mr. Martin and Mr. Sherard
beneficially owning in the aggregate approximately 34.9% of the issued
and outstanding Captec common stock;
- The elimination of REIT status and the requirement to distribute
substantially all REIT net income to stockholders, which distributions
resulted in dividends of $1.50 per share in 1998 and $1.52 per share in
1999;
- The anticipated short-term decline in the public trading price of the
Captec common stock upon the announcement that Captec would cease to be a
REIT;
- The potential liabilities associated with the direct employment of
personnel of Financial Group, including workers' disability and
compensation claims, labor disputes and other employee-related
grievances;
- The potential risks associated with Captec's expansion into the specialty
commercial finance business including the associated risks of substantial
increase of leverage following the merger, greater dependence on
borrowings, and the resulting increased sensitivity to fluctuations in
interest rates and dependence on securitization programs;
- That based upon the Unaudited Pro Forma Condensed Consolidated Financial
Statements for the year ended December 31, 1999, the merger would result
in immediate dilution of $0.66 to Captec's earnings per share;
- That Captec would incur immediate dilution of $1.84 to Captec's book
value per share for the year ended December 31, 1999;
- That, as a result of the merger, Captec would incur additional debt and
the risk that Financial Group's debt will mature in the near future and
that Captec would have to raise capital from other sources, refinance
such debt, or sell assets to produce proceeds sufficient to pay such debt
obligations;
- The potential additional expenses expected to be incurred by Captec in
connection with the merger and the approximately $17.5 million of
goodwill expected to be recorded by Captec as a result of the merger;
- The increase in Captec's ratio of total liabilities to total assets from
0.47:1.00 prior to the merger to 0.72:1.00 following the merger, as
indicated in the Unaudited Pro Forma Condensed Consolidated Balance Sheet
at December 31, 1999.
The special committee considered the potential strategic advantages that
would result from eliminating Captec's external advisory structure and
consolidating the operations of Captec, Financial Group and Advisors into a
fully-integrated, specialty commercial finance company serving all aspects of
the franchise and chain restaurant, retail petroleum and convenience store and
specialty retail markets. The special committee believed that consolidating the
operations of Captec, Financial Group and Advisors would maximize the value for
all of Captec's stockholders by, among other things, eliminating the payment of
management fees to Advisors, which were approximately $1.3 million for the year
ended December 31, 1999, reducing duplicative processes and reporting
requirements, thus having a potentially accretive effect on Captec's earnings
per share due to the efficiencies that may arise from the self-managed structure
of the combined company. In addition, the acquisition of Financial Group's
assets would allow Captec to acquire:
- a workforce that is currently in place and familiar with Captec's
operations;
- certain operating systems, proprietary business methodologies and
information databases and systems that have already been developed and
proven with regard to Captec;
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<PAGE> 64
- certain existing business books, records and contractual rights; and
- all of the rights to and goodwill associated with the "Captec Financial
Group" name.
In considering these factors, the special committee recognized that there were
potential liabilities associated with the direct employment of personnel of
Financial Group and Advisors, including workers' disability and corporation
claims, labor disputes and other employee-related grievances and that additional
costs could be involved in the operation of the combined company.
The special committee also considered the benefits that would inure to
Captec in the merger as a result of eliminating certain conflicts of interests
of the senior management of Captec, Financial Group and Advisors. The merger
would allow the senior management to focus solely on the single,
fully-integrated entity thereby eliminating potential conflicts of interest and
investor concern with respect to the conflicting demands of Mr. Beach, Mr.
Martin and Mr. Sherard, who serve as senior management and/or directors of
Captec, Financial Group and/or Advisors. The special committee also considered
that the market price of Captec's common stock historically may have been
negatively affected by the marketplace perceptions of such conflicts, and
believed it would be beneficial to eliminate such perceptions. The special
committee also recognized in considering the merger that Mr. Beach, Mr. Martin,
and Mr. Sherard were seeking to transfer control of Financial Group and that, in
connection with such possible transfer, the possibility existed that Captec
could lose the services of its senior management team, which the special
committee believed would be detrimental to Captec. The special committee weighed
the elimination of the aforementioned conflicts of interests against the
conflicts of interest of Mr. Beach, Mr. Martin, and Mr. Sherard that the special
committee recognized were inherent in connection with the proposed merger and
the consideration to be paid to such persons thereunder, including the ability
of such parties to use their management positions to maximize the issuance of
the earnout shares to themselves and the fact that, as a result of the merger,
and assuming the issuance of all the earnout shares, such parties would have
beneficial ownership of approximately 34.9% of the outstanding stock of Captec.
As part of evaluating the overall transaction, the special committee also
considered certain benefits associated with Captec eliminating its REIT status,
including, but not limited to, the elimination of the strict requirement that
Captec is required under REIT regulations to distribute to its shareholders
95.0% of its REIT net income, the restrictions on Captec engaging in a variety
of new business activities and Captec's reliance on the public and private
equity and debt markets to generate the capital needed for future growth. The
special committee also considered the direct and indirect relative costs and
benefits of Captec continuing to be an externally advised REIT.
The special committee considered that eliminating Captec's REIT status and
thereafter eliminating the dividend requirements associated with its REIT status
would allow Captec to retain and reinvest earnings in operations and permit it
to finance the growth of the combined entity. The special committee recognized
that eliminating the requirement to distribute substantially all REIT net income
to stockholders would result in stockholders no longer receiving such
distributions, which were $1.50 per share in 1998 and $1.52 per share in 1999.
In making its determination, the special committee further recognized as a
result of the presentations provided by J.C. Bradford and Prudential Securities
that, in all likelihood, there would be a short-term decline in the public
trading price of Captec common stock upon the announcement that Captec would
cease to be a REIT.
The special committee further considered that eliminating Captec's REIT
status would also allow Captec to generate capital through operations and the
sale of appreciated properties and loans, which is currently limited by Captec's
REIT status, instead of principally relying upon the public and private debt and
equity markets and prevailing market conditions to raise capital. The special
committee believed that eliminating these REIT-related restrictions would allow
Captec the flexibility to operate utilizing increased levels of debt capital
while remaining within debt to total capital ratios for specialty commercial
finance companies, as well as permit Captec to expand into other sectors of the
net lease market where it is not currently conducting business and offer
sophisticated new lending products. The special committee believed that this
would allow Captec to capitalize on significant new business opportunities and
increase stockholder value while diversifying Captec's revenue and earnings mix
and provide superior value to a broader range of customers.
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<PAGE> 65
In considering the foregoing, the special committee took into account that
there were potential risks associated with Captec's expansion into the specialty
commercial finance business, including, but not limited to, the associated risks
of substantial increase in leverage following the merger, greater dependence on
borrowings, and the resulting increased sensitivity to fluctuations in interest
rates and dependence on securitization programs.
The special committee also considered the terms and conditions of the
merger to be beneficial. Among other terms that the special committee determined
to be beneficial to Captec were: (i) that a significant amount of the
consideration to be paid in the merger was in the form of an earnout that was
conditioned on the combined company achieving specified financial performance
targets during the next two years, and that any disputes related to the earnout
would be resolved by an independent third party, (ii) that procedural safeguards
and mechanisms had been included in the merger agreement providing that shares
of Captec common stock beneficially owned by any officer, director or affiliate
of Captec who is also an officer, director or affiliate of Financial Group
and/or Advisors may not be voted on the merger proposal, and (iii) that
shareholders of Financial Group and Advisors are required to indemnify Captec
for significant amounts under certain circumstances. See "THE MERGER AGREEMENT."
As noted above, the special committee considered the conflicts of interest of
Mr. Beach, Mr. Martin and Mr. Sherard that existed in connection with the terms
of the merger and the consideration to be paid to them thereunder and thereafter
with respect to their ability to use their management positions to maximize the
issuance of earnout shares.
The special committee also considered the presentations by management,
Prudential Securities and J.C. Bradford regarding the financial conditions,
results of operations, businesses, and prospects of Captec, Financial Group and
Advisors. The special committee relied on the financial analyses and
presentations and opinion of J.C. Bradford and considered the various valuation
analyses of Captec provided by J.C. Bradford that are summarized under "THE
MERGER -- Opinion of Financial Advisor to the Special Committee."
In evaluating the merger and determining that the merger was in the best
interests of Captec and its stockholders, the special committee also considered
the analysis of Captec common stock that was provided in the analyses provided
by J.C. Bradford. As part of its determination, the special committee considered
the historical market prices at which Captec common stock had traded, the
current market price at which Captec was trading at the time it approved the
transaction, and the book value and net asset value of Captec common stock.
The special committee considered the historical trading prices of Captec
common stock during the period since November 1997, which was when Captec's
initial public offering occurred. The special committee noted that, throughout
such period, Captec common stock has, for the most part, traded below its
initial public offering per share price and that, while there had been certain
periods during this approximately two-year period when its share price has
increased, Captec's per share price generally had declined over such period. The
special committee further noted that this decline paralleled the general decline
in the per share price of other REITs in the marketplace to which Captec had
been compared. The special committee also considered that, on December 17, 1999
(the business day immediately prior to the date on which the special committee
approved the merger), Captec common stock was trading at $9.6875 per share. The
special committee further considered that the net book value of Captec as
estimated by management would be approximately $14.19 per share at December 31,
1999, and that the transaction would reduce the historical and the pro forma net
book value although it did not quantify either such dilution. The special
committee also was aware that the merger would be dilutive to Captec's earnings
per share on an historical basis, but the special committee did not have such
dilution quantified for the reasons specified below.
In observing the foregoing factors, the special committee considered that
Captec's common stock may have traded at a discount to its book value
historically and currently and be undervalued for a variety of reasons,
including the depressed REIT market in general, the underperformance of the net
lease sector in particular, the unfavorable market environment for small
capitalization companies generally, its externally advised status, and its
limited access to capital.
The special committee also considered briefly the possible liquidation of
Captec's assets, but did not have a liquidation valuation performed in light of
the fact that the special committee believed it was in the best
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<PAGE> 66
interests of Captec and its stockholders that Captec continue as a going
concern, and that, at the October 8, 1999 meeting of the special committee, it
had been advised by J.C. Bradford and Prudential Securities that it was unlikely
that Captec would receive full and fair value for many of its assets, such as
its joint venture and partnership arrangements, in a liquidation of its assets
over a short period and that if such a liquidation were to occur over a longer
period, then Captec could be subjected to a number of market and sector risks
beyond the company's control.
The special committee also considered that Captec would incur significant
additional debt as a result of the merger and assume Financial Group's
obligations with regard to such debt, and that such debt would mature in the
near future. The special committee further recognized that Captec would have to
raise capital from another source, refinance the debt, or sell assets to produce
proceeds sufficient to pay these debt obligations. The special committee was
also aware that, as a result of the assumption of such debt, Captec's leverage
ratios would increase from 0.47:1.00 to 0.72:1.00.
While the special committee viewed certain of the foregoing considerations
as negative factors in the context of approving the terms of the merger, the
special committee was also concerned that, given the current market
circumstances in which Captec was operating, Captec's market price would
continue to decline further unless it implemented a significant change to its
long-term strategic direction in an effort to reverse these trends and increase
stockholder value over the long-term. In addition, the special committee did not
quantify those factors noted above concerning the effect of the transactions on
Captec's historical book value per share and historical earnings per share since
it determined that the effect of the transaction on Captec's future financial
position and performance was a more relevant financial measurement tool than
measuring the transaction on an historical pro forma basis.
The discussion of the information and factors considered by the special
committee is not intended to be exhaustive, but includes material factors
considered by the special committee. The special committee did not undertake a
separate analysis of each of the factors discussed above nor did the special
committee reach a separate conclusion with respect to each such factor in its
determination to approve the merger and adopt the merger agreement. In view of
the foregoing, and the variety of factors considered by the special committee in
reaching its conclusion to approve the merger and the merger agreement, the
special committee did not find it practicable, to quantify or otherwise assign
relative or specific weights to the specific factors considered by the special
committee in reaching its determination, and individual directors may have given
differing weights to different factors. As a general matter, however, the
special committee believed that the positive factors heretofore described
supported its decision to approve the merger and the merger agreement and
outweighed the potentially negative factors described above. The special
committee is unanimous in its recommendation that Captec stockholders vote for
approval of the merger agreement.
The special committee consists of all non-management directors of Captec
and its recommendation constitutes the recommendation of the Board of Directors.
The special committee unanimously has determined that the merger is fair to, and
in the best interests of, Captec's stockholders based on its analyses and
conclusions, the negotiations with Financial Group and Advisors and on the
fairness opinion of J.C. Bradford delivered to the special committee. The
special committee, acting as the Board of Directors of Captec, unanimously has
approved the merger agreement and recommends that Captec's stockholders vote FOR
approval of the merger.
CONFLICTS OF INTEREST
Certain directors and executive officers of Captec who participated in
discussions and negotiations relating to the merger also are officers, directors
and/or principal stockholders of Financial Group and Advisors and have interests
in the merger that conflict with those of Captec and its stockholders. Patrick
L. Beach, the Chairman of the Board of Directors and the President and Chief
Executive Officer of Captec, is a principal stockholder and the Chairman of the
Board of Directors, President and Chief Executive Officer of each of Financial
Group and Advisors. W. Ross Martin, a Director and the Executive Vice President
and Chief Financial Officer of Captec, is a principal stockholder, Director and
Senior Vice President and Chief Financial Officer of each of Financial Group and
Advisors. H. Reid Sherard, Senior Vice President -- Sales &
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<PAGE> 67
Marketing and a Director of Captec, is a principal stockholder, Director and/or
officer of each of Financial Group and Advisors.
The following table sets forth information concerning the beneficial
ownership of Captec common stock by Mr. Beach, Mr. Martin, Mr. Sherard and
Captec's officers and directors as a group as of February 1, 2000 and as
adjusted to give effect to the issuance of the share consideration in the merger
including the earnout shares.
<TABLE>
<CAPTION>
AS OF FEBRUARY 1, 2000 ADJUSTED FOR MERGER
---------------------- -------------------
<S> <C> <C>
Mr. Beach............................................... 872,456 3,824,806
Mr. Martin.............................................. 385,295 1,044,543
Mr. Sherard............................................. 71,639 272,816
All Captec officers and directors....................... 1,439,024 5,340,946
</TABLE>
See "Security Ownership of Certain Beneficial Owners and Management."
Pursuant to the terms of the merger agreement, the shares of Captec common stock
beneficially owned by officers, directors or affiliates of both Captec and
Financial Group or Advisors may not be voted on the merger proposal. See "Risk
Factors -- Conflicts of Interest."
Following the merger, Mr. Beach, Mr. Martin and Mr. Sherard and the other
earnout participants will be eligible to receive the earnout shares based upon
Captec's consolidated EPS in 2000 and 2001. Although in the merger agreement the
earnout participants acknowledge that the Board of Directors will have complete
control over the business affairs of Captec with respect to matters that could
adversely affect consolidated EPS and the ability of the earnout participants to
receive the earnout shares, Mr. Beach as the Chairman of the Board of Directors,
President and Chief Executive Officer of Captec, Mr. Martin as a Director and
the Executive Vice President and Chief Financial Officer of Captec and Mr.
Sherard as a Director and the Senior Vice President -- Sales & Marketing, will
have substantial influence over the management of Captec following the merger
and may be subject to conflicts of interest with respect to their management
activities arising from their interest in receiving the earnout shares. These
conflicts could include causing Mr. Beach, Mr. Martin and Mr. Sherard to use
their positions and influence to seek to maximize Captec's consolidated
financial results in 2000 and 2001 to the potential detriment of Captec's longer
term business interests.
Pursuant to a December 15, 1998 engagement letter between Prudential
Securities and Financial Group, Prudential Securities has provided financial
advisory services to Financial Group, including the development and execution of
hedging strategies and in connection with the merger. Prudential Securities
acted as financial advisor to Financial Group when Financial Group's management
considered and ultimately rejected acquisition proposals for Financial Group in
January 1999 through April 1999. Prudential Securities also has provided
financial advisory services to Captec, but not the special committee, both in
connection with the merger and in exploring equity and debt financing
alternatives, acquisitions, mergers, sales, the formation of joint ventures and
recapitalizations since August 25, 1998. Prudential Securities Credit
Corporation, an affiliate of Prudential Securities, provides Financial Group's
$250.0 million warehouse credit facility, which Financial Group utilizes to
finance its origination and purchase of loans pending securitization. The
warehouse credit facility, upon which Financial Group is dependent in order to
conduct its business, expires on June 30, 2000 and must be repaid, renegotiated
or refinanced at that time. In connection with the establishment of the
Financial Group warehouse credit facility, Prudential Securities Credit
Corporation was issued warrants to purchase 3,011 shares of Financial Group
common stock, and will receive a cash payment from Captec of $1,376,350 in
consideration of the termination of its warrants upon consummation of the
merger. As of , Mr. Beach, Mr. Martin and Mr. Bruder were indebted to
Prudential Securities in the aggregate principal amount of $1,583,400, which
amounts were reloaned by Mr. Beach, Mr. Martin and Mr. Bruder to Financial Group
and for which Financial Group remains indebted to them. Upon consummation of the
merger, Prudential Securities will be paid a fee of $3.0 million, which is
contingent upon consummation of the merger, by Captec for the financial advisory
services it has rendered to Captec and Financial Group. See "Certain
Transactions and Relationships -- Financial Group."
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<PAGE> 68
As a result of these relationships, Prudential Securities is subject to
conflicts of interest with respect to the financial advice it has provided to
Captec and Financial Group. These conflicts could have caused Prudential
Securities to advise management of Financial Group to propose and pursue the
merger in order to generate its substantial advisory fee and payment to its
affiliate in consideration of the termination of the warrants to acquire
Financial Group common stock held by its affiliate. Prudential Securities also
may have been more able to influence Financial Group management than a financial
advisor which did not have these additional relationships with its client
because of the dependence of Financial Group on the $250.0 million warehouse
credit facility provided to Financial Group by Prudential Securities Credit
Corporation and the substantial personal indebtedness of Messrs. Beach, Martin
and Bruder to Prudential Securities. See "Risk Factors -- Conflicts of
Interest."
MANAGEMENT OF CAPTEC FOLLOWING THE MERGER
There will be no change to the Board of Directors of Captec as a result of
the merger, and each Director of Captec will continue to serve in that capacity
until his successor has been duly elected and qualified or until his earlier
death, resignation or removal. Following the merger, the separate corporate
existence of Advisors will cease and Financial Group will be a wholly-owned
subsidiary of Captec. Mr. Beach will continue to serve as the President and
Chief Executive Officer of Captec. Mr. Martin will continue to serve as the
Executive Vice President and Chief Financial Officer of Captec and Mr. Sherard
will continue to serve as the Senior Vice President -- Sales & Marketing of
Captec; Mr. Bruder will become the Senior Vice President -- General Counsel of
Captec and Mr. Moir will become the Senior Vice President -- Net Lease
Investments of Captec. Mr. Beach, Mr. Martin, Mr. Sherard, Mr. Bruder and Mr.
Moir currently hold similar positions with Financial Group. It is anticipated
that, following the merger, Mr. Beach's and Mr. Martin's employment agreements
with Captec will be amended to provide for annual base salaries of $450,000 and
$325,000, respectively, which are less than Mr. Beach's and Mr. Martin's current
aggregate annual base salaries from Captec and Financial Group of $525,000 and
$375,000, respectively. In addition, Mr. Beach's and Mr. Martin's employment
agreements will be amended to change the criteria on which their annual bonuses
are based from growth in funds from operations per share to growth in
consolidated earnings per share. Captec will pay annual base salaries of
$250,000 to Mr. Sherard; $175,000 to Mr. Bruder; and $150,000 to Mr. Moir which
are the amounts of their current annual base salaries from Financial Group. Mr.
Sherard currently is compensated by Financial Group and receives no salary from
Captec. See "Certain Transactions and Relationships."
Following the merger, as a result of the termination of REIT status, Captec
will have the ability to generate capital for future growth through retention
and reinvestment of earnings and the sale of properties and loans, rather than
principally relying on access to the public and private equity and debt capital
markets. Captec no longer will be required to distribute at least 95.0% of its
REIT net income to stockholders. These dividends equalled $1.50 per share in
1998 and $1.52 per share in 1999. Captec's Board of Directors has announced an
intended policy following the merger of paying an annual dividend of $0.44 per
share. As under current circumstances, there is no assurance that Captec will be
able to pay any dividend in the future, or that once implemented, any dividend
policy will be maintained.
Following the merger, Captec will be required to pay federal income taxes
on its taxable income at regular corporate rates as a result of the termination
of its REIT status. Upon consummation of the merger, Captec will recognize a
deferred tax asset of approximately $2.88 million which Captec will be able to
utilize to reduce future income tax liability.
Captec's strategy after the merger is to focus on high-return investments
in the net-lease and specialty lending sectors. The combined business will offer
a broad array of products to its customers, including real estate net leases,
mortgage financing, construction financing, equipment leases, equipment loans
and other complementary products. Management plans to utilize the customer bases
and products to further cross-selling opportunities, enter into new related
lines of business and thereby diversify revenue.
Captec intends to continue to own a substantial portfolio of net-leased
real estate, including retail and restaurant properties, which will generate
stable returns. Captec will seek opportunities for increased returns
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through funding property development through Captec's preferred developers,
acquiring properties at attractive capitalization rates, selling mature assets
from the existing portfolio, selling appreciated properties and dealing in
credit-tenant leases. Following the merger Captec will implement a strategy of
actively selling appreciated properties which it could not previously pursue
effectively due to REIT restrictions. These restrictions presently restrict
Captec from becoming a dealer in properties that it has owned for less than four
years and from acquiring properties for sale in the ordinary course of its
business by imposing a 100.0% tax on the net income of such transactions subject
only to limited exceptions. Management has preliminarily identified
approximately $50.0 million in appreciated properties to be offered for sale.
There can be no assurance that Captec will be able to sell these, or any other
of its properties which it may offer for sale, for an acceptable price or at
all. While Captec intends to consider the sale of appreciated properties as part
of its business plan following the merger, it also intends to continue to
acquire new properties and does not consider its intention to sell appreciated
properties to represent a reduction in the scope of that aspect of Captec's
business.
Following the merger, Captec will be able to expand Financial Group's
existing finance business. Captec expects to originate and securitize loans and
to recycle its capital by reducing its liabilities and invested equity as a
result of the securitization process. These are current business practices of
Financial Group that generate multiple sources of revenue, including interest
income from loans held for sale, gains from selling loans through
securitization, servicing revenue from servicing the securitized loans and
interest income from investments in any retained interests from securitizations.
Captec also expects to expand its net lease realty business into other similar
financial products and markets, including, the automobile dealership and
petroleum and convenience store markets.
REGULATORY APPROVAL
Under the Hart-Scott-Rodino Antitrust Improvement Act of 1996 and the rules
and regulations promulgated thereunder by the United States Federal Trade
Commission, certain acquisitions of assets or voting securities may not be
consummated without notification being given and certain information being
furnished to the FTC and the Antitrust Division of the United States Department
of Justice, and until the specified waiting period has been terminated or
expired, which has occurred. Each of Captec and Financial Group has filed
notification and report forms under the HSR Act with the FTC and the Justice
Department. The waiting period will expire at 11:59 p.m. on the 30th calendar
day following the date of filing of such notification and report forms unless
the waiting period is terminated early, as requested by the parties, or unless
the FTC or the Justice Department requests additional information from the
parties. At any time before or after consummation of the merger and the
transactions related thereto, the Justice Department or the FTC could take such
action under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the consummation of the merger and the
transactions contemplated thereby or seeking divestiture of substantial assets
of Captec or Financial Group. At any time before or after the effective time of
the merger, any state could take such action under its antitrust laws as it
deems necessary or desirable. Such action could include seeking to enjoin the
consummation of the merger and the transactions related thereto or seeking
divestiture of substantial assets of Captec or Financial Group.
None of Captec, Acquisition, Financial Group or Advisors is aware of any
other material approval or other action by any state, federal or foreign
governmental agency that would be required prior to the consummation of the
merger in order to effect the merger or of any license or regulatory permit that
is material to the businesses of Captec or Financial Group and/or Advisors and
that is likely to be adversely affected by the consummation of the merger.
REGISTRATION RIGHTS AGREEMENT
The following description of the registration rights agreement does not
purport to be complete and is qualified in its entirety by, and is subject to,
the more complete and detailed information set forth in the form of registration
rights agreement, which is an exhibit to the merger agreement.
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As a condition to the merger, Captec has agreed to enter into the
registration rights agreement with Princap Leasing Company L.P. which is the
sole preferred stockholder of Financial Group and which may require, under
certain circumstances and subject to certain limitations, that Captec on one
occasion register under the Securities Act any or all 721,866 shares of Captec
common stock to be issued to Princap Leasing Company in consideration of the
merger. This demand registration will not be deemed to have been effected until
the registration statement filed in connection therewith is declared effective
by the SEC. All costs of the registration, including, among other things,
registration and filing fees, printing expenses, attorneys' fees, accountants'
fees and other reasonable expenses, will be borne by Captec. Brokerage
commissions and discounts will be borne by Princap Leasing Company.
If Captec determines, that because of a pending material transaction, it
would be materially detrimental to Captec and its stockholders to file a demand
registration, Captec may defer the demand registration for not more than ninety
(90) days after receipt of such request. Captec also may defer the filing of a
demand registration for an additional period of ninety (90) days after the
expiration of the initial ninety (90) day period to satisfy its disclosure
obligations under the Securities Act with respect to certain material
transactions.
The registration rights agreement also provides for unlimited piggy-back
registration rights pursuant to which, if Captec proposes to register shares of
Captec common stock under the Securities Act except for registration: (i) on
Form S-8, or a successor or substantially similar form, of an employee stock
option, stock purchase or compensation plan or of Captec common stock issued or
issuable pursuant to any such plan; (ii) of a dividend reinvestment plan; or
(iii) on Form S-4, or a successor or substantially similar form, of shares
issuable in connection with any acquisition, merger, exchange or similar
transaction, Captec will, subject to certain limitations, use its best efforts
to include in such registration statement all Captec common stock held by
Princap Leasing Company as to which it has received a request for inclusion.
Such Captec common stock will not be included to the extent that Captec's
underwriters with respect to any such registration indicate that inclusion would
interfere with the successful marketing of the offering.
EFFECT OF THE MERGER ON THE RIGHTS OF EXISTING STOCKHOLDERS
The share consideration to be paid in the merger, excluding the earnout
shares, consists of 2,749,505 shares of Captec common stock. Three warrant
holders, including Prudential Securities Credit Corporation, will receive cash
for their warrants and cash will be paid in lieu of issuing fractional shares of
Captec common stock. Holders of Captec common stock are entitled to receive
dividends, when, as and if declared by the Board of Directors, out of funds
legally available therefore. The holders of Captec common stock, upon
liquidation, dissolution or winding up of Captec, are entitled to share ratably
in any assets remaining after payment in full of all liabilities of Captec and
all preferences of the holders of any outstanding preferred stock. The shares of
Captec common stock constituting the share consideration, including the earnout
shares, will possess ordinary voting rights, each share entitling the holder
thereof to one vote. Holders of Captec common stock do not have cumulative
voting rights in the election of directors and do not have preemptive rights.
All shares of Captec common stock now outstanding are, and all shares of Captec
common stock constituting the share consideration, including the earnout shares,
to be issued in consideration of the merger will be, fully paid and
nonassessable. Following the merger and based on the capitalization of Captec as
of February 1, 2000, Mr. Beach, Mr. Martin and Mr. Sherard in the aggregate will
beneficially own approximately 28.8% of the issued and outstanding shares of
Captec common stock, or approximately 34.9% of the issued and outstanding shares
of Captec common stock assuming all of the earnout shares are issued and no
other issuances of Captec common stock prior to the issuance of the earnout
shares, in each case including options exercisable within sixty days. See
"Security Ownership of Certain Beneficial Owners and Management."
ACCOUNTING TREATMENT
The Financial Group merger will be accounted for under the purchase method
of accounting. Under the purchase method of accounting, assets acquired and
liabilities assumed are recorded at their fair values. Goodwill is generated to
the extent that the consideration attributable to the Financial Group merger
including certain acquisition and closing costs, exceed the fair value of net
assets acquired. Based on the
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December 31, 1999 financial position of Financial Group, the merger is expected
initially to generate approximately $17.5 million of goodwill which will be
amortized on a straight-line basis over 20 years. Actual goodwill arising from
the Financial Group merger is based on the consideration attributable to the
Financial Group merger, including the share consideration, including the earnout
shares, attributable to the Financial Group merger, the cash payment to three
warrant holders and certain acquisition and closing costs, and fair value of
assets and liabilities of Financial Group on the closing date of the merger. No
assurance can be given that the actual goodwill resulting from the Financial
Group merger will not vary from the amount in the Unaudited Pro Forma Condensed
Consolidated Financial Statements. See "Unaudited Pro Forma Condensed
Consolidated Financial Statements."
The Advisors merger will result in a current period expense in the amount
$5,635,000 for the cost of acquiring and terminating the advisory agreement.
This expense will be recognized as an operating expense on Captec's consolidated
statement of operations immediately following the merger. Due to the
non-recurring nature of this transaction, the foregoing expense has been
excluded from the Unaudited Pro Forma Statements of Operations; however, the
weighted average shares outstanding have been adjusted to reflect issuance of
the shares. See "Unaudited Pro Forma Condensed Consolidated Financial
Statements."
Pursuant to its terms, the advisory agreement renews for an additional one
calendar year term if not terminated by either party before October 1 of the
current term. On October 1, 1999, the advisory agreement renewed through
December 31, 2000. Prior to that time, the advisory agreement was terminable as
of December 31, 1999 without the payment of any termination fee. Without the
merger with Advisors, if Captec terminated the advisory agreement, it would be
required to obtain and pay for the advisory services provided by Advisors from
some other source.
THE MERGER AGREEMENT
The following description summarizes the material provisions of the merger
agreement. This description does not purport to be complete, is qualified in its
entirety by, and is subject to, the more complete and detailed information set
forth in the merger agreement.
TERMS OF THE MERGER
The Merger. Subject to the terms and conditions of the merger agreement:
- Advisors will merge with and into Captec and the separate corporate
existence of Advisors will cease; and
- Acquisition will merge with and into Financial Group, and Financial Group
will become a wholly-owned subsidiary of Captec and the separate
corporate existence of Acquisition will cease.
Captec will continue to exist following the merger and its internal corporate
affairs will continue to be governed by Delaware law. Financial Group will
continue to exist following the merger, as a wholly-owned subsidiary of Captec
and its internal corporate affairs will continue to be governed by Michigan law.
Captec, as the sole stockholder of Financial Group, will have sole power and
authority to control all aspects of the internal corporate and business affairs
of Financial Group following the merger.
Certificate of Incorporation and Bylaws. The respective certificates of
incorporation and bylaws of Captec and Financial Group in effect immediately
before the effective time of the merger will be the respective certificates of
incorporation and the bylaws of Captec and Financial Group following
consummation of the merger. An amendment will be made to Captec's certificate of
incorporation solely to change the name of Captec to Captec Financial Group,
Inc. if stockholders approve the merger and the name change proposal at the
special meeting and the merger is consummated. See "Proposal Two -- Changing the
Name of the Company."
Conversion of Financial Group Stock and Advisors Stock. At the effective
time of the merger, the common and preferred shareholders and option and warrant
holders of Financial Group will receive, on
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average, 45.71086 shares of Captec common stock for each issued and outstanding
share of Financial Group common and preferred stock and option or warrant to
acquire Financial Group common stock, which equals an aggregate 2,189,505 shares
of Captec common stock and the Advisors stockholders will receive 560 shares of
Captec common stock for each issued and outstanding share of Advisors common
stock, which equals an aggregate 560,000 shares of Captec common stock. The
Financial Group option holders and exchanging warrant holders will relinquish
and terminate their options and/or warrants in exchange for the right to
participate, or increased participation, in the share consideration, including
the earnout shares. Cash will be paid in lieu of the issuance of fractional
shares of Captec common stock.
Cash Payment. In connection with the merger, Captec will make cash
payments of $451,620, $1,376,350 and $676,980, respectively to the Public
Institution for Social Security, Prudential Securities Credit Corporation and
Abbas Al-Qattan, in consideration of the termination of their warrants to
acquire Financial Group common stock. Captec Financial Corporation, a wholly
owned subsidiary of Financial Group, maintains a $250.0 million warehouse credit
facility with Prudential Securities Credit Corporation, an affiliate of
Prudential Securities. The warrants were issued by Financial Group to Prudential
Securities Credit Corporation in August 1998 in consideration of the
establishment of the Financial Group warehouse credit facility. Prudential
Securities has provided financial advisory services to Financial Group and
Captec with respect to the merger and other matters. See "Certain Transaction
and Relationships -- Financial Group."
Distribution to Advisors Stockholders. Prior to the consummation of the
merger, Advisors will distribute one-half of its available cash to the Advisors
stockholders. The amount of this distribution is estimated to be $145,000 as of
December 31, 1999. Mr. Beach, Mr. Martin and Mr. Sherard will receive 60.0%,
25.0% and 6.1%, respectively, of the amount of cash actually distributed to the
Advisors' stockholders. See "Certain Transactions and
Relationships -- Advisors."
EARNOUT SHARES
The earnout participants subsequently may receive the earnout shares of up
to an additional 2.0 million shares of Captec common stock based upon the
consolidated financial performance of Captec in 2000 and 2001. The earnout
participants subsequently may receive from 200,000 shares to 1.0 million shares
of Captec common stock if Captec achieves consolidated EPS in 2000 of from $1.80
to $2.00 or more. For 2000 the earnout participants will receive:
- 200,000 shares of Captec common stock if Captec achieves consolidated EPS
of at least $1.80 in 2000; and
- 200,000 shares of Captec common stock for each additional $0.05 increment
of consolidated EPS achieved in 2000 up to a maximum of 1.0 million
additional shares of Captec common stock if Captec achieves consolidated
EPS of at least $2.00 in 2000.
Consolidated EPS for 2000 will be calculated assuming the effective time of the
merger was January 1, 2000. Any unissued earnout shares in 2000 will be added to
the earnout shares eligible to be earned in 2001 as follows:
- if consolidated EPS in 2000 is greater than, or equal to, $1.60 all
unissued earnout shares will be carried over;
- if consolidated EPS in 2000 is greater than, or equal to, $1.40 and less
than $1.60, fifty percent (50.0%) of the unissued earnout shares will be
carried over; and
- if consolidated EPS in 2000 is less than $1.40, no unissued earnout
shares will be carried over.
For 2001 the earnout participants will receive:
- 111,000 shares of Captec common stock plus 11.0% of any unissued earnout
shares carried over from 2000 if Captec achieves consolidated EPS of at
least $2.00 in 2001; and
- 111,000 shares of Captec common stock plus 11.0% of any unissued earnout
shares carried over from 2000 for each additional $0.05 increment of
consolidated EPS achieved in 2001 up to a maximum of
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1.0 million shares of Captec common stock, plus any unissued earnout
shares carried over from 2000, if Captec achieves consolidated EPS of at
least $2.40 in 2001.
Mr. Beach, Mr. Martin and Mr. Sherard will be eligible to receive in the
aggregate approximately 73.47% of any earnout shares that may be issued based
upon the financial performance of Captec in 2000 and 2001 as follows:
<TABLE>
<S> <C> <C>
Mr. Beach 1,056,530 shares 52.8%
Mr. Martin 306,040 shares 15.3%
Mr. Sherard 106,954 shares 5.3%
Total 1,469,524 shares 73.4%
</TABLE>
At the time any earnout shares are issued, the earnout participants also will
receive a cash payment of 3.33% of the value of any earnout shares received for
2000 and a cash payment of 6.66% of the value of any earnout shares received for
2001 to offset partially any federal, state or local income tax liability that
the recipients of the earnout shares may incur as a result of the issuance of
the earnout shares.
The calculation of consolidated EPS is subject to readjustment in the event
of recapitalizations, stock splits, buybacks, issuances, dividends or similar
transactions. For purposes of determining the amount, if any, of the earnout
shares to be issued, consolidated EPS will be Captec's basic earnings per share
calculated in accordance with GAAP, as reported on its audited financial
statements filed with the SEC pursuant to the Exchange Act, subject to certain
adjustments set forth in the merger agreement. Consolidated EPS will exclude:
- any costs, expenses or adjustments resulting from the merger or the
termination by Captec of its REIT status, other than customary corporate
income taxes incurred after January 1, 2000;
- any gain or loss resulting from extraordinary or nonrecurring events or
any departure from Captec's prior methodology for determining accounting
estimates or any change in its accounting policies; and
- any other adjustments mutually agreed to by Captec and the earnout
participants.
In calculating consolidated EPS, the maximum pre-tax gain from the sale of
assets owned by Captec prior to December 31, 1999 will be $9,771,000 for 2000
and $15,750,000 for 2001, to which will be applied the greater of Captec's
effective federal income tax rate and 30.0% in the year in which such gain
occurs. All of the approximately $50.0 million of appreciated properties
preliminarily identified by management to be offered for sale were owned by
Captec prior to December 31, 1999 and are subject to these limitations of the
merger agreement. Any pre-tax gain from the sale of any of these or other
properties in 2000 or 2001 will be included in the calculation of consolidated
EPS for the year in which sale occurs up to the amount of the applicable
limitation in the merger agreement for 2000 and 2001. As a result of the
negotiation of the merger agreement, consolidated EPS excludes expenses and
adjustments resulting from the merger or termination of REIT status because the
special committee and Financial Group agreed that these items are not related to
the day-to-day continuing operations of Financial Group and Advisors.
If Captec: (i) sells, exchanges or otherwise disposes of any assets or
liabilities, which assets or liabilities do not principally involve real estate
assets or do not involve the purchase, sale, operation, financing or management
of real property; (ii) purchases, exchanges or otherwise acquires any such
assets or liabilities; or (iii) fundamentally and substantially changes the
strategic direction of Captec from that in effect as of the date of the merger
agreement, Captec, as represented by the special committee, and the earnout
participants, as represented by their designated representative, will attempt to
agree as to whether, and if so to what extent, the results of any such material
acquisition, material disposition or fundamental change should be included in
consolidated EPS. If Captec and the earnout participants' representative cannot
agree as to the treatment of such results, the issue will be referred for
resolution to an independent, nationally recognized accounting firm the
determination of which will be conclusive and binding.
In the merger agreement, the earnout participants acknowledge that Captec
and the Board of Directors retain the power and right to control all aspects of
the business and operations of Captec, including the power and right to make or
not make decisions that could adversely affect the ability of the earnout
participants to
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receive earnout shares. Notwithstanding the foregoing, following the merger, Mr.
Beach, Mr. Martin and Mr. Sherard, as officers and Directors of Captec, will
continue to have substantial influence over the management of Captec's business
and may be subject to conflicts of interest with respect to their management
activities arising from their interest in receiving the earnout shares. See
"Risk Factors -- Conflicts of Interest" and "Conflicts of Interest."
If there occurs a change of control, such as the sale of more than 50.0% of
the outstanding capital stock of Captec or of substantially all of Captec's
consolidated assets, or other transaction that adversely impacts, or renders
impossible or impracticable the calculation of, consolidated EPS, the earnout
participants will receive earnout shares calculated based upon the present value
of consolidated EPS assuming that, from the date of the change of control
through December 31, 2001, consolidated EPS would accrue at the same average
rate of per diem growth as consolidated EPS had accrued from the first day of
the applicable earnout period, such as January 1, 2000 or January 1, 2001
through the date of the change of control.
INDEMNIFICATION
Each of the Financial Group common stockholders, the Financial Group option
holders and the Advisors stockholders have agreed, severally, but not jointly,
and based upon each such person's pro rata interest set forth in the merger
agreement, to indemnify and hold harmless Captec, its officers, directors,
affiliates and their respective successors and permitted assigns, from any and
all demands, claims, actions, losses, damages, liabilities and expenses,
including reasonable attorneys' fees and disbursements related thereto based
upon, arising out of, or otherwise resulting from any material inaccuracy in any
representation, or any material breach of any warranty by either Financial Group
or Advisors, in the merger agreement or in any agreement or instrument delivered
in connection therewith and any nonfulfillment of any material covenant or
agreement of Financial Group or Advisors contained in the merger agreement or in
any agreement delivered in connection therewith by either Financial Group or
Advisors. Any claim for indemnification by Captec must be made no later than the
earlier of fifteen months after the effective time of the merger or twenty
business days following receipt by Captec of its audited financial statements
for the fiscal year ending December 31, 2000, except for indemnification under
the representations and warranties of Financial Group and Advisors with respect
to certain tax matters, which must be made no later than three months after the
expiration of the longest statute of limitations applicable to any claim against
Captec arising out of such tax matters.
The merger agreement limits the maximum aggregate loss which Captec may
recover from the indemnifying parties, other than the Advisors stockholders, to
70.0% of the fair market value of the share consideration, excluding earnout
shares, issued to them as of the effective time of the merger or the date the
claim for indemnification is made, whichever is less, and from the Advisors
stockholders to 100.0% of the fair market value of the share consideration
issued to them as of the effective time of the merger or the date the claim for
indemnification is made, whichever is less. Captec may not assert any claim for
indemnification of loss until aggregate loss exceeds $500,000, at which time
Captec may assert indemnification claims for aggregate loss in excess of
$500,000 subject to further reduction by the amount of any insurance proceeds
received by Captec to the extent that such proceeds are attributable to acts or
omissions giving rise to the indemnification claim.
Captec's right to indemnification includes the right, but not the
obligation, to deduct the amount of any indemnifiable loss, determined in
accordance with procedures set forth in the merger agreement, from any earnout
shares which either have been earned but are unissued or are earned in the
future by the indemnifying parties. In the event Captec chooses to exercise this
right of set-off with respect to an indemnifiable claim, the amount of any
indemnifiable loss to Captec will be subtracted from the aggregate dollar value
of the Captec common stock which otherwise would be issuable as earnout shares
based on the average sale price of the Captec common stock for the twenty
business days immediately proceeding the date of such deduction utilizing the
last reported sales price of the Captec common stock on Nasdaq.
The indemnifying parties have the right, but not the obligation, to satisfy
any obligation to indemnify Captec for loss with shares of Captec common stock
to be valued based upon the mutual agreement of Captec and the earnout
participants' representative, provided that at the time any such election is
made, Captec has
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received the favorable opinion of its legal counsel that all statutory and other
legal requirements for it to accept shares of Captec common stock in
satisfaction of its indemnification claim are satisfied. If no such agreement
with respect to valuation is reached between Captec and the earnout
participants' representative, the indemnifying parties will be required to pay
cash.
Captec has agreed to indemnify, defend and hold harmless the stockholders,
optionholders and warrant holders of Financial Group and Advisors and their
respective officers, directors and affiliates from and against any and all loss
based upon, arising out of or otherwise resulting from any material inaccuracy
in any representation or any material breach of any warranty by Captec or
Acquisition in the merger agreement or any agreement delivered in connection
therewith and the nonfulfillment of any material covenant or agreement of Captec
or Acquisition contained in the merger agreement or any agreement delivered in
connection therewith. Any indemnification claim by such parties must be made no
later than the earlier of fifteen months after the effective time of the merger
or twenty business days following the delivery to Captec of its audited
financial statements for the fiscal year ending December 31, 2000. The merger
agreement limits the maximum aggregate loss which such parties may recover from
Captec to $1.0 million subject to further reduction by the amount of the
proceeds of any insurance policies received by the indemnifying parties to the
extent that such proceeds are attributable to the acts or omissions giving rise
to the indemnification claim.
Captec has agreed that for a period of two years after the effective time
of the merger, it will continue to maintain directors' and officers' liability
insurance comparable to that maintained by Financial Group and Advisors prior to
the merger subject to certain limitations with respect to the cost of such
insurance.
Captec and the indemnifying parties have agreed that their respective
rights of indemnification pursuant to the merger agreement shall be their
respective sole and exclusive remedy under the merger agreement with respect to
the recovery of loss.
EFFECTIVE TIME OF THE MERGER
Promptly following the satisfaction or waiver, where permissible of the
conditions to the merger, the merger will be consummated and become effective on
the date and at the time certificates of merger are filed with the Secretary of
State of Delaware with respect to the Advisors merger, and the Administrator of
the Michigan Department of Consumer and Industry Services, Corporations,
Securities and Land Development Bureau, with respect to the Financial Group
merger, or at such later time, not later than five business days thereafter, as
may be specified in the certificates of merger. See "The Merger
Agreement -- Conditions to Consummation of the Merger."
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REPRESENTATIONS AND WARRANTIES
Representations and Warranties of Financial Group and Advisors. The merger
agreement includes representations and warranties of Financial Group and
Advisors as to, among other things:
- the corporate organization, good standing and corporate power and
authority of each of Financial Group and Advisors to conduct its business
and enter into and perform the merger agreement and the transactions
contemplated thereby;
- the due authorization of the merger agreement and the transactions
contemplated thereby by the respective Boards of Directors of Financial
Group and Advisors, and the Advisors stockholders, and the enforceability
of the merger agreement;
- the capitalization of Financial Group and Advisors, the validity of the
Financial Group common stock, the Financial Group preferred stock and the
Advisors stock, and the absence of any undisclosed options, warrants or
other rights to acquire the capital stock of Financial Group or Advisors;
- the absence of any undisclosed pending or threatened material litigation
and certain defaults by Financial Group or Advisors or unsatisfied
judgments against Financial Group or Advisors;
- the completeness and accuracy of the disclosure concerning the
compensation of officers, directors and employees of Financial Group and
Advisors;
- Financial Group and Advisors' liabilities under, and compliance with,
applicable laws and regulations;
- the payment or the creation of reserves for all taxes, the filing of all
required tax returns and the absence of any ongoing tax audits or
investigation;
- the fair presentation, in all material respects, of Financial Group's and
Advisors' respective financial positions, the compliance with GAAP of the
financial statements of Financial Group and Advisors and the accuracy, in
all material respects, of the books of account and other financial
records of Financial Group and Advisors;
- the completeness and accuracy of the disclosure concerning material
contracts, leases, agreements or understandings of Financial Group and
Advisors, and the absence of any material breach or default with respect
to any material agreement to which Financial Group or Advisors is a
party;
- the absence of any undisclosed transactions with affiliates;
- the validity and enforceability of all loans held, serviced or sold by
Financial Group and the compliance by Financial Group with all applicable
legal and contractual requirements concerning or relating to all such
loans or securitization transactions; and
- the accuracy of information concerning Financial Group or Advisors
supplied by Financial Group or Advisors for use in this proxy statement.
Representations and Warranties of Captec and Acquisition. The merger
agreement includes representations and warranties of Captec and Acquisition as
to, among other things:
- the corporate organization, good standing and corporate power and
authority of each of Captec and Acquisition to carry on its business and
enter into and perform the merger agreement and the registration rights
agreement;
- the due authorization and approval of the merger agreement and the
registration rights agreement and the transactions contemplated thereby
by the Board of Directors of Acquisition and Captec and the
enforceability of the merger agreement and the registration rights
agreement subject to approval by Captec's stockholders;
- the capitalization of Captec and Acquisition, the validity of Captec
common stock and the absence of any undisclosed options, warrants or
other similar rights with respect to the Captec common stock;
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- the validity of the Captec common stock to be issued as share
consideration, including the earnout shares;
- the fair presentation, in all material respects, of Captec's financial
condition and results of operations, and the compliance with GAAP in the
financial statements of Captec, and the completeness and accuracy, in all
material respects, of the books and records of Captec and Acquisition;
- the timely filing of all SEC reports, proxy statements or other documents
required to be filed by Captec with the SEC since November 1, 1997 and
the material conformity of all such documents to the requirements of the
Exchange Act and the rules and regulations promulgated thereunder;
- the absence of any undisclosed pending or threatened material litigation
against Captec or Acquisition or unsatisfied judgments against, and of
material defaults by, Captec; and
- the accuracy in all material respects of this proxy statement, except for
the information provided by Financial Group or Advisors and the
conformity of the proxy statement to the requirements of the Exchange Act
and the rules promulgated thereunder.
COVENANTS
The merger agreement contains covenants including the following:
Business of Financial Group and Advisors Pending the Merger. Each of
Financial Group and Advisors have agreed, except as contemplated by the merger
agreement, from the date of the merger agreement to the effective time of the
merger:
- not to take any action that adversely affects the ability of Financial
Group or Advisors to pursue its business in the ordinary course;
- to seek to preserve intact its current business organization;
- to keep available the service of its current officers and employees;
- to use reasonable commercial efforts to preserve its relationships with
customers, suppliers and others having business dealings with it; and
- to use reasonable efforts to encourage their officers and employees to
become employees of Captec.
Financial Group and Advisors also have agreed that before the effective
time of the merger, except as expressly permitted by the merger agreement or by
Captec or the special committee, they will not, among other things:
- issue, deliver, sell, pledge or encumber any shares of capital stock or
other securities convertible into, or exchangeable for, any shares of
capital stock or any other securities in lieu thereof or in substitution
therefor;
- redeem or acquire any outstanding securities;
- split, combine or reclassify any shares of capital stock or make any
payment, distribution or dividend to any stockholder;
- grant any increase in the compensation of any director, officer or
employee;
- adopt a plan of merger, consolidation, reorganization, recapitalization,
complete or partial liquidation or dissolution;
- make any acquisition, by means of merger, consolidation or otherwise;
- amend their respective certificates or articles of incorporation or
bylaws;
- incur or guaranty any indebtedness or refinance or restructure existing
indebtedness;
- engage in any business materially different from the business in which
they currently are engaged;
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- enter into any agreement providing for acceleration of payment or
performance or other consequences as a result of a change of control of
Financial Group or Advisors;
- enter into an agreement to purchase goods or services over a period
greater than 12 months which is not cancelable without penalty on 30 or
fewer days notice, other than in the ordinary course of business;
- forgive or convert any indebtedness;
- authorize or enter into any agreement providing for management services
to be provided by Financial Group or Advisors to any third party or an
increase in management fees payable to either of them under existing
agreements;
- mortgage, pledge, encumber, sell, lease or transfer any material assets;
- make any changes in loan underwriting or credit scoring policies;
- foreclose upon or otherwise take title to or possession or control of
real property without first obtaining a phase one environmental
assessment or environmental liability insurance;
- enter into, modify or extend any agreement, contract or commitment,
excluding loans or securities, involving an expenditure in excess of
$50,000 in the aggregate;
- acquire or invest in securities not backed by the full faith and credit
of the United States or an agency thereof, enter into, modify, amend or
extend any contract for the sale of financial or other futures, cash,
securities, commodities, interest rate swaps or other hedging
transactions except in the ordinary course of business; or
- perform any act or omit to take any action that would make any of the
representations in the merger agreement inaccurate or materially
misleading as of the effective time of the merger or materially impede or
delay the merger.
Approval of the Merger. Captec has agreed to take steps necessary to
arrange for the special meeting of Captec's stockholders at which time the
stockholders will have an opportunity to vote upon the merger agreement. Subject
to its fiduciary duties to stockholders, Captec has agreed to take all lawful
action to solicit and use reasonable efforts to obtain stockholder approval of
the merger.
Cooperation. The parties to the merger agreement have agreed to cooperate
in their respective investigations with respect to the merger and use their
reasonable commercial effects to take all actions necessary to consummate the
merger including obtaining all necessary governmental and other consents.
Management Fee. Captec will pay Advisors all amounts due it pursuant to
the advisory agreement as of the effective time of the merger and which is
estimated to be approximately $350,000. See "Certain Transactions and
Relationships -- Advisors."
CONDITIONS TO CONSUMMATION OF THE MERGER
Conditions to Each Party's Obligations to Effect the Merger. The
respective obligations of Captec, Acquisition, Financial Group and Advisors to
consummate the merger are subject to specific conditions, including the
following:
- the merger agreement will have been duly approved by the holders of the
Captec common stock;
- there will not be in effect any judgment, writ, order, injunction or
decree of any court or governmental body enjoining or otherwise
preventing consummation of the transactions contemplated by the merger
agreement nor will there be pending or threatened any suit, action or
proceeding seeking to restrain or restrict the consummation of the merger
or seeking damages in connection therewith which, in the reasonable
judgment of either Captec or Financial Group or Advisors, could have a
material adverse effect on Captec, Acquisition, Financial Group or
Advisors or the ability of any of them to perform their respective
obligations under the merger agreement;
- the receipt of any material third-party consents; and
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- the termination or expiration of the waiting period under the HSR Act,
which has occurred.
The consent of Captec, Acquisition, Financial Group and Advisors is required to
waive any of the foregoing conditions.
Conditions to the Obligations of Captec and Acquisition. In addition to
the foregoing conditions, the obligation of Captec and Acquisition to effect the
merger also is subject to satisfaction or waiver of the following conditions:
- the accuracy and completeness in all material respects of the
representations and warranties of Financial Group and Advisors in the
merger agreement;
- the performance by Financial Group and Advisors in all material respects
of their respective obligations under the merger agreement which are
required to be performed on or prior to the closing date of the merger;
- since March 31, 1999, there will not have occurred or have been
threatened any material adverse change in the business, properties,
operations or condition of Financial Group or Advisors;
- the certification as of the effective time of the merger by the President
or Senior Vice President of each of Financial Group and Advisors that the
respective boards of directors of Financial Group and Advisors, and the
stockholders of Advisors, have authorized and approved the execution,
delivery and performance of the merger agreement and that all such
authorizations and approvals remain in full force and effect;
- that J.C. Bradford has not withdrawn, modified or revoked its fairness
opinion; and
- the Board of Directors shall have determined that the merger and the
merger agreement are fair and in the best interests of Captec.
The consent of Captec and Acquisition is required to waive any of the foregoing
conditions.
Conditions to the Obligations of Financial Group and Advisors. In addition
to the foregoing conditions, the obligation of Financial Group and Advisors to
effect the merger also is subject to satisfaction or waiver of the following
conditions:
- the accuracy and completeness in all material respects of the
representations and warranties of Captec and Acquisition in the merger
agreement;
- the performance by Captec and Acquisition in all material respects of
their respective obligations under the merger agreement which are
required to be performed at or prior to the closing date of the merger;
- the certification as of the effective time of the merger by the President
or any Vice President of each of Captec and Acquisition that the
respective boards of directors of Captec and Acquisition, and Captec as
the sole stockholder of Acquisition, have authorized and approved the
execution, delivery and performance of the merger and the merger
agreement and that all such authorizations and approvals remain in full
force and effect; and
- execution and delivery of the registration rights agreement by Captec and
Princap Leasing Company.
The consent of Financial Group and Advisors is required to waive any of the
foregoing conditions.
AMENDMENT; WAIVER; TERMINATION
Amendment. The merger agreement may be amended at any time by written
agreement of Captec, Acquisition, Financial Group or Advisors prior to the
effective time of the merger. An amendment to the merger agreement subsequent to
adoption by the stockholders of Captec may not alter or change: (1) the amount
or kind of the share consideration, including the earnout shares; (2) any term
of Captec's certificate of incorporation; or (3) any of the terms and conditions
of the merger agreement if such alteration or change would adversely affect
Captec's stockholders. The registration rights agreement will be subject to
amendment only by the mutual agreement of Captec and Princap Leasing Company.
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Waiver. Any party to the merger agreement may extend the time for the
performance of any of the obligations or other acts of any other party thereto,
or waive compliance with any of the agreements or any condition to the
obligations thereunder of any other party thereto, to the extent that such
obligations, agreements and conditions are intended for its benefit. Captec does
not intend to resolicit stockholder approval in the event that, either before or
after receipt of stockholder approval, the time for performance is extended or
compliance with any condition or obligation is waived, because Captec does not
believe that any such extension or waiver would have a material consequence on
the stockholders that would require resolicitation of stockholder approval. As a
result, the merger could be consummated without a resolicitation of stockholder
approval in the event that any of the agreements or conditions to the
obligations of the parties under the merger agreement are waived. Stockholders
should consider this possibility in evaluating the importance of the various
agreements and conditions obtained in the merger agreement prior to voting on
the merger.
Termination. The merger may be abandoned and the merger agreement may be
terminated
- prior to the effective time of the merger, before or after approval by
the stockholders of Financial Group, Advisors or Captec, either by the
mutual written consent of Captec, Acquisition, Financial Group and
Advisors;
- by any party if any condition precedent to the obligations of that party
in the merger agreement is not satisfied or waived by that party provided
that party is not then in breach of any material representation or
warranty or in default in any material respect in observance or in the
timely performance of any of its covenants or agreements contained in the
merger agreement;
- by any party if there shall be in effect any permanent injunction or
action preventing the consummation of the merger which has become final
and nonappealable;
- if the effective time of the merger shall not have occurred on or before
June 30, 2000;
- by Captec or Acquisition if the merger and the merger agreement is not
approved and adopted by the stockholders of Captec;
- by Financial Group or Advisors if the Board of Directors of Captec
withdraws, modifies or changes its recommendation with respect to the
merger or the merger agreement in a manner adverse to Financial Group or
Advisors; and
- by Captec if the board of directors or stockholders of Financial Group or
Advisors withdraws, modifies or changes its recommendation with respect
to the merger or the merger agreement in a manner adverse to Captec or
any person shall have acquired beneficial ownership of any "group," as
defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder other than the current stockholders of Financial
Group and Advisors.
At the time of the execution of the merger agreement, it was, and remains,
Captec's intention to terminate its REIT election as of January 1, 2000 by the
filing of a voluntary notification of termination with the Internal Revenue
Service. March 30, 2000 was the last day on which such a notification could be
filed for calendar year 2000. If the merger is approved, Captec will terminate
its REIT status as of January 1, 2000 as a result of the implementation of its
business plan following the merger which will cause it to fail to qualify as a
REIT for 2000. Upon termination of the merger agreement pursuant to its terms if
none of Captec, Acquisition, Financial Group or Advisors is in breach of any
material provision of the merger agreement, the merger agreement shall become
void and no longer be of any force and effect and there shall be no liability of
any party or its respective directors, officers or stockholders to any other
party to the merger agreement. If any of Captec, Acquisition, Financial Group or
Advisors is in breach of any material provisions of the merger agreement and
such breach causes the terminating party to terminate the merger agreement, or
to the extent that such termination results from the willful and material breach
by a party of any of its representations, warranties, covenants or agreements
set forth in the merger agreement, the nonbreaching party or parties will retain
all legal and equitable rights and remedies against the breaching party.
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RESALE OF SHARES OF COMMON STOCK ISSUED IN THE MERGER
The shares of Captec common stock to be issued pursuant to the merger
agreement will not be registered under the Securities Act unless the shares of
Captec common stock issued to the preferred stockholder subsequently are
registered pursuant to the registration rights agreement and will not be
publicly tradable under the Securities Act. Such shares must be held
indefinitely unless: (1) the distribution thereof is registered under the
Securities Act; (2) such shares are sold in compliance with Rule 144 under the
Securities Act; or (3) some other exemption from registration is available. See
"The Merger -- Registration Rights."
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
The representations and warranties of the parties contained in the merger
agreement or in any certificate or other document or instrument delivered
pursuant thereto or in connection therewith shall not survive the closing date
of the merger, but any claim with respect thereto shall survive for the earlier
of fifteen months following the effective time of the merger or twenty business
days following the delivery to Captec of its audited financial statements for
the fiscal year ending December 31, 2000, except for indemnification claims by
Captec arising from certain tax matters which shall survive for three months
following the expiration of the longest statute of limitations applicable to any
claim against Captec arising out of such tax matters. The covenants and
agreements of the merger agreement shall not survive the closing date of the
merger, except where such covenants and agreements by their terms contemplate
performance after the effective time of the merger. Any covenant, agreement,
representation or warranty which is the basis for an indemnification claim shall
survive the time at which it would otherwise terminate pursuant to the merger
agreement if written notice of the inaccuracy or breach shall have been given to
the party against which such indemnification claim may be sought prior to the
expiration of such time period. If any governmental authority asserts a
deficiency or other tax matter which could result in a claim for
indemnification, Captec may give notice of the breach of such representation,
warranty, covenant or agreement of Financial Group or Advisors specifying the
amount of loss asserted including applicable interest and penalties,
notwithstanding Captec's intent to dispute such claim, and the amount of such
claim shall be the amount of any settlement or adjudicated damages. See "The
Merger Agreement -- Indemnification."
EXPENSES AND FEES
Unless expressly provided for in the merger agreement, each party will bear
its own expenses, including the fees and expenses of any attorneys, accountants,
investment bankers, brokers, finders or other intermediaries, incurred in
connection with the merger agreement and the transactions contemplated thereby.
Captec will bear all expenses arising out of or incurred in connection with the
preparation of this proxy statement and the special meeting, including all
related printing, mailing, solicitation, legal, accounting and other fees and
expenses. Captec will pay to Prudential Securities a fee of $3.0 million for the
financial advisory services it has rendered to Financial Group under an
engagement letter dated December 15, 1998 and for financial advisory services
provided by Prudential Securities to Captec, including exploring equity and debt
financing alternatives, acquisitions, mergers, sales, the formation of joint
ventures and recapitalizations pursuant to an engagement letter dated August 25,
1998 between Prudential Securities and Captec.
The total fee payable to Prudential Securities was reduced from the amounts
owed pursuant to the engagement letters referred to above as a result of
negotiations among Captec, Financial Group and Prudential Securities and is
contingent on consummation of the merger. At the time these engagement letters
were executed, the merger was not contemplated. See "Certain Transactions and
Relationships."
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FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes material federal income tax
considerations from the merger to Captec and its stockholders. This discussion
does not address the tax consequences to Financial Group, Advisors or their
respective stockholders arising from the merger. This discussion is general in
nature and is not tax advice. No representations are made as to state, local or
foreign tax consequences to Captec or any stockholder of Captec resulting from
the merger.
TAX TREATMENT OF THE MERGER
Captec intends to treat the Advisors merger as a tax-free reorganization
under section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended and
to treat the Financial Group merger as a tax-free reorganization under section
368(a)(2)(E) of the Internal Revenue Code. To qualify as a tax-free
reorganization, a transaction must meet the technical specifications of the
Internal Revenue Code, have the requisite business purpose and satisfy
continuity of interest and continuity of business enterprise tests described in
the regulations under section 368 of the Internal Revenue Code, which Captec
believes will be satisfied. Captec will not seek a ruling from the Internal
Revenue Service or an opinion from counsel on the tax consequences of the
merger.
Under section 368(a)(1)(A) of the Internal Revenue Code, a reorganization
includes a statutory merger or consolidation effected pursuant to the corporate
laws of a state. The Advisors merger will be consummated in accordance with
Delaware law and the Advisors stockholders will receive Captec common stock and
cash in lieu of fractional shares.
Section 368(a)(2)(E) of the Internal Revenue Code provides that a
reorganization includes a statutory merger otherwise qualifying under section
368(a)(1)(A), provided the stockholders of the surviving corporation exchange
stock for voting stock of the corporation which before the merger was in control
of the merged corporation. The stock so surrendered must constitute at least
80.0% of the total combined voting power of all classes of stock entitled to
vote and at least 80.0% of the total number of shares of all other classes of
stock of the surviving corporation. The Financial Group merger will be
consummated in accordance with the Michigan Business Corporation Act, Financial
Group will be the surviving corporation, and its stockholders will surrender the
requisite amount of Financial Group stock for shares of Captec common stock. The
IRS has issued guidelines for favorable rulings with respect to reorganizations
that include contingent-stock provisions such as the earnout shares. Captec
believes the Financial Group merger substantially complies with those guidelines
but will not seek a ruling from the IRS.
Based upon its intention to treat the merger as a tax-free reorganization,
Captec's tax basis in the Financial Group stock will be the aggregate tax basis
of the Financial Group stockholders in the Financial Group stock plus Captec's
nominal basis in the common stock of Acquisition; and Captec's tax basis in the
assets of Advisors will be the tax basis of Advisors in its assets, in each case
as of the effective time of the merger.
If the Financial Group merger fails to qualify as a tax-free
reorganization, it will be treated as a taxable sale of the Financial Group
stock to Captec. Captec would not directly or indirectly recognize gain or loss
as a result of the failure of the Financial Group merger to qualify as a
tax-free reorganization and Captec's tax basis in the Financial Group stock
would be the fair market value of the share consideration, including the earnout
shares, issued in consideration of the Financial Group merger for the Financial
Group stock, cash paid in consideration of the termination of certain warrants
and Captec's costs incurred in connection with the Financial Group merger. If
the Advisors merger fails to qualify as a tax-free reorganization, it will be
treated as a taxable sale of Advisors' assets to Captec. Captec would not
directly or indirectly recognize gain or loss as a result of the failure of the
Advisors merger to qualify as a tax-free reorganization and Captec's tax basis
in the assets of Advisors would be the fair market value of the share
consideration issued in consideration of the Advisors merger and Captec's costs
incurred in connection with the Advisors merger.
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Termination of REIT Status. As a result of the merger and Captec's plan to
exploit business opportunities currently unavailable to it as a REIT, Captec
will be operated so that it no longer will qualify as a REIT under the Internal
Revenue Code effective January 1, 2000. Upon termination of its REIT status,
Captec will be treated as a corporation for federal, state, and local income tax
purposes and will be subject to tax, including any applicable alternative
minimum tax, on its taxable income at regular corporate rates. Termination of
Captec's REIT election also will eliminate the requirement that Captec
distribute substantially all of its REIT net income to stockholders in order to
retain REIT status and will reduce the cash available for distribution by Captec
to its stockholders. Upon termination of its REIT election, Captec will be under
no legal, contractual or other obligation to make distributions to stockholders
and any future distributions will be at the sole discretion of the Board of
Directors subject only to the requirements of Delaware law with respect to
dividends. Future distributions to stockholders by Captec , if any, will not be
deductible by Captec and will be subject to corporate tax at regular corporate
rates. Any distributions to stockholders will be taxable to stockholders as
ordinary income to the extent of current and accumulated earnings and profits.
Subject to certain limitations of the Internal Revenue Code, stockholders may be
eligible for a dividends received deduction with respect to any distributions
received.
In the absence of certain relief, Captec will not be able to re-elect REIT
classification for the four years following termination of its REIT election and
would be subject to taxation on its built-in gains upon any re-election of REIT
status. Under the built-in gain rules described in I.R.S. Notice 88-19, a REIT
is subject to corporate tax if it disposes of any assets acquired from a
C-corporation in a carry-over basis transaction, including the qualification of
a C-corporation as a REIT during the 10-year recognition period beginning on the
date of the transaction. These taxes are imposed at the maximum regular
corporate rate (currently 35 percent) on the lesser of: (1) any gain recognized
during the recognition period on the distribution of such asset, or (2) the
built-in gain in such asset, such as the excess of the fair market value of such
asset over the corporation's adjusted basis in such asset, as of the beginning
of such recognition period.
PROPOSAL TWO
CHANGING THE NAME OF CAPTEC NET LEASE REALTY
The Board of Directors has determined that, if the merger proposal is
approved, it would be in the best interests of Captec to amend Article I of its
certificate of incorporation to change Captec's name to "Captec Financial Group,
Inc." in order to reflect the diversification of Captec into a full-service,
specialty commercial finance company as a result of the merger. Upon
implementation of the name change proposal, Financial Group's name will be
changed to "CFG, Inc." The name change proposal is conditioned upon consummation
of the merger and if the merger is not consummated for any reason, the
certificate of incorporation will not be amended and Captec's name will not be
changed.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
The following is a description of certain transactions and relationships
between Captec and its affiliates and Financial Group and Advisors and their
respective affiliates. Because these transactions are among affiliates there can
be no assurance they are on terms as favorable as could have been obtained
through negotiations between unaffiliated parties.
CAPTEC NET LEASE REALTY
Financial Group was indebted to Captec in the principal amount of
$9,719,798 as of December 31, 1999 pursuant to a master revolving note
collateralized in part by a senior interest in a portfolio of loans under an
assignment of contracts with Financial Group and in part by a subordinate
interest in a portfolio of loans owned by Captec Financial Corporation, a
wholly-owned subsidiary of Financial Group, under an assignment of contracts
with Financial Group. This master note bears interest at the annual rate of
10.0% and is payable on demand. The outstanding principal balance of this master
note at the time of Captec's initial public offering in November 1997 was
approximately $21,247,000. Financial Group will be a wholly-owned subsidiary of
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Captec following the merger and the master note will be eliminated upon
consolidation of Financial Group. See "Unaudited Pro Forma Condensed
Consolidated Financial Statements."
Financial Group was indebted to Captec in the principal amount of
$1,658,477 as of December 31, 1999 pursuant to a promissory note collateralized
by a subordinate class certificate issued by an affiliate of Financial Group
that bears interest at the annual rate of 15.70% and is payable on demand. The
outstanding principal balance of this note at the time of Captec's public
offering was $1,919,000.
In August 1998, Captec purchased from Mr. Beach and wholly-owned
subsidiaries of Financial Group 100.0% of the general partnership interests in
Captec Franchise Capital Partners L.P. III and Captec Franchise Capital Partners
L.P. IV for approximately $4.4 million in the aggregate in transactions that
were approved by the Board of Directors of Captec and by the limited partners of
each limited partnership and disclosed by Captec as part of its future plans in
the prospectus for its public offering in November 1997. These general
partnership interests entitle Captec to receive 1.0% of each limited
partnership's net income, net loss and cash distributions and 10.0% of net sale
or refinancing proceeds.
Captec is a party to the advisory agreement pursuant to which Advisors
provides to Captec management, investment and financial advisory services
pertaining primarily to the acquisition and development of properties. See
"Certain Transactions and Relationships -- Advisors."
Mr. Beach and Mr. Martin have executed employment agreements with Captec,
each dated October 15, 1997, pursuant to which they receive base annual salaries
of $175,000 and $125,000, respectively, health and life insurance and certain
other benefits. Each employment agreement provides for an initial three-year
term that is automatically extended for an additional year at the end of each
year, subject to the right of either party to terminate at the end of the
then-applicable term by giving written notice of termination on or before
November 30 of any year. Pursuant to their employment agreements, Mr. Beach and
Mr. Martin have been granted options to purchase 400,000 and 200,000 shares of
Captec common stock, respectively, through November 12, 2007 at an exercise
price of $18.00 per share. The employment agreements each currently entitle Mr.
Beach and Mr. Martin to an annual bonus on a sliding scale of from 10.0% to
100.0% of annual base salary, contingent and based upon, the percentage increase
in FFO per share in any calendar year from the prior calendar year. Mr. Beach
and Mr. Martin earned bonuses of $43,750 and $31,250, respectively, for 1999.
Mr. Sherard does not have an employment agreement with Captec and currently
receives no salary from Captec.
Following the merger, Mr. Bruder will become the Senior Vice President --
General Counsel of Captec and Mr. Moir will become the Senior Vice President --
Net Lease Investments of Captec which are positions similar to those currently
held by each of them with Financial Group. Captec will pay annual base salaries
of $175,000 to Mr. Bruder and $150,000 to Mr. Moir, which are the amounts of
their current respective annual base salaries from Financial Group. Following
the merger, Captec will pay an annual base salary of $250,000 to Mr. Sherard who
currently receives no salary from Captec and which is the amount of his current
annual base salary from Financial Group.
Mr. Beach and Captec are stockholders of Family Realty, Inc. and Family
Realty II, Inc., affiliates of Captec, which were formed in 1998 and 1999,
respectively. These entities invest in net-leased, entertainment-based retail
properties. Mr. Beach owns all of the voting stock, and Captec owns 60.0% of the
non-voting common stock of each of Family Realty and Family Realty II. Mr.
Al-Qattan, who will receive a payment of $676,980 from Captec upon consummation
of the merger in consideration of the termination of his warrants to purchase
$ shares of Financial Group common stock, owns the remaining 40.0% of
the non-voting common stock of each of Family Realty and Family Realty II.
During 1999, Captec received total asset management fees of approximately
$491,000 from Family Reality. The Public Institution for Social Security, which
will receive a cash payment of $451,620 upon consummation of the merger in
consideration of the termination of its warrants to purchase shares of Financial
Group common stock, has provided $30.0 million of equity capital and
subordinated debt financing to each of Family Realty and Family Realty II. The
Public Institution for Social Security invested $1.0 million in the preferred
stock of each of Family Realty and Family Realty II, which accrues an annual
dividend of 7.5% prior to the investment of such amount in triple-net base
properties and of 14.0% thereafter. The Public Institution for Social Security
also has loaned to each of Family
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Realty and Family Realty II $29.0 million which accrues interest at the annual
rate of 7.5% prior to the investment of the loan in triple-net based properties
and at the annual rate of 14.0% thereafter. The loan to Family Realty matures on
December 31, 2003 and the loan to Family Realty II matures on December 31, 2004.
Albert T. Adams, a Director of Captec and the chairman of the special
committee, is a partner of Baker & Hostetler LLP, which Captec currently retains
as its general counsel. During 1999, Captec paid fees of approximately $19,000
to Baker & Hostetler LLP for legal services rendered. Baker & Hostetler LLP also
serves as counsel to Financial Group and was paid fees of approximately $293,000
by Financial Group in 1999.
Creed L. Ford, III, a Director and a member of the special committee, is
the Chief Executive Officer of Kona Restaurant Group, which is the lessee from
Captec of five properties on which it operates Johnny Carino's Italian Kitchen
and Kona Steakhouse restaurants. Total rental payments to Captec from these
properties was approximately $525,000 in 1998 and approximately $877,000 in
1999.
On January 14, 1999, Captec granted ten-year options to purchase Captec
common stock at $12.97 per share as follows: Mr. Beach -- 60,000 shares; Mr.
Martin -- 30,000 shares; Mr. Sherard -- 15,000 shares; Ronald Max, Vice
President and Chief Investment Officer -- 15,000 shares; and each of Mr. Adams,
Mr. Chadwick, Mr. Ford, Mr. Howley, Mr. Krul and Mr. Peters -- 5,000 shares.
Options granted to Mr. Beach, Mr. Martin, Mr. Sherard and Mr. Max vest ratably
on January 14 of each of 2000, 2001 and 2002. Options granted to Mr. Adams, Mr.
Chadwick, Mr. Ford, Mr. Howley, Mr. Krul and Mr. Peters vest ratably on January
14 of each of 2000 and 2001.
FINANCIAL GROUP
At December 31, 1999, Mr. Beach was indebted to Financial Group in the
aggregate principal amount of $583,150 pursuant to promissory notes which bear
interest at the annual rate of 8.0%, with principal and interest payable in
annual installments over three to seven years, and which notes will remain
outstanding after the merger. The balances due under these notes represent the
accumulation of amounts advanced to Mr. Beach from time to time. At December 31,
1999, Financial Group was indebted to Mr. Beach in the aggregate amount of
$448,333 for accrued interest and compensation, which Mr. Beach and Financial
Group have agreed may be offset against the promissory notes at the election of
Financial Group. In addition, at December 31, 1999, Financial Group was indebted
to Mr. Beach in the aggregate principal amount of $1,016,400 pursuant to a
promissory note which is one of a group of promissory notes under which
Financial Group is indebted to certain of its officers, as further described
below.
In July 1998, wholly-owned subsidiaries of Financial Group and Mr. Beach
sold to Captec in the aggregate 100.0% of the general partnership interests in
Captec Franchise Capital Partners L.P. III and Captec Franchise Capital Partners
L.P. IV for approximately $4.4 million in the aggregate in transactions that
were approved by the Board of Directors of Captec and the limited partners of
each of their partnerships and disclosed by Captec as part of its future plans
in the prospectus for the public offering in November 1997. These general
partnership interests entitle Captec to receive 1.0% of net income, net loss and
cash distributions from those partnerships and 10.0% of net sale or refinancing
proceeds.
In December 1998, Financial Group sold 99,273 shares of Captec common stock
to Family Realty at fair market value and realized a gain of approximately
$1,352,000. Mr. Beach, who owns 100.0% of the voting stock of Family Realty, may
be deemed to beneficially own these 99,273 shares of Captec common stock. See
"Security Ownership of Certain Beneficial Owners and Management."
Captec Financial Corporation, a wholly owned subsidiary of Financial Group,
maintains a $250.0 million warehouse credit facility with Prudential Securities
Credit Corporation, an affiliate of Prudential Securities, which is used for
short-term warehouse financing of investments in mortgage loans, business
enterprise loans and equipment leases and loans. The outstanding principal
balance of this warehouse credit facility was approximately $162.0 million at
March 31, 1999 and approximately $238.9 million at December 31, 1999. Borrowings
on this warehouse credit facility bear interest at a rate equal to the thirty
day LIBOR rate plus 1.10%. The effective interest rate on this warehouse credit
facility at March 31, 1999 was 6.032% and was
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6.923% at December 31, 1999. In connection with the establishment of this
warehouse credit facility, Prudential Securities Credit Corporation received
warrants to purchase 3,011 shares of Financial Group common stock at $.01 per
share through August 2008. Prudential Securities Credit Corporation will be paid
$1,376,350 by Captec in consideration of the termination of its warrants. The
amount payable to Prudential Securities Credit Corporation for the termination
of its warrants is the result of negotiations between Financial Group and
Prudential Securities, and Financial Group and Captec in which Prudential
Securities Credit Corporation requested, and Captec agreed to pay, $10.00 per
share of Captec common stock that would have been issued in exchange for
Financial Group common stock had Prudential Securities Credit Corporation
exercised these warrants.
Captec will pay to Prudential Securities, which is an affiliate of
Prudential Securities Credit Corporation, a fee of $3.0 million for the
financial advisory services it has rendered to Financial Group under an
engagement letter dated December 15, 1998 and for financial advisory services
provided by Prudential Securities to Captec, including exploring equity and debt
financing alternatives, acquisitions, mergers, sales, the formation of joint
ventures, and recapitalizations pursuant to an engagement letter dated August
25, 1998 between Prudential Securities and Captec. The entire fee is contingent
upon the consummation of the merger. The total fee payable to Prudential
Securities in connection with the merger was reduced from the amounts owed
pursuant to the engagement letters referred above as a result of negotiations
among Captec, Financial Group and Prudential Securities, since at the time these
engagement letters were executed, the merger was not contemplated.
Financial Group and Mr. Beach each own a 50.0% ownership interest in
certain residential real estate. As of December 31, 1999, Financial Group had
contributed $453,438 and Mr. Beach had contributed $635,530 to this investment.
Financial Group was indebted to Mr. Beach, Mr. Martin, Mr. Sherard and Mr.
Bruder in the aggregate principal amount of $1,197,143 at March 31, 1999, net of
an unamortized debt discount of $486,257, and which indebtedness was $1,405,539
at December 31, 1999, net of an unamortized debt discount of $277,861, pursuant
to promissory notes that bear interest at the annual rate of 12.0% and mature on
the occurrence of certain specified events including the termination of the
Financial Group warehouse credit facility, which matures in June 2000, and
certain sales or mergers of Financial Group. Mr. Beach, Mr. Martin, Mr. Sherard
and Mr. Bruder made the loans to Financial Group to satisfy additional liquidity
requirements imposed on Financial Group by Prudential Securities Credit
Corporation. Under the Financial Group credit facility, Financial Group is
required to maintain liquid assets of not less than $1,000,000 at all times in
the form of cash or money market securities, which cannot be pledged or
encumbered. Failure to maintain this level of liquidity is deemed a "material
adverse effect" under, and constitutes a breach of, the terms and conditions of
the Financial Group warehouse credit facility. The additional liquidity was
required by Prudential Securities Credit Corporation in November 1998 as a
result of adverse conditions that existed throughout the capital markets in the
last quarter of 1998. The terms of the Financial Group credit facility also
prohibit Financial Group from using the credit facility to pay compensation or
bonuses to its officers, directors or stockholders, to make payments on loans
from affiliates, to make distributions on capital stock, or to make payments on,
or with respect to, any transaction with any of Financial Group's officers,
directors, stockholders or affiliates. Mr. Beach, Mr. Martin, Mr. Sherard and
Mr. Bruder made the loans to Financial Group on the same terms as were offered
to Financial Group by Prudential Securities Credit Corporation. In connection
with the issuance of these promissory notes, Mr. Beach, Mr. Martin, Mr. Sherard
and Mr. Bruder were issued warrants to acquire Financial Group common stock at
$.01 per share, which warrants are valued in the aggregate at $555,722 and are
being terminated in consideration of the issuance of share consideration to them
in amounts specified in the merger agreement. The warrants issued in connection
with the promissory notes are as follows: Mr. Beach -- 1,491; Mr. Martin -- 758;
Mr. Sherard -- 147; and Mr. Bruder -- 73. Financial Group's indebtedness to Mr.
Beach, Mr. Martin and Mr. Bruder corresponds to indebtedness personally incurred
by them with Prudential Securities, the proceeds of which were reloaned by them
to Financial Group and for which amounts they remain personally indebted to
Prudential Securities.
Certain of the services provided by Advisors to Captec are provided to
Advisors by Financial Group and for which Financial Group is compensated by
Advisors. During 1998, Advisors paid to Financial Group
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$1,224,155 with respect to such services rendered to Advisors by Financial
Group. Financial Group provides Advisors the following services: credit
underwriting, management consulting, property acquisition consulting,
acquisition diligence and documentation, billing and collection services,
information systems and physical facilities. During 1999, Advisors paid to
Financial Group $120,000 with respect to such services rendered to Advisors by
Financial Group on behalf of Captec. Prior to Captec's initial public offering
in November 1997, all revenue received by Advisors' predecessor from Captec's
predecessor was paid by Advisors' predecessor to Financial Group. Upon
consummation of this offering, it was discussed that this practice would be
discontinued and that Advisors would be directly responsible for readily
identifiable direct expenses and that indirect expenses would be reimbursed to
Financial Group through a fixed fee arrangement. This restructured arrangement
was finally agreed upon in late 1998 and implemented effective as of January 1,
1999.
At December 31, 1999, Financial Group was indebted to Captec pursuant to a
master note and promissory note in the aggregate principal amount of $9,719,798.
See "-- Captec Net Lease Realty."
Financial Group has loans outstanding to Merchants Capital Corporation and
Merchant's wholly-owned subsidiary in the aggregate principal amount of
$3,059,866 at March 31, 1999 and $3,063,169 at December 31, 1999. The
indebtedness is evidenced by notes collateralized by a management contract that
Merchant's and Merchants Capital Partners, L.P., an affiliated limited
partnership that is a licensed small business investment company, the general
partner of which is a limited liability company of which Mr. Beach owns
approximately 35.0% and Mr. Martin owns approximately 17.0%. The notes bear
interest at the annual rate of 8.0% and mature over five years. Mr. Beach owns
61.0% and Mr. Martin owns 31.0% of Merchants Capital Corporation. These notes
and Financial Group's obligations thereunder will remain outstanding after the
merger.
Mr. Beach, Mr. Martin, Mr. Sherard and Mr. Bruder each are employees of,
and compensated by, Financial Group. Following the merger, Mr. Beach, Mr. Martin
and Mr. Sherard will continue to serve as the President and Chief Executive
Officer, the Executive Vice President and Chief Financial Officer, and the
Senior Vice President -- Sales & Marketing of Captec, respectively, and Mr.
Bruder will become the Senior Vice President -- General Counsel of Captec, which
is a position similar to that currently held by Mr. Bruder with Financial Group.
It is anticipated that following the merger, Mr. Beach's and Mr. Martin's
employment agreements with Captec will be amended to provide for annual base
salaries of $450,000 and $325,000, respectively, which amounts are less than
their respective current aggregate annual base salaries from Captec and
Financial Group of $525,000 and $375,000, respectively and to change the
criteria on which their annual bonuses are based from growth in FFO per share to
growth in consolidated earnings per share. Mr. Sherard and Mr. Bruder will be
paid annual base salaries by Captec of $250,000 and $175,000, which are the
amounts of their current annual base salaries from Financial Group.
ADVISORS
The sole substantial asset of Advisors is the advisory agreement pursuant
to which Advisors provides to Captec certain investment and financial advisory
services pertaining primarily to the acquisition, development and leasing of
properties. Under the terms of the advisory agreement, Captec pays to Advisors
an annual management fee of the lesser of: (1) 0.6% of the aggregate capitalized
cost, excluding accumulated depreciation, of all assets in Captec's portfolio,
or (2) 5.0% of Captec's revenue. Captec also pays Advisors an annual incentive
fee equal to 15.0% of the amount by which any increase in annual 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. Captec also reimburses
Advisors in an amount equal to all costs incurred in the acquisition of
properties which, together with the incentive fee, cannot exceed 3.0% of the
acquisition cost of properties identified by Advisors and acquired during the
term of the advisory agreement. Effective January 1, 1998, the advisory
agreement was amended to reduce the management fee to Advisors by the amount of
acquisition fees paid directly to Advisors as a result of acquisitions made by
Family Realty and by Captec Franchise Capital Partners L.P. III and Captec
Franchise Capital Partners L.P. IV, of which Captec is the general partner.
Pursuant to its terms, the advisory agreement renews for an additional one
calendar year term if not terminated by either party before October 1 of the
current term. On October 1, 1999 the advisory agreement renewed through December
31, 2000. Prior to that time, the advisory agreement was terminable as of
December 31, 1999 without the payment of any termination fee. Without the merger
with Advisors, if Captec
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terminated the advisory agreement, it would be required to obtain and pay for
the advisory services provided by Advisors from some other source. During 1998,
Advisors charged $1,224,155 in management fees to Captec, comprised of $194,000
from Captec and $1,030,000 from Family Realty and the affiliated limited
partnerships, and approximately $1,123,000 in acquisition fees. For the year
ended December 31, 1999, Advisors charged approximately $1.3 million in
management fees from Family Realty and the affiliated limited partnerships,
which resulted in an equal offset to Captec and approximately $432,000 in
acquisition fees owed by Captec to Advisors. Captec will pay to Advisors all
accrued but unpaid acquisition fees and management fees due under the advisory
agreement through the effective time of the merger, at which time the advisory
agreement will terminate and Captec will become internally managed and
administered.
The Advisors merger will result in a current period expense in the amount
$5,635,000 for the cost of acquiring and terminating the advisory agreement.
This expense will be recognized as an operating expense on Captec's consolidated
statement of operations immediately following the merger. Due to the
non-recurring nature of this transaction, the foregoing expense has been
excluded from the Unaudited Pro Forma Statements of Operations; however, the
weighted average shares outstanding have been adjusted to reflect issuance of
the shares. See "Unaudited Pro Forma Condensed Consolidated Financial
Statements."
Prior to the consummation of the merger, and as permitted by the merger
agreement, Advisors will distribute one-half of its available cash to the
Advisors stockholders. Based upon and assuming collection of receivables and
payment of liabilities as of December 31, 1999, the amount of this distribution
is estimated to be $145,000. Mr. Beach, Mr. Martin and Mr. Sherard will receive
60.0%, 25.0% and 6.1%, respectively, of the amount of cash actually distributed
to the Advisors' stockholders.
CAPTEC NET LEASE REALTY
BUSINESS
Background. Captec, 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 national retailers. 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. Captec's leases typically provide for
minimum rent plus specified fixed periodic rent increases. Other revenues are
derived primarily from interest income on loans to affiliates and fee income
earned from affiliated ventures.
Captec completed a public offering of 8,000,000 shares of its common stock
in November 1997. Captec was incorporated in Delaware in August 1997. In
September 1997, Captec Net Lease Realty, Inc., a Michigan corporation, and
Captec Net Lease Realty Advisors, Inc., a Michigan corporation, were merged into
Captec. Captec Net Lease Realty Michigan and Captec Net Lease Advisors Michigan
each were incorporated in Michigan, in October 1994 and commenced operations in
February 1995. Prior to being merged into Captec, Captec Net Lease Realty
Michigan was engaged in substantially the same business as Captec and Captec Net
Lease Advisors Michigan was engaged in the business of providing management,
investment and financial advisory services to Captec Net Lease Realty Michigan.
On December 20, 1999, Captec executed an Omnibus Agreement and Plan of
Merger by and among Captec, Acquisition, Financial Group, and Advisors. The
merger agreement provides for the merger of Acquisition with and into Financial
Group and of Advisors with and into Captec. Upon consummation of the merger,
Financial Group will be a wholly-owned subsidiary of Captec and the separate
corporate existence of Advisors will terminate. Because Financial Group and
Advisors are affiliates of Captec, the Board of Directors established a special
committee consisting entirely of all independent, disinterested directors to
consider and negotiate the merger.
The merger agreement contains numerous customary and transaction specific
representations, warranties, covenants and conditions to closing. Although the
DGCL does not require that the merger be approved by stockholders of Captec,
because the merger is among affiliates and members of Captec's management and
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Board of Directors have interests which are in addition to, or differ from,
those of Captec, the merger agreement provides that the merger is 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 Captec
who or that are also officers, directors or affiliates of Financial Group or
Advisors.
Properties. As of December 31, 1999, Captec had a portfolio of 162
properties located in 28 states, with a cost basis of $229.5 million. The
properties are leased to 51 operators of 33 distinct national and regional
restaurant concepts and 12 operators of 14 national and regional retail
concepts. The restaurant and retail markets represented approximately 73.0% and
27.0%, respectively, of the annualized total revenue from the properties as of
December 31, 1999.
As of December 31, 1999, leases to a single lessee, S&A Properties, Inc.,
the franchisor of the Bennigan's concept, represent 11.5% of annualized total
revenue, and the next highest single lessee represents 3.6% of annualized total
revenue. 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 Captec.
In addition to these properties, as of December 31, 1999, Captec had
entered into commitments to acquire 89 properties for an aggregate cost of
$208.4 million. Captec generally acquires properties from operators or
developers in locations which have exhibited growth in retail sales and
population. Upon acquiring a property, Captec normally enters into a long-term
triple-net lease typically for a 15- to 20-year term, plus one or more five-year
renewal options, with the lessee that 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. Captec
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.
Financial Group and Advisors. Captec has retained Advisors, which, together
with Financial Group, manages the operations of Captec and provides it with
investment and financial advisory services pertaining primarily to the
acquisition, development and leasing of properties and administrative support.
Financial Group is a specialty commercial finance company which, together with
its affiliates, provide a diverse line of financing products to the franchise
and chain restaurant, and retail petroleum and convenience store markets,
including equipment leases, mortgage and acquisition loans, construction and
development financing and private equity financing. Since 1981, Financial Group
and its affiliates have developed substantial expertise in all aspects of the
franchise, chain restaurant and specialty retail finance business, including
property acquisition, loan and lease origination, underwriting and monitoring of
business concepts, obligor credit and real estate quality, portfolio management,
accounting and other administrative functions. As of December 31, 1999,
Financial Group serviced 1,845 loans and leases representing $1.3 million of
book value, including the leased properties owned by Captec, and had 92
employees, including a senior management team with substantial direct industry
experience.
Subject to the direction of the Board of Directors, Advisors'
responsibilities include:
- selecting restaurant and specialty retail properties for acquisition,
formulating, evaluating the terms of each proposed acquisition, and
arranging for the acquisition of properties by Captec;
- identifying potential leases for the restaurant properties and
formulating, evaluating and negotiating the terms of the leases;
- negotiating the terms of any borrowings;
- performing credit analyses of prospective lessees;
- conducting legal and business due diligence and overseeing the
preparation of all legal documentation for the development and leasing of
all properties; and
- identifying properties for sale consistent with Captec's investment
objectives and prevailing economic conditions.
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Financial Group and Advisors also provide all necessary and customary
billing and administrative functions with respect to the leases; take all
actions necessary to cause Captec to comply with all applicable laws and
regulations; prepare reports to stockholders and materials for stockholders
meetings; prepare and deliver to Captec periodic financial statements; promptly
notify Captec upon the occurrence of certain events, including defaults under
the leases; and perform such other administrative and managerial functions as
may be requested by Captec.
Advisors renders advisory, management and other services to Captec pursuant
to an advisory agreement. Under the terms of the advisory agreement, Captec pays
to Advisors a management fee of the lesser of (i) 0.6% of the aggregate
capitalized cost (excluding accumulated depreciation) of all assets in Captec's
portfolio, or (ii) 5.0% of Captec's revenues. Captec also pays 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 Captec common stock
outstanding. Captec also reimburses Advisors in an amount equal to all costs
incurred in the acquisition of properties pursuant to an acquisition fee which,
together with the incentive fee, cannot exceed 3.0% of the acquisition cost of
properties identified by the Advisor and acquired during the term of the
advisory agreement. Effective January 1, 1998, the advisory agreement was
amended to reduce the management fee to Advisors by the amount of acquisition
fees paid directly to Advisors as a result of acquisitions made by Family Realty
or by Captec Franchise Capital Partners L.P. III and Captec Franchise Capital
Partners LP. IV, both of which Captec is the general partner. The advisory
agreement expires on December 31, 2000, 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.
Investment in Affiliates
Investments in Partnerships. In August 1998, Captec purchased from
affiliates 100.0% of the general partnership interests in Captec Franchise
Capital Partners L.P. III and Captec Franchise Capital Partners L.P. IV, which
are engaged in substantially the same business as Captec. Pursuant to the terms
outlined in the amended and restated agreement of limited partnership of each of
Captec Franchise Capital Partners L.P. III and Captec Franchise Capital Partners
L.P. IV, Captec 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 Captec Franchise Capital Partners L.P. III's and Captec
Franchise Capital Partners L.P. IV's properties and equipment. In connection
with the amendment of the advisory agreement, the limited partnership agreements
for Captec Franchise Capital Partners L.P. III and Captec Franchise Capital
Partners L.P. IV were amended retroactive to January 1, 1998. The effect of the
amended agreements is to provide an acquisition fee of 2.0% of the aggregate
purchase price of properties to Captec from Captec Franchise Capital Partners
L.P. III and Captec Franchise Capital Partners L.P. IV and an acquisition fee of
3.0% of the aggregate purchase price of properties to Advisors from Captec
Franchise Capital Partners L.P. III and Captec Franchise Capital Partners L.P.
IV, for which Captec receives an equal reduction in management fee expense to
Advisors. Cash flows of Captec Franchise Capital Partners L.P. III and Captec
Franchise Capital Partners L.P. IV are allocated 99.0% to the limited partners
and 1.0% to Captec as the general partner. Net sale or refinancing proceeds of
Captec Franchise Capital Partners L.P. III and Captec Franchise Capital Partners
L.P. IV are allocated 90.0% to the limited partners and 10.0% to Captec as the
general partner. Captec will 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 either Captec Franchise Capital
Partners L.P. III or Captec Franchise Capital Partners L.P. IV. The cash flow,
liquidation fees, and net sale proceeds to Captec are subordinated to a 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 Family Realty. Family Realty was formed in 1998 to invest in
net-leased entertainment-based retail properties, principally state of the art
stadium style seating movie theaters. These types 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
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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 Captec on favorable terms. Captec owns a 60.0% non-voting ownership
in Family Realty and receives a quarterly asset management fee based on a
percentage of Family Realty's portfolio. Family Realty is obligated to pay
acquisition fees of 4.0% to CNLR Development Inc., a subsidiary of Captec.
Advisors earns an advisory fee from CNLR Development up to 50.0% of the
acquisition fees earned by CNLR Development from Family Realty, which, pursuant
to the advisory agreement, provides for an equal reduction in management fee
expense to Captec. Family Realty II was formed in November 1999 to conduct the
same business as Family Realty in a second venture.
Investment in Joint Venture. During the twelve months ended December 31,
1999, Captec, through a wholly-owned subsidiary, formed a joint venture, FC
Venture I, LLC with an affiliate of Fidelity Management Trust Company, one of
the largest investment managers in the United States, on behalf of its
institutional clients. The joint venture was formed to develop and acquire
net-leased restaurant and retail properties similar to those which Captec
develops and acquires. At December 31, 1999, the affiliate of Fidelity and
Captec have provided $24.4 million and $7.1 million, respectively, of equity
capital for the joint venture. Captec is the joint venture's administrative
agent authorized to act on behalf of the joint venture. The joint venture's
objective is to leverage its capital through borrowing to acquire up to $100.0
million in properties. As properties are acquired, Captec will receive
management fees and participate in any distributions from the joint venture as
provided in the operating agreement. Captec will utilize any proceeds from the
joint venture as working capital, including for the acquisition of properties
for its portfolio. The affiliate of Fidelity has been granted an option to
convert either 25.0% or 75.0% of its joint venture interest into Captec common
stock during the period March 31, 2001 through March 31, 2003. Under the 75.0%
option the affiliate of Fidelity is entitled to convert 75.0% of the value of
its membership interests into Captec common stock at the factor equal to 90.0%
of the greater of $18.00 per share or the market price of Captec common stock on
the date notice of conversion is given. Under the 25.0% option the affiliate of
Fidelity is entitled to convert 25.0% of the value of its membership interest
into Captec common stock at the greater of the market price of Captec common
stock on March 31, 1999, which was $13.00 per share, or the date notice of
conversion is given. Captec believes an additional benefit of the joint venture
will be the expansion of Captec's preferred developer network and business
opportunities which will result from its exposure to significant new business
development partners.
Operations
Acquisitions from Operators. Captec purchases properties from, and enters
into leases with, creditworthy multi-unit operators of national and regional
chain and franchised restaurants and national and regional specialty retailers.
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 as a result of a
comprehensive credit review process, which includes an evaluation of corporate
financial statements and federal income tax returns, unit level operating data
and projections and demographic and site information. Captec targets only
lessees which it believes have the competitive position and financial strength
to meet lease obligations. By acting in tandem with Financial Group as a
value-added provider of capital to restaurant operators, Captec seeks to
purchase properties at below "retail" market value and thus realizes above
market returns.
Acquisitions from Developers. Captec has developed alliances with select
retail developers to acquire properties in the retail industry. By developing
these alliances, Captec establishes mutually beneficial, rather than
competitive, relationships with developers, intended to increase Captec's supply
of retail acquisition opportunities and provide Captec with below market
purchase prices and above market lease yields.
Underwriting Restaurant Chains and Retailers. Captec leases its properties
to franchisees and operators of select major national and regional restaurants
and retailers because Captec 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
Captec's lessees.
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A concept is a proprietary theme under which a retailer or franchise
conducts business such as Blockbuster Video or Taco Bell. Captec 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 franchise fee and expense structure to industry averages;
- analysis of concept penetration and trade 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.
Captec's concept underwriting procedures also result in the establishment
of credit standards for concept lessees. Once selected, Captec 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 are predominantly experienced,
multi-unit operators of fast-food, family-style and casual dining restaurants
and national retailers. Captec subjects each proposed lessee to a thorough
underwriting process to identify the most creditworthy lessees and minimize
Captec's risk from defaults and business failures. Lessees that are deemed
creditworthy are those lessees that are most capable of meeting the obligations
of its lease over the term. Captec targets only lessees with the competitive
position and financial strength to meet lease obligations. Captec'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 Captec's risk.
Underwriting Site Selection. Prior to acquiring a property, Captec conducts
a site review. Captec 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. Captec 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 environmental site assessment or
environmental liability insurance.
In addition, many of the chain operators and franchisors have sophisticated
full-time staffs engaged in site selection, evaluation and pre-approval of all
new sites. The operators of national and regional franchised and chain
restaurants that become Captec's lessees generally are required to submit their
proposed locations to a rigorous site evaluation and approval process by
franchisors or national chain management, which generally includes assessments
of many of the factors considered by Captec in performing its analysis. These
studies often are made available to, and utilized by, Captec in analyzing a
potential acquisition. The retailers which become Captec'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 Captec's
properties also submit their proposed locations to a rigorous site evaluation
and approval process similar to that for restaurants. These processes provide
additional support and confirmation for Captec's site selection process.
Maintenance of Relationships with Restaurant Chains, Retailers and
Lessees. Once a business concept has been approved, Captec seeks to develop a
strong ongoing working relationship with national or regional senior chain or
retailer management. Captec believes that such relationships facilitate the
identification,
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<PAGE> 93
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, Captec regularly reviews the financial condition of its lessees and
business, economic and market trends in order to identify and anticipate
problems with lessee performance that could adversely affect the lessee's
ability to meet lease obligations. If potential problems are identified, Captec
seeks early intervention with its lessees and, when appropriate, chain or
retailer national management to address and avoid such problems.
All of Captec's operations are conducted in the United States. Captec's
operations historically have not been seasonal.
Competition. The restaurant and retail finance industry is intensely
competitive and fragmented. Captec believes that competition for the acquisition
of restaurant properties is fragmented among large public corporations, private
companies and individuals. Captec 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 industry and assessment of
other REITs, Captec considers Franchise Finance Corporation of America, Realty
Income Corporation and Commercial Net Lease Realty, Inc. to be its primary
competitors among REITs.
Captec believes that it has several key competitive advantages that enable
it to compete favorably for property acquisitions, including Captec's ability to
"bank" the chain restaurant industry in tandem with Financial Group. Captec and
its affiliates meet most of the chain restaurant operator's financing needs on a
"one-stop shopping" basis. To execute this strategy, Captec and Financial Group
have strategically developed diversified financing products and a
relationship-based marketing strategy founded upon the value of building
long-term relationships with customers. Captec and Financial Group 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 Captec or its affiliates. In
addition, Captec has established alliances with select retail developers, which
allow Captec 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 and other environmental investigations
as appropriate or Captec has obtained environmental liability insurance at the
properties. Where possible, Captec has entered into indemnification agreements
with lessees and/or prior owners at certain of the properties where potential
environmental issues have been raised, but have been remediated or otherwise
resolved. Captec currently is not directing or paying the costs of any
remediation or monitoring work at any property. The environmental site
assessments of the properties have not revealed any environmental liability that
Captec believes could have a material adverse effect on Captec's financial
condition, nor is Captec aware of any material environmental liability. Captec
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
properties. As part of its underwriting procedures, Captec will obtain
environmental site assessments or environmental liability insurance for all
future properties, including the properties subject to acquisition by Captec.
Captec believes that the extent and geographic diversity of its portfolio
minimizes the likelihood of Captec being exposed to a material environmental
liability.
Employees. At December 31, 1999 Captec had four employees who were Mr.
Beach, Mr. Martin, Mr. Sherard and Ronald Max, its Vice President and Chief
Investment Officer.
Financial Information. All of Captec's revenues from external customers for
the fiscal year ended December 31, 1999 may be attributed to, and all of its
long-term assets are located in, the United States.
PROPERTIES
Existing Properties. As of December 31, 1999, Captec's portfolio consisted
of 162 properties located in 28 states, which were leased to 63 operators of 33
distinct restaurant concepts and 14 retail concepts. The properties ranged from
one year to 79 years and averaged 5.5 years of age and were subject to leases
with
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<PAGE> 94
remaining terms, excluding renewals, ranging from 4.6 to 21.8 years and
averaging approximately 14.4 years. Investments in individual properties ranged
from $304,000 to $6.8 million and the total investment in the properties,
excluding accumulated depreciation, was $229.5 million. The size of facilities
located on the properties ranged from 2,200 to 78,400 square feet and the
properties aggregated approximately 1,018,997 square feet. The properties
include four properties which presently are under construction, for which Captec
had invested $10.7 million and had remaining commitments totaling $3.7 million.
Most of Captec's properties are pledged as collateral for Captec's $125.0
million credit facility. The following table sets forth certain information
concerning the properties as of December 31, 1999.
<TABLE>
<CAPTION>
NO. OF ANNUALIZED
FACILITY NO. OF LESSEES LOCATION ACQUISITION REVENUE AT
CONCEPT TYPE PROPERTIES (1) (STATE) COST DECEMBER 31, 1999
------- -------- ---------- ------- ----------------------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
PROPERTIES SUBJECT TO OPERATING LEASES:
Bennigan's........... Restaurant 10 1 CO,CT,FL,IL,MI,NC,OK,TX $ 18,022,089 $ 2,126,152
Red Robin............ Restaurant 4 3 CO,OH,WA 10,701,648 1,569,133
Steak & Ale.......... Restaurant 8 1 FL,IN,OK,TX,VA 11,593,288 1,367,722
Boston Market........ Restaurant 10 4 IL,MI,NC,OH,PA 11,760,135 1,268,336
Arby's............... Restaurant 12 6 CO,GA,IN,MI,NM,OH,OR,PA 9,826,642 1,143,560
Applebee's........... Restaurant 5 3 KY,MO,OH,WA 8,801,628 1,128,576
Black Angus.......... Restaurant 4 1 MN 9,689,373 1,005,108
Denny's.............. Restaurant 8 2 AZ,LA,NC,TX 7,820,088 887,689
Golden Corral........ Restaurant 4 4 FL,NE,TX 7,442,156 836,347
Blockbuster Video.... Retail 8 1 AL,GA,KY,SC,TX 7,675,074 834,379
BMW.................. Retail 1 1 GA 7,115,013 709,200
Sportmart............ Retail 1 1 IL 6,104,161 654,450
Carino's............. Restaurant 3 1 TX 5,478,135 630,160
Carrows.............. Restaurant 4 1 CA 4,855,722 603,927
Keg Steakhouse....... Restaurant 4 1 OR,WA 4,820,938 581,673
Claim Jumper......... Restaurant 2 1 AZ,CA 4,908,616 571,260
Stop & Go............ Restaurant 5 1 TX 4,320,018 532,126
Mountain Jack's...... Restaurant 3 1 MI,OH 4,314,971 506,393
Circle K............. Retail 3 1 CA,GA 4,073,445 494,449
Jack In The Box...... Restaurant 4 1 AZ,CA,TX 4,551,532 489,963
Edward Bros./Best
Buy................. Retail 1 1 CA 3,627,692 476,679
Kona Steakhouse...... Restaurant 2 1 TX 3,932,821 473,269
Video Update......... Retail 3 1 AZ,MN,NM 3,582,900 442,657
Pizza Hut............ Restaurant 8 4 AL,CT,FL,GA,NJ,NY 3,745,674 379,868
Champps.............. Restaurant 1 1 GA 3,804,820 378,635
Texas Roadhouse...... Restaurant 2 1 CO 3,030,989 376,008
Babies R Us.......... Retail 1 1 MO 3,157,534 335,347
Hollywood Video...... Retail 3 1 CO,GA,OH 3,182,779 327,086
Nissan............... Retail 1 1 GA 3,250,023 323,952
Stanford's........... Restaurant 1 1 CO 2,427,861 316,995
Office Depot......... Retail 1 1 GA 2,822,117 305,732
Burger King.......... Restaurant 2 2 VA,WV 2,095,925 262,700
Jared Jewelers....... Retail 1 1 VA 2,013,333 261,516
Schlotzski's Deli.... Restaurant 3 1 AZ 2,645,054 258,968
Rite Aid............. Retail 1 1 CA 2,117,455 245,923
Athlete's Foot....... Retail 1 1 GA 1,691,680 196,588
Taco Bell............ Restaurant 1 1 MN 1,725,250 193,417
KFC.................. Restaurant 2 2 PA,WA 2,149,203 187,410
Damon's.............. Restaurant 1 1 AZ 1,429,445 161,483
Blockbuster Music.... Retail 1 1 AL 1,526,653 155,402
Roadhouse Grill...... Restaurant 1 1 NY 1,048,395 149,970
Perkins.............. Restaurant 1 1 FL 1,016,704 110,999
Popeye's............. Restaurant.. 1 1 GA 877,941 101,538
Skipper's Fish &
Chips............... Restaurant 1 1 WA 989,848 77,342
Whataburger.......... Restaurant 1 1 NM 948,068 71,262
Hooters.............. Restaurant 1 1 FL 1,048,870 71,050
Wendy's.............. Restaurant 1 1 PA 750,701 55,567
Vacant............... Restaurant/
Retail 11 0 IL,IN,MI,OR,PA,GA,TX,MO,WA 10,695,971 --
--- -- ------------ -----------
158 68 225,210,376 24,637,965
--- -- ------------ -----------
PROPERTIES SUBJECT TO FINANCING LEASES:
Jared Jewelers....... Retail 4 1 AZ,FL,TX 4,317,451 547,437
--- -- ------------ -----------
Total Revenue from Properties..... 162 69 $229,527,827 $25,185,403
=== == ============ ===========
Annualized Total Revenue.............................................................................. $30,377,827
===========
<CAPTION>
% OF
TOTAL
ANNUAL
CONCEPT REVENUE
------- ----------
<S> <C>
PROPERTIES SUBJECT TO
Bennigan's........... 7.0%
Red Robin............ 5.2
Steak & Ale.......... 4.5
Boston Market........ 4.2
Arby's............... 3.8
Applebee's........... 3.7
Black Angus.......... 3.3
Denny's.............. 2.9
Golden Corral........ 2.8
Blockbuster Video.... 2.7
BMW.................. 2.3
Sportmart............ 2.2
Carino's............. 2.1
Carrows.............. 2.0
Keg Steakhouse....... 1.9
Claim Jumper......... 1.9
Stop & Go............ 1.8
Mountain Jack's...... 1.7
Circle K............. 1.6
Jack In The Box...... 1.6
Edward Bros./Best
Buy................. 1.6
Kona Steakhouse...... 1.6
Video Update......... 1.5
Pizza Hut............ 1.3
Champps.............. 1.2
Texas Roadhouse...... 1.2
Babies R Us.......... 1.1
Hollywood Video...... 1.1
Nissan............... 1.1
Stanford's........... 1.0
Office Depot......... 1.0
Burger King.......... 0.9
Jared Jewelers....... 0.9
Schlotzski's Deli.... 0.9
Rite Aid............. 0.8
Athlete's Foot....... 0.6
Taco Bell............ 0.6
KFC.................. 0.6
Damon's.............. 0.5
Blockbuster Music.... 0.5
Roadhouse Grill...... 0.5
Perkins.............. 0.4
Popeye's............. 0.3
Skipper's Fish &
Chips............... 0.3
Whataburger.......... 0.2
Hooters.............. 0.2
Wendy's.............. --
Vacant...............
--
-----
80.9%
-----
PROPERTIES SUBJECT TO
Jared Jewelers....... 1.8%
-----
Total Revenue from Pr 82.7%
=====
Annualized Total Reve 100.0%
=====
</TABLE>
85
<PAGE> 95
<TABLE>
<CAPTION>
% OF TOTAL ANNUALIZED % OF
NO. OF NO. OF NO. OF ACQUISITION ACQUISITION REVENUE AT ANNUALIZED
SEGMENT CONCEPTS PROPERTIES LESSEES(1) COST COST DECEMBER 31, 1999 REVENUE
------- -------- ---------- ---------- ----------- ------------ ----------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Restaurant........... 33 124 51 73.0% $167,620,014 $18,342,481 72.8%
Retail............... 14 38 12 27.0 61,907,813 6,842,922 27.2
-- --- -- ----- ------------ ----------- -----
47 162 63 100.0% $229,527,827 $25,185,403 100.0%
== === == ===== ============ =========== =====
</TABLE>
- ---------------
(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 (63).
Description of Properties. 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 Captec are in locations zoned for commercial use which have been
reviewed for traffic patterns and volume. Land costs vary but generally range
from $130,000 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 11,000 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 Captec are improved with buildings
although in some instances Captec may acquire only land, even if improved, or
only improvements. Captec 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, Captec believes that retailers increasingly prefer
smaller, freestanding facilities which are more accessible and facilitate the
customized presentation of the retail concept. Captec believes that it will
benefit from these trends because its properties meet these retailer
preferences.
Description of the Leases. Captec 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 national retailers.
During the term of a lease, the lessee pays Captec 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, 1999, the net
weighted average capitalization rate, which is annual minimum rent divided by
the total property investment, including acquisition cost, for the properties
was 10.2% and the weighted average annualized rate of automatic fixed increases
in the minimum annual rent was 1.86%. In accordance with generally accepted
accounting principles (GAAP), Captec 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, 1999, the net weighted
average straight-line capitalization rate, which is annual straight-line rental
revenue divided by the total property investment, including capitalized
acquisition cost, was 11.51% for the properties. Under the terms of the leases,
the lessees are typically responsible for all operating costs and expenses of
repairs, maintenance, real property taxes, assessments, utilities and insurance.
In limited circumstances, Captec's retail leases are on a "double-net" basis
pursuant to which Captec, rather than the lessee, is responsible for maintenance
of the exterior walls and/or roof of the property. Therefore, Captec generally
is not required to make significant capital expenditures with respect to its
portfolio. Captec had no capital expenditures for the years ended December 31,
1999 and 1998 and capital expenditures totaled approximately $5,000 for the year
ended December 31, 1997.
The following table sets forth, as of December 31, 1999, scheduled lease
expirations for the properties. Only 14.0% of Captec's leases are scheduled to
expire during the next 10 years (assuming no renewals).
86
<PAGE> 96
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
YEAR OF LEASES ANNUALIZED OF ANNUALIZED
EXPIRATION(1) EXPIRING REVENUE(2) REVENUE(1)
------------- --------- ------------- --------------
<S> <C> <C> <C>
2004.................................. 1 $ 654,450 2.6%
2005.................................. 1 84,439 0.3%
2006.................................. 3 341,843 1.4%
2007.................................. 7 705,812 2.8%
2009.................................. 18 1,731,681 6.9%
2010 and thereafter................... 121 21,667,178 86.0%
--- ----------- -----
TOTAL............................... 151 $25,185,403 100.0%
=== =========== =====
</TABLE>
- ---------------
(1) Assumes no early termination due to exercise of purchase options, defaults
or otherwise.
(2) Based upon monthly revenue as of December 31, 1999, as annualized and
without giving effect to any future rent increases or percentage rent.
Occupancy and Lease Performance. As of December 31, 1999, 151 of the 162
properties were subject to leases that were performing. The 11 vacant
properties, comprised of 6 properties formerly leased to Boston Chicken, Inc.
and its franchisees, three other properties and two modular buildings, represent
4.7% of the total investment in the properties. Captec is actively remarketing
vacant properties. Captec 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 1999, Captec reserved for an impairment loss of
approximately $497,000 for a vacant property 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 Captec's Boston
Chicken leases were rejected and classified as vacant as of December 31, 1998.
During the year ended December 31, 1999 Captec has re-leased six and sold two
properties formerly leased to Boston Chicken. As of December 31, 1999, 10 of
Captec's properties were leased to Boston Chicken or its affiliates.
Property and Lease Concentrations. The properties are leased to operators
of 47 distinct restaurant and retail concepts or brands. As of December 31,
1999, leases to the franchisor of Bennigan's restaurants represent 7.0% of
annualized total revenue from the properties, and the next highest "concept
concentration" was 5.2%.
The properties are leased to 63 different lessees. As of December 31, 1999,
leases to S&A Properties, Inc., which operates Bennigan's and Steak & Ale
restaurants and is also the franchisor of these concepts, represent 11.5% of
annualized total revenue from the properties, and the next highest single lessee
represents 3.6% of annualized total revenue from the properties. No single
property contributed more than 3.0% of annualized total revenue from the
properties. As of December 31, 1999, of the properties, 124 are restaurant
properties leased to 51 different lessees representing 73.0% of Captec's
investment in properties and 38 are retail properties leased to 12 different
lessees representing 27.0% of Captec's investment in properties.
Captec invests in restaurant and retail properties throughout the United
States. The properties generally are well diversified geographically across 28
states with a maximum "geographic concentration" in Texas equal to 10.8% of the
annualized total revenue. No other geographic concentrations exceed 10.0%.
LEGAL PROCEEDINGS
Captec is not presently involved in any material legal proceedings, nor, to
its knowledge, are any material claims threatened against Captec or its
properties other than claims arising in the ordinary course of business which
are not considered to be material.
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<PAGE> 97
CAPTEC NET LEASE REALTY, INC.
SELECTED FINANCIAL DATA
The following tables present selected consolidated historical financial
data for Captec and selected consolidated historical financial data for
Financial Group and pro forma amounts reflecting the merger. The pro forma
amounts assume that the merger had been effective during the periods presented.
The data presented is derived from the consolidated financial statements of
Captec and Financial Group and should be read in conjunction with the more
detailed information and financial statements included elsewhere in this proxy
statement including the Unaudited Pro Forma Condensed Consolidated Financial
Statements.
The Unaudited Pro Forma Condensed Consolidated Financial Statements have
been prepared based on a number of assumptions, estimates and uncertainties
including, but not limited to, estimates of the fair values of assets acquired
and liabilities assumed and estimated acquisition and closing costs. As a result
of these assumptions, estimates and uncertainties, the accompanying Unaudited
Pro Forma Condensed Consolidated Financial Statements do not purport to predict
the actual financial condition or results of operations that would have been
achieved had the merger occurred on December 31, 1999 or January 1, 1999, nor do
they purport to predict Captec's consolidated financial condition or results of
operations following the effective time of the merger. The pro forma financial
information does not reflect any potential effects related to the new strategic,
financial and operating strategies of Captec as a result of the merger, such as
the impact of increases in property sales, growth in the lending business of
Financial Group, new opportunities to cross-sell products to the combined
company's customers and to expand into new related markets and potential
reductions in cost of debt capital on savings in general and administrative
expenses.
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<PAGE> 98
CAPTEC NET LEASE REALTY, INC.
PRO FORMA DATA
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
PRO FORMA
(IN THOUSANDS, EXCEPT PER SHARE DATA) ---------
<S> <C>
STATEMENT OF OPERATIONS DATA:
REVENUE:
Rental, lease and mortgage loan income.................... $42,094
Interest and other income................................. 10,825
-------
Total revenue.......................................... 52,919
-------
EXPENSES:
Interest.................................................. 21,546
General and administrative................................ 14,971
Provision for losses...................................... 810
Depreciation and amortization............................. 4,608
-------
Total expenses......................................... 41,935
-------
Income before gain on sale of loans, loan hedging gains
and gain on sale of properties and income tax......... 10,984
Gain on sale of loans and loan hedging gains................ 4,736
Gain/(loss) on sale of properties, net...................... (635)
-------
Income before income tax.................................... 15,085
Provision for income tax.................................... 5,506
-------
Net income before accounting change.................... 9,579
Income/(loss) attributable to Common Stock............. $ 9,579
=======
Income/(loss) per share of Common Stock................ $ 0.78
=======
Weighted Average number of shares of Common Stock
outstanding............................................... 12,257,613
=================
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2,706
Investments in properties and financing leases............ 243,760
Investments in mortgage loans............................. 226,331
Total assets.............................................. 540,702
Notes payable............................................. 380,989
Subordinated debt......................................... 5,000
Total liabilities......................................... 394,250
Total stockholders' equity................................ 151,452
</TABLE>
89
<PAGE> 99
CAPTEC NET LEASE REALTY, INC.
HISTORICAL DATA
<TABLE>
<CAPTION>
THREE
MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1997 1996 1995
------------ ------------ ------------ ------------- ------------ ------------
PREDECESSOR PREDECESSOR PREDECESSOR
------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUE:
Rental income........................ $24,559 $22,451 $3,591 $ 7,974 $ 4,907 $ 614
Interest and other income............ 4,428 3,235 468 1,363 2,011 1,255
------- ------- ------ ------- ------- --------
Total revenue...................... 28,987 25,686 4,059 9,337 6,918 1,869
------- ------- ------ ------- ------- --------
EXPENSES:
Interest............................. 9,272 6,800 1,476 4,419 1,977 112
General and administrative........... 1,567 1,616 262 1,812 1,218 329
Provision for unbilled rent.......... -- 865
Depreciation and amortization........ 3,485 3,069 530 1,076 649 88
------- ------- ------ ------- ------- --------
Total expenses..................... 14,324 12,350 2,268 7,307 3,844 529
------- ------- ------ ------- ------- --------
Income before gain on sale of
properties and income tax............ 14,663 13,336 1,791 2,030 3,074 1,340
Equity income of joint venture......... 257 --
Gain (loss) on sale of properties...... (850) (1,838) 207 (59) -- --
------- ------- ------ ------- ------- --------
Income before income tax............... 14,070 11,498 1,998 1,971 3,074 1,340
Provision for income tax............... -- -- -- 167 95 457
------- ------- ------ ------- ------- --------
Net income before accounting change.... 14,070 11,498 1,998 1,804 2,979 883
Cumulative effect of accounting
change............................... (337) -- -- -- -- --
Redeemable Preferred Stock dividend
requirements......................... -- -- 1,012 5,625 7,496 3,619
------- ------- ------ ------- ------- --------
Income/(loss) attributable to Common
Stock................................ $13,733 $11,498 $ 986 $(3,821) $(4,517) $ (2,736)
======= ======= ====== ======= ======= ========
Income/(loss) per share of Common
Stock................................ $ 1.44 $ 1.21 $ 0.20 $ (3.90) $ (4.61) $ (2.79)
======= ======= ====== ======= ======= ========
Weighted Average number of shares of
Common Stock outstanding............. 9,508,108 9,508,108 4,966,139 980,330 980,330 980,330
============ ============ ============ ============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Cash flows from operating
activities......................... $ 16,688 $ 14,885 $ 2,148 $ 2,777 $ 3,994 $ 869
Cash flows from investing
activities......................... $ (8,672) $(70,980) $(44,353) $(33,789) $(53,274) $(39,526)
Cash flows from financing
activities......................... $(11,468) $ 57,055 $ 44,980 $ 27,903 $ 51,173 $ 40,626
Total properties (at end of
period)............................ 162 163 112 83 63 18
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 1,306 $ 4,489 $ 3,528 $3,862 $ 1,969
Properties subject to leases, net......................... 222,023 224,478 152,766 71,137 15,554
Total investments......................................... 244,951 238,195 166,953 85,735 37,302
Total assets.............................................. 255,522 252,010 181,702 98,614 42,292
Notes payable............................................. 116,922 113,985 42,746 48,160 1,588
Total liabilities......................................... 120,586 116,403 46,896 49,214 2,121
Redeemable Preferred Stock................................ -- -- -- 49,399 40,000
Total stockholders' equity................................ 134,936 135,607 134,806 1 171
</TABLE>
90
<PAGE> 100
CAPTEC NET LEASE REALTY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the historical financial statements of Captec and
notes thereto appearing elsewhere in this proxy statement.
Captec, 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 expenses of the property, including
the costs of repairs, maintenance, real property taxes, assessments, utilities
and insurance. Captec's leases typically provide for minimum rent plus specified
fixed periodic rent increases. Other revenues are derived primarily from fee
income earned from the affiliated ventures and interest income on loans to
affiliates.
Captec recognizes rental revenue on a straight-line basis over the term of
each lease. Substantially all of the leases are treated as operating leases for
purposes of GAAP and the related properties are recorded at cost less
accumulated depreciation. All costs associated with the acquisition and
development of a property, including fees paid to Advisors, have been
capitalized at the time of acquisition. Buildings acquired or developed are
amortized on a straight-line basis over forty years. The substantial change in
revenue and expense from year to year is the result primarily of the acquisition
and development of properties and the commencement of leases during the year of
acquisition and the recognition of a full year's operation in the year
subsequent to acquisition.
As of December 31, 1999, Captec owned 162 properties, located in 28 states,
subject to long-term net leases with 63 different lessees. The lessees
predominantly are franchisees or operators of national restaurant and retail
concepts including Bennigan's, Applebee's, Denny's, Best Buy, Athlete's Foot,
Blockbuster Video, and Office Depot.
RESULTS OF OPERATIONS
1999 to 1998. Total revenue increased 12.9% to $29.0 million for the year
ended December 31, 1999 as compared to $25.7 million for the year ended December
31, 1998. Rental revenue from operating leases increased 9.4% to $24.6 million
for 1999 as compared to $22.5 million for 1998. The increase is primarily from
the benefit of a full period of rental revenue from properties acquired and
leased in preceding periods, offset by the elimination of rental revenues of
approximately $1.1 million, related to vacant properties, principally from
properties formerly leased to Boston Chicken and its affiliates. Earned income
from financing leases increased to approximately $650,000 in 1999 as compared to
approximately $48,000 for 1998 as a result of the addition of four financing
leases during the year ended December 31, 1999. Interest income on loans to
affiliates decreased 28.8% to $1.3 million for 1999 as compared to $1.8 million
for 1998 as a result of $9.1 million of principal payments received. Other
income increased 79.0% to $2.5 million for 1999 as compared to $1.4 million for
1998 primarily due to fees earned for the acquisition, development and
management of properties on behalf of its affiliated ventures.
Total expenses increased 16.0% to $14.3 million for the year ended December
31, 1999 as compared to $12.4 million for the year ended December 31, 1998.
Interest expense increased 36.4% to $9.3 million in 1999 as compared to $6.8
million for 1998. The increase was principally due to an increase in the average
balance outstanding on Captec's credit facility which is used to fund the
acquisition and development of properties. General and administrative expenses,
including management fees to affiliates, remained the same at $1.6 million.
Depreciation and amortization increased 13.6% to $3.5 million for 1999 as
compared to $3.1 million for 1998. 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 and the
amortization of the goodwill of approximately $107,000 in connection with
Captec's investment in Captec Franchise Capital
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<PAGE> 101
Partners L.P. III and Captec Franchise Capital Partners L.P. IV. Provision for
unbilled rent decreased 100.0% to zero for 1999 as compared to approximately
$865,000 for 1998 due to a one-time non-cash charge related to unbilled rents on
properties leased to Boston Chicken and its subsidiaries and affiliates recorded
in 1998.
During 1999, Captec invested approximately $7.1 million in a 22.6%
membership interest in FC Venture I, LLC, a joint venture, and recorded
approximately $257,000 as its portion of FC Venture's equity earnings for the
year ended December 31, 1999.
During 1999, Captec sold twelve properties for $17.6 million and reserved
approximately $497,000 for a loss expected on the disposition of one vacant
property. As a result of these transactions, Captec collected total proceeds of
$17.6 million and reflected a net loss on sale of properties totaling
approximately $850,000.
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, Captec
recorded a $336,875 non-cash charge for the balance of unamortized organization
costs in the first quarter of 1999.
As result of the foregoing, Captec's net income after accounting change
increased 19.4% to $13.7 million for 1999 as compared to $11.5 million for 1998.
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. Earned income from
financing leases decreased 70.0% to approximately $48,000 for 1998 as compared
to approximately $162,000 for 1997 due to the write-off of a financing lease in
1998. Interest income on loans to affiliates increased 12.6% to $1.8 million in
1998 as compared to $1.6 million in 1997 due to an increase in the interest
rate. Other income increased to $1.4 million in 1998 as compared to
approximately $82,000 in 1997 due to fee income earned from Captec Franchise
Capital Partners L.P. III and Captec Franchise Capital Partners L.P. IV.
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 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 proceeds of the public offering in the prior period. General
and administrative expenses, including 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 new advisory agreement
entered into in conjunction with Captec's initial public offering. 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
Captec's 27 Boston Chicken leases were rejected. During 1998, Captec 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. Monthly
revenue related to the 14 rejected leases was approximately $135,000.
During 1998, Captec sold three real estate properties, disposed of one
direct financing lease, sold a 50.0% interest in a property under construction
to Family Realty, and reserved approximately $455,000 for losses expected on the
disposition of two vacant modular buildings. As a result of these transactions,
Captec collected total gross proceeds of $4.8 million and reflected a net loss
on the sale of properties totaling $1.8 million.
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<PAGE> 102
Since Captec 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 IRS, Captec
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
Captec's estimate of the minimum settlement of this matter, should a claim be
asserted by the IRS.
As a result of the foregoing, Captec'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. Income attributable to Captec common stock was $11.5 million
compared to a loss of $2.8 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Captec'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. Captec expects to meet its long-term liquidity
requirements, which are principally property development and acquisition and
scheduled debt maturities, through a variety of future sources of capital,
including 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.
Captec's leases generally provide for specified periodic rent increases. In
addition, most of Captec'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 Captec's exposure to
increases in costs and operating expenses. Based upon these factors, Captec 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 December 31, 1999, Captec had cash and cash equivalents of $1.0 million.
For the year ended December 31, 1999, Captec generated cash from operations of
$16.7 million as compared to $14.9 million in 1998. Cash generated from
operations provides funds for dividends. Any excess cash from operations may
also be used for investment in properties. For the year ended December 31, 1999,
Captec used $8.7 million in investing activities as compared to $71.0 million in
1998. Captec used $11.5 million in financing activities during the year ended
December 31, 1999 as compared to generating $57.1 million in 1998.
At December 31, 1999, Captec's debt-to-total assets was 45.8% as compared
to 45.2% at December 31, 1998.
On November 19, 1997, Captec completed the public offering of common stock
at a price of $18.00 per share. Net proceeds from the public offering totaled
$132.1 million, after underwriting commissions and public offering expenses.
Captec used the net proceeds of the public 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, Captec's preferred stock dividend requirement has
been eliminated.
Joint Venture. In April 1999, Captec, through a wholly-owned subsidiary,
formed FC Venture I, LLC with an affiliate of Fidelity Management Trust Company.
FC Venture was formed to acquire and develop net-leased restaurant and retail
properties similar to those which Captec acquires and develops. FC Venture's
objective is to leverage its capital through borrowing to acquire and develop up
to $100.0 million in properties. At December 31, 1999, Captec had contributed
$7.1 million in equity capital and FC Venture has invested $33.4 million in
properties subject to leases. During 1999, Captec received $63,828 in cash
distributions from FC Venture.
Credit Facility. In February 1998, Captec 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
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<PAGE> 103
capital, and repaid all amounts outstanding under a prior credit facility. On
December 1, 1998, Captec amended the credit facility to provide up to $125.0
million of debt which is collateralized by the properties. At December 31, 1999,
Captec had $115.3 million of aggregate outstanding borrowings under the credit
facility.
The credit facility has a three-year term and initially enabled Captec to
borrow up to $175.0 million, subject to certain borrowing base restrictions that
are dependent on a cash basis lease revenue. The credit facility contains
covenants which, among other restrictions, require Captec to maintain a minimum
net worth of $125.0 million, a maximum leverage ratio of 60.0%, an interest
coverage ratio greater than 2.25:1.00 and a fixed charge coverage ratio greater
than 1.75:1.00. As of December 31, 1999, Captec is in compliance with all debt
covenants.
Due to the filing by Boston Chicken, Inc. for Chapter 11 bankruptcy
protection in October 1998, Captec was in technical violation of a financial
covenant and was precluded from additional borrowings under the credit facility.
At that time, Captec was in negotiation with the credit facility lender
regarding an amendment to prevent the violation of this covenant in the event
that Boston Chicken chose to file for bankruptcy protection. The credit facility
lender agreed to forbear from taking any action against Captec pursuant to the
credit facility. On December 1, 1998, the credit facility was amended as
follows: the facility borrowing capacity was reduced from $175.0 million to
$125.0 million, the maximum leverage ratio was increased from 50.0% to 60.0%,
and annual interest rate spread over LIBOR was increased from a range of 1.25%
to 1.50% to a range of 1.25% to 1.75%.
In connection with the credit facility, Captec incurred issuance cost of
$1.7 million and is also required to pay a commitment fee ranging from 0.125% to
0.20% per annum on the unused amount of the commitment. Commitment fees and
closing expenses paid in conjunction with the credit facility have been
capitalized in other assets and are being amortized under the effective interest
method and classified as additional interest expense over the term of the credit
facility.
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, Captec 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.
Property Acquisitions and Commitments. During the year ended December 31,
1999, Captec developed and acquired properties for an aggregate acquisition cost
of approximately $23.8 million. The gross weighted average capitalization rate
(annual rental divided by the property purchase price) on aggregate 1999
property acquisitions was 10.44% on a cash basis (using annual minimum rents)
and 11.35% 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 1999
property acquisitions was 10.19% on a cash basis and 11.08% on a straight-line
basis.
As of December 31, 1999, Captec had entered into commitments to acquire 89
properties totaling approximately $208.4 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 Captec is in negotiations regarding the proposed acquisition of other
properties and related co-development opportunities. Captec may enter into
commitments to acquire some of these prospective properties in the future.
Captec 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 and development commitments are expected to generate
the primary demand for additional capital in the future.
Dividends. During 1999, Captec paid dividends of $14.4 million. In January
2000, Captec declared a fourth 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 January 12, 2000 and was paid on January 19, 2000.
Captec expects to
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<PAGE> 104
pay future dividends from cash available for distribution. Captec believes that
cash from operations will be sufficient to allow Captec to make distributions
necessary to enable Captec to continue to qualify as a REIT to the extent such
requirements remain applicable.
INFLATION
Captec'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 Captec's exposure to increases in costs and operating expenses
resulting from inflation.
Captec's 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. Captec uses derivative financial instruments in the normal course of
business to manage its exposure to fluctuations in interest rates.
MARKET RISK
Market risk represents a risk of loss arising from adverse changes in
market prices and interest rates. Captec's market risk arises from interest rate
risk inherent in its financial instruments. Captec is not subject to foreign
currency exchange rate risk or commodity price risk.
Captec 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 December 31, 1999, approximately 100.0% of Captec's debt bears
interest at variable rates of LIBOR rate plus 1.25% to 1.75%.
The following table presents certain information on Captec's assets and
liabilities which are sensitive to interest rate changes at December 31, 1999:
<TABLE>
<CAPTION>
MATURITY
-------------------------------------------
0 TO 3 1 TO 5
MONTHS YEARS TOTAL
---------- ------------- ------------
<S> <C> <C> <C>
Assets:
Cash and cash equivalents............... $1,035,607 $ -- $ 1,035,607
Properties subject to operating leases,
net(1)............................... -- 3,365,182 3,365,182
---------- ------------- ------------
Total assets......................... $1,035,607 $ 3,365,182 $ 4,400,789
========== ============= ============
Liabilities:
Notes payable........................... $ -- $ 115,305,195 $115,305,195
========== ============= ============
Reprice difference...................... $1,035,607 $(111,940,013)
Cumulative gap.......................... $1,035,607 $(110,904,406)
</TABLE>
- ---------------
(1) Represents leases that are under construction and sensitive to interest rate
fluctuations.
A 1.0% increase in the variable interest rate for the year ended December
31, 1999 would have resulted in additional interest expense of approximately
$691,000.
Captec 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. Captec does not enter into derivative
transactions for trading purposes. At December 31, 1999, Captec had an interest
rate swap contract outstanding with a total notional amount of $50.0 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 Captec
through the use of derivatives. Under the interest rate swap contract, Captec
agrees to pay a fixed rate of 5.8% and the
95
<PAGE> 105
counterparty agrees to make payments based on 3-month LIBOR. Under the interest
rate cap agreement the counterparty agrees to make payments to Captec 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.
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 January 1, 2001 for Captec. 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.
96
<PAGE> 106
CAPTEC FINANCIAL GROUP, INC.
HISTORICAL DATA
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1999 1998 1997 1996 1995
------------ ------------ ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Leases......................... $ 1,211 $ 2,245 $ 2,907 $ 5,128 $ 6,608 $ 6,545 $4,076
Management fees................ 1,362 2,817 2,829 2,792 3,811 2,421 598
Mortgage loan income........... 11,467 10,532 13,788 5,755 2,718 1,323 --
Gain on sales of loans,
equipment and other.......... 3,204 6,269 9,308 1,660 569 171 397
Other.......................... 3,958 2,945 3,012 1,167 957 515 251
------- -------- ------- -------- ------- ------- ------
Total revenues............... 21,202 24,808 31,844 16,502 14,663 10,975 5,322
EXPENSES:
Interest....................... 10,501 11,581 15,360 8,252 7,230 5,075 2,146
Selling, general and
administrative............... 9,490 9,845 13,007 9,135 6,179 4,423 2,585
Provision for losses........... 675 1,116 1,251 3,906 345 332 343
Depreciation and
amortization................. 188 155 216 146 97 84 64
------- -------- ------- -------- ------- ------- ------
Total expenses............... 20,854 22,697 29,834 21,439 13,851 9,912 5,138
Income (loss) before income
tax............................ 348 2,111 2,010 (4,937) 812 1,063 184
Provision for income tax......... 119 722 683 (1,679) 276 95 --
------- -------- ------- -------- ------- ------- ------
Net income................... 229 1,389 1,327 (3,258) 536 968 184
------- -------- ------- -------- ------- ------- ------
Income/(loss) attributable to
Common Stock............... $ 29 $ 1,189 $ 927 $ (3,658) $ 136 $ 573 $ (165)
======= ======== ======= ======== ======= ======= ======
Income/(loss) per share of
common stock............... $ 1.32 $ 54.49 $ 42.48 $(167.69) $ 6.26 $ 28.91 $(8.31)
======= ======== ======= ======== ======= ======= ======
Weighted Average number of shares
of Common stock outstanding.... 21,813 21,813 21,813 21,813 21,813 19,813 19,813
======= ======== ======= ======== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 1,670 $ 3,730 $ 2,772 $ 3,384 $ 4,509 $ 1,293 $ 1,214
Investments..................................... 262,570 162,885 175,302 153,749 74,584 76,981 32,900
Total assets.................................... 276,210 177,828 200,246 176,584 93,345 83,771 37,057
Notes payable................................... 257,783 162,156 183,865 164,230 78,993 75,867 29,750
Subordinated debt............................... 4,424 5,000 4,322 5,000 5,000 -- 15
Total liabilities............................... 271,401 175,188 195,982 174,364 87,984 79,161 33,021
Total stockholders' equity...................... 4,809 2,640 4,264 2,220 5,361 4,609 4,037
</TABLE>
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<PAGE> 107
FINANCIAL GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Financial Group is a specialized commercial finance company providing
financing to the franchise and chain restaurant, and the retail petroleum and
convenience store markets. Financial Group principally provides equipment leases
and loans and mortgage loan and business enterprise loan financing to its
customers. Financial Group makes these investments directly, as reflected on its
consolidated balance sheet, and also on behalf of affiliates for a management
fee.
RESULTS OF OPERATIONS
Nine months ended December 31, 1999 compared to nine months ended December
31, 1998. Total revenue decreased 14.5% to $21.2 million for the nine months
ended December 31, 1999, as compared to $24.8 for the nine months ended December
31, 1998. The decrease in total revenue is the result of decreases in mortgage
loan income, gain on sales of loans, financing lease income and management fees
slightly offset by increases in loan servicing income, interest and dividend
income and gain on hedging activities. Mortgage loan income increased 8.9% to
$11.5 million for the nine months ended December 31, 1999, as compared to $10.5
million for the nine months ended December 31, 1998. Financing lease income
decreased 46.0% to $1.2 million for the nine months ended December 31, 1999 as
compared to $2.2 million for the nine months ended December 31, 1998. The
decreases are primarily the result of the timing of securitizations. During the
nine months ended December 31, 1999, Financial Group securitized a portfolio of
mortgage loans and leases in May, as compared to securitizing a portfolio in
August of 1998, resulting in Financial Group holding the mortgage loans and
leases for a longer period during the nine months ended December 31, 1998. Gain
on sales of loans decreased to $1.5 million for the nine months ended December
31, 1999, as compared to $6.1 million for the nine months ended December 31,
1998. The income realized in the May 1999 securitization totalled $3.4 million,
of which $1.5 million was recorded as a gain on sale loans, $285,000 was
recorded as interest income, and $1.5 million was previously recognized as a
gain on hedging activities in prior periods in accordance with Financial Group's
accounting policies related to hedging instruments. The income realized in the
August 1998 securitization totalled $7.1 million, of which $6.1 million was
recorded as a gain on sale of loans and $1.0 million was recorded as interest
income. The aggregate income realized from securitization decreased 52.1% for
the nine months ended December 31, 1999 as compared with the nine months ended
December 31, 1998. The decrease was due to the fact that during the nine months
ended December 31, 1999, as compared to the nine months ended December 31, 1998,
the amount of loans securitized was smaller by $8.8 million, excluding other
collateral included in the September 1998 securitization, and the spread between
weighted average coupon on the securitized loans and the weighted average cost
of bonds sold was approximately 20 basis points lower due to competitive and
securitization market conditions. Financial Group believes that competitive and
securitization market conditions are principally the result of the weighted
average coupons on a pool of loans and bond spreads in the securitization
market. Management fees decreased 51.6% to $1.4 million for the nine months
ended December 31, 1999, as compared to $2.8 million for the nine months ended
December 31, 1998. Prior to Captec's initial public offering in November 1997,
all revenue received by Advisors' predecessor from Captec's predecessor was paid
by Advisors' predecessor to Financial Group. Upon consummation of these
offerings it was discussed that this practice would be discontinued and that
Advisors would be directly responsible for readily identifiable direct expenses
and that indirect expenses would be reimbursed to Financial Group through a
fixed fee arrangement. This restructured arrangement was finally agreed upon in
late 1998 and implemented effective as of January 1, 1999. Loan servicing income
increased 68.3% to $1.1 million for the nine months ended December 31, 1999 as
compared to $647,000 for the nine months ended December 31, 1998. This increase
is due to an increase in the pool of loans and leases that Financial Group
services as a result of securitizations. Interest and dividend income increased
to $2.0 million for the nine months ended December 31, 1999 as compared to
$406,000 for the nine months ended December 31, 1998 resulting from an increase
in the balance of retained interests from Financial Group's securitizations.
Gain on hedging activities increased to $1.5 million for the nine months ended
98
<PAGE> 108
December 31, 1999, as compared to $0 for the nine months ended December 31,
1998. The increase is a result of marking to market certain hedging instruments
that were associated with loans held by Financial Group during the nine months
ended December 31, 1999.
Total expenses decreased 8.1% to $20.9 million for the nine months ended
December 31, 1999, as compared to $22.7 million for the nine months ended
December 31, 1998. The decrease in total expenses is primarily the result of a
9.3% decrease in interest expense to $10.5 million for the nine months ended
December 31, 1999, as compared to $11.6 million for the nine months ended
December 31, 1998. The decrease in interest expense is primarily the result of
reduced average balances outstanding under the notes payable during the nine
months ended December 31, 1999, as compared to December 31, 1998 partially
offset by an increase in amortization of debt discount related to warrants
issued in 1998 in conjunction with certain notes payable. Selling, general and
administrative expenses, including salaries, wages and benefits decreased 3.6%
to $9.5 million for the nine months ended December 31, 1999 as compared to $9.8
million for the nine months ended December 31, 1998. This decrease is the result
of reductions in general and administrative expenses. Provision for losses
decreased 39.5% to $675,000 during the nine months ended December 31, 1999 as
compared to $1.1 million for the nine months ended December 31, 1998. This
decrease is the result of the improved delinquency status of the loan portfolio.
Depreciation and amortization increased 21.8% to $188,000 for the nine months
ended December 31, 1999 as compared to $155,000 for the nine months ended
December 31, 1998. This increase is the result of the acquisition of capital
assets.
Most of Financial Group's interest-bearing assets have fixed interest rates
while Financial Group's borrowings are primarily at variable rates. Therefore,
Financial Group's profits could be influenced by changes in interest rates and
the corresponding levels of assets and liabilities. At December 31, 1999,
Financial Group had assets of $11.4 million subject to variable rates and $238.9
million of liabilities subject to variable rates, representing a negative
re-pricing difference of $227.9 million. At December 31, 1998, Financial Group
had assets of $19.3 million subject to variable rates and $132.8 million of
liabilities subject to variable rates, representing a negative re-pricing
difference of $113.6 million. At March 31, 1999, Financial Group had assets of
$12.5 million subject to variable rates and $162.9 million in liabilities
subject to variable rates, representing a negative re-pricing difference of
$150.4 million. At March 31, 1998, Financial Group had assets of $13.4 million
subject to variable rates and $125.2 million of liabilities subject to variable
rates, representing a negative re-pricing difference of $111.7 million. A 1.0%
increase in the variable interest rate for the nine months ended December 31,
1999 and the fiscal year ended March 31, 1999 would have resulted in an
additional interest expense of approximately $949,000 and $1.3 million,
respectively.
As a result of the foregoing, Financial Group's net income before income
tax decreased 83.5% to $348,000 for the nine months ended December 31, 1999, as
compared to $2.1 million for the nine months ended December 31, 1998.
1999 Compared to 1998. Total revenue increased 93.0% to $31.8 million for
the fiscal year ended March 31, 1999, as compared to the fiscal year ended March
31, 1998. The increase in total revenue is the result of increases in mortgage
loan income, gain on sales of loans, interest and dividend income, gain on sale
of Captec common stock and gain on hedging activities slightly offset by a
decrease in financing lease income. Mortgage loan income increased 140.0% to
$13.8 million for the fiscal year ended March 31, 1999, as compared to $5.8
million for the fiscal year ended March 31, 1998. The increase is principally
the result of an increase in average outstanding mortgage loans held during the
fiscal year ended March 31, 1999, as compared to March 31, 1998. Gain on sales
of loans increased 303.9% to $6.1 million for the fiscal year ended March 31,
1999, as compared to $1.5 million for the fiscal year ended March 31, 1998. The
income realized in the August 1998 securitization totalled $7.1 million, of
which $6.1 million was recorded as a gain or sale of loans and $1.0 million was
recorded as interest income. The income realized from securitization during the
year ended March 31, 1998 was recorded entirely as gain on sale of loans. Thus,
the aggregate income realized from securitization increased 373.3% in the year
ended March 31, 1999 as compared to the year ended March 31, 1998. The increase
was due to the fact that during the fiscal year ended March 31, 1999, as
compared to the fiscal year ended March 31, 1998, the amount of loans
securitized was greater by $88.3 million, excluding other collateral included in
the September 1998 securitization, and the spread between weighted average
coupon on the securitized loans and the weighted average cost of the bonds sold
was approximately 20 basis
99
<PAGE> 109
points higher due to competitive and securitization market conditions arising
from fluctuations in the supply and demand for quality pools of loans and leases
in the securitization market and as a result of economic conditions in the
financial markets in general. Interest and dividend income increased 286.3% to
$1.7 million for the fiscal year ended March 31, 1999, as compared to $447,000
for the fiscal year ended March 31, 1998. The increase is a result of the
increase in the balance of retained interests in leases and loans that have been
securitized during the fiscal year ended March 31, 1999, as compared to the
fiscal year ended March 31, 1998. Gain on the sale of Captec common stock was
$1.4 million for the fiscal year ended March 31, 1999, as the result of a
one-time sale of Captec common stock. Gain on hedging activities increased to
$1.8 million for the fiscal year ended March 31, 1999, as compared to $0 for the
fiscal year ended March 31, 1998. The increase is due to the fact that Financial
Group was not involved in hedging activities during the fiscal year ended March
31, 1998. Financing lease income decreased 43.3% to $2.9 million for the fiscal
year ended March 31, 1999, as compared to $5.1 million for the fiscal year ended
March 31, 1998. The decrease is principally the result of Financial Group
experiencing greater growth in mortgage loan originations as compared to
equipment lease originations.
Total expenses increased 39.2% to $29.8 million for the fiscal year ended
March 31, 1999, as compared to $21.4 million for the fiscal year ended March 31,
1998. The increase in total expenses is primarily the result of an increase in
interest expense and selling, general and administrative expenses, including
salaries, wages and benefits, and depreciation and amortization slightly offset
by a decrease in provision for losses. Interest expense increased 86.1% to $15.4
million for the fiscal year ended March 31, 1999, as compared to $8.3 million
for the fiscal year ended March 31, 1998. The increase is a result of increased
borrowings under notes payable to fund increased average outstanding mortgage
loans and leases during the fiscal year ended March 31, 1999, as compared to
1998, as well as any increase in amortization of debt discount related to
warrants issued during the year ended March 31, 1999 in conjunction with certain
notes payable. Selling, general and administrative expenses, including salaries,
wages and benefits, increased 42.4% to $13.0 million for the fiscal year ended
March 31, 1999, as compared to $9.1 million for the fiscal year ended March 31,
1998. The increase is a result of the increased business activity level related
to mortgage loans and leases during the fiscal year ended March 31, 1999, as
compared to the fiscal year ended March 31, 1998. Provision for losses decreased
by 68% to $1.3 million for the fiscal year ended March 31, 1999, as compared to
$3.9 million for the fiscal year ended March 31, 1998. Depreciation and
amortization increased 48.0% to $216,000 for the fiscal year ended March 31,
1999 as compared to $146,000 for the fiscal year ended March 31, 1998. The
increase is a result of the acquisition of capital assets. The decrease is
primarily the result of a one-time write-off of equipment leases related to
Kenny Rogers Roasters that declared bankruptcy during the fiscal year ended
March 31, 1998.
As a result of the foregoing, Financial Group's net income before income
tax increased to $2.0 million for the fiscal year ended March 31, 1999, as
compared to a net loss of $4.9 million for the fiscal year ended March 31, 1998.
1998 Compared to 1997. Total revenue increased 12.5% to $16.5 million for
the fiscal year ended March 31, 1998, as compared to the fiscal year ended March
31, 1997. The increase in total revenue is the result of increases in mortgage
loan income, gain on sales of loans, and interest and dividend income slightly
offset by decreases in financing lease income and management fees. Mortgage loan
income increased 111.7% to $5.8 million for the fiscal year ended March 31,
1998, as compared to $2.7 million for the fiscal year ended March 31, 1997. The
increase is a result of growth in loan originations and average outstanding loan
balances. Gain on sales of loans increased 281.6% to $1.5 million for the fiscal
year ended March 31, 1998, as compared to $393,000 for the fiscal year ended
March 31, 1997. The increase is a result of a significant increase in the dollar
volume of securitizations. Interest and dividend income increased 18.0% to
$447,000 for the fiscal year ended March 31, 1998 as compared to $381,000 for
the fiscal year ended March 31, 1997. The increase is due to the dividends
received on Captec common stock and as a result of the increase in the balance
of retained interests in leases and loans that were securitized during the
fiscal year ended March 31, 1998. Financing lease income decreased 22.4% to $5.1
million for the fiscal year ended March 31, 1998, as compared to $6.6 million
for the fiscal year ended March 31, 1997. The decrease is a result of the shift
of focus from leases to mortgage loans as discussed above. Management fees
decreased 26.7% to $2.8 million for the fiscal year ended
100
<PAGE> 110
March 31, 1998, as compared to $3.8 million for the fiscal year ended March 31,
1997. The decrease is a result of changes in the management agreements between
Financial Group, Captec and Advisors. These changes were negotiated in
connection with the initial public offering of Captec.
Total expenses increased 54.7% to $21.4 million for the fiscal year ended
March 31, 1998, as compared to $13.9 million for the fiscal year ended March 31,
1997. The increase in total expenses is primarily the result of an increase in
interest expense, selling, general and administrative expenses, including
salaries, wages and benefits, provision for losses and depreciation and
amortization. Interest expense increased 14.1% to $8.3 million for the fiscal
year ended March 31, 1998, as compared to $7.2 million for the fiscal year ended
March 31, 1997. The increase is a result of the increase in the outstanding
borrowing under notes payable during the fiscal year ended March 31, 1998, as
compared to the fiscal year ended March 31, 1997. Selling, general and
administrative expenses, including salaries, wages and benefits, increased 47.8%
to $9.1 million for the fiscal year ended March 31, 1998, as compared to $6.2
million for the fiscal year ended March 31, 1997. The increase is a result of
the increased business activity level related to mortgage loans and leases
during the fiscal year ended March 31, 1998, as compared to the fiscal year
ended March 31, 1997. Provision for losses increased to $3.9 million for the
fiscal year ended March 31, 1998, as compared to $345,000 million for the fiscal
year ended March 31, 1997. The decrease is primarily the result of a one-time
write-off of equipment leases related to Kenny Rogers Roasters that declared
bankruptcy during the fiscal year ended March 31, 1998. Depreciation and
amortization increased 51.0% to $146,000 for the fiscal year ended March 31,
1998 as compared to $97,000 for the fiscal year ended March 31, 1997. The
increase is the result of the acquisition of capital assets.
As a result of the foregoing, Financial Group's net income before income
tax decreased to a net loss of $4.9 million for the fiscal year ended March 31,
1998, as compared to net income of $812,000 million for the fiscal year ended
March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the measurement of Financial Group's ability to have adequate
cash or access to cash at all times in order to meet financial obligations when
due, as well as to fund growth or other activities. Financial Group expects to
meet both its short term and long term liquidity requirements through a
combination of working capital provided by operating activities, borrowings
under its notes payable and through the periodic securitizations of its loan and
lease portfolio.
Financial Group currently funds its mortgage loans and equipment leases
through borrowings under the $250.0 million warehouse credit facility with
Prudential Securities Credit Corporation. At December 31, 1999, Financial Group
has outstanding borrowings of $238.9 million under the Financial Group credit
facility and anticipates that either it will renew its warehouse credit facility
with Prudential Securities Credit Corporation or refinance its indebtedness
under its warehouse credit facility. Currently, Financial Group has not received
a commitment from any other lender to provide it the financing necessary for
Financial Group to refinance its warehouse credit facility. The Financial Group
credit facility is subject to renewal on June 30, 2000. Financial Group is
currently in the process of negotiating terms of the renewal with Prudential
Securities Credit Corporation. Interest on outstanding borrowings under the
Financial Group warehouse credit facility floats monthly at a rate equal to the
30-day LIBOR rate plus 1.10%. Financial Group is, and has been, in compliance
with all negative covenants on its credit facility. These covenants include
financial statement delivery requirements, prohibitions on additional lines,
maintenance of underwriting guidelines and an interest rate hedging strategy,
and limitations on dividends and distributions and transactions with affiliates.
In addition to the Financial Group warehouse credit facility, at December
31, 1999 Financial Group had an additional $23.9 million indebtedness
outstanding under five debt arrangements. Credit facilities with affiliates that
are payable upon demand and bear annual interest at 10.0% represents $15.4
million outstanding at December 31, 1999. Nonrecourse notes collateralized by
investments in leases and loans which bear annual interest rates from 6.95% to
8.40% represents $1.1 million outstanding at December 31, 1999. Notes payable to
others, including stockholders, which bear annual interest rates from 8.20% to
12.0% and mature through
101
<PAGE> 111
2007 represent $2.4 million outstanding at December 31, 1999. Subordinated debt
outstanding at December 31, 1999 represents $4.4 million at an annual interest
rate of 12.0% and mature through 2004.
During the nine months ended December 31, 1999, Financial Group securitized
and sold approximately $144.5 million of outstanding principal balance of its
mortgage loan and equipment lease portfolio. The securitization and sale
resulted in proceeds to Financial Group of $144.5 million.
In December 1998, action was brought by Credit Suisse First Boston
Corporation against Financial Group, alleging that Credit Suisse overpaid
Financial Group upon the closing of a joint securitization. Credit Suisse is
seeking damages of up to $1.8 million. Financial Group has filed counterclaims
against Credit Suisse for, among other things, breaches of fiduciary duties
undertaken by Credit Suisse in the securitization as well as breaches of
contract with respect to joint venture loans. The amount of monetary damages
sought by Financial Group in its counterclaims exceeds the amount of Credit
Suisse's claim. Financial Group intends to vigorously pursue its counterclaims
against Credit Suisse. Financial Group has reserved approximately $1.1 million
at December 31, 1999 against this claim.
At December 31, 1999, Financial Group had cash and cash equivalents of $1.7
million. For the nine months ended December 31, 1999, Financial Group generated
cash from operations of $1.9 million and used $76.3 million and $73.3 million in
investing and financing activities, respectively.
Origination of mortgage loans, business enterprise loans and equipment
leases and loans are expected to generate the primary demand for additional
capital in the future. At December 31, 1999, Financial Group had $174.0 million
in mortgage loan and equipment lease commitments, of which $158.0 million has
been credit approved and is subject to commitment agreements and $16.0 million
is subject to credit approval, and an additional $193.00 million in outstanding
loan and equipment lease proposals.
INFLATION
Because many of Financial Group's interest bearing assets have fixed
interest rates while Financial Group's borrowings are primarily at variable
rates, Financial Group's profits could be influenced by changes in interest
rates and sensitive to inflation. Financial Group closely monitors interest rate
risk and uses hedging instruments to reduce the risks of rising variable
interest rates. See "Market Risk" below for further discussion.
MARKET RISK
Market risk represents a risk of loss arising from adverse changes in
market prices and interest rates. Financial Group's market risk arises from
interest rate risk inherent in its financial instruments. Financial Group is not
subject to foreign currency exchange rate risk or commodity price risk.
Financial Group monitors and manages interest rate exposures 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 December 31, 1999, approximately 93.0% of
Financial Group's debt bears interest at variable rates of LIBOR rate plus
1.10%. Financial Group intends to utilize variable rate indebtedness available
under its warehouse credit facility in order to initially fund future
acquisitions and developments. Thus, to the extent that Financial Group incurs
additional variable rate indebtedness, its exposure to an increase in interest
rates would increase. Although all of Financial Group's loans contain fixed
rates of return such rates float up to the time of funding. This provision is
designed to mitigate the adverse impact of interest rate increases between the
time of a loan commitment and a loan closing.
102
<PAGE> 112
The following table presents certain information on Financial Group's
assets and liabilities which are sensitive to interest rate changes at December
31, 1999:
<TABLE>
<CAPTION>
MATURITY
---------------------------------------------------------
0 TO 3 1 TO 5 OVER 5
MONTHS YEARS YEARS TOTAL
---------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents........... $1,670,076 $ -- $ -- $ 1,670,076
Investment in mortgage loans(1)..... -- -- 9,732,153 9,732,153
---------- ------------- ------------- ------------
Total assets..................... $1,670,076 $ -- $ 9,732,153 $ 11,402,229
LIABILITIES:
Notes payable....................... $ -- $ 238,884,831 $ -- $238,884,831
---------- ------------- ------------- ------------
Reprice difference.................. $1,670,076 $(238,884,831) $ 9,732,153
Cumulative gap...................... $1,670,076 $(237,214,755) $(227,482,602)
</TABLE>
- ---------------
(1) Represents those mortgage loans that are sensitive to interest rate
fluctuations.
Financial Group believes the negative effect of a rise in interest rates is
reduced by the anticipated short duration of Financial Group's investment in its
loans and leases. Financial Group intends that when the loan and lease
portfolios attain a certain level, the portfolio will be securitized and
proceeds from the securitization would be used to pay down the corresponding
notes payable. If Financial Group were unable to securitize it would explore
whole loan sales or negotiating long-term fixed-rate matched maturity debt.
During the short duration of its investment leases and loans prior to
securitization, Financial Group manages its interest rate exposures of specific
loans held for sale by creating off-setting market exposures through the use of
forward sales of FNMA mortgage back securities and U.S. Treasury Securities.
Financial Group does not enter into transactions for trading or speculative
purposes. Financial Group believes that interest rate changes would not impact
its loans held for sale in any material respect.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133) "Accounting for Derivative
Financial Instruments and Hedging Activities." This statement, which is required
to be adopted for fiscal years beginning after June 15, 2000, establishes
standards for recognition and measurement of derivatives and hedging activities.
Financial Group has not yet determined the financial statement impact of SFAS
133.
103
<PAGE> 113
INDEPENDENT ACCOUNTANTS
The consolidated financial statements and financial statement schedule of
Captec for each of the years in the three-year period ended December 31, 1999
included in this proxy statement, and the financial statements and financial
statement schedule of Financial Group as of March 31, 1999 and 1998 and for the
three years ended March 31, 1999 also included elsewhere in this proxy statement
have been audited by PricewaterhouseCoopers LLP.
Representatives of PricewaterhouseCoopers LLP are expected to be present at
the special meeting and will have the opportunity to make a statement and to
respond to appropriate questions.
OTHER MATTERS
Captec's Board of Directors know of no other business to be presented at
the special meeting. If other matters properly come before the meeting in
accordance with Captec's bylaws, the persons named as proxies will vote on them
in accordance with their best judgment.
ANNUAL REPORT AND FORM 10-K
The 1999 Annual Report to Stockholders containing the consolidated
financial statements of Captec for the year ended December 31, 1999 and Captec's
annual report on Form 10-K for the fiscal year ended December 31, 1999 as filed
with the SEC without the accompanying exhibits has previously been mailed to
stockholders. A list of the exhibits included in the Form 10-K and the exhibits
may be obtained by writing to investor relations, Captec Net Lease Realty, Inc.,
24 Frank Lloyd Wright Drive, Lobby L, 4th Floor, Ann Arbor, Michigan 48106.
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
The deadline for submission of stockholder proposals intended for inclusion
in Captec's proxy statement for the 2000 Annual Meeting of Stockholders was
November 26, 1999. The deadline for such stockholder proposals with respect to
Captec's annual meeting for 2001 will be established by the Board of Directors
and set forth in Captec's proxy statement with respect to the 2000 Annual
Meeting.
You are urged to complete, date, sign and return your proxy card promptly
to make certain your shares will be voted at the special meeting, even if you
plan to attend the meeting in person. If you desire to vote your shares in
person at the meeting, your proxy may be revoked. For your convenience in
returning the proxy card, a pre-addressed and postage paid envelope has been
enclosed.
YOUR PROXY IS IMPORTANT
WHETHER YOU OWN FEW OR MANY SHARES
Please date, sign and mail the enclosed proxy card today.
By Order of the Board of Directors
Edward G. Ptaszek
Secretary
104
<PAGE> 114
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
CAPTEC NET LEASE REALTY, INC.
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997....................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997....................... F-6
Notes to the Consolidated Financial Statements............ F-7
Report of Independent Accountants......................... F-20
Schedule III -- Properties and Accumulated Depreciation as
of December 31, 1999................................... F-21
CAPTEC FINANCIAL GROUP, INC.
Report of Independent Accountants......................... F-25
Consolidated Balance Sheets as of December 31, 1999
(unaudited) and March 31, 1999 and 1998................ F-26
Consolidated Statements of Income for the Nine Months
Ended December 31, 1999 and 1998 (unaudited) and for
the Years Ended March 31, 1999, 1998 and 1997.......... F-27
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended March 31, 1997, 1998 and 1999 and
the Nine Months Ended December 31, 1999 (unaudited).... F-28
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 1999 and 1998 (unaudited) and for
the Years Ended March 31, 1999, 1998 and 1997.......... F-29
Notes to the Consolidated Financial Statements............ F-30
Schedule IV -- Mortgage Loans on Real Estate as of March
31, 1999............................................... F-48
</TABLE>
F-1
<PAGE> 115
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Captec Net Lease Realty, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders equity,
and cash flows present fairly, in all material respects, the financial position
of Captec Net Lease Realty, Inc. and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
January 31, 2000
Detroit, Michigan
F-2
<PAGE> 116
CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 1,035,607 $ 4,488,565
Investments:
Properties subject to operating leases, net............... 217,615,654 221,349,661
Properties subject to financing leases, net............... 4,407,195 3,128,824
Loans to affiliates, collateralized by mortgage loans..... 10,979,804 8,915,523
Investment in joint venture............................... 7,305,894 --
Investment in affiliated limited partnerships, net........ 4,251,568 4,395,000
Other loans, related party................................ 390,520 405,775
------------ ------------
Total investments...................................... 244,950,635 238,194,783
Short-term loans to affiliates.............................. 398,471 2,505,294
Unbilled rent, net.......................................... 6,027,221 3,710,487
Accounts receivable......................................... 491,052 144,642
Due from affiliates......................................... 1,326,307 1,242,675
Other assets................................................ 1,292,399 1,724,283
------------ ------------
Total assets........................................... $255,521,692 $252,010,729
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable............................................. $116,921,555 $113,984,988
Accounts payable and accrued expenses..................... 2,672,529 1,428,041
Due to affiliates......................................... -- 76,513
Federal income tax payable................................ 719,000 719,000
Security deposits held on leases.......................... 272,943 194,406
------------ ------------
Total liabilities...................................... 120,586,027 116,402,948
------------ ------------
Stockholders' Equity:
Common stock, ($.01 par value) authorized: 40,000,000
shares; issued and outstanding: 9,508,108.............. 95,081 95,081
Paid in capital........................................... 134,711,056 134,711,056
Retained earnings......................................... 129,528 801,644
------------ ------------
Total stockholders' equity............................. 134,935,665 135,607,781
------------ ------------
Total liabilities and stockholders' equity............. $255,521,692 $252,010,729
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 117
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 YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Rental income from operating leases..... $24,559,064 $22,451,150 $3,590,602 $ 7,974,798
Earned income from financing leases..... 650,233 47,880 50,697 111,395
Interest income on loans to
affiliates........................... 1,270,732 1,785,716 392,374 1,194,202
Other income, principally affiliated
ventures............................. 2,507,164 1,401,090 24,832 56,671
----------- ----------- ---------- -----------
Total revenue........................ 28,987,193 25,685,836 4,058,505 9,337,066
----------- ----------- ---------- -----------
Expenses:
Interest................................ 9,272,453 6,799,695 1,475,412 4,419,226
Management fees, affiliates, net........ -- 193,757 189,412 1,347,086
General and administrative.............. 1,566,515 1,422,212 72,528 464,769
Depreciation and amortization........... 3,485,349 3,069,074 530,318 1,076,043
Provision for unbilled rent............. -- 865,311 -- --
----------- ----------- ---------- -----------
Total expenses....................... 14,324,317 12,350,049 2,267,670 7,307,124
----------- ----------- ---------- -----------
Net income before equity in joint
venture, (loss)/gain on sale of
properties and accounting change... 14,662,876 13,335,788 1,790,835 2,029,942
Equity in net income of joint venture..... 256,722 -- -- --
(Loss)/gain on sale of properties......... (850,056) (1,837,524) 206,834 (58,687)
----------- ----------- ---------- -----------
Net income before accounting change
and provision for income tax....... 14,069,542 11,498,264 1,997,669 1,971,255
Cumulative effect of accounting change.... (336,875) -- -- --
Provision for income tax.................. -- -- -- 167,000
----------- ----------- ---------- -----------
Net income.............................. $13,732,667 $11,498,264 1,997,669 1,804,255
=========== ===========
Redeemable Preferred Stock dividend
requirements............................ 1,011,986 5,625,000
---------- -----------
Income (loss) attributable to common
stock................................ $ 985,683 $(3,820,745)
========== ===========
Basic and Diluted EPS:
Income (loss) before accounting
change............................. $ 1.48 $ 1.21 $ 0.20 $ (3.90)
=========== =========== ========== ===========
Accounting change.................... $ (0.04) $ -- $ --
=========== =========== ==========
Net income........................... $ 1.44 $ 1.21 $ 0.20
=========== =========== ==========
Weighted average number of common shares
outstanding............................. 9,508,108 9,508,108 4,966,139 980,330
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 118
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, 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....... -- -- -- (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.............................. -- -- (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
Net income.......................... 13,732,667 13,732,667
Common stock dividends ($1.51 per
share)............................ -- -- -- (14,404,783) (14,404,783)
--------- ------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999.......... 9,508,108 $95,081 $134,711,056 $ 129,528 $134,935,665
========= ======= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 119
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 YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $13,732,667 $11,498,264 $ 1,997,669 $ 1,804,255
Adjustments to net income:
Depreciation and amortization............................ 3,485,349 3,069,074 530,318 1,076,043
Accounting change........................................ 336,875 -- -- --
Amortization of debt issuance costs...................... 721,862 439,407 131,250 393,750
Equity in net income of joint venture.................... (256,722) -- -- --
Loss (gain) on sale of property.......................... 850,056 1,837,524 (206,835) 58,688
Increase in unbilled rent................................ (2,316,734) (1,439,444) (455,323) (1,193,366)
Increase in accounts receivable and other assets......... (1,110,200) (513,689) (149,697) (288,099)
Increase (decrease) in accounts payable and accrued
expenses............................................... 1,244,488 (6,627) 300,602 925,522
------------ ------------ ------------ ------------
Net cash provided by operating activities............ 16,687,641 14,884,509 2,147,984 2,776,793
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties subject to operating leases...... (22,600,058) (78,116,356) (45,113,200) (32,157,979)
Acquisition of properties subject to financing leases...... (1,188,628) (3,128,824) -- (370,165)
Collection on short-term loans to affiliates, net.......... 2,106,823 4,944,211 (1,812,604) 1,000,636
Proceeds from the transfer of properties to joint
venture.................................................. 4,472,752 -- -- --
Proceeds from the disposition of properties................ 17,646,133 4,797,472 3,503,091 704,723
Advances on loans to affiliates, collateralized by mortgage
loans, net............................................... (2,064,281) -- (6,458,589) (6,959,526)
Collection on loans to affiliates, collateralized by
mortgage loans........................................... -- 4,146,322 5,539,782 3,918,202
Collection of principal on other loans..................... 15,255 720,095 21,273 63,289
Investments in affiliated partnerships..................... -- (4,395,000) -- --
Proceeds from joint venture distribution................... 63,828 -- -- --
Collection of principal on financing leases................ (89,744) -- (33,053) (3,127)
Investment in joint venture................................ (7,113,000) -- -- --
Lease security deposits.................................... 78,537 52,514 -- 15,123
------------ ------------ ------------ ------------
Net cash used in investing activities................ (8,672,383) (70,979,566) (44,353,300) (33,788,824)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Redeemable Preferred Stock...................... -- -- (40,500,000) --
Dividends paid on common stock............................. (14,404,783) (12,550,702) -- --
Proceeds from the offering, net............................ -- -- 132,085,740 --
Borrowings of notes payable................................ 15,616,360 113,984,988 44,842,937 30,342,875
Debt issuance costs........................................ -- (1,632,604) -- --
Dividends paid on Redeemable Preferred Stock............... -- -- (10,913,381) (2,375,000)
Repayments of notes payable................................ (12,679,793) (42,746,189) (80,535,788) (64,066)
------------ ------------ ------------ ------------
Net cash (used in) provided by financing
activities......................................... (11,468,216) 57,055,493 44,979,508 27,903,809
------------ ------------ ------------ ------------
NET CASH FLOWS............................................. (3,452,958) 960,436 2,774,192 (3,108,222)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 4,488,565 3,528,129 753,937 3,862,159
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 1,035,607 $ 4,488,565 $ 3,528,129 $ 753,937
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................... $ 7,660,588 $ 5,855,889 $ 1,598,871 $ 3,837,000
============ ============ ============ ============
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> 120
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 on November 19, 1997 and has subsequently
qualified as a real estate investment trust ("REIT").
In connection with the initial public 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 of Net Lease Michigan
by Advisors Michigan in accordance with the purchase method of accounting as
provided for in 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 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 majority owned subsidiaries all of
which the Company has financial and operating control. All significant
intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS: Cash equivalents consist 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).
PROPERTIES SUBJECT TO FINANCING LEASES: Properties subject to financing
leases are recorded at their net investment (which at the inception of the lease
generally represents the cost of the property, which includes miscellaneous
acquisition and closing costs). Unearned income is deferred and amortized into
income over the lease term so as to produce a constant periodic rate of return
on the Company's net investment in the leases.
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 1.0%
interest in the Partnerships. The Company has the ability to exercise
significant influence but does not have financial operating control over Captec
Franchise Capital Partners L.P. III and Captec Franchise Capital Partners L.P.
IV. The Partnerships are accounted for under the equity method. The investment
consists primarily of goodwill which is amortized based on an effective
amortization method, reflecting the cash receipts.
F-7
<PAGE> 121
CAPTEC NET LEASE REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. In addition to
scheduled rent increases, certain of the Company's leases also have percentage
and overage rent clauses, which the Company recognizes such additional rent
after the tenants' reported sales have exceeded the applicable sales breakpoint.
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 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, provided 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 8). The return of capital
portion of dividends paid in 1999 and 1998 was 15.0% and 6.0%, respectively.
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 11) 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 1999, 1998 and 1997.
STOCK OPTION PLAN: The Company accounts for the stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25. "Accounting for Stock Issued to Employees." Accordingly, compensation
expense would be recorded only if on the date of grant the current market price
of the underlying stock exceeded the exercise price. Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share disclosures
as if the fair-value based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
DERIVATIVE 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.
NEW PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for all
quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for
the Company). The statement requires that all derivative instruments be recorded
at fair value on the balance sheet with changes in fair value recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge
F-8
<PAGE> 122
CAPTEC NET LEASE REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 recognized a $337,000 non-cash charge during the three months ended
March 31, 1999, representing the balance of unamortized organization costs.
RECLASSIFICATIONS: Certain prior period financial statement amounts have
been reclassified to conform to the 1999 presentations.
2. PROPERTIES SUBJECT TO OPERATING LEASES
The Company's real estate portfolio is leased to tenants under long-term
net operating leases. The lease agreements generally provide for monthly rents
based upon a percentage of the property's cost. The initial term of the leases
typically ranges from 15 to 20 years, although the Company in certain cases will
enter into leases with terms that are shorter or longer. As of December 31,
1999, the initial terms of the Company's leases extend through September 30,
2021. 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. At December 31, 1999, leases to a single
lessee represented approximately 11.5% of annualized total revenue (13.6% in
1998) while the next highest single lessee represented approximately 3.6%.
Leases to one national restaurant concept represented approximately 7.0% of
annualized total revenue.
Net investment in properties subject to operating leases at December 31,
1999 and 1998 includes capitalized acquisition and interest costs totaling
approximately $6.5 million and $6.4 million, 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,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Land............................................ $ 83,344,971 $ 81,437,199
Buildings and improvements...................... 131,211,643 131,698,579
Construction draws on properties................ 10,653,762 12,876,091
------------ ------------
225,210,376 226,011,869
Less accumulated depreciation................... (7,594,722) (4,662,208)
------------ ------------
Total........................................... $217,615,654 $221,349,661
============ ============
</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 under 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 December 31, 1999 and 1998, the Company had
approximately $3.7 million and $11.2 million 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 $497,000 and $445,000 for the years ended December 31, 1999 and
1998, respectively, charged to (loss)/gain on sale of properties to reduce the
net carrying value to approximately $625,000 of one property held for sale in
1999 and reduce the aggregate
F-9
<PAGE> 123
CAPTEC NET LEASE REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
carrying value to approximately $74,000 for two modular buildings held for sale
in 1998. In addition, 8 properties with an aggregate net cost of approximately
$9.4 million at December 31, 1999 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, 1999.
<TABLE>
<S> <C>
2000........................................................ $ 19,165,668
2001........................................................ 21,347,968
2002........................................................ 21,843,790
2003........................................................ 22,127,301
2004........................................................ 22,301,156
Thereafter.................................................. 253,258,553
------------
Total....................................................... $360,044,436
============
</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.
3. FINANCING LEASES
The net investment in financing leases as of December 31, 1999 and 1998 is
comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Minimum lease payments to be received.............. $10,189,037 $7,854,278
Estimated residual value........................... -- --
----------- ----------
Gross investment in financing leases............. 10,189,037 7,854,278
Unearned income.................................... (5,781,842) (4,725,454)
----------- ----------
Net investment in financing leases............... $ 4,407,195 $3,128,824
=========== ==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on financing leases as of December 31, 1999.
<TABLE>
<S> <C>
2000........................................................ $ 486,000
2001........................................................ 486,000
2002........................................................ 486,000
2003........................................................ 486,000
2004........................................................ 533,633
Thereafter.................................................. 7,711,404
-----------
Total....................................................... $10,189,037
===========
</TABLE>
F-10
<PAGE> 124
CAPTEC NET LEASE REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS TO AFFILIATE, COLLATERALIZED BY MORTGAGE LOANS
Loans to affiliates, collateralized by mortgage loans consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Loan under a master revolving note, collateralized by a
subordinate interest in a portfolio of loans owned by an
affiliate................................................. $ 9,321,327 $6,996,954
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............................ 1,658,477 1,918,569
----------- ----------
Total....................................................... $10,979,804 $8,915,523
=========== ==========
</TABLE>
The master revolving note bears interest at 10.0% per annum at December 31,
1999 and 1998, respectively. The promissory note bears interest at 15.7% per
annum at December 31, 1999 and 1998. Both notes are payable on demand.
5. INVESTMENT IN JOINT VENTURE
During 1999, the Company invested $7.1 million for a 22.6% membership
interest in FC Venture I, LLC ("FC Venture"). The investment is accounted for
under the equity method. The partner in FC Venture has been granted an option to
convert either 25.0% or 75.0% of its joint venture interest into the Company's
common stock, as defined in the joint venture agreement, during the period March
31, 2001 through March 31, 2003. Summarized financial information of the
Company's joint venture investment as of and for the year ended December 31,
1999 is set forth below:
<TABLE>
<S> <C>
Investments in property subject to leases................... $33,358,192
Total assets................................................ 35,376,647
Notes payable............................................... 1,110,000
Total liabilities........................................... 3,998,370
Members' equity............................................. 31,378,277
Revenues.................................................... 1,567,637
Net income.................................................. 1,136,176
</TABLE>
6. NOTES PAYABLE
In February 1998, the Company entered into a credit facility (the "Credit
Facility"), which was used to provide funds for the acquisition and development
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
$125.0 million facility ($50.0 million of which is subject to amortization)
which is collateralized by the properties. At December 31, 1999, the Company had
approximately $115.3 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 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 Company has been in compliance with all
debt covenants for the years presented except for a two-month period in 1998
(October-November) due to a lessee filing for bankruptcy. The Credit Facility
bears interest at an annual rate of LIBOR plus a spread ranging from 1.25% to
1.75%, set quarterly
F-11
<PAGE> 125
CAPTEC NET LEASE REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
depending on the Company's leverage ratio, or at the Company's option, the
bank's base rate plus a spread of .25%. 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 Credit Facility is
subject to principal amortization as defined in the credit agreement. As of
December 31, 1999 the calculated aggregate maturities of the borrowings
outstanding on the Credit Facility after December 31, 1999 are as follows:
The aggregate maturities of the term facility after December 31, 1999 are
as follows:
<TABLE>
<S> <C>
Year Ending December 31:
2000...................................................... $ 837,155
2001...................................................... 49,112,205
-----------
Total..................................................... $49,949,360
===========
</TABLE>
Included in other assets are costs totaling $983,000 in 1999 and $1.3
million in 1998 (net of accumulated amortization) associated with the issuance
of the notes payable. Amortization of debt issuance costs for the years ended
December 31, 1999 and 1998 amounted to $722,000 and $440,000, respectively,
which is included in interest expense in the accompanying financial statements.
In December 1999, the Company entered into a $1.6 million promissory note
in connection with the acquisition of a property. The note was payable on demand
with interest at a rate of 10.25% per annum. In January 2000, the Company paid
this $1.6 million obligation.
7. 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 initial public 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
initial public 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-12
<PAGE> 126
CAPTEC NET LEASE REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. 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
----------------- ------------------
<S> <C> <C>
Current.................................... $284,000 $167,000
Deferred................................... (284,000) --
-------- --------
Total...................................... $ -- $167,000
======== ========
</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
------------------
<S> <C>
Federal income taxes at statutory rates..................... $670,227
Preferred stock dividends deducted as interest.............. (503,500)
Other....................................................... 273
--------
Total....................................................... $167,000
========
</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 RPS as deductible interest
expense for income tax purposes. If the 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, 1999 and 1998, 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, 1999 or any amount less than the aggregate amounts.
F-13
<PAGE> 127
CAPTEC NET LEASE REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments held by the Company at
December 31, 1999 and 1998, and the valuation techniques used to estimate the
fair value, were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ----------------------------
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents....... $ 1,035,607 $ 1,035,607 $ 4,488,565 $ 4,488,565
Loans to affiliate,
collateralized by mortgage
loans........................ 10,979,804 10,979,804 8,915,523 8,915,523
Other loans..................... 390,520 390,520 405,775 405,775
Short-term loans to
affiliates................... 398,471 398,471 2,505,294 2,505,294
Liabilities
Notes payable................... 116,921,555 116,921,555 113,984,988 113,984,988
Derivative Contracts
Interest rate
instruments -- assets
(liabilities)................ 36,780 555,861 (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 re-pricing mechanism of this debt.
INTEREST RATE INSTRUMENTS. The fair value of interest rate instruments is
the estimated amount that the Company would pay or receive to terminate the
instruments at December 31, 1999 and 1998, using proprietary models based upon
current market values at December 31, 1999 and 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, 1999, the Company had an
interest rate swap contract outstanding with a total notional amount of $50.0
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 Company incurred
additional interest expense of $209,000 and $80,000 during 1999 and 1998,
respectively, in connection with the interest rate swap
F-14
<PAGE> 128
CAPTEC NET LEASE REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
agreement. The interest rate swap contract terminates July 2001 and the interest
rate cap contract terminates January 2001.
10. 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 and other affiliates. During 1999, the reduction in the
management fee as a result of the Amendment equaled that amount the Company
incurred to Captec Advisors thereby resulting in a net management fee of $0.
During 1998 and 1997, the Company incurred $194,000 and $1,536,000,
respectively, of asset management fees. During 1999, 1998 and 1997, the Company
incurred approximately $104,000, $1,123,000 and $2,030,000, 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 5.0% 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 Captec
Advisors. The Company earned $65,000 and $66,000 in acquisition fees and asset
management fees, respectively, for the year ended December 31, 1999. During
1998, the Company earned $589,000 and $45,000 in acquisition fees and asset
management fees, respectively. In addition, Captec Advisors earned approximately
$130,000 and $884,000 during 1999 and 1998, respectively, in acquisitions fees
resulting in an equal reduction in the management fee paid by the Company to
Captec Advisors. Summarized
F-15
<PAGE> 129
CAPTEC NET LEASE REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
combined financial information of the Partnerships as of and for the years ended
December 31, 1999 and 1998, is set forth below:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Investments in property under leases.............. $54,370,394 $49,580,732
Total assets...................................... 58,192,061 55,202,947
Notes payable..................................... 17,845,000 12,575,000
Total liabilities................................. 18,195,171 13,133,308
Partners' capital................................. 39,996,890 42,069,639
Revenues.......................................... 5,959,576 3,682,707
Net income........................................ 3,593,312 3,168,534
Company's portion of net income................... 35,565 31,685
</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 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 1999 and
1998, Development earned $4.0 million and $293,000 of acquisition fees from
Family Realty, respectively. Pursuant to the Amendment, Captec Advisors earns an
advisory fee from Development up to 50% (not to exceed the management fees paid
by the Company to Captec Advisors) of the acquisition fees earned by Development
from Family Realty, which provides for an equal reduction in management fee
expense to the Company. During 1999 Captec Advisors earned approximately $1.2
million in advisory fees resulting in an equal reduction in the management fee
paid by the Company to Captec Advisors. The Company is also subject to a
management fee agreement with Family Realty whereby Family Realty pays a
quarterly management fee to the Company for services the Company provides in
connection with managing the operations and providing investment and financial
advisory services pertaining to the acquisition of properties by Family Realty.
During 1999 the Company earned approximately $491,000 in management fees from
Family Realty.
In connection with the Company's investment in FC Venture, the Company is
party to an asset management agreement. During 1999 the Company earned
approximately $37,000 in management fees from FC Venture. In addition, the
Company received approximately $64,000 in cash distributions from FC Venture.
Also during 1999 the Company transferred three properties at cost to FC Venture
for an aggregate cost of $4.5 million.
The Company invested in loans to affiliates, principally Captec Financial
Group, which were collateralized by mortgage loans (see Note 4). In addition,
the Company had short-term loans to affiliates of $398,471 and $2,505,294 at
December 31, 1999 and 1998, respectively. The short-term loans principally
represent demand notes from 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 at December 31, 1999 and 1998 and are payable on demand.
Interest earned on the loans during 1999, 1998, and 1997 was $1,234,031,
$1,785,717 and $1,450,207, respectively.
F-16
<PAGE> 130
CAPTEC NET LEASE REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1999, the Company also has a demand loan with a
principal balance of $390,520 collateralized by a first mortgage on a real
estate property to a related party. The loan bears interest at a rate of 9.2%
per annum. Interest earned on the loan during 1999, 1998 and 1997 was
approximately $37,000, $38,000 and $6,500, respectively.
11. 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 and directors of the Company and to
strengthen the mutuality of interest between such key employees and directors
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. 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 are 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 of the Board of
Directors. Prior to December 31, 1999, 930,000 stock options had been granted
under the Plan. In addition, as of December 31, 1999, the Plan had reserved
140,000 shares of Common Stock for issuance. The following summarizes
transactions in the Plan for the years ended December 31:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1999 PRICE 1998 PRICE 1997 PRICE
---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1................... 780,000 $18.00 670,000 $18.00 -- --
New grants............................... 150,000 12.97 110,000 18.00 670,000 $18.00
------- ------ ------- ------ ------- ------
Outstanding, December 31................. 930,000 $17.19 780,000 $18.00 670,000 $18.00
======= ====== ======= ====== ======= ======
Exercisable, December 31................. 491,667 $18.00 226,667 $18.00 -- $18.00
======= ====== ======= ====== ======= ======
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the pro forma effects on the Company's net income and earnings per
share would have been as follows for the years ended December 31, 1999 and 1998
and for the period October 1, 1997 through December 31, 1997:
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 1, 1997
THROUGH
1999 1998 DECEMBER 31, 1997
---- ---- -----------------
<S> <C> <C> <C>
Net earnings as reported......................... $13,732,667 $11,498,264 $985,683
=========== =========== ========
Pro forma net earnings........................... $12,680,917 $10,644,881 $862,183
=========== =========== ========
Earnings per share as reported:
Basic.......................................... $ 1.44 $ 1.21 $ 0.20
=========== =========== ========
Diluted........................................ $ 1.44 $ 1.21 $ 0.20
=========== =========== ========
Pro forma earnings per share:
Basic.......................................... $ 1.33 $ 1.12 $ 0.17
=========== =========== ========
Diluted........................................ $ 1.33 $ 1.12 $ 0.17
=========== =========== ========
</TABLE>
F-17
<PAGE> 131
CAPTEC NET LEASE REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Estimated fair value per share of Options granted during
year...................................................... $2.60 $ 3.15 $3.42
Assumptions:
Annualized dividend yield................................. 11.6% 8.33% 8.33%
Common stock price volatility............................. 37% 25%, 31% 20%
Risk-free rate of return.................................. 4.7% 5.6%, 4.6% 6.18%
Expected option term (in years)........................... 5 5 5
</TABLE>
12. 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. During the year ended December
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.
13. 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 $125,000 and $103,000 for the years ended December 31,
1999 and 1998, respectively.
14. OTHER INFORMATION
In January 2000, the Company declared dividends to its shareholders of
$3,613,081, or $0.38 per share of common stock, which were paid on January 19,
2000.
On December 20, 1999 the Company announced its intent to merge with its
affiliates, Captec Financial Group, Inc. and Captec Net Lease Realty Advisors,
Inc. The merger is subject to both SEC review and shareholder approval. In
conjunction with the merger, the Company plans to change its tax status from a
REIT to a C-Corporation. As a C-Corporation the Company will no longer be
required to distribute 95.0% of its income to shareholders and will be subject
to Federal Income tax. Upon consummation of the merger, the Company will assume
the name Captec Financial Group, Inc.
F-18
<PAGE> 132
CAPTEC NET LEASE REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth the quarterly results of operations for the
years ended December 31, 1999 and 1998 (not covered by Independent Accountants'
Report):
<TABLE>
<CAPTION>
QUARTER
----------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1999
Total revenue........................................... $7,036 $7,049 $7,372 $7,531
Income before equity income of joint venture,
gain/(loss) on sales of property and accounting
change................................................ $3,599 $3,669 $3,699 $3,695
Net income.............................................. $3,212 $3,659 $3,922 $2,940
Income per common share:
Basic................................................. $ 0.34 $ 0.38 $ 0.41 $ 0.31
Diluted............................................... $ 0.34 $ 0.38 $ 0.41 $ 0.31
1998
Total revenue........................................... $5,624 $6,413 $7,412 $6,237
Income before gain/(loss) on sales of property.......... $3,288 $3,645 $2,948 $3,454
Net income.............................................. 3,241 3,440 2,057 2,760
Income per common share:
Basic................................................. $ 0.34 $ 0.36 $ 0.22 $ 0.29
Diluted............................................... $ 0.34 $ 0.36 $ 0.22 $ 0.29
</TABLE>
F-19
<PAGE> 133
CAPTEC NET LEASE REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999 and 1998
and for the period October 1 through December 31, 1997, which financial
statements are included in this Proxy Statement, we have also audited the
financial statement schedule listed in the index to Financial Statements
contained in this Proxy Statement.
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
January 31, 2000
Detroit, Michigan
F-20
<PAGE> 134
SCHEDULE III
PROPERTIES AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
COST
CAPITALIZED
SUBSEQUENT
CONTRACT TYPE OF STATE INITIAL COST TO
NUMBER LESSEE CONCEPT PROPERTY LOCATION ENCUMBRANCES TO COMPANY ACQUISITION
- -------- ------ ------- -------- -------- ------------ ------------ -----------
<C> <S> <C> <C> <C> <C> <C> <C>
PROPERTIES SUBJECT TO OPERATING
LEASES:
COMMENCED LEASES
5656 Golden Corral Corporation.......... Golden Corral Restaurant TX (a) 2,024,425 --
5735 The Synder Group Company........... Red Robin Restaurant CO (a) 2,179,000 --
5761 Thomas and King, Inc............... Applebee's Restaurant OH (a) 1,225,000 --
5772 Platinum Properties, LLC........... Boston Market Restaurant NC (a) 1,104,000 --
5778 Roadhouse Grill Buffalo, LLC....... Roadhouse Grill Restaurant NY (a) 1,048,395 --
5860 Huntington Restaurant Group........ Denny's Restaurant TX (a) 662,144 --
5861 America's Favorite Chicken Co...... Popeye's Restaurant GA (a) 877,941 --
5888 Pacific Apple Oregon, Inc.......... Applebee's Restaurant WA (a) 1,986,432 --
5892 DenAmerica Corp.................... Denny's Restaurant TX (a) 898,908 --
5893 DenAmerica Corp.................... Denny's Restaurant TX (a) 894,042 --
5899 DenAmerica Corp.................... Denny's Restaurant NC (a) 1,048,663 --
5900 DenAmerica Corp.................... Denny's Restaurant NC (a) 816,140 --
5929 Vacant............................. Vacant Restaurant GA (a) 1,186,604 (496,710)(b)
5932 Gourmet Systems, Inc............... Applebee's Restaurant MO (a) 2,087,796 --
5934 Red Robin International, Inc....... Red Robin Restaurant WA (a) 3,153,767 --
5954 Gourmet Systems, Inc............... Applebee's Restaurant MO (a) 1,772,000 --
5976 Pacific Coast Restaurant, Inc...... Stanford's Restaurant CO (a) 2,427,861 --
5977 The Synder Group Company........... Red Robin Restaurant CO (a) 3,283,130 --
5992 Family Restaurants, Inc............ Carrows Restaurant CA (a) 1,213,931 --
5993 Family Restaurants, Inc............ Carrows Restaurant CA (a) 1,213,931 --
5994 Family Restaurants, Inc............ Carrows Restaurant CA (a) 1,324,288 --
6016 P&L Food Services, LLC............. Boston Market Restaurant OH (a) 938,037 --
6017 Boston Market Vacant............... Vacant Restaurant PA (a) 717,323 4,813
6018 Boston Market Vacant............... Vacant Restaurant WA (a) 1,340,841 10,000
6030 Family Restaurants, Inc............ Carrows Restaurant CA (a) 1,103,573 --
6034 Blockbuster Entertainment, Inc..... Blockbuster Video Retail TX (a) 843,130 1,505
6035 Blockbuster Entertainment, Inc..... Blockbuster Video Retail TX (a) 790,158 1,506
6053 DenAmerica Corp.................... Denny's Restaurant TX (a) 1,213,931 --
6058 P&L Food Services, LLC............. Boston Market Restaurant OH (a) 767,065 --
6062 BC Great Lakes, LLC................ Boston Market Restaurant MI (a) 1,070,466 --
6064 Boston Market Vacant............... Vacant Restaurant OR (a) 1,218,782 10,000
6070 Boston Chicken, Inc................ Boston Market Restaurant IL (a) 1,880,489 --
6071 BC Great Lakes, LLC................ Boston Market Restaurant IL (a) 887,273 --
6073 Boston Market Vacant............... Vacant Restaurant IN (a) 1,644,324 --
6086 Vacant............................. Vacant Restaurant TX (a) 280,620 (210,170)(b)
6087 Vacant............................. Vacant Restaurant TX (a) 280,620 (235,210)(b)
6110 Huntington Restaurant Group........ Denny's Restaurant LA (a) 1,182,368 --
6114 Paragon Steakhouse Restaurant, Restaurant MI (a) 1,533,967 --
Inc................................ Mountain Jack's
6116 Paragon Steakhouse Restaurant, Restaurant MI (a) 1,125,645 --
Inc................................ Mountain Jack's
6135 Baby Superstore, Inc............... Babies R Us Retail MO (a) 3,156,219 1,315
6138 Paragon Steakhouse Restaurant, Restaurant OH (a) 1,655,360 --
Inc................................ Mountain Jack's
6144 Boston Chicken, Inc................ Boston Market Restaurant IL (a) 1,909,327 --
6145 Platinum Properties, LLC........... Boston Market Restaurant PA (a) 1,122,178 --
6152 ARG Enterprises, Inc............... Black Angus Restaurant MN (a) 2,836,183 --
6153 ARG Enterprises, Inc............... Black Angus Restaurant MN (a) 2,030,575 --
6154 ARG Enterprises, Inc............... Black Angus Restaurant MN (a) 2,350,611 --
6155 ARG Enterprises, Inc............... Black Angus Restaurant MN (a) 2,472,004 --
<CAPTION>
GROSS
AMOUNT AT
WHICH
CARRIED AT DATE OF
CONTRACT CLOSE OF ACCUMULATED ACQUISITION/ ACQUISITION/
NUMBER PERIOD DEPRECIATION CONSTRUCTION CONSTRUCTION DEPRECIATION
- -------- ---------- ------------ ------------ ------------ ------------
<C> <C> <C> <C> <C> <C>
5656 2,024,425 114,057 1995 Acquisition 40 Years
5735 2,179,000 84,981 1998 Acquisition 40 Years
5761 1,225,000 44,712 1998 Acquisition 40 Years
5772 1,104,000 30,912 1998 Acquisition 40 Years
5778 1,048,395 45,853 1995 Acquisition 40 Years
5860 662,144 61,718 1995 Acquisition 40 Years
5861 877,941 43,164 1996 Acquisition 40 Years
5888 1,986,432 111,337 1996 Construction 40 Years
5892 898,908 39,664 1995 Acquisition 40 Years
5893 894,042 40,291 1995 Acquisition 40 Years
5899 1,048,663 59,419 1995 Acquisition 40 Years
5900 816,140 50,963 1995 Acquisition 40 Years
5929 689,894 64,675 1996 Acquisition 40 Years
5932 2,087,796 119,801 1996 Construction 40 Years
5934 3,153,767 174,335 1996 Acquisition 40 Years
5954 1,772,000 59,896 1998 Acquisition 40 Years
5976 2,427,861 153,749 1996 Acquisition 40 Years
5977 3,283,130 176,001 1996 Construction 40 Years
5992 1,213,931 67,776 1996 Acquisition 40 Years
5993 1,213,931 57,094 1996 Acquisition 40 Years
5994 1,324,288 60,450 1996 Acquisition 40 Years
6016 938,037 44,644 1996 Acquisition 40 Years
6017 722,136 22,460 1996 Acquisition 40 Years
6018 1,350,841 67,230 1996 Acquisition 40 Years
6030 1,103,573 76,953 1996 Acquisition 40 Years
6034 844,635 44,119 1996 Acquisition 40 Years
6035 791,664 53,798 1996 Acquisition 40 Years
6053 1,213,931 63,320 1996 Construction 40 Years
6058 767,065 36,160 1996 Construction 40 Years
6062 1,070,466 46,919 1997 Acquisition 40 Years
6064 1,228,782 68,630 1996 Acquisition 40 Years
6070 1,880,489 89,763 1996 Acquisition 40 Years
6071 887,273 45,520 1996 Acquisition 40 Years
6073 1,644,324 95,297 1996 Construction 40 Years
6086 70,450 28,050 1995 Acquisition 40 Years
6087 45,410 28,051 1995 Acquisition 40 Years
6110 1,182,368 59,049 1997 Construction 40 Years
6114 1,533,967 98,180 1996 Acquisition 40 Years
6116 1,125,645 58,652 1996 Acquisition 40 Years
6135 3,157,534 186,886 1996 Acquisition 40 Years
6138 1,655,360 78,188 1997 Construction 40 Years
6144 1,909,327 77,348 1997 Construction 40 Years
6145 1,122,178 25,957 1997 Construction 40 Years
6152 2,836,183 141,963 1996 Acquisition 40 Years
6153 2,030,575 124,369 1996 Acquisition 40 Years
6154 2,350,611 128,642 1996 Acquisition 40 Years
6155 2,472,004 112,755 1996 Acquisition 40 Years
</TABLE>
F-21
<PAGE> 135
<TABLE>
<CAPTION>
COST
CAPITALIZED
SUBSEQUENT
CONTRACT TYPE OF STATE INITIAL COST TO
NUMBER LESSEE CONCEPT PROPERTY LOCATION ENCUMBRANCES TO COMPANY ACQUISITION
- -------- ------ ------- -------- -------- ------------ ------------ -----------
<C> <S> <C> <C> <C> <C> <C> <C>
6177 Corral South, Inc.................. Golden Corral Restaurant FL (a) 2,273,361 --
6192 Western Maryland Fast Foods........ Burger King Restaurant WV (a) 993,425 --
6217 Blockbuster Entertainment, Inc..... Blockbuster Music Retail AL (a) 1,526,653 --
6224 Video Update, Inc.................. Video Update Retail AZ (a) 1,098,541 --
6225 Vacant............................. Vacant Retail IL (a) 1,330,484 --
6302 RTM, Inc........................... Arby's Restaurant IN (a) 1,093,288 --
6314 Corral of Brandon, LP.............. Golden Corral Restaurant FL (a) 2,111,500 --
6317 Huntington Restaurant Group........ Denny's Restaurant AZ (a) 1,103,891 --
6318 Tri-Golden Kearney, LLC............ Golden Corral Restaurant NE (a) 1,032,869 --
6319 United Auto Group, Inc............. Nissan Auto Dealer GA (a) 3,250,023 --
6320 United Auto Group, Inc............. BMW Auto Dealer GA (a) 7,115,013 --
6322 Vacant............................. Vacant Restaurant MO (a) 1,169,979 --
6323 Arizona Clubhouse.................. Damon's Restaurant AZ (a) 1,429,445 --
6324 Progressive Restaurant Concepts.... Arby's Restaurant GA (a) 752,097 --
6336 Schlotzski's, Inc.................. Schlotzski's Deli Restaurant AZ (a) 838,167 15,734
6337 Schlotzski's, Inc.................. Schlotzski's Deli Restaurant AZ (a) 825,409 33,484
6338 Schlotzski's, Inc.................. Schlotzski's Deli Restaurant AZ (a) 898,896 33,364
6341 Blockbuster Entertainment, Inc..... Blockbuster Video Retail SC (a) 1,377,353 --
6348 Whatco of New Mexico, Inc.......... Whataburger Restaurant NM (a) 894,568 53,500
6349 Hooters of North Tampa, Inc........ Hooters Restaurant FL (a) 1,048,870 --
6351 Video Update, Inc.................. Video Update Retail NM (a) 1,344,400 3,750
6367 Video Update, Inc.................. Video Update Retail MN (a) 1,134,740 1,469
6372 Virginia QSC....................... Burger King Restaurant VA (a) 1,102,500 --
6376 Blockbuster Entertainment, Inc..... Blockbuster Video Retail GA (a) 1,033,801 1,153
6380 Texas Roadhouse Holdings........... Texas Roadhouse Restaurant CO (a) 1,365,889 1,181
6381 Texas Roadhouse Holdings........... Texas Roadhouse Restaurant CO (a) 1,663,919 --
6384 Kona Restaurant Group, Inc......... Carino's Restaurant TX (a) 2,070,003 --
6385 Kona Restaurant Group, Inc......... Carino's Restaurant TX (a) 1,917,860 --
6387 Boston Chicken, Inc................ Boston Market Restaurant MI (a) 1,171,769 --
6388 Boston Market Vacant............... Vacant Restaurant MI (a) 1,150,607 --
6390 Boston Market Vacant............... Vacant Restaurant IL (a) 1,293,062 --
6469 RTM, Inc........................... Arby's Restaurant MI (a) 787,500 --
6476 Kona Restaurant Group, Inc......... Carino's Restaurant TX (a) 1,490,273 --
6477 Kona Restaurant Group, Inc......... Kona Steakhouse Restaurant TX (a) 1,728,621 --
6539 Office Depot, Inc.................. Office Depot Retail GA (a) 2,822,117 --
6550 Keg Steakhouse, Inc................ Keg Steakhouse Restaurant WA (a) 907,322 --
6551 Keg Steakhouse, Inc................ Keg Steakhouse Restaurant WA (a) 1,782,822 --
6553 Keg Steakhouse, Inc................ Keg Steakhouse Restaurant WA (a) 1,236,922 --
6554 Keg Steakhouse, Inc................ Keg Steakhouse Restaurant OR (a) 866,356 --
6583 Blockbuster Entertainment, Inc..... Blockbuster Video Retail AL (a) 874,125 --
6584 Blockbuster Entertainment, Inc..... Blockbuster Video Retail AL (a) 874,125 --
6585 Blockbuster Entertainment, Inc..... Blockbuster Video Retail AL (a) 1,115,282 --
6586 Sportmart, Inc..................... Sportmart Retail IL (a) 6,097,908 6,253
6644 Capital Foods, Inc................. Arby's Restaurant OH (a) 685,139 --
6661 National Convenience Stores........ Stop & Go Retail TX (a) 841,278 3,998
6662 National Convenience Stores........ Circle K Retail GA (a) 1,229,616 2,869
6663 National Convenience Stores........ Stop & Go Retail TX (a) 635,643 2,131
6664 National Convenience Stores........ Circle K Retail CA (a) 1,417,579 3,105
6665 National Convenience Stores........ Circle K Retail CA (a) 1,417,171 3,105
6666 National Convenience Stores........ Stop & Go Retail TX (a) 1,003,882 2,590
6667 National Convenience Stores........ Stop & Go Retail TX (a) 991,496 2,575
6668 National Convenience Stores........ Stop & Go Retail TX (a) 834,047 2,379
6676 The Athlete's Foot Group, Inc...... Athlete's Foot Retail GA (a) 1,691,680 --
6712 Thomas and King, Inc............... Applebee's Restaurant KY (a) 1,730,400 --
6796 Blockbuster Entertainment, Inc..... Blockbuster Video Retail KY (a) 762,936 --
<CAPTION>
GROSS
AMOUNT AT
WHICH
CARRIED AT DATE OF
CONTRACT CLOSE OF ACCUMULATED ACQUISITION/ ACQUISITION/
NUMBER PERIOD DEPRECIATION CONSTRUCTION CONSTRUCTION DEPRECIATION
- -------- ---------- ------------ ------------ ------------ ------------
<C> <C> <C> <C> <C> <C>
6177 2,273,361 80,857 1997 Construction 40 Years
6192 993,425 38,350 1997 Construction 40 Years
6217 1,526,653 50,001 1997 Acquisition 40 Years
6224 1,098,541 50,131 1997 Acquisition 40 Years
6225 1,330,484 68,420 1997 Acquisition 40 Years
6302 1,093,288 39,077 1997 Acquisition 40 Years
6314 2,111,500 44,633 1998 Construction 40 Years
6317 1,103,891 19,511 1997 Construction 40 Years
6318 1,032,869 27,585 1998 Construction 40 Years
6319 3,250,023 142,204 1997 Acquisition 40 Years
6320 7,115,013 278,957 1997 Acquisition 40 Years
6322 1,169,979 40,621 1997 Acquisition 40 Years
6323 1,429,445 43,950 1997 Acquisition 40 Years
6324 752,097 24,132 1998 Construction 40 Years
6336 853,901 25,967 1997 Acquisition 40 Years
6337 858,893 26,885 1998 Acquisition 40 Years
6338 932,260 26,992 1998 Acquisition 40 Years
6341 1,377,353 41,905 1997 Acquisition 40 Years
6348 948,068 27,770 1997 Acquisition 40 Years
6349 1,048,870 70,966 1997 Acquisition 40 Years
6351 1,348,150 44,804 1998 Acquisition 40 Years
6367 1,136,209 41,737 1998 Acquisition 40 Years
6372 1,102,500 33,556 1997 Construction 40 Years
6376 1,034,954 37,799 1997 Acquisition 40 Years
6380 1,367,070 49,871 1997 Acquisition 40 Years
6381 1,663,919 37,368 1998 Construction 40 Years
6384 2,070,003 63,690 1997 Acquisition 40 Years
6385 1,917,860 74,469 1997 Acquisition 40 Years
6387 1,171,769 37,821 1997 Acquisition 40 Years
6388 1,150,607 34,631 1997 Acquisition 40 Years
6390 1,293,062 38,954 1997 Acquisition 40 Years
6469 787,500 31,281 1997 Acquisition 40 Years
6476 1,490,273 30,059 1998 Construction 40 Years
6477 1,728,621 29,257 1998 Construction 40 Years
6539 2,822,117 101,466 1998 Acquisition 40 Years
6550 907,322 24,253 1998 Acquisition 40 Years
6551 1,782,822 32,493 1998 Acquisition 40 Years
6553 1,236,922 39,755 1998 Acquisition 40 Years
6554 866,356 5,468 1998 Acquisition 40 Years
6583 874,125 27,613 1997 Acquisition 40 Years
6584 874,125 27,001 1997 Acquisition 40 Years
6585 1,115,282 25,831 1998 Acquisition 40 Years
6586 6,104,161 196,271 1997 Acquisition 40 Years
6644 685,139 19,312 1998 Construction 40 Years
6661 845,276 31,664 1998 Acquisition 40 Years
6662 1,232,485 37,822 1998 Acquisition 40 Years
6663 637,774 18,732 1998 Acquisition 40 Years
6664 1,420,684 51,977 1998 Acquisition 40 Years
6665 1,420,276 42,856 1998 Acquisition 40 Years
6666 1,006,472 34,194 1998 Acquisition 40 Years
6667 994,071 34,575 1998 Acquisition 40 Years
6668 836,426 101,586 1998 Acquisition 40 Years
6676 1,691,680 55,852 1998 Construction 40 Years
6712 1,730,400 55,105 1998 Acquisition 40 Years
6796 762,936 24,517 1998 Acquisition 40 Years
</TABLE>
F-22
<PAGE> 136
<TABLE>
<CAPTION>
COST
CAPITALIZED
SUBSEQUENT
CONTRACT TYPE OF STATE INITIAL COST TO
NUMBER LESSEE CONCEPT PROPERTY LOCATION ENCUMBRANCES TO COMPANY ACQUISITION
- -------- ------ ------- -------- -------- ------------ ------------ -----------
<C> <S> <C> <C> <C> <C> <C> <C>
7042 Foodmaker, Inc..................... Jack In The Box Restaurant TX (a) 893,417 --
7104 Midwest Robin, LLC................. Red Robin Restaurant OH (a) 2,085,750 --
7245 Foodmaker, Inc..................... Jack In The Box Restaurant CA (a) 1,351,798 --
7246 Foodmaker, Inc..................... Jack In The Box Restaurant TX (a) 1,119,945 --
7274 Foodmaker, Inc..................... Jack In The Box Restaurant AZ (a) 1,188,833 (2,462)
7326 Chi-Co, Inc........................ Arby's Restaurant NM (a) 772,500 --
7327 Chi-Co, Inc........................ Arby's Restaurant NM (a) 927,000 --
7328 Chi-Co, Inc........................ Arby's Restaurant NM (a) 745,720 --
7336 Chi-Co, Inc........................ Arby's Restaurant CO (a) 721,000 --
7439 Boston Chicken, Inc................ Boston Market Restaurant PA (a) 909,531 --
7445 Kona Restaurant Group, Inc......... Kona Steakhouse Restaurant TX (a) 2,204,200 --
7481 RTM, Inc........................... Arby's Restaurant OR (a) 978,500 --
7483 RTM, Inc........................... Arby's Restaurant GA (a) 587,100 --
7520 Hollywood Entertainment Corp....... Hollywood Video Retail OH (a) 781,834 1,062
7639 Perkins Family Restaurants, L.P.... Perkins Restaurant FL (a) 956,704 60,000
7709 S&A Properties, Inc................ Bennigan's Restaurant CO (a) 1,844,419 --
7710 S&A Properties, Inc................ Bennigan's Restaurant CT (a) 1,611,591 --
7711 S&A Properties, Inc................ Bennigan's Restaurant FL (a) 1,596,500 --
7712 S&A Properties, Inc................ Steak & Ale Restaurant FL (a) 1,461,163 --
7713 S&A Properties, Inc................ Bennigan's Restaurant FL (a) 1,892,325 --
7714 S&A Properties, Inc................ Steak & Ale Restaurant FL (a) 1,381,597 --
7716 S&A Properties, Inc................ Bennigan's Restaurant IL (a) 2,678,000 --
7717 S&A Properties, Inc................ Steak & Ale Restaurant IN (a) 1,461,163 --
7718 S&A Properties, Inc................ Steak & Ale Restaurant IN (a) 1,245,581 --
7720 S&A Properties, Inc................ Bennigan's Restaurant MI (a) 1,588,434 --
7721 S&A Properties, Inc................ Bennigan's Restaurant NC (a) 1,662,617 --
7722 S&A Properties, Inc................ Bennigan's Restaurant OK (a) 2,034,250 --
7723 S&A Properties, Inc................ Steak & Ale Restaurant OK (a) 1,588,434 --
7725 S&A Properties, Inc................ Steak & Ale Restaurant TX (a) 1,461,163 --
7726 S&A Properties, Inc................ Bennigan's Restaurant TX (a) 1,700,698 --
7727 S&A Properties, Inc................ Steak & Ale Restaurant VA (a) 1,700,698 --
7729 S&A Properties, Inc................ Steak & Ale Restaurant TX (a) 1,293,488 --
7730 S&A Properties, Inc................ Bennigan's Restaurant FL (a) 1,413,256 --
7770 Hollywood Entertainment Corp....... Hollywood Video Retail GA (a) 1,446,223 --
7771 Hollywood Entertainment Corp....... Hollywood Video Retail CO (a) 953,661 --
7839 Sterling Jewelers, Inc............. Jared Jewelers Retail VA (a) 2,013,333 --
8713 Border Foods, Inc.................. Taco Bell Restaurant MN (a) 1,725,250 --
8751 Morgan's Restaurants of PA......... KFC Restaurant PA (a) 1,001,032 --
8791 RTM, Inc........................... Arby's Restaurant OH (a) 843,989 --
8830 South Sound Restaurants............ KFC Restaurant WA (a) 1,175,689 --
8843 Sybra, Inc......................... Arby's Restaurant PA (a) 932,810 --
8871 Skippers, Inc...................... Skipper's Fish & Restaurant WA (a) 989,848 --
Chips
9229 Wendy's of New York, Inc........... Wendy's Restaurant PA (a) 750,701 --
9256 NPC International, Inc............. Pizza Hut Restaurant GA (a) 386,138 --
9263 NPC International, Inc............. Pizza Hut Restaurant FL (a) 370,674 --
9273 NPC International, Inc............. Pizza Hut Restaurant AL (a) 322,634 --
9274 NPC International, Inc............. Pizza Hut Restaurant AL (a) 553,672 --
9279 Mita Enterprises, LLC.............. Pizza Hut Restaurant CT (a) 552,272 --
9283 ADFP II, LLC....................... Pizza Hut Restaurant NY (a) 704,732 --
9284 ADFP I, LLC........................ Pizza Hut Restaurant NJ (a) 303,749 --
<CAPTION>
GROSS
AMOUNT AT
WHICH
CARRIED AT DATE OF
CONTRACT CLOSE OF ACCUMULATED ACQUISITION/ ACQUISITION/
NUMBER PERIOD DEPRECIATION CONSTRUCTION CONSTRUCTION DEPRECIATION
- -------- ---------- ------------ ------------ ------------ ------------
<C> <C> <C> <C> <C> <C>
7042 893,417 25,809 1998 Acquisition 40 Years
7104 2,085,750 23,068 1999 Construction 40 Years
7245 1,351,798 11,259 1998 Acquisition 40 Years
7246 1,119,945 27,389 1998 Acquisition 40 Years
7274 1,186,371 21,520 1998 Acquisition 40 Years
7326 772,500 14,961 1998 Acquisition 40 Years
7327 927,000 22,216 1998 Acquisition 40 Years
7328 745,720 22,486 1998 Acquisition 40 Years
7336 721,000 14,450 1998 Construction 40 Years
7439 909,531 30,401 1997 Construction 40 Years
7445 2,204,200 19,055 1999 Construction 40 Years
7481 978,500 29,012 1998 Acquisition 40 Years
7483 587,100 19,162 1998 Acquisition 40 Years
7520 782,896 16,276 1998 Acquisition 40 Years
7639 1,016,704 16,994 1999 Acquisition 40 Years
7709 1,844,419 47,265 1998 Acquisition 40 Years
7710 1,611,591 26,191 1998 Acquisition 40 Years
7711 1,596,500 34,666 1998 Acquisition 40 Years
7712 1,461,163 32,082 1998 Acquisition 40 Years
7713 1,892,325 38,479 1998 Acquisition 40 Years
7714 1,381,597 23,266 1998 Acquisition 40 Years
7716 2,678,000 49,170 1998 Acquisition 40 Years
7717 1,461,163 38,069 1998 Acquisition 40 Years
7718 1,245,581 37,941 1998 Acquisition 40 Years
7720 1,588,434 38,323 1998 Acquisition 40 Years
7721 1,662,617 32,877 1998 Acquisition 40 Years
7722 2,034,250 48,397 1998 Acquisition 40 Years
7723 1,588,434 39,777 1998 Acquisition 40 Years
7725 1,461,163 37,914 1998 Acquisition 40 Years
7726 1,700,698 41,528 1998 Acquisition 40 Years
7727 1,700,698 37,318 1998 Acquisition 40 Years
7729 1,293,488 34,987 1998 Acquisition 40 Years
7730 1,413,256 31,831 1998 Acquisition 40 Years
7770 1,446,223 17,250 1999 Construction 40 Years
7771 953,661 13,672 1999 Construction 40 Years
7839 2,013,333 33,240 1999 Construction 40 Years
8713 1,725,250 10,772 1999 Acquisition 40 Years
8751 1,001,032 39,730 1996 Acquisition 40 Years
8791 843,989 33,073 1996 Acquisition 40 Years
8830 1,175,689 40,269 1996 Construction 40 Years
8843 932,810 40,380 1996 Acquisition 40 Years
8871 989,848 40,767 1996 Acquisition 40 Years
9229 750,701 21,617 1997 Acquisition 40 Years
9256 386,138 2,093 1999 Acquisition 40 Years
9263 370,674 754 1999 Acquisition 40 Years
9273 322,634 1,599 1999 Acquisition 40 Years
9274 553,672 365 1999 Acquisition 40 Years
9279 552,272 1,401 1999 Acquisition 40 Years
9283 704,732 2,030 1999 Acquisition 40 Years
9284 303,749 317 1999 Acquisition 40 Years
</TABLE>
F-23
<PAGE> 137
<TABLE>
<CAPTION>
COST
CAPITALIZED
SUBSEQUENT
CONTRACT TYPE OF STATE INITIAL COST TO
NUMBER LESSEE CONCEPT PROPERTY LOCATION ENCUMBRANCES TO COMPANY ACQUISITION
- -------- ------ ------- -------- -------- ------------ ------------ -----------
<C> <S> <C> <C> <C> <C> <C> <C>
9286 ADFP I, LLC........................ Pizza Hut Restaurant NY (a) 551,804 --
9326 Champps Entertainment, Inc......... Champps Americana Restaurant GA (a) 3,804,820 --
----------- --------
SUBTOTAL -- COMMENCED LEASES 215,238,326 (681,712)
----------- --------
CONSTRUCTION DRAWS ON LEASES
6649 Claim Jumper Associates, Ltd....... Claim Jumper Restaurant AZ (a) 3,648,889 --
8787 Claim Jumper Associates, Ltd....... Claim Jumper Restaurant CA (a) 1,259,727 --
7293 Solano Mall (PCF Investments)...... Edward Bros./ Retail CA (a) 3,627,692 --
BestBuy
9136 Rite-Aid Corporation............... Rite Aid Retail AL (a) 2,117,455 --
----------- --------
SUBTOTAL -- CONSTRUCTION DRAWS 10,653,762 --
----------- --------
TOTAL -- PROPERTIES SUBJECT TO OPERATING
LEASES 225,892,088 (681,712)
=========== ========
PROPERTIES SUBJECT TO FINANCING LEASES:
7837 Sterling Jewelers, Inc............. Jared Jewelers Retail FL (a) 1,179,620 10,242
7840 Sterling Jewelers, Inc............. Jared Jewelers Retail AZ (a) 1,087,808 63,603
7841 Sterling Jewelers, Inc............. Jared Jewelers Retail AZ (a) 861,396 32,706
7838 Sterling Jewelers, Inc............. Jared Jewelers Retail TX (a) 1,082,076 --
----------- --------
TOTAL -- PROPERTIES SUBJECT TO FINANCING LEASES 4,210,900 106,551
=========== ========
<CAPTION>
GROSS
AMOUNT AT
WHICH
CARRIED AT DATE OF
CONTRACT CLOSE OF ACCUMULATED ACQUISITION/ ACQUISITION/
NUMBER PERIOD DEPRECIATION CONSTRUCTION CONSTRUCTION DEPRECIATION
- -------- ---------- ------------ ------------ ------------ ------------
<C> <C> <C> <C> <C> <C>
9286 551,804 1,530 1999 Acquisition 40 Years
9326 3,804,820 3,420 1999 Acquisition 40 Years
----------- ---------
214,556,614 7,594,722
----------- ---------
6649 3,648,889 -- 1998 Construction --
8787 1,259,727 -- 1999 Construction --
7293 3,627,692 -- 1998 Construction --
9136 2,117,455 -- 1999 Construction --
----------- ---------
10,653,762 --
----------- ---------
225,210,376 7,594,722
=========== =========
7837 1,189,862 (c) 1998 Construction (c)
7840 1,151,411 (c) 1998 Construction (c)
7841 894,102 (c) 1998 Construction (c)
7838 1,082,076 (c) 1999 Construction (c)
----------- ---------
4,317,451 --
=========== =========
</TABLE>
- ---------------
(a) Property is encumbered as part of the Company's $115 million note payable.
(b) The Company determined to record an impairment loss.
(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, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance, beginning of year.................................. $226,011,869 $153,416,796
Acquisitions................................................ 22,600,058 78,116,356
Dispositions and other...................................... (23,401,551) (5,521,283)
------------ ------------
Balance, end of year........................................ $225,210,376 $226,011,869
============ ============
</TABLE>
The changes in accumulated depreciation for the years ended December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance, beginning of year.................................. $4,662,208 $1,925,245
Depreciation expense........................................ 3,367,922 2,897,294
Dispositions and other...................................... (435,408) (160,331)
---------- ----------
Balance, end of year........................................ $7,594,722 $4,662,208
========== ==========
</TABLE>
F-24
<PAGE> 138
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Captec Financial Group, Inc:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows present fairly, in all material respects, the financial position of
Captec Financial Group, Inc. and its subsidiaries ("Financial Group") at March
31, 1999 and 1998, and the results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Detroit, Michigan
June 18, 1999
F-25
<PAGE> 139
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ----------------------------
1999 1999 1998
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 1,670,076 $ 2,772,106 $ 3,383,799
Marketable equity securities, affiliates.................. 1,700,050
Investment in direct financing leases..................... 21,737,067 24,836,775 48,312,451
Mortgage loans held for sale.............................. 226,331,075 150,465,299 103,736,475
Retained interests in leases and loans sold............... 14,502,031 12,087,628 9,076,916
Accounts receivable....................................... 594,385 179,549 535,343
Accounts receivable from affiliates....................... 635,290 63,113
Notes receivable from affiliate........................... 3,063,169 3,059,866 3,001,038
Property and equipment, net............................... 878,190 882,738 732,601
Deferred tax assets....................................... 660,605 779,605 821,768
Advances, prepaid expenses and other assets............... 6,138,530 5,182,180 5,220,430
------------ ------------ ------------
Total assets......................................... $276,210,418 $200,245,746 $176,583,984
============ ============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities
Notes payable collateralized by investments in leases
and loans Recourse (including payable to affiliates
of $15,378,374 as of December 31, 1999, $15,422,814
as of March 31, 1999 and $24,536,814 as of March 31,
1998)................................................ $254,263,205 $178,333,135 $154,912,307
Nonrecourse............................................. 1,090,463 3,243,478 8,488,485
Notes payable, other.................................... 1,023,868 1,091,195 829,490
Notes payable, shareholders............................. 1,405,539 1,197,143
Accounts payable and accrued liabilities................ 7,925,252 5,900,202 3,455,547
Accounts payable to affiliates.......................... 58,557 285,688 106,943
Lease deposits and deferred fees........................ 1,210,785 1,608,677 1,571,538
------------ ------------ ------------
266,977,669 191,659,518 169,364,310
Subordinated debt......................................... 4,424,000 4,322,353 5,000,000
------------ ------------ ------------
Total liabilities.................................... 271,401,669 195,981,871 174,364,310
------------ ------------ ------------
Stockholders' equity
Class A convertible preferred stock, shares
authorized -- 40,000; shares issued and
outstanding -- 15,792 (liquidating preference of
$3,882,210).......................................... 3,882,210 3,882,210 3,882,210
Common stock, $1 par value; shares
authorized -- 100,000; shares issued and
outstanding -- 21,813................................ 21,813 21,813 21,813
Paid-in capital......................................... 2,525,288 2,525,288 246,341
Accumulated other comprehensive income (net of deferred
taxes of $4,740 in 1999 and $652,840 in 1998)........ 3,129 3,129 1,267,278
Retained earnings (deficit)............................. (1,488,874) (1,717,565) (2,844,084)
Notes receivable from shareholder....................... (134,817) (451,000) (353,884)
------------ ------------ ------------
Total stockholders' equity........................... 4,808,749 4,263,875 2,219,674
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $276,210,418 $200,245,746 $176,583,984
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE> 140
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, YEARS ENDED MARCH 31,
------------------------- ---------------------------------------
1999 1998 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Mortgage loan income....................... $11,466,733 $10,532,075 $13,787,542 $ 5,754,904 $ 2,718,378
Gain on sales of loans..................... 1,540,436 6,142,860 6,058,317 1,500,056 393,089
Financing lease income..................... 1,211,451 2,244,728 2,906,636 5,128,054 6,607,736
Loan servicing income...................... 1,089,213 647,390 1,021,063 533,064 166,659
Management fees, affiliates................ 1,362,195 2,816,819 2,828,666 2,792,329 3,811,026
Interest and dividend income............... 1,814,809 128,421 1,378,882 390,817 380,553
Interest and dividend income, affiliates... 187,630 277,485 349,461 56,586 0.00
Gain on sales of equipment................. 195,256 126,333 146,176 159,461 175,578
Gain on sale of Captec Net Lease Realty,
Inc. .................................... -- 1,352,595 1,352,595 -- --
Gain on hedging activities................. 1,468,426 -- 1,750,907 -- --
Other...................................... 865,554 538,916 263,885 187,149 410,325
----------- ----------- ----------- ----------- -----------
Total revenues......................... 21,201,702 24,807,622 31,844,130 16,502,420 14,663,344
----------- ----------- ----------- ----------- -----------
EXPENSES
Interest................................... 9,332,125 10,068,171 13,460,962 7,069,699 7,092,541
Interest expense, affiliates............... 1,168,173 1,513,390 1,899,297 1,182,310 137,194
Salaries, wages and benefits............... 4,685,016 4,247,025 6,079,441 4,509,449 3,616,791
General and administrative................. 2,355,536 3,425,198 4,162,955 3,242,630 1,596,897
Commission and selling..................... 2,449,417 2,172,843 2,765,270 1,382,475 964,941
Provision for losses....................... 675,450 1,115,582 1,250,583 3,906,416 345,446
Depreciation and amortization.............. 188,294 154,567 215,703 146,243 97,089
----------- ----------- ----------- ----------- -----------
Total expenses......................... 20,854,011 22,696,776 29,834,211 21,439,222 13,850,899
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX............ 347,691 2,110,846 2,009,919 (4,936,802) 812,445
Provision (credit) for income tax.......... 119,000 722,200 683,400 (1,679,000) 276,000
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS).......................... 228,691 1,388,646 1,326,519 (3,257,802) 536,445
Preferred stock dividend requirements
Paid dividends........................... -- 140,000 200,000 400,000 400,000
Accrued on paid dividends................ 200,000 60,000 200,000 -- --
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCK.................................... $ 28,691 $ 1,188,646 $ 926,519 $(3,657,802) $ 136,445
=========== =========== =========== =========== ===========
INCOME (LOSS) PER COMMON SHARE
Basic.................................... 1.32 54.49 42.48 (167.69) 6.26
Diluted.................................. 0.54 22.27 17.36 (68.61) 3.38
Weighted average number of common shares
outstanding.............................. 21,813 21,813 21,813 21,813 21,813
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE> 141
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER COMPREHENSIVE INCOME
------------------------------------
UNREALIZED GAIN
UNREALIZED GAIN RETAINED INTEREST
PREFERRED COMMON PAID-IN ON AVAILABLE FOR IN MORTGAGE RETAINED
STOCK STOCK CAPITAL SALE SECURITY LOANS EARNINGS
--------- ------ ------- ---------------- ----------------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1996............. $3,882,210 $19,813 $ 30,187 $ 677,273
Stock options exercised............ 2,000 216,154
Dividends paid on preferred
stock............................ (400,000)
Comprehensive income
Net income (loss)................ 536,445
Total comprehensive income.....
---------- ------- ---------- ----------- --------- -----------
BALANCE, MARCH 31, 1997............ 3,882,210 21,813 246,341 -- -- 813,718
Dividends paid on preferred
stock............................
Notes Receivable From
Shareholder...................... (400,000)
Comprehensive income...............
Net income (loss)................ (3,257,802)
Other comprehensive income
Change in value of available
for sale security............ $ 1,122,033
Change in value of retained
interest in mortgage loans... $ 145,245
Total comprehensive income
(loss).......................
---------- ------- ---------- ----------- --------- -----------
BALANCE, MARCH 31, 1998............ 3,882,210 21,813 246,341 1,122,033 145,245 (2,844,084)
Dividends paid on preferred
stock............................ (200,000)
Issuance of warrants in conjunction
with debt........................ 2,278,947
Notes Receivable From
Shareholder......................
COMPREHENSIVE INCOME
Net income....................... 1,326,519
Other comprehensive income
Change in value of retained
interest in mortgage loans... (142,116)
Disposition of available for
sale security................ (1,122,033)
Total comprehensive income
(loss).......................
---------- ------- ---------- ----------- --------- -----------
BALANCE, MARCH 31, 1999............ 3,882,210 21,813 2,525,288 -- 3,129 (1,717,565)
Notes Receivable From
Shareholder......................
COMPREHENSIVE INCOME
Net income....................... 228,691
Total comprehensive income.....
---------- ------- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1999......... $3,882,210 $21,813 $2,525,288 $ -- $ 3,129 $ 1,488,874
========== ======= ========== =========== ========= ===========
<CAPTION>
NOTES
RECEIVABLE TOTAL
FROM STOCKHOLDERS'
SHAREHOLDER EQUITY
----------- -------------
<S> <C> <C>
BALANCE, APRIL 1, 1996............. $ 4,609,483
Stock options exercised............ 218,154
Dividends paid on preferred
stock............................ (400,000)
Comprehensive income
Net income (loss)................ 536,445
-----------
Total comprehensive income..... 536,445
-----------
BALANCE, MARCH 31, 1997............ 4,964,082
Dividends paid on preferred
stock............................
Notes Receivable From
Shareholder...................... (400,000)
Comprehensive income............... $(353,884) (353,884)
Net income (loss)................ (3,257,802)
Other comprehensive income
Change in value of available
for sale security............ 1,122,033
Change in value of retained
interest in mortgage loans... 145,245
-----------
Total comprehensive income
(loss)....................... 1,267,278
--------- -----------
BALANCE, MARCH 31, 1998............ (353,884) 2,219,674
Dividends paid on preferred
stock............................ (200,000)
Issuance of warrants in conjunction
with debt........................ 2,278,947
Notes Receivable From
Shareholder...................... (97,116) (97,116)
COMPREHENSIVE INCOME
Net income....................... 1,326,519
Other comprehensive income
Change in value of retained
interest in mortgage loans... (142,116)
Disposition of available for
sale security................ (1,122,033)
-----------
Total comprehensive income
(loss)....................... (1,264,149)
--------- -----------
BALANCE, MARCH 31, 1999............ (451,000) 4,263,875
Notes Receivable From
Shareholder...................... $ 316,183 316,183
COMPREHENSIVE INCOME
Net income....................... 228,691
-----------
Total comprehensive income..... 228,691
--------- -----------
BALANCE, DECEMBER 31, 1999......... $(134,817) $ 4,808,749
========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-28
<PAGE> 142
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31, YEAR ENDED MARCH 31,
------------------------------ --------------------------------------------
1999 1998 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 228,691 $ 1,388,646 $ 1,326,519 $ (3,257,802) $ 536,445
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sales of equipment, net................ (195,256) (126,333) (146,176) (159,461) (175,578)
Gain on sales of loans......................... (1,540,436) (6,142,860) (6,058,317) (1,500,056) (393,089)
Gain on sale of marketable equity securities,
affiliate.................................... -- (1,352,595) (1,352,595) -- --
Gain on hedging activities..................... (1,468,426) -- (1,750,907) -- --
Depreciation and amortization.................. 762,819 911,951 1,832,349 654,510 816,312
Amortization of debt discount.................. 703,052 -- 334,820 -- --
Provision for credit losses.................... 675,450 1,115,582 1,250,583 3,906,416 345,446
Deferred income tax provision.................. 119,000 722,200 683,400 (1,679,000) 276,122
Change in accounts receivable, advances,
prepaid expenses and other assets............ (642,965) 2,722,676 22,570 (2,061,617) (3,521,080)
Change in accounts payable and accrued
liabilities.................................. 1,797,919 2,728,124 2,623,401 169,202 620,413
Other.......................................... -- -- 223,293 220,794 370,675
------------- ------------- ------------- ------------- ------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES................................. 439,848 1,967,391 (1,011,060) (3,707,014) (1,124,334)
------------- ------------- ------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment for company use............ (183,746) (284,868) (365,840) (390,696) (184,793)
Increase in notes receivable from affiliates..... (3,303) (171,177) (58,828) (355,845) (1,484,761)
Equipment purchased for lease.................... (17,817,340) (15,050,888) (19,022,416) (19,409,471) (13,799,080)
Initial direct costs paid........................ -- (370,141) (460,471) (346,236) (451,138)
Principal collections on direct financing
leases......................................... 3,767,578 5,911,671 6,836,095 7,572,849 11,978,025
Net proceeds from hedging activities............. 1,527,614 --
Proceeds from sales of leased equipment.......... 1,472,506 1,031,469 2,232,765 8,240,032 1,419,154
Investments in mortgage loans.................... (208,694,610) (182,730,223) (204,448,223) (145,296,253) (40,229,960)
Proceeds on sales of loans and leases............ 142,647,831 189,052,290 187,617,162 63,515,289 32,859,421
Principal collections on retained interests...... 1,004,757 -- 1,358,337 -- --
Proceeds from sale of affiliate investments...... -- 1,352,595 5,353,595 -- --
Collection of mortgage loan principal............ 1,865,528 1,800,790 2,912,178 2,085,356 5,253,549
Other............................................ (397,892) 170,478 (105,596) 577,003 (82,421)
------------- ------------- ------------- ------------- ------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES................................. (74,811,077) 711,996 (18,151,242) (83,807,972) (4,722,004)
------------- ------------- ------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under recourse notes
payable........................................ 75,537,060 132,802,764 162,959,621 95,619,490 13,384,805
Proceeds from borrowings under notes payable,
other.......................................... -- 2,002,225 2,008,400 406,613 97,461
Proceeds from the exercise of stock options...... -- -- -- 72,960
Proceeds from borrowings under subordinate note
agreements..................................... -- 5,000,000 -- 5,000,000
Principal (repayments) of borrowing under
recourse notes payable......................... -- (132,870,855) (138,791,902) (2,449,830) (2,093,086)
Principal (repayments) of borrowing under
nonrecourse notes payable...................... (2,200,535) (4,206,432) (5,412,414) (6,749,850) (6,979,232)
Principal (repayments) of borrowing under notes
payable, other................................. (67,326) (33,084) (63,295) (36,616) (20,530)
Principal (repayments) of borrowing under
subordinate note agreements.................... (5,000,000) -- --
Debt issuance costs.............................. -- -- (1,949,801) -- --
Dividend payments................................ -- (200,000) (200,000) (400,000) (400,000)
------------- ------------- ------------- ------------- ------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES................................. 73,269,199 (2,505,382) 18,550,609 86,389,807 9,062,378
------------- ------------- ------------- ------------- ------------
Net increase (decrease) in cash.................. (1,102,030) 174,005 (611,693) (1,125,179) 3,216,040
Cash, beginning of period........................ 2,772,106 3,383,799 3,383,799 4,508,978 1,292,938
------------- ------------- ------------- ------------- ------------
Cash, end of period.............................. $ 1,670,076 $ 3,557,804 $ 2,772,106 $ 3,383,799 $ 4,508,978
============= ============= ============= ============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-29
<PAGE> 143
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Captec Financial Group, Inc. ("Financial Group") is a specialized
commercial finance company providing financing to the franchise, chain
restaurant and specialty retail industries. Financial Group principally provides
equipment lease and mortgage loan financing to its customers. Financial Group
makes these investments directly, as reflected on its consolidated balance
sheet. As of March 31, 1999, loans to various operators of two separate
franchise restaurant chains represented approximately 27.0% (over 380 loans) and
25.0% (over 330 loans) of Financial Group's loan portfolio.
Consolidation
The consolidated financial statements include the accounts of Financial
Group and its majority-owned subsidiaries, all of which the Company has
financial and operating control. All significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents
Cash equivalents consist of investments in money funds purchased with
original maturities of less than 90 days.
Origination Fees and Costs
Origination fees net of direct origination costs are deferred and amortized
over the life of the originated asset as an adjustment to yield. Captec uses the
effective interest method of amortization. The objective of the effective
interest method is to arrive at periodic interest income at a constant effective
yield on the net investment in the receivable.
Direct Financing Leases
At the commencement of a lease, Financial Group records the lease
receivable, estimated residual value of the leased equipment and unearned lease
income. The unearned lease income represents the excess of the gross lease
receivable, plus the estimated residual value, over the cost of the equipment.
Estimated residual values are periodically reviewed for impairment. Initial
direct costs associated with the origination of direct financing leases are
deferred and recorded as a component of the net investment in the lease at lease
commencement.
Unearned lease income and initial direct costs are amortized over the lease
term so as to approximate a constant rate of return on the net investment in the
lease.
Mortgage Loans Held for Sale
The loans represent mortgage loans on the land and/or buildings and
equipment. These mortgage loans held for sale are stated at the lower of cost or
market, determined in the aggregate. Gross unrealized gains or losses on forward
sales of Treasury futures are recorded as an adjustment to the basis of the
portfolio.
Sale of Mortgage Loans and Direct Financing Leases
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," was adopted prospectively effective on April 1, 1997. SFAS 125
applies a control-oriented, financial components approach to financial asset
transfer transactions whereby Financial Group (1) recognizes the financial and
servicing assets it controls, and
F-30
<PAGE> 144
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(2) derecognizes financial assets when control has been surrendered. Sales are
recognized when the transaction settles and the risks and rewards of ownership
are legally transferred to the purchaser.
Financial Group periodically securitizes and sells mortgage loans and
direct financing leases through a special purpose entity established for the
sole purpose of purchasing and reselling the loans and leases to a
securitization trust. Financial Group uses a two-step securitization structure,
whereby Financial Group (the transferor) first transfers financial assets to a
wholly owned subsidiary entity. In the second step, the wholly owned subsidiary
entity transfers, the assets to the qualifying SPE (special purpose entity), the
Trust. This SPE Trust is bankruptcy-remote with these assets being isolated from
both Financial Group and its creditors. The SPE Trust subsequently sells its
interests to investors with the proceeds flowing back to Financial Group, which
is when the sale is recognized by Financial Group.
The wholly owned subsidiary entity holds title of the non-rated assets for
which interest is retained by Financial Group. The SPE Trust activities are
permanently limited to holding title to transferred financial assets, issuing
beneficial interests and collecting and distributing cash from transferred
financial assets. The SPE Trust does not have the unconditional right to pledge
or exchange those assets.
The retained interest includes servicing rights, interest only ("IO")
strips, subordinated certificates and cash reserve accounts. Subsequent to the
sales, retained interests are recorded at estimated fair value, with unrealized
gains or loss included in equity. In accordance with FAS 125, the previous
carrying value of assets sold is allocated based its relative fair value of the
retained interest at the date of transfer. Financial Group is not aware of an
active market for the purchase and sale of these retained interests at this
time, accordingly, Financial Group estimates the fair value of the retained
interest by calculating the present value of the estimated expected future cash
flows received by Financial Group after being released by the securitization
trusts, using a discount rate commensurate with the risks involved (the "cash
out" method). Such retained interests are reviewed for quarterly impairment. Any
impairment is recognized through a charge to operations in that period.
Financial Group recognizes a servicing asset where the specified
contractual servicing fee exceeds the fee that would be required from a
substitute servicer. Capitalized servicing rights are assessed for impairment
based on the fair value of those rights. Financial Group estimates fair value of
the servicing rights using a discounted cash flow analysis incorporating
prepayment, default, and interest rate assumptions that market participants use
for similar instruments.
Loan servicing income
Assets or liabilities are established each time Financial Group undertakes
an obligation to service financial assets. Servicing assets or liabilities are
amortized in proportion to, and over the period of, estimated net servicing
revenues (or losses). For purposes of measuring impairment, the assets are
stratified based on loan type, investor type, and interest rate. The amount of
impairment recognized is the amount by which the capitalized mortgage servicing
rights for a stratum exceed their fair value. Rights to future interest income
from serviced loans that exceed contractually specified servicing fees are
classified as interest-only strips and accounted for as debt securities that are
available for sale.
Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," was adopted effective on April 1, 1998. All
prior periods have been reclassified to reflect the provisions of this
statement. SFAS 130 establishes standards for reporting comprehensive income.
Comprehensive income includes revenues, expenses, gains and losses that under
generally accepted accounting
F-31
<PAGE> 145
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
principles are reported as separate components of equity in Financial Group's
consolidated financial statements.
Hedging Instruments
Financial Group uses forward sales of mortgage-backed securities, US
Treasury securities and Treasury futures to hedge its mortgage loan and lease
portfolio. The forward sales are used as a means to hedge credit sector risk and
interest rate risk related to anticipated securitizations of the portfolio.
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", forward sales of US Treasury and mortgage-backed
securities are classified as "Trading Securities" and reported at fair value,
with unrealized gains and losses included in earnings.
Financial Group's accounting for forward sales of Treasury futures is in
accordance with concepts established in SFAS No. 80, "Accounting for Futures
Contracts." Deferral (hedge) accounting is applied if the derivative reduces the
risk of the underlying hedged item and is designated at inception as a hedge
with respect to the hedged item. Additionally, the derivative must result in
payoffs that are expected to be inversely correlated to the hedged item. In the
event correlation does not remain high, the futures contracts will cease to be
accounted for as hedges and a gain or loss will be recognized to the extent the
futures results have not been offset by the price changes of the hedged loans.
Mortgage Loan Income
Financial Group recognizes interest income as earned on its investment in
mortgage loans using the interest method (contractual interest rate applied to
the unpaid principal balance).
Allowances for Credit Losses
Allowances for estimated credit losses are established as required based on
historical experience and other factors that affect collectibility. The
allowance includes a provision for impaired loans. Financial Group periodically
evaluates loans for impairment. Impaired loans are measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate. Mortgage loans and lease investment receivables are charged to the
allowances for credit losses when an account is deemed to be uncollectible,
taking into consideration the financial condition of the lessee, the value of
the collateral, recourse to guarantors and other factors. Recoveries of
receivables previously charged off as uncollectible are credited to the
allowances for credit losses.
Property and Equipment
Property and equipment are stated at cost. Cost of maintenance and repairs
are charged to operations when incurred; cost of renewals, improvements and
additions are capitalized. The cost and accumulated depreciation applicable to
assets retired or sold are removed from the accounts, and the gain or loss on
disposition is recognized as income. Depreciation is computed using a
straight-line method over the useful lives of the related assets (computer
equipment -- five years; furniture and fixtures -- ten years;
automobiles -- three years). Amortization of leasehold improvements and capital
lease equipment is computed using the straight-line method over the shorter of
the lease term or the useful lives of the related assets.
Marketable Equity Securities
As of March 31, 1998, Financial Group held marketable equity securities in
an affiliated entity, Captec Net Lease Realty, Inc., comprising approximately a
one percent interest. In accordance with SFAS No. 115,
F-32
<PAGE> 146
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
"Accounting for Certain Investments in Debt and Equity Securities", these
securities were classified as available-for-sale and reported at fair value,
with unrealized gains and losses excluded from earnings and reported in a
separate component of shareholders' equity. These securities were sold in
December, 1998 (see Note 14).
Management Fees
Management fees consist of acquisition and asset management fees charged to
affiliated limited partnerships and affiliated companies for initiating and
managing leasing transactions on behalf of these entities. The various fees are
recognized as revenue as services are provided.
Income Taxes
Deferred taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities. Such differences arise
principally from direct financing leases and certain assigned leases being
treated as operating leases for income tax purposes. Deferred tax liabilities
and assets are recognized for the expected future tax consequences of events
that have been included in the financial statements or tax returns, measured at
the current tax rates. Deferred tax expense or benefit represents the change in
the deferred tax asset or liability balance.
Income/(Loss) per Common Share
Basic income/(loss) per common share is based on net income (loss) reduced
by preferred stock dividend requirements, divided by the weighted average number
of common shares outstanding. Diluted income/(loss) per share is computed as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED MARCH 31,
-------------------- --------------------------------
1999 1998 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income (loss) available to common
stockholders:
Effect of dilute securities:
Convertible preferred stock
dividend requirements........ $200,000 $200,000 $400,000 $400,000 $400,000
-------- -------- -------- -------- --------
Common shares outstanding......... 21,813 21,813 21,813 21,813 21,813
======== ======== ======== ======== ========
Effect of dilutive securities:
Convertible preferred stock....... 15,792 15,792 15,792 15,792 15,792
Warrants.......................... 7,949 7,949 7,949
Options........................... 7,825 7,825 7,825 2,815 2,815
-------- -------- -------- -------- --------
Weighted average number of diluted
shares outstanding................ 53,379 53,379 53,379 40,420 40,420
======== ======== ======== ======== ========
</TABLE>
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
F-33
<PAGE> 147
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 133 (SFAS 133) "Accounting for Derivative
Financial Instruments and Hedging Activities." This statement, which is required
to be adopted for fiscal years beginning after June 15, 2000, establishes
standards for recognition and measurement of derivatives and hedging activities.
Financial Group has not yet determined the financial statement impact of SFAS
133.
Reclassifications
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation.
2. INVESTMENTS IN DIRECT FINANCING LEASES
The net investment in direct financing leases is comprised of the
following:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ---------------------------
1999 1999 1998
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Receivables in installments................ $27,507,617 $28,925,699 $ 57,048,571
Estimated residual value of equipment...... 2,019,777 2,641,839 3,134,226
----------- ----------- ------------
Gross investment......................... 29,527,393 31,567,538 60,182,797
Unamortized initial direct costs........... 95,439 484,061 877,901
Unearned income............................ (6,955,661) (6,311,431) (10,203,217)
Allowance for credit losses................ (930,105) (903,393) (2,545,030)
----------- ----------- ------------
Total............................ $21,737,067 $24,836,775 $ 48,312,451
=========== =========== ============
</TABLE>
Direct financing lease receivables serve as collateral for certain notes
payable (see Note 7) are due in installments as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
(UNAUDITED)
<S> <C> <C>
2000.............................................. $ 2,773,972 $ 9,325,143
2001.............................................. 4,772,788 5,418,555
2002.............................................. 3,939,075 4,032,578
2003.............................................. 3,957,246 3,829,823
2004.............................................. 3,827,501 2,770,555
Thereafter........................................ 8,237,035 3,549,045
----------- -----------
Total................................... $27,507,617 $28,925,699
=========== ===========
</TABLE>
F-34
<PAGE> 148
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS IN DIRECT FINANCING LEASES (CONTINUED)
The gross amount of scheduled proceeds to be realized from estimated
residuals are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
(UNAUDITED)
<S> <C> <C>
2000............................................... $ 413,679 $ 845,888
2001............................................... 896,211 901,466
2002............................................... 274,701 312,517
2003............................................... 63,768 63,768
2004............................................... 194,647 317,429
Thereafter......................................... 176,771 200,771
---------- ----------
Total.................................... $2,019,777 $2,641,839
========== ==========
</TABLE>
3. MORTGAGE LOANS HELD FOR SALE
At March 31, 1999, the investment in mortgage loans consisted of 271 loans
collateralized by franchised restaurants. Included in this loan portfolio were
147 first mortgage loans representing 64.0% of the loan balances. The remainder
of the loans were collateralized by leasehold mortgages and/or general liens on
the restaurant business. The loans bear fixed rates of interest ranging from
7.52% to 11.00% per annum with maturities from 36 months through 234 months from
the dates of origination. All loans are fully amortizing, with level
installments of principal and interest due monthly. The loans and underlying
mortgages collateralize certain notes payable (see Note 7). Scheduled payments
of principal and interest totaling $16,402 were delinquent 60 days or more on
mortgage loans at March 31, 1998. Scheduled collections of principal on these
loans totaled $732,048. The allowance for credit losses is based on historical
delinquency experience. The allowance is expected to cover specifically
identified loans, as well as estimated losses inherent in the loan portfolio
that are not yet identifiable on a specific loan-by-loan basis. There were no
delinquencies over 60 days on mortgage loans as of March 31, 1999. Captec has
recorded an allowance for credit losses attributable to in mortgage loans held
for sale as of December 31, 1999 and March 31, 1999 of $812,642 and $354,592
respectively. The scheduled collections of principal on the investment in
mortgage loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
(UNAUDITED)
<S> <C> <C>
2000............................................ $ 1,453,709 $ 5,623,520
2001............................................ 7,256,975 6,360,700
2002............................................ 7,981,093 6,893,263
2003............................................ 8,778,969 7,443,704
2004............................................ 9,658,129 8,071,527
Thereafter...................................... 191,202,200 116,072,585
------------ ------------
Total................................. $226,331,075 $150,465,299
============ ============
</TABLE>
F-35
<PAGE> 149
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. MORTGAGE LOANS HELD FOR SALE (CONTINUED)
Activity in Mortgage loans held for sale consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ----------------------------
1999 1999 1998
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Balance, beginning of year.............. $ 150,465,299 $103,736,475 $ 25,270,103
New mortgage loans...................... 208,694,610 204,448,223 145,296,253
Collections of principal................ (1,865,528) (2,912,178) (2,085,356)
Securitizations......................... (128,573,882) (153,051,613) (64,744,525)
Other................................... (2,389,424) (1,755,608) --
------------- ------------ ------------
Balance, end of year.................... $ 226,331,075 $150,465,299 $103,736,475
============= ============ ============
</TABLE>
4. RETAINED INTEREST IN MORTGAGE LOANS AND LEASES SOLD
In May 1999, Financial Group sold direct financing leases and mortgage
loans with a net aggregate carrying value of approximately $145.0 million for
approximately $147.0 million in cash and $3.4 million in retained subordinated
certificates. Financial Group recognized a gain on sale of approximately $3.0
million.
Financial Group sold mortgage loans having a total principal balance of
$153,000,000 and $64,745,000 at the time of sale during 1999 and 1998,
respectively. Gains on sales totaled approximately $6,058,000 and $1,500,056
during 1999 and 1998, respectively. In 1999, Financial Group sold direct
financing leases with a net book value of approximately $32,800,000 and
recognized a gain on sale of approximately $402,000.
In each case, Financial Group retained an interest in the sold loans and
leases. The components of the retained interests are initially valued based on
their relative fair value compared to the portion sold. Subsequently, the cash
reserve accounts, the IO strip and the subordinated certificate are adjusted to
fair value with any changes recorded as a separate component of stockholders'
equity. Financial Group recorded an unrealized loss of $142,116 and an
unrealized gain of $145,245 in stockholder's equity at March 31, 1999 and 1998,
respectively.
Significant assumptions used in estimating the fair value of retained
interests are as follows:
<TABLE>
<CAPTION>
<S> <C>
Weighted average discount rate.............................. 16.9%
Weighted average default.................................... 0.1%
Weighted average prepayments................................ 1.5%
</TABLE>
The retained interest in mortgage loans sold consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, -------------------------
1999 1999 1998
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Cash reserve accounts........................ $ 1,726,277 $ 1,820,101 $1,484,667
Servicing assets............................. 1,130,981 1,368,977 1,192,131
Interest only strip receivable............... 3,454,868 3,788,138 4,482,626
Subordinated trust certificates.............. 8,189,905 5,115,412 1,917,492
----------- ----------- ----------
Total.............................. $14,502,031 $12,092,628 $9,076,916
=========== =========== ==========
</TABLE>
F-36
<PAGE> 150
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RETAINED INTEREST IN MORTGAGE LOANS AND LEASES SOLD (CONTINUED)
Activity in the servicing assets consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ------------------------
1999 1999 1998
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Balance, beginning of period.................. $1,368,977 $1,192,131 $ 449,433
Amount originated............................. -- 417,829 801,803
Amount amortized.............................. (237,996) (240,983) (59,105)
---------- ---------- ----------
Balance, end of period................... $1,130,981 $1,368,977 $1,192,131
========== ========== ==========
</TABLE>
Financial Group's servicing portfolio amounted to approximately
$476,108,000 and $96,050,000 at March 31, 1999 and 1998, respectively.
Financial Group's 1999 mortgage loan sale was part of a joint
securitization with an affiliated joint venture and a third party (see Note 14).
Financial Group assumed the servicing rights for loans originated by the
affiliated joint ventures and the third party that participated in this joint
securitization transaction.
5. ALLOWANCES FOR CREDIT LOSSES
Activity in the allowances for credit losses consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ---------------------------------------
1999 1999 1998 1997
------------ ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of period.... $1,391,947 $ 2,688,925 $ 403,282 $ 255,769
Provision for losses............ 675,450 1,250,582 3,906,416 345,446
Charge-offs..................... (190,688) (2,547,560) (1,620,773) (197,933)
---------- ----------- ----------- ---------
Balance, end of period..... $1,876,709 $ 1,391,947 $ 2,688,925 $ 403,282
========== =========== =========== =========
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ------------------------
1999 1999 1998
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment............................ $1,083,386 $ 917,418 $ 715,592
Furniture and fixtures........................ 575,907 572,185 425,603
Leasehold improvements........................ 47,887 36,454 19,022
Automobiles................................... 132,084 132,084 132,084
---------- ---------- ----------
Total............................... 1,839,264 1,658,141 1,292,301
Less -- accumulated depreciation and
amortization................................ 961,074 775,403 559,700
---------- ---------- ----------
Property and equipment, net.............. $ 878,190 $ 882,738 $ 732,601
========== ========== ==========
</TABLE>
F-37
<PAGE> 151
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE
Notes payable collateralized by investments in leases and loans, recourse
Financial Group's recourse notes payable are principally comprised of
borrowings under the following credit facilities:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ----------------------------
1999 1999 1998
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
A $250.0 million credit facility with a financial
institution (the "Credit Facility") is used for
short-term warehouse financing of investments in
mortgage loans and equipment lease contracts. The
Credit Facility is subject to renewal in August,
2000. Notes payable (net of unamortized discount
of $780,223) are collateralized by investment in
certain direct financing leases and mortgage
loans with a net book value of approximately
$169,608,000 at March 31, 1999. Interest on
outstanding borrowings under the Credit Facility
floats monthly at a rate equal to the 30-day
LIBOR rate plus 1.10% (effective rate of 6.032%
at March 31, 1999)............................... $238,884,831 $162,179,397 $ --
A $40,000,000 revolving credit facility with a
financial institution used for short-term
warehouse financing of equipment lease contracts
(paid off in 1999)............................... 30,717,901
A $150,000,000 revolving credit facility with a
financial institution used for short-term
warehouse financing of investments in mortgage
loans (paid off in 1999)......................... 94,412,391
Credit facilities with affiliates used for
short-term warehouse financing of investments in
leases and loans, or securities collateralized
thereby. Balances due under this facility are
payable on demand and bear interest rates ranging
between 8.0% and 10.0% per annum. Notes payable
under this credit facility are partially
collateralized by investments in certain mortgage
loans and direct financing leases, or securities
collateralized thereby, with a net book value of
approximately $6,649,000 and $11,133,000 as of
March 31, 1999 and 1998, respectively............ 15,378,374 15,422,815 24,536,814
Revolving credit agreement with a financial
institution that is used for either short-term
warehouse financing or for the longer term
financing of equipment lease contracts. Interest
on outstanding borrowings under the credit
agreement is determined at the time of the
advance and is fixed at 2.7% over the average
U.S. Treasury note having approximately an equal
term and sale amount as the applicable advance
Notes payable under this credit agreement are
collateralized by investment in certain direct
financing leases with a net book value of
approximately $764,000 and $5,917,000 as of March
31, 1999 and 1998, respectively.................. 730,923 5,245,201
------------ ------------ ------------
Totals................................. $254,263,205 $178,333,135 $154,912,307
============ ============ ============
</TABLE>
In conjunction with the Credit Facility, the financial institution also
received warrants to purchase 3,011 shares of the Financial Group Common Stock.
The warrants expire in August 2008 and may be exercised at $0.01 per share. The
warrants were valued at $1,011,696, which has been accounted for as unamortized
F-38
<PAGE> 152
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE (CONTINUED)
discount against the notes payable and an increase in additional paid-in
capital. The discount is being amortized as additional interest expense over the
term of the notes payable. Financial Group also paid $1,400,000 of issuance
costs related to the Credit Facility, which were capitalized and are being
amortized to interest expense on a straight-line basis over the expected term of
the facility.
The Credit Facility agreement includes various covenants and a subjective
acceleration clause. Financial Group has been in compliance with these covenants
for all periods presented.
Annual maturities on recourse notes payable are as indicated below. This
schedule assumes that Financial Group's Credit Facility, which is subject to
renewal in 2000 as described above, is not renewed.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
(UNAUDITED)
<S> <C> <C>
2000............................................ $ 15,378,374 $ 15,873,758
2001............................................ 238,884,831 162,427,776
2002............................................ 31,601
------------ ------------
Total................................. $254,263,205 $178,333,135
============ ============
</TABLE>
Notes Payable Collateralized by Investments in Leases and Loans, Nonrecourse
Financial Group financed a portion of its investment in direct financing
leases with nonrecourse notes payable, principally through the sale of
asset-backed securities. The notes bear interest at rates from 6.95% to 8.40%.
In the event of a default by a lessee under a lease which has been financed
on a nonrecourse basis, the noteholder has a first lien against the underlying
leased equipment but has no further recourse against Financial Group.
Nonrecourse notes payable are collateralized by investment in certain direct
financing leases with a net book value of approximately $3,970,000 and
$9,182,000 as of March 31, 1999 and 1998, respectively.
Annual maturities on nonrecourse notes payable collateralized by leases and
loans are collateralized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
(UNAUDITED)
<S> <C> <C>
2000............................................... $ 580,319 $2,536,746
2001............................................... 394,995 577,035
2002............................................... 62,474 77,022
2003............................................... 18,415 18,415
2004 and thereafter................................ 34,260 34,260
---------- ----------
Total.................................... $1,090,463 $3,243,478
========== ==========
</TABLE>
F-39
<PAGE> 153
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE (CONTINUED)
Notes payable, other
Financial Group's other notes payable are comprised of the following
borrowings:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ----------------------
1999 1999 1998
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Term loans payable to financial institutions.
The notes bear interest at rates ranging from
8.20% to 8.50% per annum...................... $ 398,868 $ 466,195 $204,490
Note payable to an individual that bears
interest at 8.50% and is due in 2007.......... 625,000 625,000 625,000
---------- ---------- --------
1,023,868 1,091,195 829,490
Notes payable to shareholders, bearing interest
at a rate of 12.0% (net of unamortized debt
discount of $486,257 at March 31,1999)........ 1,405,539 1,197,143
---------- ---------- --------
Total................................. $2,429,407 $2,288,338 $829,490
========== ========== ========
</TABLE>
In connection with the issuance of notes payable to shareholders, the
holders also received warrants to purchase 2,469 shares of the Financial Group
Common Stock. The warrants expire in February 2004 and may be exercised at $0.01
per share. The warrants were valued at $555,722 (relative to the fair value of
the notes payable), which has been accounted for as unamortized discount against
the notes payable and an increase in additional paid-in capital. The discount is
being amortized as additional interest expense over the term of the notes
payable.
Annual maturities on other notes payable are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
(UNAUDITED)
<S> <C> <C>
2000............................................... $ 24,032 $ 91,501
2001............................................... 1,505,171 1,296,633
2002............................................... 102,181 102,181
2003............................................... 145,023 145,023
2004............................................... 28,000 28,000
Thereafter......................................... 625,000 625,000
---------- ----------
Total.................................... $2,429,407 $2,288,338
========== ==========
</TABLE>
8. SUBORDINATED DEBT
Financial Group issued subordinated note agreements in an aggregate amount
of $5,000,000 in 1997 and used the proceeds to repay the outstanding
subordinated note agreements as of March 31, 1998. The notes bear interest at
12.0% per annum with a maturity of seven years from the date of commencement. At
March 31, 1999, annual aggregate maturities on the notes payable are $2,500,000
on February 20, 2003 and $2,500,000 on February 20, 2004.
In connection with the issuance of the subordinated notes, the holders also
received warrants to purchase 2,469 shares of the Financial Group Common Stock.
The warrants expire in February 2004 and may be exercised at $0.01 per share.
The warrants were valued at $711,529 (relative to the fair value of the
subordinated notes), which has been accounted for as unamortized discount
against the notes payable and an
F-40
<PAGE> 154
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SUBORDINATED DEBT (CONTINUED)
increase in additional paid-in capital. The discount is being amortized as
additional interest expense over the term of the notes payable. The unamortized
discount at March 31, 1999 is $677,647.
9. OPERATING LEASE OBLIGATIONS
Financial Group leases its office facilities under noncancellable lease
agreements which expired in August 1999. Subsequently, the leases were
renegotiated through 2005. Financial Group also leases vehicles and some office
equipment under noncancellable lease agreements which expire through 2004. Rent
expense for such leases was approximately $500,000, $406,000 and $318,000 for
1999, 1998 and 1997, respectively.
Future minimum payments under noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
(UNAUDITED)
<S> <C> <C>
2000................................................. $ 118,468 $261,974
2001................................................. 792,806 47,106
2002................................................. 799,835 31,963
2003................................................. 821,035 30,055
2004................................................. 827,835 12,523
Thereafter........................................... 839,069 --
---------- --------
Total...................................... $4,199,048 $383,621
========== ========
</TABLE>
10. STOCKHOLDERS' EQUITY
A cumulative dividend accrues on the preferred stock, beginning on the date
of issuance, at a per annum rate of $25.33 per share. Dividends, subject to
declaration by the Board of Directors, are payable semiannually on the first day
of May and November.
The preferred stock is convertible to the Financial Group Common Stock at
the option of the stockholders at a ratio of one-to-one. The preferred
stockholder has participation rights of the remaining assets on a pro rata basis
with common stockholders and is entitled to liquidation preferences, allowing
for a return of the stockholders investment. There are no sinking-fund
requirements or put or call rights available under the purchase agreement. The
preferred stock is a nonvoting class of stock, subject to the conversion of
shares to common stock. Three of eight seats on Financial Group's Board of
Directors have been allotted to representatives of the preferred stockholder.
In conjunction with the Credit Facility agreement and the issuance of the
officer and subordinated notes, the holders of the notes also received warrants
to purchase an aggregate 7,949 shares of the Financial Group Common Stock. The
warrants may be exercised at $0.01 per share. The warrants were valued at an
aggregate of $2,278,947. (see Notes 7 and 8)
11. COMMON STOCK OPTIONS
Financial Group periodically grants options to purchase shares of the
Financial Group Common Stock at exercise prices that approximate the fair market
value of the Financial Group Common Stock at the date of grant.
Presented below is a summary of the status of stock options held by
eligible employees for all plans, and the related transactions for the years
ended March 31, 1999, 1998, and 1997.
F-41
<PAGE> 155
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMON STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year.............................. 2,875 $196 2,875 $196 4,375 $ 62
Granted............................. 4,950 682 500 732
Exercised........................... 2,000 36
----- ---- ----- ---- ----- ----
Options outstanding, end of year.... 7,825 $504 2,875 $196 2,875 $196
===== ==== ===== ==== ===== ====
</TABLE>
The following table summarizes the status of employee stock options
outstanding and exercisable as of March 31, 1999.
<TABLE>
<CAPTION>
STOCK OPTIONS STOCK OPTIONS
OUTSTANDING EXERCISABLE
---------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
EXERCISE PRICE RANGE SHARES TERM PRICE SHARES PRICE
- -------------------- ------ --------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$33........................................ 1,875 3.00 years $ 33 1,875 $ 33
$253 - $279................................ 500 6.25 years 271 500 271
$666....................................... 3,675 9.84 years 665 3,675 665
$732....................................... 1,775 7.75 years 732 1,775 732
</TABLE>
Financial Group adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), but elected to continue to measure compensation
costs using the intrinsic value method, in accordance with APB Opinion No. 25
("APB 25"). Accordingly, no compensation cost for stock options has been
recognized. Had Financial Group elected to recognize compensation expense for
stock options based on the fair value at the grant dates of awards, the
recognized expense would not result in a significant difference from reported
net income.
The fair value 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 for 1997 through 1999: (i) dividend yield of 0 percent;
(ii) expected stock price volatility of 0 percent; (iii) risk free interest rate
of 5.6 percent; and (iv) expected option term of eight years.
12. INCOME TAX
The components of the provision for income tax are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
NINE MONTHS ENDED -----------------------------------
DECEMBER 31, 1999 1999 1998 1997
----------------- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Currently payable.............. -- -- -- --
Deferred tax provision
(benefit).................... $119,000 $683,400 $(1,679,000) $276,000
-------- -------- ----------- --------
Total................ $119,000 $683,400 $(1,679,000) $276,000
======== ======== =========== ========
</TABLE>
F-42
<PAGE> 156
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAX (CONTINUED)
The components of net deferred taxes consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, --------------------------
1999 1999 1998
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets......................... $ 5,974,719 $ 6,093,719 $10,283,108
Deferred tax liabilities.................... (2,432,114) (2,432,114) (9,265,340)
Valuation allowance......................... (2,882,000) (2,882,000) (261,000)
----------- ----------- -----------
Net deferred tax asset
(liability)..................... $ 660,605 $ 779,605 $ 756,768
=========== =========== ===========
</TABLE>
In 1999, a deferred tax provision of $1,611 was included in stockholders'
equity, relating to unrealized gains on retained in mortgage loans sold.
In 1998, a deferred tax provision of $652,840 was included in stockholders'
equity, relating to unrealized gains on investment securities and retained
interest in mortgage loans sold.
The deferred assets and liabilities noted above arise principally from net
operating losses and direct financing leases and certain assigned leases in the
financial statements being treated as operating leases for income tax purposes.
Deferred income taxes reflect the estimated tax effect of temporary differences
between the bases of assets and liabilities for financial reporting purposes and
those amounts as measured by tax laws and regulations. The components of
deferred income tax assets and liabilities as of March 31, were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
DEFERRED TAX LIABILITIES
Leasing transactions and finance receivable............... $2,432,114 $ 9,265,340
========== ===========
DEFERRED TAX ASSETS
Provision for credit losses............................... 473,262 914,235
Net operating losses...................................... 4,853,638 5,934,655
Leasing transaction and other............................. 766,819 3,434,218
---------- -----------
Total deferred tax assets.............................. $6,093,719 $10,283,108
========== ===========
</TABLE>
There is no significant difference between the provision for income taxes
and the amount which would be provided at the federal statutory rate of 34
percent.
At March 31, 1999, for federal income tax purposes, Financial Group has
approximately $12,965,000 of net operating loss carryforwards available to
reduce future taxable income, which expire in various amounts through the year
2012. Financial Group also has investment tax credit carryforwards, subject to
certain limitations, of approximately $261,000, which expire in various amounts
through the year 2001. A valuation allowance has been recorded for net operating
loss and investment tax credit carryforwards Financial Group believes will
expire prior to realization.
13. CONTINGENT LIABILITIES
In December 1998, action was brought by Credit Suisse First Boston
Corporation ("CS") in the United States District Court for the Southern District
of New York against Financial Group, alleging that CS overpaid Financial Group
upon the closing of a joint securitization of pooled restaurant and energy
mortgage loans. In its complaint CS is seeking damages of up to $1,800,000.
Financial Group has filed counterclaims against CS for, among other things,
breaches of fiduciary duties undertaken by CS in the securitization as well as
breaches of contract with respect to certain joint venture loans. The amount of
monetary damages sought by
F-43
<PAGE> 157
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. CONTINGENT LIABILITIES (CONTINUED)
Financial Group in its counterclaims exceeds the amount of CS's claim. The
action is in early discovery stages. Financial Group intends to vigorously
pursue its counterclaims against CS. Financial Group has reserved approximately
$1,100,000 at March 31, 1999 and December 31, 1999.
14. RELATED PARTIES
Advances have been made to the majority shareholder of Financial Group. The
advances are evidenced by notes receivable bearing a eight percent interest
rate, with principal and interest payable in annual installments from 3 to 7
years. Notes receivable from shareholder totaled $457,000 and $353,884 at March
31, 1999 and 1998, respectively.
Advances, prepaid expenses and other assets at March 31, 1998 include
approximately $3,934,000 for affiliated limited partnerships and private
placements. In July 1998, Financial Group's general partnership interest in the
limited partnerships was sold for approximately $4,001,000.
Financial Group held marketable equity securities in an affiliated entity,
Captec Net Lease Realty, Inc., a publicly traded real estate investment trust.
The securities were recorded at fair value and the gross unrealized holding gain
of $1,122,033 was shown as a separate component of stockholders equity as of
March 31, 1998. Cost of the securities was zero. In December 1998, Financial
Group sold these securities to another affiliate at fair market value and
realized a gain on sale of approximately $1,352,000.
Financial Group received proceeds of $1,683,400 in December 1998 from
issuing notes to officers (see Note 7). During 1999, Financial Group recognized
$69,000 of interest expense related to these notes.
Financial Group recognized approximately $1,899,000, $1,710,000 and
$2,302,207 in interest expense related to notes payable to affiliates (see Note
7) for 1999, 1998 and 1997, respectively.
Financial Group recognized approximately $2,461,000, $2,831,000 and
$3,540,000 in management fee revenue from affiliated companies and limited
partnerships in 1999, 1998 and 1997, respectively.
Financial Group shares a 50 percent ownership interest in a real estate
investment with an officer of Financial Group. As of March 31, 1999, Financial
Group has contributed $358,000 to this investment, which is included in other
assets. Financial Group periodically evaluates this asset for impairment.
15. NOTES RECEIVABLE FROM AFFILIATES
Financial Group has advances to Merchants Capital Corporation ("MCC") and
its wholly-owned subsidiary, Sarasota Restaurant Concepts, Inc. Two stockholders
of Financial Group own a majority interest in MCC. The advances are evidenced by
notes and collateralized by a management contract with MCC and Merchants Capital
Partners, L.P., a licensed small business investment company. The notes bear
interest at
F-44
<PAGE> 158
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. NOTES RECEIVABLE FROM AFFILIATES (CONTINUED)
eight percent per annum and are due over a period of five years. The scheduled
collection of principal on the notes as of March 31, 1999 and December 31, 1999
is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
(UNAUDITED)
<S> <C> <C>
2000............................................... $ 67,561 $ 96,544
2001............................................... 307,397 307,397
2002............................................... 838,789 838,789
2003............................................... 904,121 904,121
2004............................................... 945,301 913,015
---------- ----------
Total.................................... $3,063,169 $3,059,866
========== ==========
</TABLE>
16. SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENT OF CASH FLOWS
Cash paid for interest during the years ended March 31, 1999, 1998 and 1997
was approximately $13,514,000, $7,894,000 and $6,890,000, respectively. During
the years ended March 31, 1999 and 1998, the financial institutions with which
Financial Group assigned various direct financing leases received approximately
$838,000 and $1,969,000, respectively, in lease rental receipts;
correspondingly, there was a reduction to the nonrecourse notes payable for the
same amounts.
17. HEDGING
Financial Group hedges its mortgage loan and direct financing lease
portfolio as part of its credit sector and interest rate risk management
strategy. Financial Group hedges the credit sector and interest rate risk on its
portfolio by using forward sales of FNMA mortgage-backed securities, U.S.
Treasury securities and Treasury futures. During the year ended March 31, 1999,
Financial Group recognized a gain on forward sales of FNMA mortgage-backed and
U.S. Treasury Securities of approximately $1,751,000.
Financial Group classifies the forward sales of Treasury futures as hedges
on specific lease and loan receivables. Any gross unrealized gains or losses on
forward sales of Treasury futures are an adjustment to the basis of the
portfolio.
The following table identifies open positions of the forward sales as of
March 31, 1999:
<TABLE>
<CAPTION>
DESCRIPTION NOTIONAL UNREALIZED GAINS
- ----------- -------- ----------------
<S> <C> <C>
MORTGAGE-BACKED SECURITY
FNMA 6.0% -- 5/08............................... $34,000,000 $897,787
</TABLE>
As of March 31, 1999, Financial Group recognized income of $1,751,000
related to forward sales of securities (realized gains of $853,000; unrealized
gains of $898,000).
<TABLE>
<S> <C> <C>
FUTURES CONTRACTS
5 year -- U. S. Treasury note -- 6/99............... 14,200,000 $ 75,438
10 year -- U. S. Treasury bonds -- 6/99............. 36,300,000 669,406
30 year -- U. S. Treasury bond -- 6/99.............. 3,000,000 6,797
--------
$751,641
========
</TABLE>
At March 31, 1999 deferred gains on futures contracts totaled $1,401,000
(realized gains of $649,000; unrealized gains of $752,000).
F-45
<PAGE> 159
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments held by Financial Group
at March 31, 1999 and 1998 and the valuation techniques used to estimate the
fair value, were as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------- --------------------------------
ESTIMATED ESTIMATED
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
------------ ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Investments in mortgage
Loans, net............... $150,465,299 $ 151,931,865 $ 103,736,475 $104,261,012
Investments in retained
interest................. 12,092,628 12,092,628 9,076,916 9,076,916
Hedging instruments........ 1,649,428 1,649,428
Notes receivable from
affiliates............... 3,059,866 3,059,866 3,001,038 3,001,038
Marketable equity
securities, affiliates... -- -- 1,700,050 1,700,050
LIABILITIES
Notes payable
collateralized by
investments in leases and
loans.................... 181,576,613 181,658,359 163,400,792 163,653,679
Notes payable,
shareholders............. 1,197,143 1,197,143 -- --
Notes payable, other....... 1,091,195 1,091,195 829,490 867,597
Subordinated debt.......... 5,000,000 5,000,000 5,000,000 5,000,000
</TABLE>
Investment in Mortgage Loans
The book value of investment in mortgage loans is reflected, net of
unrealized gains on hedging instruments and reserves. Fair value is estimated by
discounting future cash flows using an estimated discount rate which reflects
U.S. Treasury Note rates plus the spread over those rates at which Financial
Group originally entered into under these contracts.
Investment and Retained Interest
The retained interest in mortgage loans sold is recorded at the present
value of estimated future cash flows discounted at rates commensurate with this
type of instrument, which approximates fair value.
Hedging Instruments
The estimated fair values of hedging instruments are estimated based on
market prices.
Notes Receivable from Affiliates
The book value approximates fair value because of the maturity of these
notes.
Investments in Securities
The estimated fair value of investments in marketable securities is
estimated based on market prices.
F-46
<PAGE> 160
CAPTEC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. FINANCIAL INSTRUMENTS (CONTINUED)
Notes Payable Collateralized by Investments in Leases and Loans
The fair value of fixed rate debt is estimated by discounting future cash
flows using an estimated discount rate which reflects U.S. Treasury rates plus
the spread over those rates at which Financial Group currently borrows under its
credit facilities. The fair value of floating rate debt approximates the book
value due to the short maturity of these instruments.
Notes Payable, Shareholder
The fair value of fixed rate debt is estimated by discounting future cash
flows using an estimated discount rate which reflects U.S. Treasury rates plus
the spread over those rates at which Financial Group currently borrows under its
credit facilities. The fair value of floating rate debt approximates the book
value due to the short maturity of these instruments.
Notes Payable, Other
The fair value of fixed rate debt is estimated by discounting future cash
flows using an estimated discount rate which reflects U.S. Treasury rates plus
the spread over those rates at which Financial Group currently borrows under its
credit facilities. The fair value of floating rate debt approximates the book
value due to the short maturity of these instruments.
Subordinated Debt
Subordinated debt is recorded at the present value of estimated future cash
flows discounted at rates commensurate with this type of instrument, which
approximates fair value.
F-47
<PAGE> 161
CAPTEC FINANCIAL GROUP, INC.
SCHEDULE IV
MORTGAGE LOANS
MARCH 31, 1999
<TABLE>
<CAPTION>
PERIODIC
MATURITY PAYMENT PRIOR INTEREST FACE
CONCEPT DEPRECIATION DATE TERM LIEN RATE AMOUNT
------- ------------ -------- -------- ------ --------- --------------
<S> <C> <C> <C> <C> <C> <C>
BRUEGGERS BAGELS................................. -- 01/01/12 FIXED -- 9.67 590,000.00
KFC.............................................. -- 09/01/13 FIXED -- 9.13 610,000.00
BURGER KING...................................... -- 04/01/13 FIXED -- 9.07 1,100,000.00
BURGER KING...................................... -- 04/01/13 FIXED -- 9.59 700,000.00
TACO BELL........................................ -- 01/01/13 FIXED -- 9.40 467,000.00
TACO BELL........................................ -- 10/01/13 FIXED -- 8.07 956,925.68
CHILI'S.......................................... -- 01/01/13 FIXED -- 9.34 1,014,360.24
TACO BELL........................................ -- 04/01/14 FIXED -- 9.00 1,225,000.00
APPLEBEE'S....................................... -- 01/01/14 FIXED -- 9.00 1,850,000.00
KFC.............................................. -- 01/01/13 FIXED -- 9.09 360,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.08 615,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 8.99 639,000.00
KFC.............................................. -- 01/01/13 FIXED -- 9.09 186,000.00
DENNY'S.......................................... -- 11/01/13 FIXED -- 7.94 1,360,000.00
BURGER KING...................................... -- 08/01/13 FIXED -- 8.88 1,140,000.00
POPEYE'S......................................... -- 09/01/13 FIXED -- 9.16 950,000.00
TACO BELL........................................ -- 04/01/14 FIXED -- 9.00 1,113,631.00
ARBY'S........................................... -- 01/01/14 FIXED -- 9.00 705,000.00
BURGER KING...................................... -- 04/01/14 FIXED -- 9.60 1,120,000.00
KFC.............................................. -- 04/01/14 FIXED -- 9.42 650,000.00
TACO BELL........................................ -- 04/01/14 FIXED -- 9.20 772,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.01 845,000.00
BURGER KING...................................... -- 09/01/13 FIXED -- 8.86 535,000.00
TGI FRIDAY'S..................................... -- 04/01/14 FIXED -- 9.10 2,670,000.00
DENNY'S.......................................... -- 01/01/14 FIXED -- 9.00 850,000.00
KFC.............................................. -- 09/01/13 FIXED -- 8.85 300,000.00
KFC.............................................. -- 09/01/13 FIXED -- 8.85 500,000.00
KFC.............................................. -- 09/01/13 FIXED -- 8.85 375,000.00
KFC.............................................. -- 09/01/13 FIXED -- 8.85 450,000.00
KFC.............................................. -- 09/01/13 FIXED -- 8.85 300,000.00
KFC.............................................. -- 09/01/13 FIXED -- 8.85 375,000.00
TACO BELL/KFC.................................... -- 04/01/14 FIXED -- 9.48 595,000.00
WENDY'S.......................................... -- 09/01/13 FIXED -- 8.85 2,807,000.00
CHILI'S.......................................... -- 04/01/14 FIXED -- 9.36 1,450,000.00
ARBY'S........................................... -- 03/01/14 FIXED -- 9.03 900,000.00
TACO BELL........................................ -- 10/01/13 FIXED -- 8.29 850,000.00
ARBY'S........................................... -- 09/01/13 FIXED -- 8.65 710,000.00
ARBY'S........................................... -- 09/01/13 FIXED -- 8.65 420,000.00
ARBY'S........................................... -- 09/01/13 FIXED -- 8.65 540,000.00
ARBY'S........................................... -- 09/01/13 FIXED -- 8.65 552,000.00
<CAPTION>
CARRYING DELINQUENT GEOGRAPHIC
CONCEPT AMOUNT(a) LOANS LOCATION
------- -------------- ---------- ----------
<S> <C> <C> <C>
BRUEGGERS BAGELS................................. 552,169.84 -- FL
KFC.............................................. 604,826.72 -- MO
BURGER KING...................................... 1,075,062.71 -- CO
BURGER KING...................................... 685,358.08 -- WA
TACO BELL........................................ 452,986.17 -- IN
TACO BELL........................................ 949,339.92 -- CA
CHILI'S.......................................... 999,217.03 -- TX
TACO BELL........................................ 1,225,000.00 -- CA
APPLEBEE'S....................................... 1,853,986.86 -- UT
KFC.............................................. 345,071.39 -- TX
TACO BELL........................................ 616,389.70 -- MI
TACO BELL........................................ 640,368.71 -- MI
KFC.............................................. 178,288.72 -- TX
DENNY'S.......................................... 1,352,930.93 -- FL
BURGER KING...................................... 1,123,960.29 -- AR
POPEYE'S......................................... 942,006.08 -- VA
TACO BELL........................................ 1,113,631.00 -- CO
ARBY'S........................................... 706,519.32 -- MI
BURGER KING...................................... 1,120,000.00 -- AK
KFC.............................................. 650,000.00 -- OH
TACO BELL........................................ 772,000.00 -- TN
TACO BELL........................................ 846,832.08 -- PA
BURGER KING...................................... 530,135.21 -- WA
TGI FRIDAY'S..................................... 2,670,000.00 -- MO
DENNY'S.......................................... 851,831.82 -- FL
KFC.............................................. 297,268.47 -- SC
KFC.............................................. 495,442.32 -- SC
KFC.............................................. 371,584.63 -- SC
KFC.............................................. 445,900.77 -- SC
KFC.............................................. 297,268.47 -- SC
KFC.............................................. 371,584.63 -- SC
TACO BELL/KFC.................................... 595,000.00 -- TX
WENDY'S.......................................... 2,781,411.05 -- GA
CHILI'S.......................................... 1,450,000.00 -- TX
ARBY'S........................................... 906,772.50 -- MD
TACO BELL........................................ 843,652.21 -- FL
ARBY'S........................................... 703,206.49 -- PA
ARBY'S........................................... 415,979.83 -- PA
ARBY'S........................................... 534,833.97 -- PA
ARBY'S........................................... 546,718.23 -- PA
</TABLE>
F-48
<PAGE> 162
<TABLE>
<CAPTION>
PERIODIC
MATURITY PAYMENT PRIOR INTEREST FACE
CONCEPT DEPRECIATION DATE TERM LIEN RATE AMOUNT
------- ------------ -------- -------- ------ --------- --------------
<S> <C> <C> <C> <C> <C> <C>
ARBY'S........................................... -- 09/01/13 FIXED -- 8.65 42,000.00
ARBY'S........................................... -- 09/01/13 FIXED -- 8.65 807,000.00
ARBY'S........................................... -- 09/01/13 FIXED -- 8.65 207,000.00
ARBY'S........................................... -- 09/01/13 FIXED -- 8.65 587,000.00
ARBY'S........................................... -- 07/01/13 FIXED -- 8.79 500,000.00
ARBY'S........................................... -- 07/01/13 FIXED -- 8.79 438,000.00
TACO BELL........................................ -- 09/01/13 FIXED -- 8.57 300,000.00
TACO BELL........................................ -- 07/01/12 FIXED -- 8.79 900,000.00
BENNIGAN'S/STEAK & ALE........................... -- 09/01/13 FIXED -- 8.62 4,655,000.00
ARBY'S........................................... -- 10/01/13 FIXED -- 8.57 490,000.00
ARBY'S........................................... -- 10/01/13 FIXED -- 8.57 380,000.00
ARBY'S........................................... -- 10/01/13 FIXED -- 8.57 490,000.00
WENDY'S.......................................... -- 10/01/18 FIXED -- 7.77 750,000.00
WENDY'S.......................................... -- 10/01/18 FIXED -- 7.77 500,000.00
WENDY'S.......................................... -- 10/01/18 FIXED -- 7.77 675,000.00
WENDY'S.......................................... -- 10/01/18 FIXED -- 7.77 870,000.00
WENDY'S.......................................... -- 10/01/18 FIXED -- 7.77 930,000.00
WENDY'S.......................................... -- 10/01/17 FIXED -- 7.77 575,000.00
WENDY'S.......................................... -- 09/01/18 FIXED -- 8.15 1,100,000.00
WENDY'S.......................................... -- 09/01/18 FIXED -- 8.15 910,000.00
WENDY'S.......................................... -- 09/01/18 FIXED -- 8.15 930,000.00
WENDY'S.......................................... -- 10/01/18 FIXED -- 7.77 570,000.00
WENDY'S.......................................... -- 09/01/18 FIXED -- 8.15 870,000.00
WENDY'S.......................................... -- 09/01/13 FIXED -- 8.15 390,000.00
WENDY'S.......................................... -- 09/01/13 FIXED -- 8.15 170,000.00
WENDY'S.......................................... -- 09/01/13 FIXED -- 8.15 300,000.00
WENDY'S.......................................... -- 09/01/13 FIXED -- 8.15 260,000.00
ARBY'S........................................... -- 09/01/08 FIXED -- 8.70 475,000.00
ARBY'S........................................... -- 11/01/13 FIXED -- 9.50 414,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 9.00 830,000.00
TACO BELL........................................ -- 07/01/12 FIXED -- 8.79 402,000.00
TACO BELL........................................ -- 07/01/03 FIXED -- 7.82 37,000.00
APPLEBEE'S....................................... -- 04/01/19 FIXED -- 9.38 1,397,595.32
ARBY'S........................................... -- 09/01/13 FIXED -- 9.10 288,000.00
TONY ROMA'S...................................... -- 01/01/14 FIXED -- 9.00 1,670,000.00
TONY ROMA'S...................................... -- 01/01/14 FIXED -- 9.00 1,800,000.00
TACO BELL........................................ -- 01/01/09 FIXED -- 8.38 670,000.00
TACO BELL........................................ -- 02/01/10 FIXED -- 8.57 700,000.00
TACO BELL........................................ -- 10/01/13 FIXED -- 8.57 570,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.57 590,000.00
TACO BELL........................................ -- 01/01/09 FIXED -- 8.38 380,000.00
TACO BELL........................................ -- 02/01/10 FIXED -- 8.57 420,000.00
TACO BELL........................................ -- 10/01/13 FIXED -- 8.57 326,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.57 84,000.00
TACO BELL........................................ -- 10/01/07 FIXED -- 8.38 500,000.00
TACO BELL........................................ -- 01/01/06 FIXED -- 10.50 372,000.00
TACO BELL........................................ -- 01/01/08 FIXED -- 9.00 550,000.00
<CAPTION>
CARRYING DELINQUENT GEOGRAPHIC
CONCEPT AMOUNT(a) LOANS LOCATION
------- -------------- ---------- ----------
<S> <C> <C> <C>
ARBY'S........................................... 41,600.70 -- PA
ARBY'S........................................... 799,275.05 -- PA
ARBY'S........................................... 205,019.82 -- PA
ARBY'S........................................... 581,384.19 -- PA
ARBY'S........................................... 492,533.15 -- TX
ARBY'S........................................... 431,455.52 -- TX
TACO BELL........................................ 297,074.99 -- FL
TACO BELL........................................ 883,959.19 -- CA
BENNIGAN'S/STEAK & ALE........................... 4,610,121.01 -- NM
ARBY'S........................................... 486,624.17 -- TX
ARBY'S........................................... 377,382.02 -- TX
ARBY'S........................................... 486,624.17 -- TX
WENDY'S.......................................... 748,177.28 -- MI
WENDY'S.......................................... 498,784.85 -- MI
WENDY'S.......................................... 673,359.55 -- MI
WENDY'S.......................................... 867,885.66 -- MI
WENDY'S.......................................... 927,739.84 -- MI
WENDY'S.......................................... 573,067.39 -- MI
WENDY'S.......................................... 1,096,209.34 -- MI
WENDY'S.......................................... 906,864.29 -- MI
WENDY'S.......................................... 926,794.81 -- MI
WENDY'S.......................................... 568,616.48 -- MI
WENDY'S.......................................... 867,003.22 -- MI
WENDY'S.......................................... 385,815.89 -- MI
WENDY'S.......................................... 168,178.54 -- MI
WENDY'S.......................................... 296,781.16 -- MI
WENDY'S.......................................... 257,213.29 -- MI
ARBY'S........................................... 463,083.61 -- OH
ARBY'S........................................... 413,014.36 -- OH
ARBY'S........................................... 833,846.19 -- TX
TACO BELL........................................ 394,835.84 -- CA
TACO BELL........................................ 34,497.58 -- CA
APPLEBEE'S....................................... 1,397,595.32 -- OH
ARBY'S........................................... 285,539.72 -- OH
TONY ROMA'S...................................... 1,673,598.95 -- AZ
TONY ROMA'S...................................... 1,803,879.11 -- AZ
TACO BELL........................................ 657,033.96 -- FL
TACO BELL........................................ 689,357.50 -- FL
TACO BELL........................................ 566,075.03 -- FL
TACO BELL........................................ 589,281.98 -- FL
TACO BELL........................................ 372,648.48 -- FL
TACO BELL........................................ 413,615.32 -- FL
TACO BELL........................................ 323,755.32 -- FL
TACO BELL........................................ 83,897.77 -- FL
TACO BELL........................................ 493,755.99 -- FL
TACO BELL........................................ 369,141.23 -- MI
TACO BELL........................................ 547,402.83 -- MI
</TABLE>
F-49
<PAGE> 163
<TABLE>
<CAPTION>
PERIODIC
MATURITY PAYMENT PRIOR INTEREST FACE
CONCEPT DEPRECIATION DATE TERM LIEN RATE AMOUNT
------- ------------ -------- -------- ------ --------- --------------
<S> <C> <C> <C> <C> <C> <C>
TACO BELL........................................ -- 01/01/09 FIXED -- 9.00 760,000.00
TACO BELL........................................ -- 01/01/11 FIXED -- 9.00 700,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 500,000.00
TACO BELL........................................ -- 01/01/08 FIXED -- 10.50 84,000.00
TACO BELL........................................ -- 01/01/09 FIXED -- 10.50 171,000.00
TACO BELL........................................ -- 01/01/11 FIXED -- 10.50 238,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 10.50 239,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 10.50 331,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 10.50 271,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 10.50 324,000.00
BURGER KING...................................... -- 09/01/13 FIXED -- 8.32 965,000.00
BURGER KING...................................... -- 03/01/14 FIXED -- 7.75 575,000.00
BENNIGAN'S....................................... -- 01/01/14 FIXED -- 8.49 1,220,000.00
KFC.............................................. -- 04/01/14 FIXED -- 9.41 560,000.00
KFC.............................................. -- 04/01/14 FIXED -- 9.00 390,000.00
ARBY'S........................................... -- 01/01/14 FIXED -- 9.50 400,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 623,000.00
PIZZA HUT........................................ -- 02/01/09 FIXED -- 7.84 546,000.00
PIZZA HUT........................................ -- 04/01/10 FIXED -- 7.87 370,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 391,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 378,000.00
PIZZA HUT........................................ -- 05/01/05 FIXED -- 7.55 248,000.00
PIZZA HUT........................................ -- 04/01/06 FIXED -- 7.59 256,000.00
PIZZA HUT........................................ -- 07/01/13 FIXED -- 7.87 308,000.00
PIZZA HUT........................................ -- 08/01/07 FIXED -- 7.64 106,000.00
PIZZA HUT........................................ -- 06/01/07 FIXED -- 7.63 128,000.00
ARBY'S........................................... -- 09/01/13 FIXED -- 8.36 600,000.00
ARBY'S........................................... -- 09/01/05 FIXED -- 8.78 652,000.00
ARBY'S........................................... -- 06/01/11 FIXED -- 8.34 85,000.00
PIZZA HUT........................................ -- 08/01/07 FIXED -- 7.64 122,000.00
PIZZA HUT........................................ -- 10/01/06 FIXED -- 7.62 107,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 110,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 546,000.00
PIZZA HUT........................................ -- 07/01/13 FIXED -- 7.87 364,000.00
PIZZA HUT........................................ -- 10/01/10 FIXED -- 7.86 126,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 91,000.00
ARBY'S........................................... -- 09/01/13 FIXED -- 8.78 160,000.00
ARBY'S........................................... -- 09/01/13 FIXED -- 8.85 241,000.00
TACO BELL........................................ -- 10/01/13 FIXED -- 8.22 364,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 651,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 462,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 434,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 378,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 376,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 298,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 350,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 203,000.00
<CAPTION>
CARRYING DELINQUENT GEOGRAPHIC
CONCEPT AMOUNT(a) LOANS LOCATION
------- -------------- ---------- ----------
<S> <C> <C> <C>
TACO BELL........................................ 757,756.70 -- MI
TACO BELL........................................ 699,756.29 -- MI
TACO BELL........................................ 501,077.53 -- MI
TACO BELL........................................ 83,781.67 -- MI
TACO BELL........................................ 170,852.62 -- MI
TACO BELL........................................ 238,398.70 -- MI
TACO BELL........................................ 239,975.45 -- MI
TACO BELL........................................ 332,350.94 -- MI
TACO BELL........................................ 272,106.06 -- MI
TACO BELL........................................ 325,322.37 -- MI
BURGER KING...................................... 955,031.53 -- MI
BURGER KING...................................... 578,713.55 -- MI
BENNIGAN'S....................................... 1,221,809.35 -- CT
KFC.............................................. 560,000.00 -- PA
KFC.............................................. 390,000.00 -- PA
ARBY'S........................................... 401,122.15 -- ID
PIZZA HUT........................................ 617,799.04 -- NY
PIZZA HUT........................................ 534,925.99 -- NY
PIZZA HUT........................................ 363,978.97 -- NY
PIZZA HUT........................................ 387,735.81 -- NY
PIZZA HUT........................................ 374,844.35 -- NY
PIZZA HUT........................................ 238,593.92 -- NY
PIZZA HUT........................................ 246,816.40 -- NY
PIZZA HUT........................................ 305,296.13 -- NY
PIZZA HUT........................................ 103,090.62 -- NY
PIZZA HUT........................................ 124,369.34 -- NY
ARBY'S........................................... 593,858.42 -- MI
ARBY'S........................................... 622,013.42 -- CA
ARBY'S........................................... 83,974.08 -- CA
PIZZA HUT........................................ 118,651.49 -- NY
PIZZA HUT........................................ 103,538.44 -- NY
PIZZA HUT........................................ 109,081.70 -- NY
PIZZA HUT........................................ 541,441.87 -- NY
PIZZA HUT........................................ 360,804.50 -- NY
PIZZA HUT........................................ 124,128.19 -- NY
PIZZA HUT........................................ 90,240.31 -- NY
ARBY'S........................................... 158,516.05 -- CA
ARBY'S........................................... 238,803.14 -- CA
TACO BELL........................................ 361,228.62 -- NY
PIZZA HUT........................................ 645,565.31 -- NY
PIZZA HUT........................................ 458,143.12 -- NY
PIZZA HUT........................................ 430,376.85 -- NY
PIZZA HUT........................................ 374,844.35 -- NY
PIZZA HUT........................................ 372,861.05 -- NY
PIZZA HUT........................................ 295,512.20 -- NY
PIZZA HUT........................................ 347,078.12 -- NY
PIZZA HUT........................................ 201,305.31 -- NY
</TABLE>
F-50
<PAGE> 164
<TABLE>
<CAPTION>
PERIODIC
MATURITY PAYMENT PRIOR INTEREST FACE
CONCEPT DEPRECIATION DATE TERM LIEN RATE AMOUNT
------- ------------ -------- -------- ------ --------- --------------
<S> <C> <C> <C> <C> <C> <C>
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 176,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 70,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 61,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 462,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 199,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 343,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 187,000.00
BURGER KING...................................... -- 12/01/13 FIXED -- 9.00 857,082.00
BURGER KING...................................... -- 12/01/13 FIXED -- 9.00 1,430,000.00
BURGER KING...................................... -- 12/01/13 FIXED -- 9.00 815,000.00
JACK IN THE BOX.................................. -- 12/01/13 FIXED -- 8.50 990,000.00
JACK IN THE BOX.................................. -- 12/01/13 FIXED -- 8.50 200,000.00
BENNIGAN'S....................................... -- 10/01/13 FIXED -- 8.37 1,372,000.00
BENNIGAN'S....................................... -- 10/01/13 FIXED -- 8.37 786,000.00
BENNIGAN'S....................................... -- 10/01/13 FIXED -- 8.37 693,000.00
BENNIGAN'S....................................... -- 10/01/13 FIXED -- 8.37 509,000.00
BENNIGAN'S....................................... -- 10/01/13 FIXED -- 8.37 662,000.00
BENNIGAN'S....................................... -- 09/01/11 FIXED -- 8.17 1,078,000.00
PIZZA HUT........................................ -- 12/01/03 FIXED -- 7.52 8,000.00
PIZZA HUT........................................ -- 08/01/07 FIXED -- 7.64 12,000.00
PIZZA HUT........................................ -- 10/01/13 FIXED -- 7.87 10,000.00
ARBY'S........................................... -- 12/01/13 FIXED -- 9.00 651,000.00
KFC.............................................. -- 10/01/13 FIXED -- 8.27 475,000.00
ARBY'S........................................... -- 10/01/13 FIXED -- 8.37 350,000.00
ARBY'S........................................... -- 12/01/12 FIXED -- 8.34 315,000.00
ARBY'S........................................... -- 11/01/12 FIXED -- 8.34 50,000.00
BURGER KING...................................... -- 01/01/09 FIXED -- 8.44 725,000.00
BURGER KING...................................... -- 01/01/09 FIXED -- 8.44 575,000.00
BURGER KING...................................... -- 01/01/09 FIXED -- 8.44 700,000.00
BURGER KING...................................... -- 01/01/09 FIXED -- 8.44 1,000,000.00
TACO BELL........................................ -- 12/01/11 FIXED -- 8.50 760,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 763,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 630,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 160,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 600,000.00
BURGER KING...................................... -- 12/01/13 FIXED -- 9.00 880,000.00
BURGER KING...................................... -- 12/01/13 FIXED -- 9.00 175,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 620,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 381,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 630,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 510,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 358,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 630,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 635,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 580,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 840,000.00
TACO BELL........................................ -- 12/01/13 FIXED -- 8.50 480,000.00
<CAPTION>
CARRYING DELINQUENT GEOGRAPHIC
CONCEPT AMOUNT(a) LOANS LOCATION
------- -------------- ---------- ----------
<S> <C> <C> <C>
PIZZA HUT........................................ 174,530.72 -- NY
PIZZA HUT........................................ 69,415.63 -- NY
PIZZA HUT........................................ 60,496.76 -- NY
PIZZA HUT........................................ 458,143.12 -- NY
PIZZA HUT........................................ 197,338.69 -- NY
PIZZA HUT........................................ 340,136.57 -- NY
PIZZA HUT........................................ 185,438.87 -- NY
BURGER KING...................................... 856,612.75 -- VA
BURGER KING...................................... 1,429,217.06 -- VA
BURGER KING...................................... 814,553.77 -- VA
JACK IN THE BOX.................................. 988,686.38 -- CA
JACK IN THE BOX.................................. 199,734.63 -- CA
BENNIGAN'S....................................... 1,361,981.64 -- GA
BENNIGAN'S....................................... 780,260.61 -- GA
BENNIGAN'S....................................... 687,939.71 -- TN
BENNIGAN'S....................................... 505,283.27 -- TN
BENNIGAN'S....................................... 657,166.08 -- TN
BENNIGAN'S....................................... 1,065,230.84 -- MS
PIZZA HUT........................................ 7,510.19 -- NY
PIZZA HUT........................................ 11,670.66 -- NY
PIZZA HUT........................................ 9,916.53 -- NY
ARBY'S........................................... 650,643.58 -- TN
KFC.............................................. 471,432.97 -- MO
ARBY'S........................................... 347,444.30 -- CA
ARBY'S........................................... 313,182.08 -- CA
ARBY'S........................................... 49,549.65 -- CA
BURGER KING...................................... 722,284.29 -- IA
BURGER KING...................................... 572,846.17 -- IA
BURGER KING...................................... 697,377.93 -- IA
BURGER KING...................................... 996,254.20 -- IA
TACO BELL........................................ 757,223.96 -- MD
TACO BELL........................................ 761,987.59 -- MD
TACO BELL........................................ 629,164.06 -- MD
TACO BELL........................................ 159,787.69 -- MD
TACO BELL........................................ 599,203.88 -- MD
BURGER KING...................................... 879,518.20 -- VA
BURGER KING...................................... 174,904.20 -- VA
TACO BELL........................................ 619,177.34 -- PA
TACO BELL........................................ 380,494.46 -- PA
TACO BELL........................................ 629,164.06 -- PA
TACO BELL........................................ 509,323.29 -- MD
TACO BELL........................................ 357,524.99 -- MD
TACO BELL........................................ 629,164.06 -- PA
TACO BELL........................................ 634,157.44 -- PA
TACO BELL........................................ 579,230.41 -- PA
TACO BELL........................................ 838,885.42 -- PA
TACO BELL........................................ 479,363.10 -- PA
</TABLE>
F-51
<PAGE> 165
<TABLE>
<CAPTION>
PERIODIC
MATURITY PAYMENT PRIOR INTEREST FACE
CONCEPT DEPRECIATION DATE TERM LIEN RATE AMOUNT
------- ------------ -------- -------- ------ --------- --------------
<S> <C> <C> <C> <C> <C> <C>
DENNY'S.......................................... -- 07/01/09 FIXED -- 9.00 425,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 799,000.00
KFC.............................................. -- 01/01/14 FIXED -- 9.00 330,000.00
KFC.............................................. -- 01/01/14 FIXED -- 9.00 260,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 10.00 260,000.00
ARBY'S........................................... -- 01/01/14 FIXED -- 9.00 570,000.00
BENNIGAN'S....................................... -- 01/01/14 FIXED -- 10.75 730,000.00
ARBY'S........................................... -- 02/01/11 FIXED -- 10.00 275,000.00
ARBY'S........................................... -- 03/01/14 FIXED -- 9.16 403,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 720,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 820,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 770,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 540,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 680,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 770,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 680,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.50 896,000.00
TACO BELL........................................ -- 01/01/09 FIXED -- 9.50 513,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 10.00 749,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 375,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 352,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 449,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 322,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 333,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 425,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 356,000.00
TACO BELL........................................ -- 01/01/09 FIXED -- 9.00 540,000.00
TACO BELL........................................ -- 01/01/09 FIXED -- 9.00 520,000.00
TACO BELL........................................ -- 01/01/09 FIXED -- 9.00 490,000.00
TACO BELL........................................ -- 01/01/09 FIXED -- 9.00 590,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 730,000.00
TACO BELL........................................ -- 01/01/09 FIXED -- 9.00 250,000.00
TACO BELL........................................ -- 01/01/09 FIXED -- 9.00 270,000.00
TACO BELL........................................ -- 01/01/09 FIXED -- 9.00 250,000.00
TACO BELL........................................ -- 01/01/09 FIXED -- 9.00 310,000.00
TACO BELL........................................ -- 01/01/14 FIXED -- 9.00 520,000.00
DENNY'S.......................................... -- 01/01/14 FIXED -- 10.00 700,000.00
KFC.............................................. -- 01/01/14 FIXED -- 10.50 85,000.00
KFC.............................................. -- 01/01/14 FIXED -- 10.50 75,000.00
WENDY'S.......................................... -- 03/01/14 FIXED -- 10.03 930,000.00
WENDY'S.......................................... -- 03/01/14 FIXED -- 10.03 1,070,000.00
ARBY'S........................................... -- 01/01/06 FIXED -- 10.50 338,790.00
ARBY'S........................................... -- 04/01/05 FIXED -- 10.50 223,410.00
ARBY'S........................................... -- 02/01/14 FIXED -- 11.00 191,000.00
BURGER KING...................................... -- 01/01/14 FIXED -- 9.00 600,000.00
BURGER KING...................................... -- 01/01/14 FIXED -- 9.00 1,400,000.00
ARBY'S........................................... -- 04/01/14 FIXED -- 10.17 875,000.00
<CAPTION>
CARRYING DELINQUENT GEOGRAPHIC
CONCEPT AMOUNT(a) LOANS LOCATION
------- -------------- ---------- ----------
<S> <C> <C> <C>
DENNY'S.......................................... 428,152.08 -- OK
TACO BELL........................................ 800,721.89 -- NC
KFC.............................................. 330,711.17 -- NY
KFC.............................................. 260,560.31 -- PA
ARBY'S........................................... 261,534.13 -- TX
ARBY'S........................................... 571,228.38 -- IL
BENNIGAN'S....................................... 733,208.63 -- TX
ARBY'S........................................... 276,288.58 -- CA
ARBY'S........................................... 406,076.23 -- IL
TACO BELL........................................ 721,551.64 -- MO
TACO BELL........................................ 821,767.16 -- MO
TACO BELL........................................ 771,659.40 -- MO
TACO BELL........................................ 541,163.74 -- MO
TACO BELL........................................ 681,465.44 -- MO
TACO BELL........................................ 771,659.40 -- MO
TACO BELL........................................ 681,465.44 -- MO
TACO BELL........................................ 898,513.61 -- MO
TACO BELL........................................ 511,846.18 -- MO
TACO BELL........................................ 751,582.12 -- MO
TACO BELL........................................ 375,808.15 -- MO
TACO BELL........................................ 352,758.59 -- MO
TACO BELL........................................ 449,967.63 -- MO
TACO BELL........................................ 322,693.93 -- MO
TACO BELL........................................ 333,717.63 -- MO
TACO BELL........................................ 425,915.90 -- MO
TACO BELL........................................ 356,767.21 -- MO
TACO BELL........................................ 538,406.07 -- MS
TACO BELL........................................ 518,465.11 -- TN
TACO BELL........................................ 488,553.65 -- TN
TACO BELL........................................ 588,258.48 -- TN
TACO BELL........................................ 731,573.21 -- TN
TACO BELL........................................ 249,262.05 -- MS
TACO BELL........................................ 269,203.05 -- TN
TACO BELL........................................ 249,262.05 -- TN
TACO BELL........................................ 309,084.97 -- TN
TACO BELL........................................ 521,120.65 -- TN
DENNY'S.......................................... 702,413.21 -- GA
KFC.............................................. 85,346.92 -- NY
KFC.............................................. 75,306.10 -- PA
WENDY'S.......................................... 937,773.25 -- GA
WENDY'S.......................................... 1,078,943.42 -- GA
ARBY'S........................................... 336,186.45 -- CA
ARBY'S........................................... 221,068.84 -- CA
ARBY'S........................................... 192,326.91 -- CA
BURGER KING...................................... 601,293.04 -- VA
BURGER KING...................................... 1,403,017.08 -- VA
ARBY'S........................................... 875,000.00 -- AZ
</TABLE>
F-52
<PAGE> 166
<TABLE>
<CAPTION>
PERIODIC
MATURITY PAYMENT PRIOR INTEREST FACE
CONCEPT DEPRECIATION DATE TERM LIEN RATE AMOUNT
------- ------------ -------- -------- ------ --------- --------------
<S> <C> <C> <C> <C> <C> <C>
ARBY'S........................................... -- 04/01/14 FIXED -- 10.17 560,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 11.00 595,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 11.00 392,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 11.00 60,000.00
ARBY'S........................................... -- 10/01/03 FIXED -- 11.00 533,000.00
ARBY'S........................................... -- 01/01/09 FIXED -- 11.00 155,000.00
ARBY'S........................................... -- 10/01/01 FIXED -- 11.00 352,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 11.00 315,000.00
ARBY'S........................................... -- 06/01/12 FIXED -- 11.00 455,000.00
ARBY'S........................................... -- 01/01/12 FIXED -- 11.00 1,393,000.00
ARBY'S........................................... -- 07/01/07 FIXED -- 11.00 237,000.00
ARBY'S........................................... -- 03/01/08 FIXED -- 11.00 156,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 11.00 336,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 11.00 262,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 11.00 270,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 11.00 104,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 11.00 139,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 11.00 302,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 11.00 272,000.00
ARBY'S........................................... -- 02/01/14 FIXED -- 11.00 315,000.00
ARBY'S........................................... -- 04/01/14 FIXED -- 10.70 1,029,000.00
ARBY'S........................................... -- 04/01/14 FIXED -- 10.20 600,000.00
ARBY'S........................................... -- 05/01/04 FIXED -- 11.00 245,000.00
PIZZA HUT........................................ -- 09/01/07 FIXED -- 10.59 225,000.00
PIZZA HUT........................................ -- 09/01/07 FIXED -- 10.59 400,000.00
PIZZA HUT........................................ -- 09/01/07 FIXED -- 10.59 285,000.00
TACO BELL........................................ -- 09/01/07 FIXED -- 10.59 240,000.00
TACO BELL........................................ -- 09/01/07 FIXED -- 10.59 350,000.00
------------ --------------
SUBTOTAL -- PERMANENT MORTGAGE LOANS............. -- 144,751,794.24
------------ --------------
CONSTRUCTION -- MORTGAGE LOANS:
WENDY'S.......................................... -- TBD FIXED -- 7.44 670,694.24
POPEYE'S......................................... -- TBD FIXED -- 9.45 691,937.84
BURGER KING...................................... -- TBD FIXED -- 9.39 1,034,535.48
BURGER KING...................................... -- TBD FIXED -- 9.35 292,739.32
PERKIN'S......................................... -- TBD FIXED -- 8.41 684,380.34
HOULIHAN'S....................................... -- TBD FIXED -- 8.06 1,010,143.00
ARBY'S........................................... -- TBD FIXED -- 8.00 511,768.80
ARBY'S........................................... -- TBD FIXED -- 8.00 462,413.06
ARBY'S........................................... -- TBD FIXED -- 9.50 711,268.73
TACO BELL/KFC.................................... -- TBD FIXED -- Prime + 2% 805,539.81
<CAPTION>
CARRYING DELINQUENT GEOGRAPHIC
CONCEPT AMOUNT(a) LOANS LOCATION
------- -------------- ---------- ----------
<S> <C> <C> <C>
ARBY'S........................................... 560,000.00 -- AZ
ARBY'S........................................... 599,133.59 -- CA
ARBY'S........................................... 394,723.31 -- CA
ARBY'S........................................... 60,416.83 -- CA
ARBY'S........................................... 530,493.02 -- CA
ARBY'S........................................... 155,690.01 -- CA
ARBY'S........................................... 345,624.04 -- CA
ARBY'S........................................... 317,188.37 -- CA
ARBY'S........................................... 457,897.64 -- CA
ARBY'S........................................... 1,401,630.83 -- CA
ARBY'S........................................... 237,723.78 -- CA
ARBY'S........................................... 156,582.95 -- CA
ARBY'S........................................... 338,334.27 -- CA
ARBY'S........................................... 263,820.16 -- CA
ARBY'S........................................... 271,875.75 -- CA
ARBY'S........................................... 104,722.51 -- CA
ARBY'S........................................... 139,965.67 -- CA
ARBY'S........................................... 304,098.05 -- CA
ARBY'S........................................... 273,889.64 -- CA
ARBY'S........................................... 317,188.37 -- CA
ARBY'S........................................... 1,029,000.00 -- IA
ARBY'S........................................... 600,000.00 -- PA
ARBY'S........................................... 245,000.00 -- CA
PIZZA HUT........................................ 225,000.00 -- TX
PIZZA HUT........................................ 400,000.00 -- TX
PIZZA HUT........................................ 285,000.00 -- TX
TACO BELL........................................ 240,000.00 -- TX
TACO BELL........................................ 350,000.00 -- TX
-------------- ----------
SUBTOTAL -- PERMANENT MORTGAGE LOANS............. 144,149,611.50 --
-------------- ----------
CONSTRUCTION -- MORTGAGE LOANS:
WENDY'S.......................................... 682,766.89 -- MI
POPEYE'S......................................... 765,429.86 -- DC
BURGER KING...................................... 1,115,672.38 -- AZ
BURGER KING...................................... 324,656.64 -- TX
PERKIN'S......................................... 711,059.01 -- MD
HOULIHAN'S....................................... 1,052,668.69 -- MD
ARBY'S........................................... 535,306.70 -- IN
ARBY'S........................................... 480,142.22 -- IN
ARBY'S........................................... 731,010.63 -- IL
TACO BELL/KFC.................................... 861,814.86 -- LA
</TABLE>
F-53
<PAGE> 167
<TABLE>
<CAPTION>
PERIODIC
MATURITY PAYMENT PRIOR INTEREST FACE
CONCEPT DEPRECIATION DATE TERM LIEN RATE AMOUNT
------- ------------ -------- -------- ------ --------- --------------
<S> <C> <C> <C> <C> <C> <C>
WENDY'S.......................................... -- TBD FIXED -- 7.27 804,996.52
------------ --------------
SUBTOTAL -- CONSTRUCTION MORTGAGE LOANS.......... -- 7,680,417.14
------------ --------------
OTHER (INCLUDING ALLOWANCE OF $354,592 AND
HEDGING ACTIVITIES)............................
TOTAL -- MORTGAGE LOANS.......................... 152,432,211.38
==============
- -------------------------
(a) For Federal income tax purposes, the aggregated basis of the listed mortgages was $150,465,299 at March 31, 1999.
Changes in mortgage loans for the year ended March 31, 1999 are as follows:
Balance at March 31, 1998................................................................................................
Additions during period:
New mortgage loans..................................................................................................
Other...............................................................................................................
Deductions during period:
Collections of principal............................................................................................
Foreclosures........................................................................................................
Securitizations.....................................................................................................
Other...............................................................................................................
Balance at March 31, 1999................................................................................................
<CAPTION>
CARRYING DELINQUENT GEOGRAPHIC
CONCEPT AMOUNT(a) LOANS LOCATION
------- -------------- ---------- ----------
<S> <C> <C> <C>
WENDY'S.......................................... 822,678.98 -- MI
-------------- ----------
SUBTOTAL -- CONSTRUCTION MORTGAGE LOANS.......... 8,083,206.86 --
-------------- ----------
OTHER (INCLUDING ALLOWANCE OF $354,592 AND
HEDGING ACTIVITIES)............................ (1,767,518.82)
--------------
TOTAL -- MORTGAGE LOANS.......................... 150,465,299.54 --
============== ==========
- -------------------------
(a) For Federal income tax purposes, the aggregat
Changes in mortgage loans for the year ended
Balance at March 31, 1998........................ $103,736,475
Additions during period:
New mortgage loans.......................... 204,448,223
Other....................................... --
--------------
204,448,223
Deductions during period:
Collections of principal.................... 2,912,178
Foreclosures................................ --
Securitizations............................. 153,051,613
Other....................................... 1,755,608
--------------
157,719,399
----------------------
Balance at March 31, 1999........................ $150,465,299
======================
</TABLE>
F-54
<PAGE> 168
EXHIBIT A
EXECUTION COPY
OMNIBUS AGREEMENT AND PLAN OF MERGER
BY AND AMONG
CAPTEC NET LEASE REALTY, INC.,
CAPTEC ACQUISITION, INC.,
CAPTEC FINANCIAL GROUP, INC.,
AND
CAPTEC NET LEASE REALTY ADVISORS, INC.
DATED AS OF DECEMBER 20, 1999
<PAGE> 169
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
DEFINITIONS
SECTION 1.01 Terms Defined in this Section............................... 1
ARTICLE II
THE MERGERS
SECTION 2.01 The Mergers; Effective Time................................. 7
SECTION 2.02 Closings.................................................... 8
SECTION 2.03 Effective Time.............................................. 8
SECTION 2.04 Effect of the Mergers....................................... 8
ARTICLE III
THE SURVIVING CORPORATIONS
SECTION 3.01 Names....................................................... 8
SECTION 3.02 Certificates of Incorporation and Bylaws.................... 8
SECTION 3.03 Officers and Directors...................................... 9
SECTION 3.04 Additional Actions.......................................... 9
ARTICLE IV
MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SECURITIES;
ADDITIONAL CONSIDERATION
SECTION 4.01 Share Consideration; Conversion or Cancellation of 9
Securities..................................................
SECTION 4.02 Surrender and Exchange of Securities........................ 11
SECTION 4.03 Fractional Shares........................................... 11
SECTION 4.04 Transfer of Acquisition and CA Shares....................... 11
SECTION 4.05 Lost, Stolen or Destroyed Certificates...................... 11
SECTION 4.06 Additional Share Consideration.............................. 11
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CFG AND CA
SECTION 5.01 Organization................................................ 17
SECTION 5.02 Authorization; Enforceability............................... 18
SECTION 5.03 Conflicts................................................... 18
SECTION 5.04 Consents and Approvals...................................... 18
SECTION 5.05 Anti-takeover Provisions Inapplicable....................... 18
SECTION 5.06 Capitalization.............................................. 18
SECTION 5.07 Investments; Subsidiaries................................... 19
</TABLE>
A-i
<PAGE> 170
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 5.08 Financial Statements; No Material Adverse Change............ 19
SECTION 5.09 Compliance with Laws; Permits............................... 20
SECTION 5.10 Litigation.................................................. 21
SECTION 5.11 Compensation and Employee Matters........................... 21
SECTION 5.12 Employee Benefit Plans; Labor Matters....................... 21
SECTION 5.13 Tax Matters................................................. 23
SECTION 5.14 Real Property Owned or Leased............................... 24
SECTION 5.15 Undisclosed Liabilities..................................... 24
SECTION 5.16 Absence of Certain Changes or Events........................ 24
SECTION 5.17 Assets...................................................... 25
SECTION 5.18 Books and Records........................................... 26
SECTION 5.19 Proxy Statement............................................. 26
SECTION 5.20 Brokers and Finders......................................... 26
SECTION 5.21 Full Disclosure............................................. 26
SECTION 5.22 Environmental Matters....................................... 26
SECTION 5.23 Insurance Disclosure........................................ 27
SECTION 5.24 Allowance for Possible Loan Losses.......................... 27
SECTION 5.25 Year 2000 Compliance........................................ 27
SECTION 5.26 Material Agreements......................................... 28
SECTION 5.27 Intellectual Property....................................... 28
SECTION 5.28 Absence of Certain Business Practices....................... 28
SECTION 5.29 Affiliate Transactions...................................... 28
SECTION 5.30 Loans; Investments.......................................... 29
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND ACQUISITION
SECTION 6.01 Organization................................................ 32
SECTION 6.02 Authorization; Enforceability............................... 32
SECTION 6.03 Conflicts................................................... 32
SECTION 6.04 Consents and Approvals...................................... 32
SECTION 6.05 Anti-takeover Provisions Inapplicable....................... 33
SECTION 6.06 Capitalization.............................................. 33
SECTION 6.07 Financial Statements; No Material Adverse Change............ 33
SECTION 6.08 No Prior Activities; Assets of Acquisition.................. 34
SECTION 6.09 Compliance with Laws........................................ 34
SECTION 6.10 SEC Reports................................................. 34
SECTION 6.11 Litigation.................................................. 34
SECTION 6.12 Proxy Statement............................................. 35
SECTION 6.13 Brokers and Finders......................................... 35
</TABLE>
A-ii
<PAGE> 171
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE VII
COVENANTS AND AGREEMENTS OF THE PARTIES
SECTION 7.01 Conduct of the Business..................................... 35
SECTION 7.02 Officers and Employees...................................... 37
SECTION 7.03 Meeting of Shareholders..................................... 37
SECTION 7.04 Proxy Materials............................................. 38
SECTION 7.05 Filings; Other Action....................................... 38
SECTION 7.06 Access to Information....................................... 38
SECTION 7.07 Advisory Agreement.......................................... 39
SECTION 7.08 Intellectual Property Rights................................ 39
SECTION 7.09 Tax Matters................................................. 39
SECTION 7.10 Reorganization.............................................. 40
SECTION 7.11 Further Actions; Cooperation................................ 41
SECTION 7.12 Notice of Certain Events.................................... 41
SECTION 7.13 Certain Actions............................................. 41
SECTION 7.14 Current Information......................................... 42
SECTION 7.15 Reservation of Shares to Satisfy Contingent Payment 42
Obligation..................................................
SECTION 7.16 Indemnification and Insurance............................... 42
SECTION 7.17 Certain Employment Matters.................................. 42
SECTION 7.18 Disclosure Schedule......................................... 42
SECTION 7.19 Tax Certificates............................................ 42
ARTICLE VIII
CONDITIONS TO THE MERGERS
SECTION 8.01 Conditions to Each Party's Obligations...................... 43
SECTION 8.02 Additional Conditions to Obligation of the Company and 44
Acquisition.................................................
SECTION 8.03 Additional Conditions to Obligation of CFG and CA........... 45
ARTICLE IX
INDEMNIFICATION
SECTION 9.01 CFG and CA Indemnities to the Company....................... 46
SECTION 9.02 Company's Indemnities to CFG and CA......................... 46
SECTION 9.03 Notice and Opportunity to Defend............................ 47
SECTION 9.04 Survival of Representations and Warranties.................. 48
SECTION 9.05 Right of Set-off............................................ 48
SECTION 9.06 Limitations on Indemnification.............................. 48
</TABLE>
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<TABLE>
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PAGE
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<S> <C> <C>
ARTICLE X
TERMINATION
SECTION
10.01 Termination................................................. 49
SECTION
10.02 Notice...................................................... 50
SECTION
10.03 Effect of Termination....................................... 50
ARTICLE XI
GENERAL PROVISIONS
SECTION
11.01 Expenses.................................................... 50
SECTION
11.02 Notices, Etc. .............................................. 51
SECTION
11.03 Binding Effect; No Assignment............................... 51
SECTION
11.04 Entire Agreement............................................ 52
SECTION
11.05 Remedies Cumulative; Specific Performance................... 52
SECTION
11.06 Waiver...................................................... 52
SECTION
11.07 No Third-Party Beneficiaries................................ 52
SECTION
11.08 Governing Law............................................... 52
SECTION
11.09 Section Headings; Interpretation............................ 52
SECTION
11.10 Severability................................................ 52
SECTION
11.11 Amendment................................................... 53
SECTION
11.12 Further Assurances.......................................... 53
SECTION
11.13 Public Announcements........................................ 53
SECTION
11.14 Exhibits and Schedules...................................... 53
SECTION
11.15 CFG/CA Representative....................................... 53
SECTION
11.16 Counterparts................................................ 53
</TABLE>
<TABLE>
<S> <C>
EXHIBITS
Exhibit A-1 CA Shareholders
Exhibit A-2 CFG Common Shareholders
Exhibit A-3 CFG Preferred Shareholders
Exhibit A-4 Individual Warrant Holders
Exhibit A-5 Institutional Warrant Holders
Exhibit A-6 Option Holders
Exhibit A-7 Options
Exhibit A-8 Warrants
Exhibit B Form of Registration Rights Agreement
Exhibit C Earnout Applicable Percentage
</TABLE>
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<TABLE>
<S> <C>
SCHEDULES
Schedule 5.03 Conflicts
Schedule 5.04 Consents and Approvals
Schedule 5.06 Capitalization
Schedule 5.07 Investments; Subsidiaries
Schedule 5.08 Liabilities
Schedule 5.10 Litigation
Schedule 5.12 Employee Plans; Labor Matters
Schedule 5.13 Tax Matters
Schedule 5.14 Real Property
Schedule 5.15 Undisclosed Liabilities
Schedule 5.16 Absence of Certain Changes or Events
Schedule 5.17 Assets
Schedule 5.18 Books and Records
Schedule 5.22 Environmental Matters
Schedule 5.25 Year 2000 Compliance
Schedule 5.26 Material Agreements
Schedule 5.27 Intellectual Property
Schedule 5.29 Affiliate Transactions
Schedule 5.30(b) Portfolio Loans
Schedule 5.30(e) Loans
Schedule 5.30(g) Servicing Requirements
Schedule 5.30(k) Interest Rate Risk Management
Schedule 5.30(m) Repurchase Obligations
Schedule 5.30(o) Loan Defaults
Schedule 5.30(p) Loans Held for Securitizations
Schedule 5.30(q) Securitizations
Schedule 6.04 Governmental Authority Consents and Approvals
Schedule 9.01 Indemnification Percentage Interests
</TABLE>
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OMNIBUS AGREEMENT AND PLAN OF MERGER
This OMNIBUS AGREEMENT AND PLAN OF MERGER (this "Agreement") is dated as of
December 20, 1999 and is by and among CAPTEC NET LEASE REALTY, INC., a Delaware
corporation (the "Company"), CAPTEC FINANCIAL GROUP, INC., a Michigan
corporation ("CFG"), CAPTEC NET LEASE REALTY ADVISORS, INC., a Delaware
corporation ("CA"), and CAPTEC ACQUISITION, INC., a Michigan corporation and a
wholly-owned subsidiary of the Company ("Acquisition").
RECITALS
WHEREAS, the Board of Directors of each of CFG and Acquisition has
determined that it is in the best interests of CFG and Acquisition and their
respective shareholders for CFG and Acquisition to merge pursuant to applicable
law, with CFG being the surviving entity;
WHEREAS, the Board of Directors of each of the Company and CA has
determined that it is in the best interests of the Company and CA and their
respective shareholders for the Company and CA to merge pursuant to applicable
law, with the Company being the surviving entity;
WHEREAS, the parties desire that (i) as part of the CFG Merger (as
hereinafter defined), the CFG Common Shareholders (as hereinafter defined) are
to receive shares of Company Common Stock (as hereinafter defined) and Earnout
Participation Rights (as hereinafter defined); the CFG Preferred Shareholders
(as hereinafter defined) are to receive shares of Company Common Stock and no
Earnout Participation Rights, but are to receive in lieu thereof certain rights
under the Registration Rights Agreement (as hereinafter defined); the Individual
Warrant Holders (as hereinafter defined) are to receive shares of Company Common
Stock and Earnout Participation Rights; the Option Holders are to receive shares
of Company Common Stock and Earnout Participation Rights; the Institutional
Warrant Holders (as hereinafter defined) are to receive cash and no shares of
Company Common Stock or Earnout Participation Rights; and (ii) as part of the CA
Merger, the CA Common Shareholders are to receive shares of Company Common
Stock, in each of (i) and (ii) all as more fully set forth herein; and
WHEREAS, for federal income tax purposes, it is intended that each of the
Mergers (as hereinafter defined) qualify as a reorganization within the meaning
of Section 368(a) of the Code (as hereinafter defined).
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties to this Agreement, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 Terms Defined in this Section. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Acquisition" shall have the meaning set forth in the Preamble.
"Acquisition Common Stock" shall mean the common stock, par value $0.01 per
share, of Acquisition.
"Acquisition Proposal" shall have the meaning set forth in Section 7.13(b).
"Advisory Agreement" shall mean that certain Advisory Agreement, dated as
of August 29, 1997, by and between the Company and CA, as amended to date.
"Additional Payment" shall have the meaning given thereto in Section
4.06(l).
"Affiliate" shall have the meaning set forth in Rule 12b-2 under the
Exchange Act.
"Agreement" shall have the meaning set forth in the Preamble.
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"Applicable Percentages" shall have the meaning set forth in Section
4.06(d).
"Asserted Liability" shall have the meaning set forth in Section 9.03.
"Audited CFG Financial Statements" shall have the meaning set forth in
Section 5.08(a).
"Authorization" shall mean any consent, approval or authorization of,
expiration or termination of any waiting period requirement (including pursuant
to the HSR Act) by, or filing, registration, qualification, declaration or
designation with, any Governmental Authority.
"Bradford" shall mean J.C. Bradford & Co. LLC.
"Business Combination" shall have the meaning set forth in Section 4.01(e).
"Business Day" shall mean any day, other than a Saturday or Sunday, that is
neither a legal holiday nor a day on which banking institutions are authorized
or required by law, regulation or executive order to close in The City of New
York or in the State of Michigan.
"CA" shall have the meaning set forth in the Preamble.
"CA Common Stock" shall mean the common stock, without par value, of CA.
"CA Exchange Ratio" shall have the meaning set forth in Section 4.01(d).
"CA Financial Statements" shall have the meaning set forth in Section
5.08(c).
"CA Merger" shall have the meaning set forth in Section 2.01(b).
"CA Shareholders" shall mean the holders of CA Common Stock identified in
Exhibit A-1.
"Certificate of Merger" shall mean the certificate of merger with respect
to each of the Mergers containing the provisions required by, and executed in
accordance with, DGCL Section 251 and MBCA Section 707, as the case may be.
"Certificate" or "Certificates" shall have the meaning set forth in Section
4.0l(f).
"CFG" shall have the meaning set forth in the Preamble.
"CFG/CA Financial Statements" shall have the meaning set forth in Section
5.08(c).
"CFG/CA Permits" shall have the meaning set forth in Section 5.09.
"CFG/CA Representative" shall have the meaning set forth in Section 11.15.
"CFG Common Shareholders" shall mean the holders of CFG Common Stock
identified in Exhibit A-2.
"CFG Common Stock" shall mean the common stock, par value $1.00 per share
of CFG.
"CFG Exchange Ratio" shall have the meaning set forth in Section 4.01(b).
"CFG Merger" shall have the meaning set forth in Section 2.01(a).
"CFG Preferred Shareholders" shall mean the holders of CFG Preferred Stock
listed in Exhibit A-3.
"CFG Preferred Stock" shall mean the Class A Convertible Preferred Stock,
without par value, of CFG.
"CFG Shareholders" shall mean all of the shareholders of CFG Common Stock
and CFG Preferred Stock.
"CFG Stock" shall mean the CFG Common Stock and the CFG Preferred Stock.
"CFG Surviving Corp." shall have the meaning set forth in Section 2.03(b).
"CFG Tax Issue" shall have the meaning set forth in Section 7.09(c).
"Change of Control" shall have the meaning set forth in Section 4.06(k).
"Closing" or "Closings" shall mean the closing of the Mergers.
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"Closing Date" shall mean the date on which the Closings occur.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall have the meaning set forth in the Preamble.
"Company Common Stock" shall mean the common stock, par value $0.01 per
share, of the Company.
"Company EPS" shall have the meaning set forth in Section 4.06(e).
"Company Indemnitees" shall have the meaning set forth in Section 9.01.
"Company Losses" shall have the meaning set forth in Section 9.01.
"Company Surviving Corp." shall have the meaning set forth in Section
2.03(b).
"DGCL" shall mean the General Corporation Law of the State of Delaware, as
amended from time to time.
"Disclosure Schedule" shall mean the schedule executed and delivered by the
Company, Acquisition, CFG and CA within 10 Business Days of the date of
execution hereof and that sets forth exceptions to the representations and
warranties contained herein and contains certain other information required
hereby.
"Earnout Audit" shall have the meaning set forth in Section 4.06(g).
"Earnout Default" shall have the meaning set forth in Section 4.06(k).
"Earnout Participants" shall mean the (i) CFG Common Shareholders, (ii)
Individual Warrant Holders, and (iii) Option Holders immediately prior to the
CFG Merger.
"Earnout Participation Rights" shall mean the right to receive the Earnout
Shares referred to in Section 4.06.
"Earnout Payment" shall have the meaning set forth in Section 4.06(a).
"Earnout Period" shall have the meaning set forth in Section 4.06(a)
"Earnout Shares" shall have the meaning set forth in Section 4.06(a).
"Earnout Statement" shall have the meaning set forth in Section 4.06(g).
"Effective Time" shall have the meaning set forth in Section 2.03(a).
"Environmental Claim" shall mean any written notice, claim, demand, action,
suit, complaint, or proceeding which has been served upon or delivered or
otherwise transmitted to the party in question, by any Person alleging material
Environmental Liabilities or potential material Environmental Liabilities.
"Environmental Laws" shall mean all applicable federal, state, local and
foreign laws, statutes, ordinances, codes, rules, standards and regulations, as
amended or supplemented from time to time, and any applicable judicial or
administrative interpretation thereof, including any applicable judicial or
administrative order, consent decree, order or judgment, imposing liability or
standards of conduct for or relating to the regulation and protection of the
environment and natural resources (including ambient air, surface water,
groundwater, wetlands, land surface or subsurface strata, wildlife, aquatic
species and vegetation). Environmental Laws include without limitation the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
(42 U.S.C. sections 9601 et seq.) ("CERCLA"); the Hazardous Materials
Transportation Authorization Act of 1994 (49 U.S.C. sections 5101 et seq.); the
Federal Insecticide Fungicide, and Rodenticide Act (7 U.S.C. sections 136 et
seq.); the Solid Waste Disposal Act (42 U.S.C. sections 6901 et seq.); the Toxic
Substance Control Act (15 U.S.C. sections 2601 et seq.); the Clean Air Act (42
U.S.C. sections 7401 et seq.); the Occupational Safety and Health Act (29 U.S.C.
sections 651 et seq.); and the Safe Drinking Water Act (42 U.S.C. sections
300(f) et seq.), each as from time to time amended, and any and all regulations
promulgated thereunder, and all analogous state, local and foreign counterparts
or equivalents and any transfer of ownership notification or approval statutes.
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"Environmental Liabilities" shall mean, with respect to any Person, all
liabilities, obligations, responsibilities, response, remedial and removal
costs, investigation and feasibility study costs, capital costs, operation and
maintenance costs, losses, damages, punitive damages, property damages, natural
resource damages, consequential damages, treble damages, costs and expenses
(including all fees, disbursements and expenses of experts and consultants and
reasonable fees, disbursements and expenses of counsel), fines, penalties,
sanctions and interest incurred as a result of or related to any claim, suit,
action, investigation, proceeding or demand by any Person, whether based in
contract, tort, implied or express warranty, strict liability, criminal or civil
statute or common law, including any arising under or related to any
Environmental Laws, Environmental Permits, or in connection with any Release or
threatened Release or presence of a Hazardous Material whether on, at, in,
under, from or about or in the vicinity of any real or personal property.
"Environmental Permits" shall mean all permits, licenses, authorizations,
certificates, approvals or registrations required by any Governmental Authority
under any Environmental Laws.
"ERISA" shall have the meaning set forth in Section 5.12(a).
"ERISA Affiliate" shall have the meaning set forth in Section 5.12(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
and the rules and regulations promulgated thereunder.
"Financial Statements" shall have the meaning set forth in Section 6.07(a).
"First Earnout Payment" shall have the meaning set forth in Section
4.06(a).
"First Earnout Period" shall have the meaning set forth in Section 4.06(a).
"First Year Maximum Shares" shall have the meaning set forth in Section
4.06(b)(ii).
"Governmental Authority" shall mean any nation or government, any state or
other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government and any self-regulating organization, securities exchange or
securities trading system.
"Hazardous Material" shall mean any substance, material or waste which is
regulated by or forms the basis of liability under, any Environmental Laws,
including any material or substance which is (a) defined as a "solid waste,"
"hazardous waste," "hazardous material," "hazardous substance," "extremely
hazardous waste," "restricted hazardous waste," "pollutant," "contaminant,"
"hazardous constituent," "special waste," "toxic substance" or other similar
term or phrase under any Environmental Laws, (b) petroleum or any fraction or
by-product thereof, asbestos, polychlorinated biphenyls (PCB')s, or any
radioactive substance.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended and the rules and regulations thereunder.
"Indemnitee" shall have the meaning set forth in Section 9.03.
"Indemnifying Party" shall have the meaning set forth in Section 9.03.
"Individual Warrant Holders" shall mean the individuals holding the
Warrants identified in Exhibit A-4.
"Initial Share Consideration" shall mean the shares of Company Common Stock
to be paid to the CFG Shareholders, the Individual Warrant Holders, the Option
Holders, and the CA Shareholders pursuant to the terms of Sections
4.01(b) - 4.01(d) hereof.
"Institutional Warrant Holders" shall mean the institutions holding the
Warrants identified on Exhibit A-5.
"Insurance Amount" shall have the meaning set forth in Section 7.16.
"Intellectual Property" shall mean any and all patents, patent
applications, trademarks, trademark applications and registrations, service
marks, service mark applications and registrations, tradenames, tradename
applications and registrations, trade dress copyrights, copyright applications
and registrations, mask
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work, mask work applications, licenses, logos, corporate and partnership names,
and customer lists, proprietary processes, formulae, inventions, trade secrets,
secret processes, computer programs, know-how, confidential information,
development tools and other proprietary rights, and all documentation and media
constituting, describing or relating to the above, including, but not limited
to, manuals, memoranda, know-how, notebooks, software, records and disclosures.
"Internal MIS Systems and Facilities" shall mean any computer software and
systems (including hardware, firmware, operating system software, utilities, and
applications software) used in the ordinary course of the applicable party's
business by or on behalf of such party, including the Company's payroll,
accounting, billing/receivables, inventory, asset tracking, customer service,
human resources, and e-mail systems.
"Investor" shall have the meaning set forth in Section 5.30(a).
"IRS" shall mean the Internal Revenue Service of the United States.
"Knowledge" or "knowledge" shall mean the terms "knowledge" and "aware" and
any derivatives thereof and, when applied to any party to this Agreement, shall
refer to the knowledge or awareness, as the case may be, which such party or, if
applicable, any director or executive officer thereof has, or reasonably should
have had, given such party's official position and after reasonable due inquiry
of the other officers, directors, and/or key employees of such party.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment,
encumbrance, claim, easement, transfer restriction, lien (statutory or
otherwise) or security agreement of any kind or nature whatsoever.
"Loan" shall have the meaning set forth in Section 5.30(a).
"Loan Documents" shall have the meaning set forth in Section 5.30(a).
"Loans Held for Sale" shall have the meaning set forth in Section 5.30(a).
"Material Acquisition" shall have the meaning set forth in Section
4.06(e)(ii).
"Material Adverse Effect" shall mean as to any Person, a material adverse
effect on the business, properties, operations or condition (financial or other)
of such Person taken as a whole; provided, however, that under no circumstance
shall a Material Adverse Effect be determined to have occurred as a result of
the Company ceasing to be a real estate investment trust. Whenever in this
Agreement an event, circumstance, or set of facts is described as having or
resulting in, or not having or resulting in, a Material Adverse Effect with
regard to the party involved, whether such event, circumstance or set of facts
does, in fact, so constitute such a Material Adverse Effect shall be determined
by assessing whether such event, circumstance, or set of facts would have or
result in a Material Adverse Effect individually or in the aggregate when taken
together with all such other similar or other events, circumstances, or set of
facts, which in and of themselves may not constitute, have, or result in a
Material Adverse Effect, but when taken together may so constitute a Material
Adverse Effect.
"Material Agreement" shall mean any contract, lease, restriction,
agreement, instrument or commitment to which CFG or CA is a party or by which
its properties are bound (i) which provides for either CFG or CA to receive or
commits either CFG or CA to expend, $50,000 (including cash or the fair market
value of non-cash assets) or more in the aggregate in any 12-month period or
$50,000 or more in the aggregate over any period, (ii) which if breached by any
party thereto would result in liability or loss to either CFG or CA of $50,000
or more in the aggregate or (iii) which is a stockholders agreement relating to
either CFG or CA, partnership agreement, joint venture agreement or other
agreement pursuant to which either CFG or CA has an equity interest in any
Person or any Person has an equity interest in CFG or CA.
"Material Disposition" shall have the meaning set forth in Section
4.06(e)(i).
"MBCA" shall mean the Business Corporation Act of the State of Michigan, as
in effect from time to time.
"Mergers" shall mean the CFG Merger and the CA Merger, collectively.
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"Mortgage Loan" shall have the meaning set forth in Section 5.30(a).
"Objection Notice" shall have the meaning set forth in Section 4.06(g).
"Offering Circular" shall mean the Offering Circular for Captec Franchise
Trust 1999-1, dated May 19, 1999.
"Option Holders" shall mean the holders of Options identified on Exhibit
A-6.
"Options" shall mean the options to purchase shares of CFG Common Stock
listed in Exhibit A-7.
"Option Termination Agreement" shall have the meaning set forth in Section
4.01(c).
"Order" shall have the meaning set forth in Section 8.01(e).
"ordinary course of business" shall mean the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Permitted Liens" shall mean (a) statutory Liens, including mechanics',
carriers', workmen's, repairmen's and other similar liens, arising or incurred
in the ordinary course of business with respect to which the underlying
obligations are not delinquent or the validity of which is being contested in
good faith by appropriate proceedings, (b) Liens for current taxes not yet due
and payable or for taxes the validity of which is being contested in good faith
by appropriate proceedings, and (c) Liens and defects in title that in the
aggregate do not have a Material Adverse Effect.
"Person" shall mean any individual or corporation, company, partnership,
trust, incorporated or unincorporated association, joint stock company,
Governmental Authority, joint venture or other legal entity of any kind.
"Plans" shall have the meaning set forth in Section 5.12(a).
"Pre-Closing Book Value" shall mean Fifteen Dollars ($15.00), the per-share
book value of the Company Common Stock as determined by mutual agreement of the
Company and the CFG Shareholders and the CA Shareholders.
"Portfolio Loan" shall have the meaning set forth in Section 5.30(a).
"Present Value" shall have meaning set forth in Section 4.06(k).
"Proxy Statement" shall have the meaning set forth in Section 5.04.
"Prudential Securities" shall mean Prudential Securities Incorporated.
"Registration Rights Agreement" shall mean that certain Registration Rights
Agreement between the Company and the CFG Preferred Shareholders to be entered
pursuant to and in accordance with Section 8.03(e) hereof and substantially in
the form of Exhibit B.
"Release" shall mean any release, threatened release, spill, emission,
leaking, pumping, pouring, emitting, emptying, escape, injection, deposit,
disposal, discharge, dispersal, dumping, leaching or migration of Hazardous
Material in the indoor or outdoor environment, including the movement of
Hazardous Material through or in the air, soil, surface water, ground water or
property.
"Remaining Shares" shall have the meaning set forth in Section
4.06(c)(iii).
"Representation Agreement" shall have the meaning set forth in Section
11.15.
"Resolution" shall have the meaning set forth in Section 7.09(c)(vii).
"SEC" shall mean the Securities and Exchange Commission.
"SEC Documents" shall have the meaning set forth in Section 6.10.
"Second Earnout Payment" shall have the meaning set forth in Section
4.06(a).
"Second Earnout Period" shall have the meaning set forth in Section
4.06(a).
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"Second Year Maximum Shares" shall have the meaning set forth in Section
4.06(c)(ii).
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Seller Losses" shall have the meaning set forth in Section 9.02.
"Serviced Loans" shall have the meaning set forth in Section 5.30(a).
"Servicing Requirements" shall have the meaning set forth in Section
5.30(a).
"Special Committee" shall mean the Special Committee of the Board of
Directors of the Company.
"Stockholders' Meetings" shall have the meaning set forth in Section 5.04.
"Subsidiary" shall mean as to any Person, any other Person of which at the
time of determination the first Person owns or controls directly or indirectly
more than 50% of the outstanding common stock or equity securities.
"Surviving Corporations" shall have the meaning set forth in Section
2.03(b).
"Tax" or "Taxes" means all net income, capital gains, gross income, gross
receipts, sales, use, ad valorem, franchise, profits, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property, or
windfall profit taxes, customs duties, or other taxes, fees, assessments, or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax, or additional amounts imposed by any Taxing Authority.
"Tax Matter" shall have the meaning set forth in Section 7.09(c).
"Tax Return" shall mean any return, declaration of estimated tax, tax
report, customs declaration, claim for refund or information return or statement
relating to Taxes, including any amendment thereto.
"Taxing Authority" shall have the meaning set forth in Section 5.13(e).
"Unaudited CFG Financial Statements" shall have the meaning set forth in
Section 5.08(b).
"Warrants" shall mean the warrants to purchase shares of CFG Common Stock
listed in Exhibit A-8.
"Warrant Holder" shall mean each Institutional Warrant Holder and each
Individual Warrant Holder.
"Warrant Termination Agreement" shall have the meaning set forth in Section
4.01(c).
"Year 2000 Compliant" means that (1) the products, services, or other
item(s) at issue accurately process, provide and/or receive all date/time data
(including calculating, comparing, sequencing, processing, and outputting)
within, from, into, and between centuries (including the twentieth and
twenty-first centuries and the years 1999 and 2000), including leap year
calculations, and (2) neither the performance nor the functionality of the
products, services, and other item(s) at issue will be affected by any
dates/times prior to, on, after, or spanning January 1, 2000 except as could not
reasonably be expected to have a Material Adverse Effect.
ARTICLE II
THE MERGERS
SECTION 2.01 The Mergers; Effective Time.
(a) The CFG Merger. Subject to the terms and conditions set forth in this
Agreement, at the Effective Time, Acquisition shall be merged with and into CFG
in accordance with Section 707 of the MBCA, with CFG being the surviving
corporation, whereupon the separate corporate existence of Acquisition shall
cease and CFG shall continue its corporate existence under the laws of the State
of Michigan (the "CFG Merger").
(b) The CA Merger. Subject to the terms and conditions set forth in this
Agreement, at the Effective Time, CA shall be merged with and into the Company
in accordance with Section 251 of the DGCL, with the
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Company being the surviving corporation, whereupon the separate corporate
existence of CA shall cease and the Company shall continue its corporate
existence under the laws of the State of Delaware (the "CA Merger").
SECTION 2.02 Closings. Subject to Article X and the fulfillment or waiver
of the conditions set forth in Article VIII, the Closings shall take place at
(i) the offices of Brown & Wood LLP, 1666 K Street, N.W., Washington, D.C., at
10:00 a.m., as promptly as practical (and in any event within two Business Days)
following the fulfillment or waiver of the conditions set forth in Article VIII
(other than conditions which by their nature are intended to be fulfilled at the
Closings), or (ii) such other place or time or on such other date as the parties
may mutually agree in writing or as the parties may mutually agree is necessary
to permit the fulfillment or waiver of the conditions set forth in Article VIII.
SECTION 2.03 Effective Time.
(a) In accordance with the applicable provisions of the MBCA and the DGCL,
the Mergers shall become effective (the "Effective Time") (i) on the date and at
the time of the filing of a Certificate of Merger with respect to the CFG Merger
with the Secretary of State of the State of Michigan in accordance with the
provisions of the MBCA; and (ii) on the date and at the time of the filing of a
Certificate of Merger with respect to the CA Merger with the Secretary of State
of the State of Delaware in accordance with the provisions of the DGCL, or at
such later times, not later than five Business Days thereafter, as may be
specified in the respective Certificates of Merger. Each Certificate of Merger
shall, at least 15 Business Days prior to the date of filing thereof, be
submitted to the appropriate authority for pre-clearance in accordance with the
administrative procedures of the Secretary of State of the State of Michigan and
the Secretary of State of the State of Delaware, as the case may be. The parties
agree to use their reasonable commercial efforts to ensure that the Effective
Time of each Merger occurs concurrently and on the Closing Date.
(b) CFG, as the surviving corporation of the CFG Merger, shall be referred
to herein as "CFG Surviving Corp." The Company, as the surviving corporation of
the CA Merger, shall be referred to herein as "Company Surviving Corp."
(collectively, CFG Surviving Corp. and Company Surviving Corp. are referred to
herein as the "Surviving Corporations"). In accordance with and subject to the
provisions of the DGCL and the MBCA, as applicable, (i) all the rights,
privileges, powers, immunities, purposes and franchises of CFG and Acquisition
shall vest in CFG Surviving Corp. and all debts, liabilities, obligations, and
duties of CFG and Acquisition shall become the debts, liabilities, obligations,
and duties of CFG Surviving Corp., and (ii) all the rights, privileges, powers,
immunities, purposes and franchises of the Company and CA shall vest in Company
Surviving Corp. and all debts, liabilities, obligations, and duties of the
Company and CA shall become the debts, liabilities, obligations, and duties of
Company Surviving Corp. For Tax purposes, the parties agree that the Effective
Time shall be deemed to occur after the close of business on the date on which
the Effective Time occurs, and no party hereto shall take a position
inconsistent therewith, except as may be required by law.
SECTION 2.04 Effect of the Mergers. The CFG Merger shall have the effect
set forth in Section 724 of the MBCA, and the CA Merger shall have the effect
set forth in Section 259 of the DGCL.
ARTICLE III
THE SURVIVING CORPORATIONS
SECTION 3.01 Names. The name of the surviving corporation of (a) the CFG
Merger shall be "CFG, Inc.", and (b) the CA Merger shall be "Captec Financial
Group, Inc." or, in each case, such other name as may be approved by the
shareholders of the respective Surviving Corporations.
SECTION 3.02 Certificates of Incorporation and Bylaws.
(a) The Articles of Incorporation and Bylaws of CFG as in effect
immediately prior to the Effective Time shall be the Articles of Incorporation
and Bylaws of CFG Surviving Corp. unless and until amended in accordance with
their terms and applicable law.
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(b) The Certificate of Incorporation and Bylaws of the Company as in effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation and Bylaws of Company Surviving Corp. unless and until amended in
accordance with their terms and applicable law.
SECTION 3.03 Officers and Directors.
(a) The officers and, except as otherwise provided in the Certificate of
Merger evidencing the CFG Merger, the directors of CFG immediately prior to the
Effective Time shall continue as the officers and directors of CFG Surviving
Corp. and shall remain officers and directors thereof until their successors are
duly elected and qualified or their prior resignation, removal or death.
(b) The officers and directors of the Company immediately prior to the
Effective Time shall continue as the officers and directors of Company Surviving
Corp. and shall remain officers and directors thereof until their successors are
duly elected and qualified or their prior resignation, removal or death.
SECTION 3.04 Additional Actions. If, at any time after the Effective Time,
CFG Surviving Corp. or Company Surviving Corp. shall consider or be advised that
any deeds, bills of sale, assignments, assurances or any other actions, things
or documents are necessary or desirable to vest, perfect or confirm of record or
otherwise in CFG Surviving Corp. or Company Surviving Corp., as the case may be,
its respective right, title or interest in, to or under any of the rights,
properties or assets of Acquisition or CA, as the case may be, or otherwise to
carry out the terms or purposes of this Agreement, the officers and directors of
CFG Surviving Corp. or Company Surviving Corp., as appropriate, shall be
authorized to execute and deliver, in the name and on behalf of Acquisition or
CA, as the case may be, all such deeds, bills of sale, assignments and
assurances or other documentation and to take and do, in the name and on behalf
of Acquisition or CA, all such other actions and things as may be necessary or
desirable to vest, perfect or confirm any and all right, title and interest in,
to and under such rights, properties or assets in CFG Surviving Corp. or Company
Surviving Corp., as the case may be, or otherwise to carry out the purpose of
this Agreement.
ARTICLE IV
MERGER CONSIDERATION; CONVERSION OR
CANCELLATION OF SECURITIES; ADDITIONAL CONSIDERATION
SECTION 4.01 Share Consideration; Conversion or Cancellation of Securities.
(a) Company Securities. All issued and outstanding securities of the
Company outstanding immediately prior to the Effective Time (including, without
limitation, all shares of Company Common Stock and all options and warrants
exercisable for and securities convertible into shares of Company Common Stock)
shall remain issued and outstanding following the Mergers with the same terms
and subject to the same conditions as in effect prior to the Effective Time.
(b) CFG Securities; Acquisition Securities. At the Effective Time, each
share of CFG Stock issued and outstanding immediately prior to the Effective
Time, shall, by virtue of the CFG Merger and without any action on the part of
the holder thereof, be converted into the right to receive, except as otherwise
indicated on Exhibit A-2, 45.71086 shares of Company Common Stock, subject to
appropriate adjustment in the event of a stock split, stock dividend or
recapitalization or other similar event applicable to shares of Company Common
Stock prior to the Effective Time (the "CFG Exchange Ratio"), upon surrender of
the certificate representing such share of CFG Stock. The aggregate number of
shares of Company Common Stock to be provided to the CFG Shareholders, the
Option Holders and the Warrant Holders hereunder shall not exceed 2,440,000,
subject to any additional shares of Company Common Stock to be provided to the
Earnout Participants pursuant to Section 4.06. In addition to the shares of
Company Common Stock to be received by the holders of CFG Stock and the Option
Holders and the Warrant Holders (as more fully set forth in Section 4.01(c)) in
the CFG Merger, (i) the Earnout Participants shall also be entitled to receive
the Earnout Shares and the Additional Payments all as more fully set forth in
Section 4.06, and (ii) the CFG Preferred Shareholders shall receive registration
rights as are provided in the Registration Rights Agreement referred to in
Section 8.03(e) hereof. Each share of CFG Stock held in treasury by CFG
immediately prior to the Effective Time shall, by
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virtue of the CFG Merger, be canceled and retired and cease to exist, without
any conversion thereof and no consideration shall be issued in exchange
therefor. At the Effective Time, each share of Acquisition Common Stock issued
and outstanding immediately prior to the Effective Time, shall, by virtue of the
CFG Merger and without any action on the part of the holder thereof, be
converted into one share of common stock of CFG Surviving Corp.
(c) Treatment of Options and Warrants. Immediately prior to the Effective
Time, each Option Holder shall execute and deliver to CFG an agreement (an
"Option Termination Agreement") in a form to be mutually agreed between CFG and
the Special Committee, and pursuant to which the Option Holders shall forfeit
all rights under and pursuant to the terms of their Options, in exchange for the
right to receive in the CFG Merger such number of shares of Company Common Stock
as is set forth opposite the name of each respective Option Holder on Exhibit
A-6. Immediately prior to the Effective Time, each Warrant Holder shall execute
and deliver to CFG an agreement (a "Warrant Termination Agreement") in a form to
be mutually agreed between CFG and the Special Committee, and pursuant to which
the Institutional Warrant Holders and the Individual Warrant Holders, shall
forfeit all rights under and pursuant to the terms of their Warrants in exchange
for the right to receive in the CFG Merger such cash payments and shares of
Company Common Stock, respectively, as are set forth opposite the name of such
Warrant Holder on Exhibit A-8. The effectiveness of each Option Termination
Agreement and each Warrant Termination Agreement shall be expressly contingent
upon and subject to the consummation of the transactions contemplated herein.
(d) CA Securities. At the Effective Time, each share of CA Common Stock,
issued and outstanding immediately prior to the Effective Time, shall, by virtue
of the CA Merger and without any action on the part of the holder thereof, be
converted into the right to receive 560 shares of Company Common Stock, subject
to appropriate adjustment in the event of a stock split, stock dividend or
recapitalization or other similar event applicable to shares of Company Common
Stock prior to the Effective Time (the "CA Exchange Ratio"), upon surrender of
the certificate representing such share of CA Common Stock. The aggregate number
of shares of Company Common Stock to be provided to the CA Shareholders
hereunder shall be 560,000. Each share of CA Common Stock held in treasury by CA
immediately prior to the Effective Time shall, by virtue of the CA Merger, be
canceled and retired and cease to exist, without any conversion thereof and no
consideration shall be issued in exchange therefor.
(e) No Splits, Etc. Each of CFG and CA covenants and agrees that, prior to
the Effective Time, each of such entities shall not split or combine its capital
stock, or pay a stock dividend or other stock distribution in shares of its
capital stock, or in rights or securities exchangeable or convertible into or
exercisable for its capital stock, or otherwise change its capital stock into,
or exchange its capital stock for, any other securities (whether pursuant to or
as part of a merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation of such entity as a result of which
its respective shareholders receive cash, stock or other property in exchange
for, or in connection with, their capital stock of such entity (a "Business
Combination") or otherwise), or make any other dividend or distribution on or of
its capital stock, without the parties hereto having first entered into an
amendment to this Agreement pursuant to which the consideration to be paid
hereunder will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination or change; provided, however, that CA shall
not be prohibited by reason of this Section 4.01(e) from making a cash
distribution to its officers, directors and shareholders immediately prior to
the CA Merger.
(f) No Further Rights. All CFG Stock, Options, Warrants, and CA Common
Stock to be converted into Company Common Stock pursuant to this Section 4.01
shall cease to be outstanding, shall be canceled and retired and shall cease to
exist, and the holders of a certificate or certificates representing such shares
(a "Certificate" or the "Certificates") or Options or Warrants representing the
right to acquire such shares shall thereafter cease to have any rights with
respect thereto, except the right to receive for all of the CFG Stock, Options,
Warrants, or CA Common Stock, as the case may be, upon the surrender of such
Certificates, Options or Warrants in accordance with Section 4.02, the Company
Common Stock or in the case of the Institutional Warrant Holders, cash,
specified and, with respect to all the CFG Shareholders and CA Shareholders,
cash in lieu of fractional shares of Company Common Stock as contemplated by
Section 4.03.
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SECTION 4.02 Surrender and Exchange of Securities. At or after the
Effective Time, upon surrender by the CFG Shareholders and the CA Shareholders
of their respective Certificates for cancellation to the Company, together with
any other required documents, and upon evidence that the Option Holders and
Warrant Holders have executed the Option Termination Agreement or the Warrant
Termination Agreement, as applicable, the CFG Shareholders, the CA Shareholders,
the Option Holders and the Individual Warrant Holders shall receive (i)
certificates of Company Common Stock representing the number of whole shares of
Company Common Stock into which shares of CFG Stock or CA Common Stock, as the
case may be, have been converted in accordance with Section 4.01(b) or Section
4.01(d), as the case may be, or such number of shares of Company Common Stock as
each Option Holder or Individual Warrant Holder is entitled to under Section
4.01(c) hereof, as the case may be, and (ii) cash in lieu of fractional shares
as contemplated by Section 4.03, and all Certificates, Options and Warrants so
surrendered shall forthwith be canceled, and the Institutional Warrant Holders
shall receive the cash referred to in Section 4.01. Until surrendered or
exchanged, the outstanding Certificates, Options and Warrants shall, upon and
after the Effective Time, be deemed for all purposes (other than to the extent
provided in the following sentence) to evidence ownership of the number of
shares of Company Common Stock into which such CFG Stock, Options, Warrants, or
CA Common Stock, as the case may be, has been converted pursuant to Section 4.01
hereof and the other rights contemplated in the preceding sentence; provided,
however, that no dividends or other distributions, if any, in respect of such
shares of Company Common Stock, declared after the Effective Time and payable to
holders of record after the Effective Time, shall be paid to the holders of any
unsurrendered Certificates, Options or Warrants until such Certificates, Options
or Warrants are surrendered. Subject to applicable law, after the surrender and
exchange of Certificates, Options or Warrants the record holders thereof will be
entitled to receive any such dividends or other distributions without interest
thereon, which theretofore have become payable with respect to the number of
shares of Company Common Stock for which such Certificate, Option or Warrant was
exchangeable. Holders of any unsurrendered Certificates, Options or Warrants
shall not be entitled to vote with respect to Company Common Stock that they may
be entitled to receive until such unsurrendered Certificates are exchanged
pursuant to this Section 4.02.
SECTION 4.03 Fractional Shares. No fractional shares of Company Common
Stock shall be issued in the Mergers. In lieu of any such fractional securities,
CFG Shareholders, Option Holders, Warrant Holders, and CA Shareholders, as the
case may be, will be paid an amount in cash (without interest) equal to the Pre-
Closing Book Value of one share of the Company Common Stock, multiplied by such
fraction.
SECTION 4.04 Transfer of Acquisition and CA Shares. No transfers of CFG
Stock, Options, Warrants or CA Common Stock shall be made on the stock transfer
books of CFG or CA, respectively, after the date of this Agreement and before
the Closing Date; provided, however, that any holder of any CFG Common Stock or
CA Common Stock, or any Option Holder or Individual Warrant Holder shall not be
precluded from making such transfers for personal estate planning purposes,
including transfers to a trust or trusts for the benefit of such party's family
members.
SECTION 4.05 Lost, Stolen or Destroyed Certificates. In the event any
Certificate, Option or Warrant shall have been lost, stolen or destroyed, upon
receipt by the Company of an affidavit of that fact from the holder thereof and
if reasonably satisfied that adequate provision for indemnification has been
made, which may include, at the Company's discretion, the provision by the
holder thereof at his sole cost and expense, of an appropriate bond or other
form of insurance, the Company will issue in exchange for such lost, stolen or
destroyed Certificate, Option or Warrant shares of Company Common Stock, as
applicable, cash in lieu of fractional shares, and unpaid dividends and
distributions on shares of Company Common Stock all as provided in Section 4.02,
deliverable in respect thereof pursuant to this Agreement.
SECTION 4.06 Additional Share Consideration.
(a) Timing and Procedure of Earnout Shares. In addition to the Initial
Share Consideration, the Company hereby agrees that it shall issue to the
Earnout Participants in accordance with the terms of this Section 4.06
additional shares of Company Common Stock (collectively, the "Earnout Shares")
based on the performance of the Company Surviving Corp. on a consolidated basis
during (i) the period from January 1, 2000 (pro forma assuming the Mergers were
consummated as of such date) until and including December 31,
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2000 (such period referred to as the "First Earnout Period" and such amount
referred to as the "First Earnout Payment"), and (ii) the period from January 1,
2001 until and including December 31, 2001 (such period referred to as the
"Second Earnout Period" and such amount referred to as the "Second Earnout
Payment," and each of the First Earnout Period and the Second Earnout Period, an
"Earnout Period," and each of the First Earnout Payment and the Second Earnout
Payment, an "Earnout Payment"). Any Earnout Shares to be issued pursuant to the
terms of this Section 4.06 shall be issued not later than the tenth Business Day
following the date the Earnout Statement (as hereinafter defined) is required to
be delivered to the CFG/CA Representative in accordance with Section 4.06(g)
unless the parties disagree as to the computation of the Company EPS (as defined
in Section 4.06(e)) reflected on the Earnout Statement for the applicable
Earnout Period, in which event any such Earnout Shares to be issued shall be
issued within two Business Days following final resolution of any such
disagreement in accordance with Section 4.06(g). Any Earnout Shares to be issued
shall be in an amount as determined in accordance with Section 4.06(b) and
Section 4.06(c) hereof, as the case may be. Any reference to the Company in this
Section 4.06 shall be deemed to refer to Company Surviving Corp.
(b) Determination of First Earnout Payment. The Earnout Shares, if any, to
be issued to the Earnout Participants pursuant to this Section 4.06 for the
applicable period shall be issued pursuant to the applicable formulae set forth
in Section 4.06(b)(i) and 4.06(c)(i), based on Company EPS (as defined in
Section 4.06(e)) during the applicable period. The First Earnout Payment shall
be equal to the Earnout Shares earned for the First Earnout Period.
(i) If Company EPS for the First Earnout Period is:
(A) Less than $1.80 per share, no Earnout Shares shall be issued;
(B) Greater than or equal to $1.80 per share, and less than $1.85
per share, the Company shall issue 200,000 shares of Company Common
Stock;
(C) Greater than or equal to $1.85 per share, and less than $1.90
per share, the Company shall issue an aggregate of 400,000 shares of
Company Common Stock;
(D) Greater than or equal to $1.90 per share, and less than $1.95
per share, the Company shall issue an aggregate of 600,000 shares of
Company Common Stock;
(E) Greater than or equal to $1.95 per share, and less than $2.00
per share, the Company shall issue an aggregate of 800,000 shares of
Company Common Stock; and
(F) Greater than or equal to $2.00 per share, the Company shall
issue an aggregate of 1,000,000 shares of Company Common Stock.
(ii) The maximum number of shares of Company Common Stock that the
Earnout Participants in the aggregate shall be entitled to receive for the
First Earnout Period shall be 1 million shares (the "First Year Maximum
Shares").
(c) Determination of Second Earnout Payment. The Second Earnout Payment
shall be equal to the Earnout Shares earned for the Second Earnout Period.
(i) If Company EPS for the Second Earnout Period is:
(A) Less than $2.00 per share, no Earnout Shares shall be issued;
(B) Greater than or equal to $2.00 per share, and less than $2.05
per share, the Company shall issue the greater of (x) 111,000 shares of
Company Common Stock, and (y) 11% of the Maximum Shares (as defined in
Section 4.06(c)(iii));
(C) Greater than or equal to $2.05 per share, and less than $2.10
per share, the Company shall issue the greater of (x) an aggregate of
222,000 shares of Company Common Stock, and (y) 22% of the Maximum
Shares;
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(D) Greater than or equal to $2.10 per share, and less than $2.15
per share, the Company shall issue the greater of (x) an aggregate of
333,000 shares of Company Common Stock, and (y) 33% of the Maximum
Shares;
(E) Greater than or equal to $2.15 per share, and less than $2.20
per share, the Company shall issue the greater of (x) an aggregate of
444,000 shares of Company Common Stock and (y) 44% of the Maximum
Shares;
(F) Greater than or equal to $2.20 per share, and less than $2.25
per share, the Company shall issue the greater of (x) an aggregate of
555,000 shares of Company Common Stock, and (y) 56% of the Maximum
Shares;
(G) Greater than or equal to $2.25 per share, and less than $2.30
per share, the Company shall issue the greater of (x) an aggregate of
666,000 shares of Company Common Stock and (y) 67% of the Maximum
Shares;
(H) Greater than or equal to $2.30 per share, and less than $2.35
per share, the Company shall issue the greater of (x) an aggregate of
777,000 shares of Company Common Stock and (y) 78% of the Maximum
Shares;
(I) Greater than or equal to $2.35 per share, and less than $2.40
per share, the Company shall issue the greater of (x) an aggregate of
888,000 shares of Company Common Stock and (y) 89% of the Maximum
Shares; and
(J) Greater than $2.40 per share, the Company shall issue the
greater of (x) an aggregate of 1,000,000 shares of Company Common Stock,
and (y) 100% of the Maximum Shares.
(ii) Except as otherwise provided in Section 4.06(c)(iii), the maximum
number of shares of Company Common Stock that the Earnout Participants in
the aggregate shall be entitled to receive for the Second Earnout Payment
shall be 1 million shares (the "Second Year Maximum Shares").
(iii) Subject to Section 4.06(c)(iv), if (x) no Earnout Shares, or (y)
fewer than the First Year Maximum Shares are issued to the Earnout
Participants for the First Earnout Period as a result of Company EPS being
less than the earnings amounts specified in Section 4.06(b)(i)(A)-(F), then
the number of shares of Company Common Stock represented by the difference
between (A) the number of Earnout Shares issued for such period pursuant
thereto, and (B) the First Year Maximum Shares (such amount, the "Remaining
Shares") shall be added to the Second Year Maximum Shares (with such
resulting number of shares being referred to herein as the "Maximum
Shares").
(iv) In the event that Company EPS for the First Earnout Period is (x)
greater than or equal to $1.60 per share, 100% of the Remaining Shares
shall be added to the Second Year Maximum Shares, (y) greater than or equal
to $1.40 per share, and less than $1.60 per share, 50% of the Remaining
Shares shall be added to the Second Year Maximum Shares, and (z) less than
$1.40 per share, no Remaining Shares shall be added to the Second Year
Maximum Shares.
(d) Issuance to Earnout Participants. Any Earnout Shares to be issued to
the Earnout Participants pursuant to this Section 4.06 shall be issued thereto
based on, or in the same proportion, as is represented by such participant's
percentage ownership interest with respect to CFG (the "Applicable Percentage")
as represented on Exhibit C.
(e) Calculation of Company EPS. The term "Company EPS" shall mean Basic
Earnings Per Share as defined by GAAP and as the same shall be incorporated in
the audited annual financial statements included in public filings made by the
Company with the SEC from time to time pursuant to the requirements of the
Exchange Act, but subject to adjustment as otherwise provided herein.
(i) If, during an applicable Earnout Period, the Company sells,
exchanges or otherwise disposes of any assets or liabilities of any Person,
which assets or liabilities do not principally involve real estate assets,
or do not involve the purchase, sale, operation, financing, or management
of real property (a "Material Disposition"), the Company (as represented by
the Special Committee) and the CFG/CA
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Representative shall within 30 Business Days after the consummation of such
transaction determine whether financial results based on such Material
Disposition are to be included in Company EPS. If the Company and the
CFG/CA Representative cannot agree within such required period, the Special
Committee shall make such determination; provided, however, that if the
CFG/CA Representative disagrees with such determination, the Company (as
represented by the Special Committee) and the CFG/CA Representative shall
select an independent, nationally recognized accounting firm mutually
acceptable to the Special Committee and the CFG/CA Representative to
resolve any dispute with regard to whether such financial results are to be
included in Company EPS, which accounting firm has not performed any
services for the Company or any of the Earnout Participants or any
Affiliates thereof or the Special Committee within the past 24 months. The
parties shall use their reasonable efforts to cause such accounting firm to
resolve such dispute no later than 30 Business Days after being selected.
If such parties are unable to agree on the choice of an accounting firm,
such accounting firm will be selected by lot from a list of nationally
recognized accounting firms, after excluding the regular outside accounting
firms of the Company and the Earnout Participants. The determination of any
accounting firm so selected will be set forth in writing and will be
conclusive and binding upon the parties. In the event that the parties
submit any unresolved objections to an accounting firm for resolution as
provided in this Section 4.06(e)(i), the fees and expenses of the
accounting firm shall be (x) borne by the objecting party if such
accounting firm determines that no additional payment is due to such party,
or (y) borne by the Company if such accounting firm determines that
additional payment is due to the Earnout Participants;
(ii) If, during the applicable Earnout Period, the Company purchases,
exchanges or otherwise acquires any assets or liabilities of any Person,
which assets or liabilities do not principally involve real estate assets,
or do not involve the purchase, sale, operation, financing, or management
of real property (a "Material Acquisition"), the Company (as represented by
the Special Committee) and the CFG/CA Representative shall within 30
Business Days after the consummation of such transaction determine whether
financial results based on such Material Acquisition are to be included in
Company EPS. If the Company and the CFG/CA Representative cannot agree
within such required period, the Special Committee shall make such
determination; provided, however, that if the CFG/CA Representative
disagrees with such determination, the Company (as represented by the
Special Committee) and the CFG/CA Representative shall select an
independent, nationally recognized accounting firm mutually acceptable to
the Special Committee and the CFG/CA Representative to resolve any dispute
with regard to whether such financial results are to be included in Company
EPS, which accounting firm has not performed any services for the Company
or any of the Earnout Participants or any Affiliates thereof or the Special
Committee within the past 24 months. The parties shall use their reasonable
efforts to cause such accounting firm to resolve such dispute no later than
30 Business Days after being selected. If such parties are unable to agree
on the choice of an accounting firm, such accounting firm will be selected
by lot from a list of nationally recognized accounting firms, after
excluding the regular outside accounting firms of the Company and the
Earnout Participants. The determination of any accounting firm so selected
will be set forth in writing and will be conclusive and binding upon the
parties. In the event that the parties submit any unresolved objections to
an accounting firm for resolution as provided in this Section 4.06(e)(ii),
the fees and expenses of the accounting firm shall be (x) borne by the
objecting party if such accounting firm determines that no additional
payment is due to such party, or (y) borne by the Company if such
accounting firm determines that additional payment is due to the Earnout
Participants. Notwithstanding the foregoing, any securitizations or sales
and purchases of Loans by the Company after the Effective Time shall not
constitute a Material Disposition or a Material Acquisition for purposes of
this Section 4.06 and shall be included for purposes of calculating Company
EPS;
(iii) Company EPS will exclude the effect of the following items:
(A) Any costs, expenses or adjustments arising out of, resulting
from or in any way connected with the Mergers or the Company's
forfeiture of its status as a Real Estate Investment Trust (other than
customary taxes on corporate income incurred after January 1, 2000 in
the ordinary course of business) including without limitation, the
effect of expensing all costs, expenses, fees and charges associated
with the CA Merger;
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(B) Any other extraordinary or nonrecurring gain or loss or any
departure from the Company's prior methodology for determining
accounting estimates or any change in its accounting policies; and
(C) Company EPS will reflect any other adjustments mutually agreed
to in writing by the Company and the CFG/CA Representative.
(iv) The maximum pre-tax gain from the sale of assets owned by the
Company prior to December 31, 1999 that shall be included in the
calculation of Company EPS shall be (x) $9,771,000 for the First Earnout
Period, and (y) $15,750,000 for the Second Earnout Period and Company EPS
solely with respect to such maximum pre-tax gains will be calculated for
the applicable period using the greater of (x) the Company's effective tax
rate, and (y) 30%.
(f) Other Adjustments. The targeted earnings per share amounts specified
in Section 4.06(b)(i) and 4.06(c)(i) shall be adjusted to reflect any stock
split, buyback, issuances, dividends, or purchases, or any redemption,
reclassification, recapitalization, reorganization, exchange of shares,
adjustment or other similar change in or to the outstanding securities of the
Company.
(g) Determination of Company EPS. As soon as reasonably practicable (and
in no event later than 10 Business Days) following the preparation and
completion of the audit of the Company's financial statements for each of the
Company's fiscal years ending on December 31, 2000 and December 31, 2001, the
Company and its independent auditors will, in connection with their regular
audit procedures, complete an audit (each, an "Earnout Audit") of the Company's
financial statements for such period and will prepare and deliver to the CFG/CA
Representatives and to the Special Committee a computation of the Company EPS
for such period, in each case based on the results of the Earnout Audit and the
terms of this Section 4.06 (each, an "Earnout Statement"). The Earnout Statement
shall set forth the amount of Company EPS and the number of Earnout Shares, if
any, to be issued based thereon, based on the terms of Section 4.06(b) and
Section 4.06(c), and a reasonably detailed description and accounting of the
derivation of such Company EPS. The Company will (i) provide the CFG/CA
Representative and the Special Committee an opportunity to review each Earnout
Audit and will make available all records and work papers and personnel used in
preparing any Earnout Statement, subject to the execution of customary waivers
and releases, and (ii) at reasonable times and upon reasonable notice and so as
not to interrupt the Company's business operations, allow the CFG/CA
Representative or representatives of the Special Committee to meet with any
personnel of the Company or outside accountants who prepared the Earnout
Statement with respect to such preparation. If the CFG/CA Representative or the
Special Committee disagree with the computation of the Company EPS reflected on
any Earnout Statement, the CFG/CA Representative or the Special Committee may,
within 10 Business Days after receipt of the Earnout Statement, deliver a notice
(an "Objection Notice") to the Company setting forth in reasonable detail the
CFG/CA Representative's or the Special Committee's calculation of the Company
EPS for such period, as applicable and any other objections as to the Earnout
Statement. In the event an Objection Notice is not received within the required
period, the Company's calculation of Company EPS and the Earnout Payment, as set
forth in the Earnout Statement, shall be conclusive and binding on the parties.
The Company and the CFG/CA Representative or the Special Committee will use
reasonable efforts to resolve any disagreements as to the computation of Company
EPS for such period, but if they do not obtain a final resolution within 30 days
after the Company has received the Objection Notice, the Company, the CFG/CA
Representative and the Special Committee will select an independent, nationally
recognized accounting firm mutually acceptable to the Company and the CFG/CA
Representative and the Special Committee to resolve any remaining objections,
which firm has not performed any services for the Company or any of the Earnout
Participants or any Affiliates thereof or the Special Committee within the past
24 months. If such parties are unable to agree on the choice of an accounting
firm, such accounting firm will be selected by lot from a list of nationally
recognized accounting firms, after excluding the regular outside accounting
firms of the Company and the Earnout Participants. The determination of any
accounting firm so selected will be set forth in writing and will be conclusive
and binding upon the parties. In the event that the parties submit any
unresolved objections to an accounting firm for resolution as provided in this
Section 4.06(g), the fees and expenses of the accounting firm shall (i) be borne
by the objecting party if such accounting firm determines that no additional
payment is due to such party, or (ii) be
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borne by the Company if the shares of Company Common Stock that such accounting
firm determines to be due exceeds the Earnout Shares reflected on the Earnout
Statement.
(h) Information Rights. During the Earnout Period, the Company will
provide the CFG/CA Representative with copies of any management and/or financial
reports relating to the Company's results of operations, as prepared in the
ordinary course of the Company's business and which are delivered to the Board
of Directors of the Company.
(i) Control by the Company. The Earnout Participants acknowledge that the
Company and its designees to the Board of Directors of the Company will have the
power and right to control all aspects of the business and operations of the
Company, including the power and right to make or not make decisions as to the
choice of independent accountants and counsel for the Company, the hiring,
firing and compensation of employees, the incurrence or not of debt and the
prepayment or not of debt (including the refinancing or not of existing debt),
the expenditure or not of funds for research and development and product
promotion, the pricing and terms of sale of the Company's products and services,
the making or not of capital expenditures, the settlement or not of claims and
the management of all litigation and disputes with third parties (including
suppliers, customers, competitors, employees, consultants and agents). The
Earnout Participants further agree and acknowledge that the right to receive any
Earnout Shares is a vested right to receive a contingent payment pursuant to the
terms of this Section 4.06 and that neither the Company nor any of its officers,
directors, employee or any other party shall not be and shall be deemed to be, a
fiduciary on behalf of any such party or a guarantor as to the amount of any
payment or issuance with regard to any matters contained in this Section 4.06.
(j) Impact of Fundamental Changes. The Company (as represented by the
Special Committee) and the CFG/CA Representative agree to discuss in good faith
appropriate revisions, if any, to this Section 4.06 in the event that either (i)
the Company decides to fundamentally and substantially change the strategic
direction of the Company from that envisioned as of the date hereof, or (ii) it
is determined that any payments to be made under this Section 4.06 jeopardize
the tax status of the CFG Merger. This obligation to discuss in good faith such
revisions shall not constitute a binding commitment to make any such revisions
in the event that the Company and such shareholders do not mutually agree on
appropriate revisions. Any such revisions shall be subject to the final approval
of the Special Committee as it determines appropriate; provided, however, that
if the CFG/CA Representative disagrees with such revision, the Company (as
represented by the Special Committee) and the CFG/CA Representative shall select
an independent, nationally recognized accounting firm mutually acceptable to the
Special Committee and the CFG/CA Representative to resolve any dispute with
regard to whether such financial results are to be included in Company EPS,
which accounting firm has not performed any services for the Company or any of
the Earnout Participants or any Affiliates thereof or the Special Committee
within the past 24 months. The parties shall use their reasonable efforts to
cause such accounting firm to resolve such dispute no later than 30 Business
Days after being selected. If such parties are unable to agree on the choice of
an accounting firm, such accounting firm will be selected by lot from a list of
nationally recognized accounting firms, after excluding the regular outside
accounting firms of the Company and the Earnout Participants. The determination
of any accounting firm so selected will be set forth in writing and will be
conclusive and binding upon the parties. In the event that the parties submit
any unresolved objections to an accounting firm for resolution as provided in
this Section 4.06(j), the fees and expenses of the accounting firm shall be (x)
borne by the objecting party if such accounting firm determines that no
additional payment is due to such party, or (y) borne by the Company if such
accounting firm determines that additional payment is due to the Earnout
Participants.
(k) Change of Control. In the event that a Change of Control (as
hereinafter defined) occurs prior to January 1, 2002, the Company will, prior to
or at the time of such Change of Control, make appropriate provision or cause
appropriate provision to be made (in each case reasonably satisfactory to the
CFG/CA Representative) so that (i) Company EPS can be calculated and Earnout
Shares issued (if the targets for payment are met) following such Change of
Control, and (ii) the Company's obligations under this Section 4.06 are
expressly assumed by the acquiring Person. This Section 4.06, and the Company's
obligation hereunder, shall survive any Change of Control which is effected in
such a manner that the Company does not have the opportunity to comply with the
provisions of the first sentence of this Section 4.06(k). In the event
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that (x) the Company does not comply with the provisions of the first sentence
of this Section 4.06(k) in connection with a Change of Control, or (y) following
any Change of Control and prior to the end of the Second Earnout Period, the
acquiring Person (1) disposes of any material portion of the business conducted
by the Company as of the Change of Control so as to adversely affect Company
EPS, or (2) engages in any other transaction or reorganization that makes
calculation of Company EPS impossible or unduly burdensome (in each case, an
"Earnout Default"), then the Company shall issue to the Earnout Participants
such number of shares of Company Common Stock calculated in accordance with
Section 4.06(b) or 4.06(c), as the case may be, based on the Present Value (as
hereinafter defined) of the Company EPS assuming for purposes of such
calculation that the Company EPS would accrue at the same average per diem rate
as such Company EPS had accrued during the period commencing on the first day of
the applicable Earnout Period and the date of the Change of Control. Any such
amount shall become due and payable upon consummation of the Change of Control
in the case of clause (x) of this Section 4.06(k) or immediately upon occurrence
of the circumstances described in clause (y) of this Section 4.06(k). "Present
Value" means, with respect to any amount or amounts to be paid in the future,
that amount which, if allowed to accrue interest at a rate equal to 8%, would be
equal to the amount on such future date. "Change of Control" means a transaction
pursuant to which an independent third party or third parties acquire (i) more
than 50% of the outstanding capital stock of the Company after giving effect to
such transaction (whether by merger, consolidation or sale or transfer of the
Company's capital stock), or (ii) all of substantially all of the Company's
assets determined on a consolidated basis. For purposes of this Section 4.06(k),
a third party shall not be deemed to be an "independent third party" if any
Earnout Participants either directly or indirectly has any economic or voting
interest therein.
(l) Additional Payment. Contemporaneous with the issuance and delivery of
any Earnout Shares to the Earnout Participants, the Company shall pay each such
party in cash an amount (each, an "Additional Payment") equal to the product of
the (x)(i) 3.33% with respect to Earnout Shares earned for the First Earnout
Period, and (ii) 6.66% with respect to Earnout Shares earned for the Second
Earnout Period, times (y) the fair market value of the Earnout Shares delivered
to each CFG Common Shareholder as of the date of delivery thereof, which fair
market value shall be the closing price at which the Company's Common Stock is
traded or quoted on the NASDAQ/NMS on such date.
(m) No Rights Until Issued. Earnout Shares shall not possess any
attributes of Company Common Stock or any other security and shall not entitle
the holders thereof to any rights of any kind unless and until such shares have
been issued in accordance with the terms of this Agreement.
(n) Special Committee Approval. Notwithstanding any other provision of
this Section 4.06 or any other provision of this Agreement, the Company shall
not issue any shares of Company Common Stock pursuant to this Section 4.06
unless such issuance and the calculations that form the bases for any such
issuance shall have first been approved by the Special Committee. Wherever in
this Section 4.06 any party is required to deliver any calculation, computation,
objection or other communication to any other party hereto, such party shall
also provide such communication to the Special Committee. The Special Committee
shall be required to raise any objection to any of the calculations referred to
in this Section 4.06 within the time periods otherwise specified herein and any
dispute as to such issuance shall be resolved in accordance with Section
4.06(g).
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CFG AND CA
CFG and CA hereby represent and warrant to the Company and Acquisition as
follows:
SECTION 5.01 Organization. Each of CFG and CA is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all requisite power and authority, to own,
operate and lease its properties, and to carry on its business substantially as
now conducted. Each of CFG and CA is duly qualified to do business and is in
good standing in each jurisdiction in which the character of its assets or
property owned, leased or operated by it or the nature of the business conducted
by it
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makes such qualification necessary, except where the failure to be so qualified
or to be in good standing has not had or would not have a Material Adverse
Effect on CFG and CA as the case may be, or on the ability of either CFG or CA
to consummate the transactions contemplated hereby. Each of CFG and CA has all
requisite power and authority, to enter into this Agreement and, subject to the
adoption of this Agreement by the stockholders of the Company and the receipt of
all requisite regulatory approvals and the expiration of any applicable waiting
periods, to consummate the transactions contemplated hereby. Each of CFG and CA
has provided to the Company a complete and correct copy of the Articles of
Incorporation or Certificate of Incorporation and the Bylaws, as amended or
restated, of CFG and CA, as the case may be. Neither CFG nor CA is in violation
of any of the provisions of its Articles of Incorporation, Certificate of
Incorporation or Bylaws, as amended or restated, or equivalent organizational
documents.
SECTION 5.02 Authorization; Enforceability. The execution, delivery and
performance of this Agreement and all other agreements contemplated hereby and
the consummation of the transactions contemplated hereby have been duly approved
and authorized by the Board of Directors of each of CFG and CA, and all
necessary corporate action on the part of such party with respect thereto has
been taken, subject to the adoption of this Agreement by the stockholders of the
Company. This Agreement has been duly executed and delivered by each of CFG and
CA and constitutes the valid and binding obligation of such party and is
enforceable against such party in accordance with its terms, except to the
extent that enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws or equitable principles
or doctrines.
SECTION 5.03 Conflicts. Except as disclosed on Schedule 5.03 of the
Disclosure Schedule, the execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated hereby will not, conflict with
or result in any violation, breach or termination of, or default or loss of a
material benefit under, or permit the acceleration of any obligation under, or
result in the creation of any material lien, charge or encumbrance on any of the
property or assets under, any provision of the Certificate of Incorporation or
Bylaws (or equivalent organizational documents) of either of CFG or CA, or any
mortgage, indenture, lease, agreement or other instrument, permit, concession,
grant, franchise, license, decree, statute, law, ordinance, rule or regulation
applicable to CFG or CA or their respective properties, other than any such
conflicts, violations, breaches or defaults which would not have a Material
Adverse Effect on each of CFG or CA or the ability of each of CFG or CA to
consummate the transactions contemplated hereby.
SECTION 5.04 Consents and Approvals. Except as set forth on Schedule 5.04
of the Disclosure Schedule, no consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Authority is required
by or with respect to CFG or CA in connection with the execution and delivery of
this Agreement or the consummation by such party of the transactions
contemplated hereby except for: (i) any filings or consents required to be made
by the Company, including without limitation, a proxy statement (the "Proxy
Statement") for use in connection with a meeting of the stockholders of the
Company to consider and vote on the terms of this Agreement and the Mergers (the
"Stockholders' Meetings"); (ii) the filing of a Certificate of Merger with the
Delaware Secretary of State in the case of the CA Merger and the Michigan
Secretary of State in the case of the CFG Merger, and the approval thereof;
(iii) any filings, approvals or no-action letters with or from state securities
authorities; and (iv) any antitrust filings (including filings required under
the HSR Act), or consents, waivers or approvals obtained with respect thereto.
SECTION 5.05 Anti-takeover Provisions Inapplicable. No "business
combination," "moratorium," "control share" or other state anti-takeover statute
or regulation applicable to CFG or CA (i) applies to the Mergers, (ii) prohibits
or restricts the ability of CFG or CA to perform its obligations under this
Agreement or its ability to consummate the transactions contemplated hereby,
(iii) would have the effect of invalidating or voiding this Agreement or any
provision hereof, or (iv) would subject the Company or Acquisition to any
material impediment or condition in connection with the exercise of any of its
rights under this Agreement.
SECTION 5.06 Capitalization.
(a) The authorized capital stock of CFG consists of (i) 100,000 shares of
common stock, par value $1.00 per share (the "CFG Common Stock") of which 21,813
shares are issued and outstanding as of the date hereof, (ii) 40,000 shares of
Class A Convertible Preferred Stock, without par value per share (the "CFG
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Preferred Stock") of which 15,792 shares are issued and outstanding as of the
date hereof, (iii) warrants to acquire 7,949 shares of CFG Common Stock, and
(iv) options and incentive stock options to acquire 7,825 shares of CFG Common
Stock, all as more fully set forth on Schedule 5.06 of the Disclosure Schedule.
The authorized capital stock of CA consists of 10,000 shares of common stock, no
par value per share (the "CA Common Stock") of which 1,000 shares are issued and
outstanding as of the date hereof. All of the issued and outstanding shares of
the CFG Common Stock and the CA Common Stock are (i) duly and validly authorized
and issued, (ii) fully paid and nonassessable, and (iii) free from any
preemptive rights of current or past stockholders. The shareholders of each of
CFG and CA and the Option Holders and Warrant Holders of CFG are listed on
Schedule 5.06 with the number of shares of CFG Stock, CA Stock, Options or
Warrants opposite such party's name.
(b) Except as set forth in this Section 5.06, as of the date hereof, there
are no shares of capital stock or other equity securities of CFG or CA
outstanding nor are there any outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for, shares of the capital
stock of CFG or CA, or contracts, commitments, understandings, or arrangements
by which CFG or CA is or may be bound to issue additional shares of its capital
stock or options, warrants, or rights to purchase or acquire any additional
shares of its capital stock.
SECTION 5.07 Investments; Subsidiaries. Except as set forth on Schedule
5.07 of the Disclosure Schedule, neither of CFG nor CA is, directly or
indirectly, a partner or joint venturer in any partnership or joint venture
arrangement. Except as set forth on Schedule 5.07 of the Disclosure Schedule,
neither of CFG nor CA has, directly or indirectly, any Subsidiaries or is the
beneficial owner of any equity or debt securities or has any other ownership
interest in any Person.
SECTION 5.08 Financial Statements; No Material Adverse Change.
(a) CFG has furnished to the Company true and complete copies of its
audited financial statements (including balance sheets, statements of income,
statements of changes in stockholders' equity and statements of changes in
financial position) as of and for the years ended March 31 for each of 1999,
1998, 1997, and 1996 accompanied by the related opinions of CFG's official
independent auditors as of such dates and for such periods (collectively, the
"Audited CFG Financial Statements"). The Audited CFG Financial Statements,
together with the notes thereto, fairly present, in all material respects, the
financial position of CFG at the dates of, and the results of the operations and
the changes in stockholders' equity and financial position for CFG for the
periods covered by, the Audited CFG Financial Statements, all in accordance with
GAAP consistently applied with prior periods except as indicated in the
accompanying opinion of CFG's official independent auditors and subject, in the
case of interim financial statements, to annual year-end adjustments.
(b) CFG has furnished to the Company true and complete copies of the
unaudited balance sheets of CFG as at June 30, 1999 and September 30, 1999 and
the related statements of income, statements of changes in stockholders' equity
and statements of changes in financial position of CFG as of and for the period
then ended (collectively, the "Unaudited CFG Financial Statements"). The
Unaudited CFG Financial Statements fairly present in all material respects, the
financial position of CFG at the dates of, and the results of the operations and
the changes in stockholders' equity and financial position for CFG for the
periods covered by, the Unaudited CFG Financial Statements. Such Unaudited CFG
Financial Statements have been prepared in accordance with GAAP consistently
applied with prior periods, except that the Unaudited CFG Financial Statements
do not contain any or all of the footnotes required by GAAP, are condensed and
are subject to year-end adjustments consistent with prior practice.
(c) CA has furnished to the Company true and complete copies of its
unaudited financial statements (including balance sheets, statements of income,
statements of changes in stockholders equity and statements of changes in
financial position) as of and for the year ended December 31, for 1998, as well
as its unaudited balance sheets as at March 31, 1999, June 30, 1999 and
September 30, 1999 and the related statements of income, statements of changes
in stockholders' equity and statements of changes in financial position of CA as
of and for the period then ended (collectively, the "CA Financial Statements"
and with the Audited CFG Financial Statements and Unaudited CFG Financial
Statements, the "CFG/CA Financial Statements"). The CA Financial Statements
fairly present, in all material respects, the financial position of CA at the
dates of,
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and the results of the operations and the changes in stockholders' equity and
financial position for CA for the periods covered by, the CA Financial
Statements, all in accordance with GAAP consistently applied with prior periods,
except that the CA Financial Statements do not contain any or all of the
footnotes required by GAAP, are condensed and are subject to year-end
adjustments consistent with prior practice.
(d) Since March 31, 1999, except as disclosed on Schedule 5.08 of the
Disclosure Schedule, and except for the execution, delivery and performance of
this Agreement and any other agreements to be entered into or contemplated
hereby and the transactions contemplated hereby and thereby, (i) neither CFG nor
CA has incurred any obligations, contingent or non-contingent liabilities,
liabilities for Taxes, levies, liens, claims or other charges, long-term leases
or unusual forward or long-term commitments (whether absolute, accrued,
contingent or otherwise, known or unknown, whether due or to become due, except
liabilities and obligations which (x) are adequately accrued or reserved against
in the CFG/CA Financial Statements or disclosed in the notes thereto or are not
required to be reflected in such statements under GAAP, (y) were incurred after
March 31, 1999 with regard to CFG or December 31, 1998 with regard to CA in the
ordinary course of business or otherwise are not in the aggregate material to
CFG or CA or would not be material to the Surviving Corporations assuming the
transactions contemplated hereby are consummated, or (z) have been discharged or
paid in full, (ii) no contract, lease or other agreement or instrument has been
entered into by CFG or CA or has become binding upon CFG or CA or its assets
which, individually or in the aggregate, has had or could reasonably be expected
to have a Material Adverse Effect on CFG or CA or the Surviving Corporations or
the ability of CFG or CA to consummate the transactions contemplated hereby, and
(iii) neither of CFG nor CA is in default, and to CFG's and CA's knowledge no
third party is in default, under any Material Agreement which, individually or
in the aggregate, has had or could reasonably be expected to have a Material
Adverse Effect on CFG or CA or the Surviving Corporations assuming the
transactions contemplated herein are consummated or on the ability of the CFG or
CA to consummate the transactions contemplated hereby, and (iv) each of CFG and
CA has been operated in the ordinary course of business. To the knowledge of CFG
or CA, since March 31, 1999 no event has occurred, which alone or together with
other events, could reasonably be expected to have a Material Adverse Effect on
CFG or CA or the Surviving Corporations assuming the transactions contemplated
hereby are consummated or on the ability of CFG or CA to consummate the
transactions contemplated hereby, except as disclosed on Schedule 5.08 and
except to the extent resulting from (x) any changes in general economic
conditions in the United States, or (y) any changes affecting the real estate
and/or real estate investment trust industries in general.
SECTION 5.09 Compliance with Laws; Permits.
(a) The business of each of CFG and CA has been and is being conducted in
compliance in all material respects with all laws, ordinances and regulations of
Governmental Authorities, including, without limitation, federal and state
securities laws, laws and regulations relating to financial statements and
reports, truth-in-lending, truth-in-savings, usury, fair credit reporting,
consumer protection, occupational safety, fair employment practices, fair labor
standards and laws and regulations relating to employees and employee benefits,
and any statutes or ordinances relating to the properties occupied or used by
CFG or CA, except where the failure to so comply would not have a Material
Adverse Effect on CFG or CA or the ability of CFG or CA to consummate the
transactions contemplated hereby. Each of the CFG and CA is in possession of all
franchises, grants, authorizations, licenses, permits, easements, variances,
exemptions, consents, certificates, approvals and orders necessary for CFG or CA
to own, lease and operate its properties or to carry on its business as it is
now being conducted (the "CFG/CA Permits") and no suspension, revocation or
cancellation of any of the CFG/CA Permits is pending or, to the knowledge of CFG
or CA or threatened, except where the failure to hold any CFG/CA Permits or the
suspension, revocation or cancellation thereof would not have a Material Adverse
Effect on CFG or CA or the ability of CFG or CA to consummate the transactions
contemplated hereby.
(b) Except for pending tax audits disclosed in Schedule 5.13 of the
Disclosure Schedule, no investigation or review by any Governmental Authority
with respect to CFG or CA is pending or, to the knowledge of CFG or CA,
threatened.
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SECTION 5.10 Litigation. Except as disclosed on Schedule 5.10 of the
Disclosure Schedule, there is no action, suit, investigation or proceedings,
legal, quasi-legal, administrative or otherwise, pending or, to the knowledge of
CFG or CA, threatened against CFG or CA or any property of CFG or CA in any
court or before any arbitrator of any kind or before or by any Governmental
Authority except for such actions, suits, investigations or legal proceedings
that would not have a Material Adverse Effect on CFG or CA or which would affect
the ability of CFG or CA to consummate the transactions contemplated hereby.
Neither CFG nor CA is in default with respect to any judgment, order, writ,
injunction or decree of any arbitrator, court or Governmental Authority, and
there are no unsatisfied judgments against CFG or CA except for such defaults or
unsatisfied judgments as would not have a Material Adverse Effect on CFG or CA
or the ability of CFG or CA to consummate the transactions contemplated hereby.
SECTION 5.11 Compensation and Employee Matters. Each of CFG and CA has
previously provided to the Company, a true, correct and complete list of all
directors, officers and personnel of such party, and the annual salary, bonuses
paid or accrued for the year ending December 31, 1998, and for the period from
January 1, 1999 through November 30, 1999, and any commitments by CFG or CA
entered into on or prior to the date hereof to pay any further bonuses for or
increase the salary of any such person, which list shall be updated as of the
Closing Date.
SECTION 5.12 Employee Benefit Plans; Labor Matters.
(a) Schedule 5.12 contains a true and complete list of all employee plans,
programs, practices and arrangements, including, without limitation, all
employee benefit plans (within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), employment
agreements, and health, medical, dental, welfare, accident, disability, life
insurance, stock purchase, bonus, equity and equity-type compensation, severance
pay and other employee benefit or fringe benefit plans maintained or contributed
to by CFG or CA or any of its ERISA Affiliates or with respect to which CFG or
CA or any of its ERISA Affiliates has any fixed or contingent, direct or
indirect liability (collectively, the "Plans"). For purposes of this Agreement,
the term "ERISA Affiliate" means any Affiliate or Subsidiary of CFG or CA and
any other Person that would be treated as under common control or a single
employer with CFG or CA under Section 4001 of ERISA or Section 414 of the Code.
Each of CFG and CA has delivered or made available to the Company copies of each
of its Plans and all amendments thereto and, if applicable, the summary plan
description and any summaries of material modifications, any other material
employee communications, the most recent determination letters and any other
rulings, the three most recent annual reports on Internal Revenue Service Form
5500, and the three most recent actuarial reports and/or statements of trust
assets with respect to each such Plan (or such lesser number if such Plans have
been in existence for less than three years).
(b) Except as set forth on Schedule 5.12 of the Disclosure Schedule, (i)
neither CFG or CA nor any of its ERISA Affiliates maintains, has maintained or
has been obligated to contribute to any Plan that is subject to Title IV of
ERISA; (ii) there is no accumulated funding deficiency, whether or not waived,
within the meaning of Section 302 of ERISA and Section 412 of the Code with
respect to any Plan that is subject to such sections; (iii) no "prohibited
transaction" (other than those for which there is an available exemption) (as
such terms are defined in ERISA and the Code, as applicable) has occurred with
respect to any Plan during the five years preceding the Effective Time; (iv)
each Plan is and has been operated in compliance in all respects with the
presently applicable provisions of ERISA, the Code and other applicable law
except for such non-compliance as would not have a Material Adverse Effect on
CFG or CA or the ability of CFG or CA to consummate the transactions
contemplated hereby; (v) with respect to any insurance contract providing
funding under any Plan, there is no liability for any retroactive rate
adjustment arising from events occurring prior to the Effective Time except for
such liability as would not have a Material Adverse Effect on CFG or CA or the
ability of CFG or CA to consummate the transactions contemplated hereby; (vi)
the IRS has issued, with respect to each Plan intended to be tax qualified under
Sections 401(a) and 501(a) of the Code, a letter determining that such Plan is
qualified and its related trust is exempt from United States federal income tax
under Sections 401(a) and 501(a) of the Code, respectively, and, to the
knowledge of CFG or CA, there has been no occurrence affecting the form or
operation of any Plan since the date of any such determination letter that is
likely to adversely affect such qualification; and (vii) no Plan is a "welfare
benefit fund" (within
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the meaning of Section 419(e) of the Code), a "multiple employer plan" (within
the meaning of Section 413(c) of the Code) or a "multiemployer plan" (as defined
in Section 3(37) of ERISA), and no withdrawal liability has been incurred by or
asserted against CFG or CA or any of its ERISA Affiliates with respect to any
employee pension benefit plan which is a multiple employer plan or a
multiemployer plan.
(c) Each Plan that is a "group health plan" (as defined in Section 4980B of
the Code) has been operated in compliance with Section 4980B of the Code and the
secondary payor requirements of Section 1862(b)(1) of the Social Security Act
except where the failure to so comply would not have a Material Adverse Effect
on CFG or CA or the ability of CFG or CA to consummate the transactions
contemplated hereby. To the knowledge of CFG or CA, no medical claim in excess
of $50,000 has been incurred but is unpaid under any Plan. Except as provided in
Schedule 5.12 of the Disclosure Schedule and except as required by Section 4980B
of the Code, neither of CFG or CA nor any of its ERISA Affiliates has any
obligation or liability to provide medical, life insurance or supplemental
pension benefits in respect of any current or former employees or independent
contractors of CFG or CA or any such ERISA Affiliate beyond their retirement.
Except as set forth on Schedule 5.12 of the Disclosure Schedule, no Plan
provides for severance pay, unemployment compensation or any similar payment
with respect to any current or former employee or independent contractor of CFG
or CA or any of its ERISA Affiliates. Except as provided in Schedule 5.12 of the
Disclosure Schedule, the consummation of the transactions contemplated by this
Agreement will not (i) entitle any such Person to severance pay, unemployment
compensation or any other similar payment; (ii) accelerate the time of payment
or vesting of any amount; (iii) create a contractual obligation or other
commitment or requirement to increase the amount of compensation due to any such
Person; (iv) constitute a "prohibited transaction" (as defined in Section 406 of
ERISA or Section 4975 of the Code); or (v) entitle any such Person to an "excess
parachute payment" within the meaning of Section 280G of the Code. Each of CFG
or CA and each of its ERISA Affiliates, as applicable, have reserved all rights
necessary to amend each Plan and to terminate its participation in each Plan.
(d) Except as set forth on Schedule 5.12 of the Disclosure Schedule, there
are no actions or claims existing or pending (other than routine claims for
benefits) or threatened with respect to any Plan, and neither of CFG or CA nor
any of its ERISA Affiliates has been notified of any audit or investigation of a
Plan by any Governmental Authority.
(e) All contributions required to be made by CFG or CA or any of its ERISA
Affiliates under applicable laws or the terms of any Plan or collective
bargaining agreement to each Plan have been made within the time prescribed by
such laws, Plan or collective bargaining agreement.
(f) Each of CFG and CA and each of its ERISA Affiliates (except as a result
of any actions taken by the Company) (i) is in compliance with all applicable
laws respecting employment, employment practices, terms and conditions of
employment and wages and hours (including, but not limited to, the Worker
Adjustment Retraining Notification Act, the Age Discrimination in Employment
Act, the Civil Rights Act of 1964, the Equal Pay Act, the Occupational Safety
and Health Act, the Fair Labor Standards Act, the Americans with Disability Act
of 1990, the Family and Medical Leave Act of 1993, and any other federal, state
or local law regulating employment or protecting employee rights), in each case,
with respect to current and former employees and independent contractors of CFG
and CA and such ERISA Affiliates except where the failure to so comply would not
have a Material Adverse Effect on CFG or CA or the ability of CFG or CA to
consummate the transactions contemplated hereby (ii) has withheld all amounts
required by applicable laws or by agreement to be withheld from the wages,
salaries and other payments to such current and former employees and independent
contractors, (iii) is not liable for any arrears of wages or any Taxes or any
penalty for failure to comply with any of the foregoing except for such
liabilities as would not have a Material Adverse Effect on CFG or CA or the
ability of CFG or CA to consummate the transactions contemplated hereby, and
(iv) is not liable for any payment to any trust or other fund or to any
Governmental Authority, with respect to unemployment compensation benefits,
social security or other benefits for such current or former employees and
independent contractors except for such payments as would not have a Material
Adverse Effect on CFG or CA or the ability of CFG or CA to consummate the
transactions contemplated hereby.
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(g) Except as set forth on Schedule 5.12 of the Disclosure Schedule, (i) no
employees of CFG or CA is represented by any labor organization and, to the
knowledge of CFG or CA, there is no union organizational activity currently
underway threatened, with respect to any employees of CFG or CA, (ii) neither
CFG nor CA has received any written notice during the current or preceding year
of, any unfair labor practice, and no such complaint is pending before the
National Labor Relations Board or any other agency having jurisdiction thereof,
(iii) neither CFG nor CA is engaged in, or has received any notice of, any
grievances arising under any collective bargaining agreements, or any pending
arbitration proceedings under any collective bargaining agreements, (iv) during
the immediately preceding 24 calendar months there has not been any, and there
is no threatened, labor strike, work stoppage or slowdown pending against any
portion of the business of CFG nor CA, and there is no pending lockout by CFG or
CA. Each of CFG and CA has satisfied and performed in all material respects its
obligations under each collective bargaining agreement, and under any order,
conciliation contract or settlement contract by which any of them is bound or to
which any of them is subject concerning employment related matters. Neither of
CFG nor CA is engaged in, or has received notice of, any local, state and/or
federal charge, complaint, lawsuit or other action, pertaining to the violation
of any employment law, statute, ordinance or regulation, except for such as
would not have a Material Adverse Effect on CFG or CA or on the ability of CFG
or CA to consummate the transactions contemplated hereby, and no such charge,
complaint, lawsuit or other action is pending before any agency or
administrative body responsible for administering such employment law, statute,
ordinance or regulation.
SECTION 5.13 Tax Matters.
(a) Each of CFG and CA has filed when due all material federal, foreign,
state, and local Tax returns, Tax information returns, reports, and estimates
(all federal, foreign, state, and local Tax returns, Tax information returns,
reports, and estimates in the case of income Taxes or other Taxes based upon the
income of CFG or CA, as the case may be) required to be filed for all years and
periods (and portions thereof) for which the due date (with extensions) is on or
before the Effective Time. All such returns, reports and estimates (i) were
prepared in the manner required by law, (ii) are true, correct and complete in
all material respects, and (iii) reflect the liability for Taxes of CFG or CA,
as the case may be, in all material respects. All Taxes shown to be payable on
such returns, reports, and estimates, and all assessments received by CFG and CA
before the Effective Time, have been paid when due.
(b) CFG and CA have paid, or have provided a sufficient reserve on the
CFG/CA Financial Statements for the payment of, all federal, state, local, and
foreign Taxes with respect to all periods, or portions thereof, ending on or
prior to September 30, 1999; and such Taxes paid or provided for include those
for which CFG and CA may be liable in their own right, or as the transferee of
the assets of, or as successor to, any other corporation, association,
partnership, joint venture, or other entity.
(c) Each of CFG and CA have withheld amounts from their respective
employees and filed all federal foreign, state, and local returns and reports
with respect to employee income Tax withholding and social security and
unemployment Taxes for all periods (or portions thereof) ending before the
Effective Time in compliance with the provisions of the Code, and other
applicable federal, foreign, state, and local laws.
(d) Schedule 5.13 hereto sets forth all federal income Tax Returns for CFG
and CA, whether separate returns or consolidated returns for an affiliated group
of corporations of which such party is or was a member corporation includible in
such return, that before the Effective Time are not closed by the applicable
statutes of limitations; and all assessments or proposed deficiencies, including
interest and penalties thereon, made as a result of any examinations of any such
return that has been examined have been paid or provided for on the CFG/CA
Financial Statements.
(e) Except as set forth in Schedule 5.13 hereto, there are no examinations,
investigations or material claims by any taxing authority ("Taxing Authority")
pending or, to the knowledge of CFG or CA, threatened against CFG or CA for any
Taxes due before the Effective Time; and before the Effective Time there has
been no waiver of any applicable statute of limitations or extension of the time
for the assessment of any Tax against CFG or CA.
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(f) Neither CFG nor CA has before the Effective Time made, signed, or filed
any consent under Section 341(f) of the Code.
(g) Except as set forth on Schedule 5.13, neither CFG nor CA has ever been,
nor is such party currently, a party to any agreement relating to the sharing of
any liability for, or payment of, Taxes.
(h) Except for liens for real and personal property Taxes that are not yet
past due, there are no liens for any Taxes owed by either CFG or CA upon any
assets of such entities.
(i) With respect to any taxable period ended on or before the date of this
Agreement, (i) neither CFG nor CA has filed an amended federal or state income
Tax Return, except as set forth on Schedule 5.13; and (ii) after the date of
this Agreement and before the Effective Time, neither CFG nor CA, without the
Company's consent, which may not be unreasonably withheld, (A) will file, except
as required by law (and then only if a copy of such amended return is supplied
to the Company fifteen (15) days prior to such filing), an amended federal or
state income Tax Return, or (B) will enter into any settlement agreement with
any Taxing Authority or otherwise comprise any federal or state income Tax
liability, if such amended return, settlement, or compromise will result in an
increase in a federal or state income Tax liability of CFG or CA for a taxable
year, or portion thereof, ending after the Effective Time.
(j) Except as set forth on Schedule 5.13, neither CFG nor CA has granted a
power of attorney to any Person relating to any Tax matter with respect to any
taxable year ending after the Effective Time.
(k) True and complete copies of all returns of Taxes and all schedules
thereto filed by, on behalf of, or with respect to CFG and CA with any Taxing
Authority for all taxable years or periods, all written communications with any
Taxing Authority and any written communications with such party's accountants
relating to all such returns (including revenue agents' reports, settlement
agreements, compromise agreements and similar items), has been made available to
the Company for inspection prior to the date hereof.
(l) The Mergers will not cause any payment to be made to any Person by the
Surviving Corporations to be non-deductible, in whole or in part, for federal
income Tax purposes by reason of Section 280G of the Code.
SECTION 5.14 Real Property Owned or Leased. Schedule 5.14 of the
Disclosure Schedule sets forth a complete and accurate list or description of
all real property (including a general description of fixtures located at such
property and specific identification of any such fixtures not owned by the CFG
or CA) that CFG or CA owns or leases, has agreed (or has an option) to purchase,
sell or lease, or may be obligated to purchase, sell or lease and any title
insurance or guarantee policies with respect thereto, specifying in the case of
leases, the name of the lessor, licensor or other grantor, the approximate
square footage covered thereunder, the basic annual rental and other amounts
paid or payable with respect thereto and a summary of the other terms thereof.
True copies of all such leases for real property have been delivered to the
Company prior to the date hereof. No consent to the consummation of the
transactions contemplated by this Agreement is required from the lessor of any
such real property.
SECTION 5.15 Undisclosed Liabilities. As of the date hereof and as of the
Effective Time, except as and to the extent reflected, reserved against or
otherwise disclosed on the CFG/CA Financial Statements or the notes thereto or
not required to be reflected in such statements under GAAP, or set forth in
Schedule 5.15 of the Disclosure Schedule, and except for those incurred in the
ordinary course of business, neither CFG nor CA has any indebtedness or
liability of any nature, whether accrued, absolute, contingent or otherwise,
whether due or to become due.
SECTION 5.16 Absence of Certain Changes or Events. Since September 30,
1999, except as contemplated by this Agreement or disclosed on the CFG/CA
Financial Statements or the notes thereto or as set forth in Schedule 5.16 of
the Disclosure Schedule, each of CFG and CA has conducted its business only in
the ordinary course and, since such date, there has not been:
(a) any changes in the business, financial condition or results of
operations of such party having or reasonably likely to have a Material Adverse
Effect;
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(b) any damage, destruction or loss (whether or not covered by insurance)
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect;
(c) except for such changes in policies and procedures as were or are
required to be made in order to ensure compliance with accounting policies and
procedures promulgated by the SEC, any material change by such party in its
accounting methods, principles or practices;
(d) any revaluation by such party of any of its material assets, including
but not limited to writing down the value of inventory or writing off notes or
accounts receivable;
(e) any entry by such party into any commitment or transactions material to
such party (other than commitments or transactions entered into in the ordinary
course of business);
(f) any declaration, setting aside or payment of any dividends or
distributions in respect of the capital stock of such party;
(g) any increase in or establishment of any bonus, insurance, severance,
deferred compensation, pension, retirement, profit sharing, stock option
(including without limitation the granting of stock options, stock appreciation
rights, performance awards, or restricted stock awards), stock purchase or other
employee benefit plan or agreement or arrangement, or any other increase in the
compensation payable or to become payable to any present or former directors,
officer or key employees of such party, except for increases in base
compensation or the payment of any bonus or other incentive payments in the
ordinary course of business, or pursuant to any employment, consulting or
severance agreement or arrangement previously entered into with any such present
or former directors, officers or key employees; or
(h) any other action which, if it had been taken after the date hereof,
would require the consent of the Company hereunder.
SECTION 5.17 Assets.
(a) Each of CFG and CA has good and marketable title to their real
properties, including any leaseholds and ground leases, and their other assets
and properties, all as reflected as owned or held by CFG and CA respectively, in
the CFG/CA Financial Statements as of the latest applicable dates thereof, and
those acquired since such date, except for (i) assets and properties disposed of
since such date in the ordinary course of business, and (ii) Permitted Liens,
none of which, in the aggregate, except as set forth in the CFG/CA Financial
Statements or in Schedule 5.17 of the Disclosure Schedule, would have a Material
Adverse Effect on CFG or CA, respectively, or the Surviving Corporations
assuming the transactions contemplated hereby are consummated. All buildings,
structures, fixtures and appurtenances comprising part of the real properties of
CFG and CA (whether owned or leased) are in good operating condition, reasonable
wear and tear excepted. Title to all real property owned by CFG and CA is held
in fee simple, except as otherwise noted in the CFG/CA Financial Statements or
as set forth in Schedule 5.17 of the Disclosure Schedule. CFG and CA have title
or other rights to its assets sufficient in all material respects for the
conduct of their respective businesses as presently conducted, and except as set
forth in the CFG/CA Financial Statements or in Schedule 5.17 of the Disclosure
Schedule, such assets are free, clear and discharged of and from any and all
liens, charges, encumbrances, security interests and/or equities which are
material to CFG and CA, other than Permitted Liens, except that all property
that is owned by CFG that is leased to third parties is subject to the terms and
conditions set forth in each of the leases between CFG and each respective
lessee.
(b) All leases and licenses pursuant to which CFG and CA, as lessee or
licensee, leases or licenses real property, personal property or Intellectual
Property are, to the knowledge of CFG and CA, valid, effective, and enforceable
against the lessor or licensor or in accordance with their respective terms
except as the enforceability thereof may be limited by bankruptcy, insolvency,
moratorium, reorganization, receivership, conservatorship or similar laws
relating to or affecting the enforcement of creditors' rights generally, and by
general principles of equity, whether applied by a court of law or equity.
Except for such defaults as would not have a Material Adverse Effect on CFG or
CA or the ability of CFG or CA to consummate the transactions contemplated
hereby, there is not under any of such leases or licenses any existing material
default, or any event which with notice or lapse of time, or both, would
constitute a material default, with respect to either
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CFG or CA, or to the knowledge of CFG or CA, any other party thereto. Except as
disclosed in Schedule 5.17 of the Disclosure Schedule, none of such leases
provide for a rental payment of more than $50,000 annually and none of such
licenses contains a prohibition against assignment by CFG or CA, by operation of
law or otherwise, or any other provision which would preclude the Surviving
Corporations from possessing and using the leased premises or licensed property
(including Intellectual Property) for the same purposes and upon the same rental
and other terms upon the consummation of the Mergers as are applicable to the
use by CFG or CA as of the date of this Agreement.
SECTION 5.18 Books and Records. The respective minute books of CFG and CA,
as previously made available to the Company and its representatives, contain
records of all meetings of and all corporate actions or written consents taken
by the respective shareholders and board of directors of CFG and CA that are
complete and correct in all material respects. Except as set forth on Schedule
5.18 of the Disclosure Schedule, neither CFG nor CA has any of their respective
records, systems, controls, data or information recorded, stored, maintained,
operated or otherwise wholly or partly dependent upon or held by any means
(including any electronic, mechanical or photographic process, whether
computerized or not) which (including all means of access thereto and therefrom)
are not under the exclusive ownership and control of CFG and CA, as the case may
be.
SECTION 5.19 Proxy Statement. The information to be provided by CFG or CA
for inclusion in the Proxy Statement will not on the date the Proxy Statement
(or any amendment thereof or supplement thereto) is first mailed to the
Company's Stockholders, at the time of the Stockholders Meeting, and at the
Effective Time, contain any statement that, in the light of the circumstances
under which it is made, is false or misleading with respect to any material
fact, omit to state a material fact necessary in order to make the statements
made therein not false or misleading, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Stockholders Meeting that has become false
or misleading. If at any time prior to the Effective Time, any event relating to
either CFG or CA or their respective officers or directors is discovered by CFG
or CA that either entity believes should be set forth in a supplement to the
Proxy Statement, CFG or CA shall promptly inform the Company thereof.
SECTION 5.20 Brokers and Finders. Except for the fees and expenses paid or
to be paid to Prudential Securities pursuant to the terms of its engagement
letter with CFG, which fees and expenses shall be paid by the Company, each of
CFG and CA represents and warrants to the other parties hereto that no broker,
finder, investment bankers, agent or similar intermediary has acted directly or
indirectly on its behalf in connection with this Agreement or the transactions
contemplated hereby, and that no brokerage commissions, finders' fees,
investment banker, or similar fees or commissions and/or expenses are payable or
to be paid in connection therewith based on any agreement, arrangement or
understanding with it or any action taken by it. Each of CFG and CA agrees to
indemnify and hold the other parties hereto harmless from any and all claims,
losses, liabilities, expenses (including reasonable attorney fees), demands or
commissions or other compensation by any broker, finder, investment bankers,
agent or similar intermediary claiming to have been employed by or on behalf of
such party.
SECTION 5.21 Full Disclosure. None of this Agreement, the CFG/CA Financial
Statements, or any Schedule, Exhibit or certificate delivered in accordance with
the terms hereof or any other document or instrument in writing that has been
supplied by or on behalf of CFG or CA in connection with the transactions
contemplated hereby contains an untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein not misleading in light of the circumstances in which the same were
made. There is no fact known to CFG or CA with regard to CFG or CA that has had
or could reasonable be expected to have a Material Adverse Effect on CFG or CA
or the Surviving Corporations assuming the transactions contemplated hereby are
consummated or their respective property or assets and that has not been
disclosed herein or in the Schedules, Exhibits or certificates furnished in
connection with the consummation of the transactions contemplated hereby.
SECTION 5.22 Environmental Matters. Except as set forth in Schedule 5.22:
(i) CFG and CA are and have been in compliance in all material respects with all
Environmental Laws, except for such
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noncompliance which would not result in Environmental Liabilities which could
reasonably be expected to have a Material Adverse Effect on CFG or CA or the
Surviving Corporations assuming the transactions contemplated hereby are
consummated; (ii) CFG and CA have obtained, and are in compliance in all
material respects with, all Environmental Permits required by Environmental Laws
for the operations of their respective businesses as presently conducted or as
proposed to be conducted, except where the failure to so obtain or comply with
such Environmental Permits would not result in Environmental Liabilities which
could reasonably be expected to have a Material Adverse Effect on CFG or CA or
the Surviving Corporations assuming the transactions contemplated hereby are
consummated; (iii) neither of CFG or CA are involved in operations or know of
any facts, circumstances or conditions, including any Releases of Hazardous
Materials, that are likely to result in any Environmental Liabilities of CFG or
CA or which could reasonably be expected to have a Material Adverse Effect on
CFG or CA or the Surviving Corporations assuming the transactions contemplated
hereby are consummated, and none of CFG or CA has permitted any current or
former tenant of such Person to engage in any such operations, except as would
not reasonably be expected to have a Material Adverse Effect on CFG or CA or the
Surviving Corporations assuming the transactions contemplated hereby are
consummated; (iv) neither CFG nor CA has received any Environmental Claim, nor
to their knowledge is any Environmental Claim threatened, which would result in
a Material Adverse Effect on CFG or CA or the Surviving Corporations assuming
the transactions contemplated hereby are consummated; (v) neither CFG nor CA has
assumed, contractually or by operation of law, any material liabilities under
any Environmental Laws which could reasonably be expected to have a Material
Adverse Effect on CFG or CA or the Surviving Corporations assuming the
transactions contemplated hereby are consummated, and (vi) neither CFG nor CA
has entered into, has agreed to, or is subject to any material judgment, decree,
order or other similar requirement of any Governmental Authority under any
Environmental Laws, including without limitation those relating to compliance
with Environmental Laws or with respect to the investigation, cleanup,
remediation or removal of any Hazardous Material.
SECTION 5.23 Insurance Disclosure. CFG and CA maintain insurance on CFG's
and CA's respective assets and upon their respective businesses and operations
against loss or damage, risks, hazards and liabilities as are consistent with
customary practices and standards of companies engaged in business similar to
CFG and CA. Such insurance is with insurers that in the reasonable judgment of
management of CFG and CA are sound and reputable. CFG and CA maintain in effect
all insurance required to be carried by law or by any agreement by which they
are bound. All material claims under all policies of insurance maintained by CFG
and CA have been filed in due and timely fashion. Each of CFG and CA has taken
or will timely take all requisite action (including without limitation the
making of claims and the giving of notices) pursuant to its directors' and
officers' liability insurance policy or policies in order to preserve all rights
thereunder with respect to all matters (other than matters arising in connection
with this Agreement and the transactions contemplated hereby) occurring prior to
the Effective Time. Neither CFG nor CA has, during the past three years, had an
insurance policy cancelled or been denied insurance coverage for which such
company has applied.
SECTION 5.24 Allowance for Possible Loan Losses. The reserve for losses
shown on the CFG/CA Financial Statements as of September 30, 1999 was adequate
in all material respects to provide for possible losses of a level consistent
with historic practice and based on current economic conditions and information
available to CFG and CA, and are considered adequate under GAAP and standards
applied to the specialty finance business conducted by CFG. To the knowledge of
CFG, the aggregate principal amount of all loans and leases contained in the
loan and lease portfolio of CFG as of September 30, 1999, in excess of such
reserve, was fully collectible.
SECTION 5.25 Year 2000 Compliance. Except as set forth on Schedule 5.25 of
the Disclosure Schedule, all of CFG's and CA's Internal MIS Systems and
Facilities are Year 2000 Compliant except where the failure to be so compliant
will not have a Material Adverse Effect on CFG or CA or on the ability of CFG or
CA to consummate the transactions contemplated hereby. CFG and CA have furnished
the Company with true, correct and complete copies of all internal
investigations, memoranda, budget plans, forecasts, or reports concerning the
Year 2000 Compliance of the products, services, operations, systems, supplies,
and facilities of CFG and CA.
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SECTION 5.26 Material Agreements. Each of CFG and CA has made available to
the Company a true and correct copy of all Material Agreements. Each Material
Agreement is valid, binding, in full force and effect and enforceable by CFG and
CA as the case may be in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors generally and by general equitable principles
and except to the extent where the inability to enforce such Material Agreements
in accordance with their terms will not have a Material Adverse Effect on CFG or
CA or the ability of CFG or CA to consummate the transactions contemplated
hereby. Except as disclosed in Schedule 5.26, CFG and CA are not (with or
without the lapse of time or the giving of notice, or both) in breach or default
in any material respect thereunder and, to the knowledge of CFG and CA, no other
party to any of the Material Agreements is (with or without the lapse of time or
the giving of notice, or both) in breach or default in any material respect
thereunder.
SECTION 5.27 Intellectual Property.
(a) Schedule 5.27 of the Disclosure Schedule contains a list of all
Intellectual Property used by each of CFG or CA in its business. Each of CFG and
CA owns or has a valid license to use, in the manner currently used, all
Intellectual Property used in its business.
(b) No claims with respect to CFG's or CA's Intellectual Property have been
asserted, or to the knowledge of CFG or CA are threatened, by any third party
nor are there valid grounds, to the knowledge of CFG or CA, for any bona fide
claims (i) that any distribution, license, sublicense, use or licensing of the
Intellectual Property infringes the rights of any third parties, (ii) against
the use of any Intellectual Property as used in CFG's or CA's business as
currently conducted, or (iii) challenging the ownership, validity or
effectiveness of the Intellectual Property, except as could not reasonably be
expected to have a Material Adverse Effect on CFG or CA or the Surviving
Corporations assuming the transactions contemplated hereby are consummated. To
CFG's or CA's knowledge, all registered trademarks, servicemarks, copyrights and
patents held by CFG or CA, if any, are valid and subsisting except as could not
reasonably be expected to have a Material Adverse Effect on CFG or CA or the
Surviving Corporations assuming the transactions contemplated hereby are
consummated. None of the Intellectual Property owned by CFG or CA is subject to
any outstanding decree, order, judgment or stipulation restricting in any manner
the licensing thereof by CFG or CA except as could not reasonably be expected to
have a Material Adverse Effect on CFG or CA or the Surviving Corporations
assuming the transactions contemplated hereby are consummated.
(c) To CFG's or CA's knowledge, there is no material unauthorized use,
infringement or misappropriation of any of such party's Intellectual Property by
any third party, except as could not reasonably be expected to have a Material
Adverse Effect on CFG or CA or the Surviving Corporations assuming the
transactions contemplated hereby are consummated.
SECTION 5.28 Absence of Certain Business Practices. None of CFG, CA, or
any officer, employee or agent thereof, nor any other Person acting on behalf of
CFG or CA, has, directly or indirectly, within the past five years given or
agreed to give any gift or similar benefit to any customer, supplier,
governmental employee or other Person or entity who is or may be in a position
to help or hinder CFG or CA (or assist CFG or CA in connection with any actual
or proposed transaction) which (i) subjects any party to any damage or penalty
in any civil, criminal or governmental litigation or proceeding which would have
a Material Adverse Effect on CFG or CA or the Surviving Corporations assuming
the transactions contemplated hereby are consummated, (ii) if not given in the
past, could have had a Material Adverse Effect on CFG or CA, or (iii) if not
continued in the future, could have a Material Adverse Effect on CFG or CA or
the Surviving Corporations assuming the transactions contemplated hereby are
consummated.
SECTION 5.29 Affiliate Transactions. Schedule 5.29 of the Disclosure
Schedule sets forth (i) all contracts, agreements, other arrangements or
transactions existing or occurring at any time after December 31, 1997 between
CFG or CA, on the one hand, and any of CFG's or CA's Affiliates (including
officers, directors, or employees) or any holder of 10% of the outstanding
common stock of CFG or CA or a family member of such a Person, on the other
hand, or any of their respective Affiliates, other than agreements relating to
services provided as an officer or director of the Company other than relating
to any extraordinary bonuses, and (ii) a description of all payments made to or
received from, CFG or CA, on the one hand, and any of the
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Company's Affiliates (including officers, directors, or employees) or any holder
of 10% of the outstanding common stock of CFG or CA or a family member of such a
Person, on the other hand, or any of their respective Affiliates, since December
31, 1997, except for dividends paid or distributions made with respect to any
outstanding class or series of securities of such party and payments of salary
or other regular compensation for services in the ordinary course.
SECTION 5.30 Loans; Investments.
(a) The following terms shall have the meaning ascribed to them for
purposes of this Section 5.30:
(i) "Investor" means any Person (including any securitization vehicle)
that has acquired or hereinafter acquires a Loan from CFG, other than the
Company.
(ii) "Investor Requirements" means any outstanding contractual, legal
and regulatory obligation of CFG to any Investor, including but not limited
to, the representations, warranties and covenants made by CFG to any
Investor.
(iii) "Loan" means any loan or lease (whether such lease is a
"financing" lease or a "true" lease) at any time held, serviced or sold by
CFG to the extent that CFG could have any liability, obligation or duties
with respect thereto.
(iv) "Loans Held for Sale" means all Loans currently held and
hereinafter acquired or originated by CFG where beneficial ownership has
not been transferred to an Investor.
(v) "Loan Documents" means the note, mortgage, deed of trust, security
agreement, or other instrument securing the note or lease contract and the
related documents for each Loan.
(vi) "Mortgage Loan" shall mean a loan secured by a mortgage.
(vii) "Portfolio Loan" means all Loans currently owned or hereinafter
owned for investment by CFG.
(viii) "Serviced Loans" means all Loans currently and hereinafter
serviced by CFG for its own account or for others.
(ix) "Servicing Requirements" means prudent practice and industry
standards together with any contractual, legal or regulatory obligation of
CFG relating to the Serviced Loans or any Loan previously serviced by CFG.
(b) Except as set forth on Schedule 5.30(b) of the Disclosure Schedule,
neither CFG nor CA has any Portfolio Loan. Except as set forth on Schedule
5.30(b) of the Disclosure Schedule, all Loans owned by CFG are Loans Held for
Sale, except Loans held as collateral for a securitization.
(c) To the knowledge of CFG, the Loan Documents evidencing each Loan (other
than Serviced Loans that have never been owned by CFG) that is currently
outstanding constitute the legal, valid and binding obligations of the parties
thereto and are enforceable against such parties in accordance with their terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting the rights of lending institutions or
creditors generally and by general equitable principles. To the knowledge of
CFG, no Loan is subject to any legally enforceable right of rescission, set-off,
counterclaim or defense, including the defense of usury or lack of legal
capacity of any borrower or guarantor, nor will the operation of any of the
terms of any Loan, or the exercise of any legally enforceable right thereunder,
render any Loan or any of the Loan Documents unenforceable, in whole or in
material part, or subject to any right of rescission, set-off, counterclaim or
defense, including the defense of usury or, to the knowledge of CFG, lack of
legal capacity of any borrower or guarantor, and no such right of rescission,
set-off, counterclaim or defense has been asserted with respect to any Loan Held
for Sale or any Loan for which there is any recourse against, or responsibility
or exposure of, CFG.
(d) The Loan Documents for each Loan (other than Serviced Loans that have
never been owned by CFG) have been duly executed by CFG and recorded, or are in
the process of being recorded, and are in due and proper form, and, to the
knowledge of CFG, the information contained therein was true, accurate and
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complete in all material respects at the time such Loan Documents were executed.
CFG has at all times maintained the Loan Documents in all material respects in
accordance with Investor Requirements, Servicing Requirements and otherwise in
accordance with all legal and regulatory requirements and contractual
obligations.
(e) To the knowledge of CFG, and except as set forth on Schedule 5.30(e),
all outstanding Loans sold and/or securitized by CFG complied in all material
respects with Investor Requirements on the date of sale.
(f) CFG has at all times been and is in compliance in all material respects
with the Servicing Requirements relating to the Serviced Loans and Loans
previously serviced by it.
(g) Except as set forth in Schedule 5.30(g) of the Disclosure Schedule, CFG
has no advances outstanding with respect to any Loan, except for advances made
under the Servicing Requirements or the requirements of the Loan Documents, the
aggregate amount of which is not material.
(h) CFG is not in material default with respect to any of its obligations
under any Loan.
(i) To the knowledge of CFG, CFG is not in violation in any material
respect of any applicable federal, state, or local law, statute, ordinance,
rule, regulation, order or guideline pertaining to the Loans, its origination or
production practices, or otherwise relating to its purchase or sale of Loans or
its lending business, including but not limited to, real estate settlement
procedures, fair credit reporting, and every other prohibition against unlawful
discrimination or governing consumer credit, and also including, without
limitation the Consumer Credit Reporting Act, Equal Credit Opportunity Act of
1975 and Regulation B, Fair Credit Reporting Act, Truth in Lending Law, in
particular, Regulation Z as amended, the Flood Disaster Protection Act of 1973,
and state consumer credit codes and laws. The Company has not received notice
from any governmental, quasi-governmental or private agency of pending or
threatened actions or investigations relating to origination or production
practices.
(j) All pools relating to Loans that require certification have been
initially certified, finally certified and/or recertified in accordance with
applicable guidelines, and if any "trailing documents" are outstanding, the lack
of such documents does not have any Material Adverse Effect on the ability of
the securitized pool to enforce its rights with respect thereto. The net
investment value or principal balance, as applicable, outstanding and owing on
the Serviced Loans in each pool equals or exceeds the amount owing to the
corresponding security holders of such pool.
(k) Set forth in Schedule 5.30(k) is a list of all interest rate swaps,
caps, floors and option agreements and other interest rate risk management
arrangements to which CFG is a party or by which any of their properties or
assets may be bound. All interest rate swaps, caps, floors and option agreements
and other interest rate risk management arrangements to which CFG is a party or
by which any of its properties or assets may be bound were entered into in the
ordinary course of business and for the purpose of hedging or managing a risk
specifically relating to the Loans and, to the knowledge of CFG, in accordance
with then-customary practice and all applicable rules and regulations and with
counterparties believed to be financially responsible at the time and are legal,
valid and binding obligations and are in full force and effect, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization, receivership, conservatorship or similar laws relating to or
affecting the enforcement of creditors' rights generally, and by general
principles of equity, whether applied by a court of law or equity except to the
extent that the unenforceability or invalidity of any such arrangements would
not have a Material Adverse Effect on CFG. CFG has duly performed in all
material respects all of its obligations thereunder to the extent that such
obligations to perform have accrued, and to the knowledge of CFG, there are no
material breaches, violations or defaults or allegations or assertions of such
by any party thereunder.
(l) The terms of each Loan have not been impaired, waived, altered or
modified in any material respect from the date of its origination except by a
written instrument, which written instrument has been recorded if recordation is
necessary to protect the interests of the owner thereof. The substance of any
such waiver, alteration or modification has been communicated to and approved in
writing by: (i) the relevant Investor, to the extent required by the relevant
Investor Requirements; and (ii) the title insurer, to the extent required by the
relevant policies, and its terms are reflected in the Loan Documents. Except as
authorized by the
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applicable Investor, where the Investor's authorization is required, CFG has
not: (i) subordinated the lien of any Mortgage Loan to any other mortgage or
lien or given any other mortgage or lien equal priority with the lien of a
mortgage loan; or (ii) executed any instrument of release, cancellation or
satisfaction with, in whole or in part, respect to any Mortgage Loan.
(m) As of the date hereof, except as set forth in Schedule 5.30(m), CFG is
not subject to and has not been notified of any currently existing repurchase
obligation under any Loan.
(n) All escrows required to be maintained pursuant to the terms of the
Mortgage Loans have been maintained by CFG and, to the knowledge of CFG, all
prior servicers, in all material respects in accordance with all applicable
legal rules and Investor Requirements and in accordance with the mortgage
servicing agreements and the Loan Documents related thereto. CFG has credited to
the account of mortgagors all interest required to be paid on any escrow
account. All escrow, custodial, and suspense accounts related to the owned
Mortgage Loans are held in CFG's name or in the Investor's name. With respect to
escrow deposits and payments which are required to be collected, all such
payments are in the possession of, or under the control of, CFG, and there exist
no material deficiencies in connection therewith for which customary
arrangements for repayment thereof have not been made. No escrow deposits or
other charges or payments have been capitalized under any mortgage or the
related mortgage note.
(o) Except as set forth on Schedule 5.30(o) of the Disclosure Schedule, CFG
has not received written notice of a servicing default for any Loan, and each
Loan serviced by CFG has been properly serviced and accounted for in all
material respects in accordance with the applicable Servicing Requirements. To
the extent that any applicable legal requirement in any jurisdiction or any
Investor Requirement requires the payment of interest on escrow accounts with
respect to any particular Loan, all such interest has been properly paid or
arrangements for such payment have been made. All amounts payable in respect of
a Loan, or the property covered by a mortgage which CFG is responsible for
paying, directly or on behalf of a mortgagor, have, in all material respects,
been paid prior to becoming delinquent. All pools for which CFG is responsible
are in compliance in all material respects with all applicable Investor
Requirements, procedures, rules, regulations and guidelines.
(p) Schedule 5.30(p) contains (i) the characteristics of the Loans
currently held for securitization, presented in a manner consistent with the
characteristics of the Loans listed on pages 61 through 69 of the Offering
Circular; (ii) a list of all Loans to Affiliates of CFG and description of
affiliation; and (iii) the historical delinquency and loss experience as of
November 30, 1999 presented in a manner consistent with pages 44 and 45 of the
Offering Circular. Each Loan satisfies the eligibility requirements of pages 103
through 106 of the Offering Circular and the sale agreement related thereto.
(q) Schedule 5.30(q) contains a list of all securitizations sponsored by
CFG or an Affiliate, and provides the following as to each securitization: (1)
original net investment value ("NIV") or principal balance, as applicable, of
the Loans; (2) current "NIV" or principal balance, as applicable, of the Loans;
(3) original principal balances of each class of securities issued; (4) current
principal balances of each class of securities issued; (5) current delinquency
levels and the "trigger events," "reserve account increase events" and service
termination percentages that apply to the related securitization; (6) the
outstanding amounts of servicing advances for each securitization; (7) indicate
whether the overcollateralization targets have been reached and, if not, the
anticipated date they will be reached; and (8) whether any securitizations
cross-collateralize other securitizations. To the knowledge of CFG, no facts
currently exist with respect to existing securitizations heretofore undertaken
by CFG that would be reasonably likely to materially and adversely affect the
ability of the Surviving Corporations to continue to service any of the existing
securitizations or to do securitizations in the future in accordance with
existing practices assuming the transactions contemplated hereby are
consummated.
(r) As to each securities offering document relating to a securitization,
at the time prepared and delivered to investors and the placement agent and as
of any date with respect to which the Company may have been obligated to deliver
any such offering document to an investor or the placement agent, such offering
document did not include any untrue statement of a material fact, or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
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were made, not misleading. To the knowledge of CFG, no offer or sale of any
securities relating to any securitization was made in violation of any state or
federal securities laws.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND ACQUISITION
The Company and Acquisition hereby represent and warrant to CFG and CA as
follows:
SECTION 6.01 Organization. Each of the Company and Acquisition is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite power and authority, to own,
operate and lease its properties, and to carry on its business substantially as
now conducted. Each of the Company and Acquisition is duly qualified to do
business and is in good standing in each jurisdiction in which the character of
the assets or property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification necessary, except where the
failure to be so qualified or in good standing has not had or would not have a
Material Adverse Effect on the Company or Acquisition taken as a whole, or on
the ability of either the Company or Acquisition to consummate the transactions
contemplated hereby. Each of the Company and Acquisition has all requisite power
and authority, to enter into this Agreement and, subject to the adoption of this
Agreement by the stockholders of the Company and the receipt of all requisite
regulatory approvals and the expiration of any applicable waiting periods, to
consummate the transactions contemplated hereby.
SECTION 6.02 Authorization; Enforceability. The execution, delivery and
performance of this Agreement and all other agreements contemplated hereby and
the consummation of the transactions contemplated hereby have been duly approved
and authorized by the Board of Directors of each of the Company and Acquisition,
and all necessary corporate action on the part of such party with respect
thereto has been taken, subject to the adoption of this Agreement by the
stockholders of the Company. This Agreement has been duly executed and delivered
by each of the Company and Acquisition and constitutes the valid and binding
obligation of such party and is enforceable against such party in accordance
with its terms, except to the extent that enforceability thereof may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
or equitable principles or doctrines.
SECTION 6.03 Conflicts. The execution and delivery of this Agreement does
not, and the consummation of the transactions contemplated hereby will not,
conflict with or result in any violation, breach or termination of, or default
or loss of a material benefit under, or permit the acceleration of any
obligation under, or result in the creation of any material lien, charge or
encumbrance on any of the property or assets under, any provision of the
Certificate of Incorporation or Bylaws (or comparable constitutive documents) of
either the Company or Acquisition, or any mortgage, indenture, lease, agreement
or other instrument, permit, concession, grant, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to the
Company or Acquisition or their respective properties, other than any such
conflicts, violations, breaches or defaults which would not have a Material
Adverse Effect on the Company or Acquisition taken as a whole or on the ability
of either the Company or Acquisition to consummate the transactions contemplated
hereby.
SECTION 6.04 Consents and Approvals. Except as set forth on Schedule 6.04,
no consent, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Authority is required by or with respect to the
Company or Acquisition in connection with the execution and delivery of this
Agreement or the consummation by such party of the transactions contemplated
hereby except for: (i) any filing or consent required to be made by the Company,
including without limitation, the Proxy Statement with the SEC for use in
connection with the Stockholders' Meeting to approve the Mergers; (ii) the
filing of a certificate of merger with the Delaware Secretary of State in the
case of the CA Merger and the Michigan Secretary of State in the case of the CFG
Merger, and the approval thereof; (iii) any filings, approvals or no-action
letters with or from state securities authorities; and (iv) any antitrust
filings (including filings required under the HSR Act), or consents, waivers or
approvals obtained with respect thereto.
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SECTION 6.05 Anti-takeover Provisions Inapplicable. No "business
combination," "moratorium," "control share" or other state anti-takeover statute
or regulation applicable to the Company or Acquisition (i) applies to the
Mergers, (ii) prohibits or restricts the ability of the Company or Acquisition
to perform its obligations under this Agreement or its ability to consummate the
transactions contemplated hereby, (iii) would have the effect of invalidating or
voiding this Agreement or any provision hereof, or (iv) would subject CFG or CA
to any material impediment or condition in connection with the exercise of any
of its rights under this Agreement.
SECTION 6.06 Capitalization.
(a) The authorized capital stock of the Company consists of (i) 40,000,000
shares of Company Common Stock, of which 9,508,108 shares are issued and
outstanding as of the date hereof, and (ii) 10,000,000 shares of Preferred
Stock, par value $0.01 per share, none of which are issued and outstanding as of
the date hereof. The authorized capital stock of Acquisition consists of 100
shares of Acquisition Common Stock, all of which are issued and outstanding and
owned by the Company. All of the issued and outstanding shares of Company Common
Stock and Acquisition Common Stock are, and all shares of Company Common Stock
issuable under stock option plans of the Company, and all of the shares of the
Company Common Stock to be issued pursuant to and in accordance with Article IV
of this Agreement will be, if and when issued (i) duly and validly issued, (ii)
fully paid and non-assessable, and (iii) free from any preemptive rights of
current or past stockholders. All of the issued and outstanding shares of
Company Common Stock will be entitled to vote to adopt this Agreement other than
Company Common Stock owned by any officer, director or Affiliate of CFG and/or
CA or any Affiliate of such officer, director or Affiliate.
(b) As of the date hereof, the Company had 1,070,000 shares of the Company
Common Stock reserved for issuance under its stock benefit plans for the benefit
of officers, directors and employees of the Company, pursuant to which awards
covering 930,000 shares of the Company Common Stock are outstanding.
(c) Except as set forth in this Section 6.06, as of the date hereof, there
are no shares of capital stock or other equity securities of the Company or
Acquisition outstanding nor are there any outstanding options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into or exchangeable for,
shares of the capital stock of the Company or Acquisition, or contracts,
commitments, understandings, or arrangements by which the Company or Acquisition
is or may be bound to issue additional shares of its capital stock or options,
warrants, or rights to purchase or acquire any additional shares of its capital
stock.
SECTION 6.07 Financial Statements; No Material Adverse Change.
(a) The financial statements of the Company included in its Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, and its Quarterly
Reports on Form 10-Q for the fiscal quarters ended March 31, 1999, June 30,
1999, and September 30, 1999 (collectively, the "Financial Statements") comply
as to form in all material respects with the applicable accounting requirements
and with the published rules and regulations of the SEC with respect thereto,
have been prepared in accordance with GAAP during the periods covered thereby
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q of the SEC, or for normal
year-end adjustments), and fairly present in all material respects the financial
position of the Company as at the dates thereof and the results of its
operations and cash flows for the periods then ended. Since December 31, 1998,
there has not been any declaration, setting aside or payment of a dividend or
other distribution with respect to shares of capital stock of the Company except
for dividends distributed to shareholders in the ordinary course of business or
any material change in accounting methods or practices by the Company. The
Company has delivered to CFG and CA the Financial Statements prior to the date
hereof.
(b) Since December 31, 1998, except as disclosed in the SEC Documents filed
prior to the date hereof, and except for the execution, delivery and performance
of this Agreement and any other agreements to be entered into or contemplated
hereby and the transactions contemplated hereby and thereby, (i) the Company has
not incurred any obligations, contingent or non-contingent liabilities,
liabilities for Taxes, levies, liens, claims or other charges, long-term leases
or unusual forward or long-term commitments (whether absolute,
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accrued, contingent or otherwise, known or unknown, whether due or to become
due, except liabilities and obligations which (x) are adequately accrued or
reserved against in the Financial Statements or disclosed in the notes thereto
or are not required to be reflected in such statements under GAAP, (y) were
incurred after September 30, 1999 in the ordinary course of business or
otherwise are not in the aggregate material to the Company, or (z) have been
discharged or paid in full, (ii) no contract, lease or other agreement or
instrument has been entered into by the Company or has become binding upon the
Company or its assets which, individually or in the aggregate, has had or could
reasonably be expected to have a Material Adverse Effect on the Company or the
ability of the Company to consummate the transactions contemplated hereby, (iii)
the Company is not in default, and to the Company's knowledge no third party is
in default, under any Material Agreement which, individually or in the
aggregate, has had or could reasonably be expected to have a Material Adverse
Effect on the Company or the ability of the Company to consummate the
transactions contemplated hereby, and (iv) the business of the Company has been
operated in the usual and ordinary course consistent with past practice. Since
December 31, 1998 no event has occurred, which alone or together with other
events, could reasonably be expected to have a Material Adverse Effect on the
Company or the ability of the Company to consummate the transactions
contemplated hereby, except as disclosed in the SEC Documents filed after
December 31, 1998 and prior to the date hereof and except to the extent
resulting from (x) any changes in general economic conditions in the United
States, or (y) any changes affecting the real estate and/or real estate
investment trust industries in general.
SECTION 6.08 No Prior Activities; Assets of Acquisition. Acquisition was
formed solely for the purpose of effecting the CFG Merger and engaging in the
transactions contemplated hereby. Acquisition has neither incurred any
obligations or liabilities nor engaged in any business or activities of any type
or kind whatsoever or entered into any agreements or arrangements with any
Person except in connection with its organization and this Agreement.
SECTION 6.09 Compliance with Laws.
(a) The business of each of the Company and Acquisition has been and is
being conducted in compliance in all material respects with all laws, ordinances
and regulations of Governmental Authorities, including, without limitation,
federal and state securities laws, laws and regulations relating to financial
statements and reports, occupational safety, fair employment practices, fair
labor standards and laws and regulations relating to employees and employee
benefits, and any statutes or ordinances relating to the properties occupied or
used by the Company or Acquisition.
(b) No investigation or review by any Governmental Authority with respect
to the Company or Acquisition is pending or, to the knowledge of the Company or
Acquisition, threatened, nor has any Governmental Authority indicated to the
Company or Acquisition an intention to conduct the same.
SECTION 6.10 SEC Reports. The Company has filed and made available to CFG
and CA a true and complete copy of each report, schedule, filing, registration
statement and definitive proxy statement required to be filed by the Company
with the SEC since November 1, 1997 (the "SEC Documents"). As of their
respective dates, the SEC Documents, after giving effect to any amendments and
supplements thereto filed prior to the date hereof, complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, applicable to such SEC Documents. None of the SEC Documents when
filed, after giving effect to any amendments an supplements thereto filed prior
to the date hereof, contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
SECTION 6.11 Litigation. There is no action, suit, investigation or
proceeding, legal, quasi-legal, administrative or otherwise, pending or, to the
knowledge of the Company or Acquisition, threatened against the Company or
Acquisition or any property of the Company or Acquisition in any court or before
any arbitrator of any kind or before or by any Governmental Authority except for
such actions, suits, investigations or legal proceedings that would not have a
Material Adverse Effect on the Company or Acquisition taken as a whole or which
would not materially affect the ability of the Company or Acquisition to
consummate the transactions contemplated hereby. Neither the Company nor
Acquisition is in default with respect to any
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judgment, order, writ, injunction or decree of any arbitrator, court or
Governmental Authority, and there are no unsatisfied judgments against the
Company or Acquisition except for such defaults or unsatisfied judgments as
would not have a Material Adverse Effect on the Company or Acquisition taken as
a whole or the ability of the Company and Acquisition to consummate the
transactions contemplated hereby.
SECTION 6.12 Proxy Statement. The information to be provided by the
Company and Acquisition for inclusion in the Proxy Statement will not, on the
date the Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to the Company's stockholders, at the time of the Stockholders
Meeting, and at the Effective Time, contain any statement that, in the light of
the circumstances under which it is made, is false or misleading with respect to
any material fact, omit to state any material fact necessary in order to make
the statements made therein not false or misleading or omit to state any
material fact necessary to correct any statement in any earlier communication
with respect to the solicitation of proxies for the Stockholders' Meetings that
has become false or misleading. If at any time prior to the Effective Time, any
event relating to either the Company or Acquisition or their respective officers
or directors is discovered by the Company or Acquisition that either entity
believes should be set forth in a supplement to the Proxy Statement, the Company
shall promptly inform CFG and CA and such amendment or supplement will be
promptly filed with the SEC and, as required by law, disseminated to the
Company's stockholders. Notwithstanding the foregoing, the Company and
Acquisition make no representation or warranty with respect to any information
supplied by CFG and/or CA that is to be contained in the Proxy Statement. The
Proxy Statement will (with respect to the Company) comply in all material
respects as to form and substance with the requirements of the Exchange Act and
the rules and regulations thereunder.
SECTION 6.13 Brokers and Finders. Except for the fees and expenses paid or
to be paid by the Company to (i) Bradford, and (ii) Prudential Securities with
respect to engagement letters entered into with the Company and CFG and such
firms, each of the Company and Acquisition represents and warrants to the other
parties hereto that no broker, finder, investment bankers, agent or similar
intermediary has acted directly or indirectly on its behalf in connection with
this Agreement or the transactions contemplated hereby, and that no brokerage
commissions, finders' fees, investment banker, or similar fees or commissions
and/or expenses are payable or to be paid in connection therewith based on any
agreement, arrangement or understanding with it or any action taken by it. Each
of the Company and Acquisition agrees to indemnify and hold the other parties
hereto harmless from any and all claims, losses, liabilities, expenses
(including reasonable attorney fees), demands or commissions or other
compensation by any broker, finder, investment bankers, agent or similar
intermediary claiming to have been employed by or on behalf of such party.
ARTICLE VII
COVENANTS AND AGREEMENTS OF THE PARTIES
SECTION 7.01 Conduct of the Business. During the period from the date of
this Agreement to the Effective Time, each of CFG and CA will not take any
action that adversely affects its ability to, and each of CFG and CA covenants
and agrees that it will (i) pursue its business in the ordinary course, (ii)
seek to preserve intact its current business organization, (iii) keep available
the services of its current officers and employees, and (iv) use its reasonable
commercial effects to preserve its relationships with customers, suppliers and
others having business dealings with it. During such period, neither CFG nor CA
will, and will not permit any officer or director thereof to, without the
Company's prior written consent:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrances of (i) any shares of any class of its capital stock, or
any securities or rights convertible into, exchangeable for or evidencing
the right to subscribe for any shares of its capital stock, or any rights,
warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any shares of its capital stock or any
securities or rights convertible into, exchangeable for or evidencing the
right to subscribe for any shares of its capital stock, or (ii) any other
securities in respect of, in lieu of, or in substitution for, any shares of
its capital stock outstanding on the date hereof;
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(b) directly or indirectly redeem, purchase or otherwise acquire, or
propose to redeem, purchase or otherwise acquire, any of its outstanding
capital stock or any profit or loss or any beneficial interest therein;
(c) split, combine, subdivide or reclassify any shares of its capital
stock or otherwise make any payments to its shareholders other than the
payments referred to in Section 4.01(e);
(d) (i) grant any increases in the compensation of any of its
directors, officers or employees, (ii) pay or agree to pay any pension or
retirement allowance or other employee benefit not required or contemplated
by any Plan as in effect on the date hereof to any such director, officer
or employee, whether past or present, (iii) enter into any new or amend any
existing employment or severance agreement or any change of control
agreement with any such director, officer or employee, (iv) pay or agree to
pay any bonus to any director, officer or employee (whether in the form of
cash, capital stock or otherwise), or (v) except as may be required to
comply with applicable law, amend any existing, or become obligated under
any new, Plan, except in the case of the foregoing clauses (i) - (v);
(e) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, reclassification, restructuring, recapitalization or
other reorganization (other than as contemplated hereby) or otherwise
effect the same;
(f) declare or pay any dividend or make any other distribution with
respect to its capital stock, whether in cash, stock or other property;
(g) make any acquisition, by means of merger, consolidation or
otherwise, of any direct or indirect ownership interest in, or assets
comprising, any business enterprise or operation or enter into any joint
venture, partnership, or strategic alliance agreement with any Person;
(h) adopt any amendments to its Certificate of Incorporation or Bylaws
or comparable governing documents;
(i) directly or indirectly incur any indebtedness for borrowed money
or guarantee such indebtedness or agree to become contingently liable, by
guaranty or otherwise, for the obligations or indebtedness of any Person or
make or commit to make any loans, advances or capital contributions to, or
investments in, any Person or to any other Person, except for bank deposits
and other investments in marketable securities and cash equivalents made in
the ordinary course of its business, or refinance or restructure any
existing loan;
(j) engage in the conduct of any business the nature of which is
materially different from the business in which it is currently engaged or
outside the ordinary course of business;
(k) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of CFG
or CA, as the case may be;
(l) enter into any contract, arrangement or understanding requiring
the purchase of equipment, materials, supplies or services over a period
greater than 12 months which is not cancelable without penalty on 30 or
fewer days' notice, except in the ordinary course of business;
(m) foreclose upon or otherwise take title to or possession or control
of any real property without first obtaining a phase one environmental
report thereon or adequate environmental insurance with respect thereto;
(n) except as previously disclosed to the Company in writing, forgive
any indebtedness owed to such party or convert or contribute by way of
capital contribution any such indebtedness owed or cancel any claims that
it may possess or waive any rights of material value;
(o) make any changes in its policies or practices concerning loan
underwriting and credit scoring;
(p) enter into any securities transaction for its own account or
purchase or otherwise acquire any investment security for its own account
other than securities backed by the full faith and credit of the United
States or an agency thereof;
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(q) enter into, modify or extend any agreement, contract or commitment
(other than Loans or securities) involving an expenditure in excess of
$50,000 in the aggregate;
(r) place on any of its assets or properties any mortgage, pledge,
lien, charge, or other encumbrance;
(s) except in the ordinary course of business, sell or otherwise
dispose of any real property or any material amount of tangible or
intangible personal property other than properties acquired in foreclosure
or otherwise in the ordinary collection of indebtedness;
(t) enter into any new, or modify, amend or extend the terms of any
existing, contracts relating to the purchase or sale of financial or other
futures, or any put or call option relating to cash, securities or
commodities or any interest rate swap agreements or other agreements
relating to the hedging of interest rate risk, except in the ordinary
course of business consistent with past practices and prudent business
practices;
(u) knowingly take any action that would (A) materially impede or
delay the consummation of the transactions contemplated by this Agreement
or the ability of the parties hereto to obtain any approval of any
regulatory authority required for the transactions contemplated by this
Agreement or to perform its covenants and agreements under this Agreement,
or (B) prevent the transactions contemplated hereby from qualifying as a
reorganization within the meaning of Section 368 of the Code;
(v) make any material changes in its pricing policies;
(w) authorize or enter into any agreement providing for management or
advisory services to be provided by such party to any third-party or an
increase in management or advisory fees paid by any third-party under
existing management agreements;
(x) mortgage, pledge, encumber, sell, lease or otherwise transfer or
dispose of any of its assets;
(y) authorize or announce an intention to do any of the foregoing, or
enter any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(z) perform any act or omit to take any action that would make any of
the representations or warranties contained in this Agreement inaccurate or
materially misleading as of the Effective Time or that would cause a breach
of any of the covenants or agreements of this Agreement.
SECTION 7.02 Officers and Employees. Each of CFG and CA severally agree
that, prior to the Effective Time, it will use its reasonable efforts to
encourage its officers and employees to the extent they are in good standing to
become employees of the Company or to maintain their employment with CFG and CA,
as the case may be, as determined by the Company in its sole discretion.
SECTION 7.03 Meeting of Shareholders. The Company, and each of CFG and CA
to the extent it has not already done so, hereby covenants and agrees that it
shall, as promptly as practicable, take all action necessary in accordance with
applicable law and its Certificate of Incorporation (or comparable governing
documents) and Bylaws to convene a meeting of its stockholders and shall use all
commercially reasonable efforts to hold such meeting as promptly as practicable
after the date hereof. The purpose of such meeting shall be, among other things,
to consider and vote upon the approval of the respective Mergers and the
transactions contemplated hereby. Notwithstanding the foregoing, CFG and CA
shall be deemed to have fulfilled the foregoing requirements if their respective
stockholders act by written consent in lieu of such meeting pursuant to the
provisions of applicable law. Subject to the fiduciary duties of the Company's
Board of Directors under applicable law as advised by counsel, the Board of
Directors of the Company shall recommend and declare advisable such approval and
the Company shall take all lawful action to solicit such approval, including,
without limitation, the inclusion of the recommendation of the Board of
Directors and the Special Committee of the Company in the Proxy Statement that
the stockholders of the Company vote in favor of the approval of the Mergers and
the adoption of this Agreement.
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SECTION 7.04 Proxy Materials.
(a) As soon as practicable after the date hereof, the Company shall
promptly prepare, and CFG and CA shall cooperate in the preparation of, and the
Company shall file with the SEC as soon as practicable, the Proxy Statement and
a form of proxy in connection with the vote of the Company's shareholders with
respect to each of the Mergers and the issuance of the Company's Common Stock in
connection with the Mergers. The Company will use all reasonable efforts to
cause the Proxy Statement to be declared effective by the SEC and mailed to
shareholders of the Company at the earliest practicable date as permitted by the
SEC.
(b) If at any time prior to the Effective Time, any event relating to or
affecting the Company, CFG or CA shall occur as a result of which it is
necessary, in the opinion of counsel for the Company, CFG or CA, to supplement
or amend the Proxy Statement in order to make such document not misleading in
light of the circumstances existing at the time approval of the shareholders of
the Company is sought, the Company, CFG or CA, respectively, will notify the
other parties hereto thereof and, in the case of CFG or CA, it will cooperate
with the Company in preparing, and, in the case of the Company, it will prepare
and file, an amendment or supplement with the SEC and, if required by law or the
rules and regulations under the Exchange Act, applicable state securities
authorities and each national securities exchange upon which the Company Common
Stock is then listed for trading and/or quotation system on which such stock is
quoted such that such document, as so supplemented or amended, will not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the circumstances
existing at such time, not misleading, and the Company will, as required by law,
disseminate to its shareholders such amendment or supplement.
SECTION 7.05 Filings; Other Action. The Company, CFG and CA shall: (a) to
the extent required, promptly make all filings and thereafter make any other
required submissions under the HSR Act with respect to the Mergers; (b) use all
reasonable efforts to cooperate with one another to (i) determine which
Authorizations are required to be made or obtained prior to the Effective Time
in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, and (ii) timely make and
seek all such Authorizations; (c) use all reasonable efforts to obtain in
writing any consents required from third parties in form reasonably satisfactory
to the Company, CFG and CA necessary to effectuate the Mergers; (d) use all
reasonable efforts to promptly take, or cause to be taken, all other actions and
do, or cause to be done, all other things necessary, proper or appropriate to
satisfy the conditions set forth in Article VIII and to consummate and make
effective the transactions contemplated by this Agreement on the terms and
conditions set forth herein as soon as practicable (including seeking to remove
promptly any injunction or other legal barrier that may prevent such
consummation); and (e) not take any action which might reasonably be expected to
impair the ability of the parties to consummate the Mergers at the earliest
possible time.
SECTION 7.06 Access to Information.
(a) From the date hereof until the Effective Time, CFG and CA (i) will give
the Company, its counsel, financial advisors, auditors and other authorized
representatives full access to the offices, properties, books and records of CFG
and CA during reasonable business hours, (ii) will furnish copies to the
Company, its counsel, financial advisor, auditors and other authorized
representatives such financial and operating data and other information as such
persons may reasonably request, and which is in the possession of or can be
obtained by CFG or CA without undue expense, and (iii) will instruct their
respective employees, counsel, financial advisors and accountants to cooperate
with the Company in its investigation of the business of CFG and CA.
(b) From the date hereof until the Effective Time, the Company (i) will
give CFG and CA, their respective counsel, financial advisors, auditors and
other authorized representatives full access to the offices, properties, books
and records of the Company during reasonable business hours, (ii) will furnish
copies to CFG and CA, their respective counsel, financial advisor, auditors and
other authorized representatives such financial and operating data and other
information as such parties may reasonably request, and which is in the
possession of or can be obtained by the Company without undue expense, and (iii)
will instruct its employees, counsel and financial advisors and accountants to
cooperate with CFG and CA in its investigation of the business of the Company.
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SECTION 7.07 Advisory Agreement. The Company shall pay to CA all fees
accrued and unpaid and reimbursable expenses payable to CA under the Advisory
Agreement in respect of periods up to the Effective Time.
SECTION 7.08 Intellectual Property Rights. Prior to the Effective Time, CA
and CFG shall use all reasonable efforts to cooperate with the Company in
obtaining all assignments or other consents necessary with respect to
Intellectual Property, to the extent not already owned by CFG or CA, including
all interests that may hereafter become Intellectual Property prior to the
Effective Time.
SECTION 7.09 Tax Matters.
(a) Each of the Company, CFG, and CA agrees to report the Mergers on all
Tax Returns and, if applicable, other filings as a reorganization under Section
368(a) of the Code to the extent permitted by law.
(b) The Company shall prepare at its sole cost and expense, any federal,
state, and local Tax Returns required to be filed with respect to any short
taxable year of CFG or CA ending as of the Effective Time.
(c) If the IRS or any other taxing authority initiates an audit or
examination of any Tax Return of CFG or CA or any consolidated or combined group
of which such entity was a member or required to be included as a member (a "Tax
Matter"), CFG, as the case may be, shall:
(i) promptly, but not less frequently than quarterly, provide the
Company and the Special Committee with a summary of each issue raised in
each unresolved Tax Matter;
(ii) as requested by the Company or the Special Committee, provide
additional information sufficient to inform the Company and the Special
Committee as to the nature of each such issue, and to permit the Company
and the Special Committee to exercise its rights described in this Section
7.09(c);
(iii) keep the Company and the Special Committee regularly and
promptly advised of the course of each such issue that has been reasonably
determined by the Company or the Special Committee to be a Company Tax
Issue (as hereinafter defined) pursuant to the procedure described in this
Section 7.09(c);
(iv) provide the Company and the Special Committee (not later than 10
Business Days prior to the anticipated date of delivery or filing, or
promptly after receipt as applicable) with a copy of all pleadings or other
documents to be delivered to, received from, or filed with, any court or
other tribunal, the IRS or other taxing authority with respect to (A) any
Company Tax Issue, and (B) any Tax Matter which had not previously been
summarized for the Company and the Special Committee or with respect to
which the Company and the Special Committee had requested and not received
additional information (excluding from clause (B) documents or pleadings
not filed by or on behalf of CFG or CA or any consolidated or combined
group of which such entity is a member);
(v) cooperate with the Company and the Special Committee and its
counsel, accountants and other representatives in connection with each such
the Company Tax Issue;
(vi) in connection with each such CFG Tax Issue or CA Tax Issue, not
submit to the IRS, any taxing authority or any court or other tribunal any
pleading or other document without the written consent of the Company and
the Special Committee; provided, however, that the Company and the Special
Committee (A) shall be deemed to so consent if it has not communicated
written notice of its non-consent to CFG or CA, as the case may be, before
the close of business on the 10th Business Day following its receipt of
such pleading or other document, and (B) shall so consent unless it
reasonably determines that any position taken in such pleading or other
document, if accepted, could jeopardize the Company's status as a real
estate investment trust under the Code unless the parties agree that as
part of the transactions contemplated hereby the Company shall cease to be
a real estate investment trust. The determination of the Company or the
Special Committee that a position taken in a pleading or other document
could jeopardize its status as a real estate investment trust shall be
deemed reasonable for this purpose if such determination is based on the
advice of its counsel or accountants, which advice shall be presented to
CFG or CA in writing within five Business Days after the Company or Special
Committee communicates its notice of non-consent to CFG or CA (or such
earlier time not sooner than the second
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Business Day thereafter as CFG or CA shall reasonably determine to be
necessary) unless CFG or CA agrees to waive its right to receive such
advice in writing, to the effect that the position taken, if accepted,
would give the IRS a reasonable basis for asserting that the Company failed
to continue to qualify as a real estate investment trust under the Code as
a consequence of its acquisition of CFG or CA; and
(vii) not settle, compromise or consent to the entry of any order,
decree or judgment with respect to any CFG Tax Issue or CA Tax Issue or
fail to pursue an available appeal of any such CFG Tax Issue or CA Tax
Issue (a "Resolution") without the written consent of the Company or the
Special Committee; provided, however, that the Company and the Special
Committee (A) shall be deemed to so consent if it has not communicated
written notice of its non-consent to CA before the close of business on the
10th Business Day following its receipt of notice of such proposed
settlement, compromise or consent, and (B) shall so consent unless it
reasonably determines that such Resolution would jeopardize the Company's
status as a real estate investment trust under the Code unless the parties
agree that as part of the transactions contemplated hereby the Company
shall cease to be a real estate investment trust. The determination of the
Company or the Special Committee that a Resolution would jeopardize its
status as a real estate investment trust shall be deemed reasonable for
this purpose if such determination is based on the advice of its counsel or
accountants, which advice shall be delivered to CFG or CA in writing within
five Business Days after the Company of the Special Committee communicates
its notice of non-consent to CFG or CA (or such earlier time not sooner
than the second Business Day thereafter as CA shall reasonably determine to
be necessary) unless CFG or CA agrees to waive its right to receive such
advice in writing, to the effect that the Resolution would give the IRS a
reasonable basis for asserting that the Company failed to continue to
qualify as a real estate investment trust under the Code as a consequence
of its acquisition of CFG or CA.
(viii) An issue raised in a Tax Matter shall be identified as a "CFG
Tax Issue" or a "CA Tax Issue" if the Company or the Special Committee
communicates written notice to CFG or CA, as the case may be, that it has
determined, with respect to a particular issue, that it is possible that
the resolution of such issue could jeopardize its status as a real estate
investment trust under the Code unless the parties agree that as part of
the transactions contemplated hereby the Company shall cease to be a real
estate investment trust. The determination of the Company or the Special
Committee that a possible resolution of a Tax Matter could jeopardize its
status as a real estate investment trust shall be deemed reasonable for
this purpose if such determination is based on the advice of its counsel or
accountants, which advice shall be delivered to CFG or CA in writing within
five Business Days after the Company or the Special Committee communicates
its determination to CFG or CA (or such earlier time not sooner than the
second Business Day thereafter as CFG or CA shall reasonably determine to
be necessary) unless CFG or CA agrees to waive its right to see such advice
in writing, to the effect that a possible Resolution would give the IRS a
reasonable basis for asserting that the Company failed to continue to
qualify as a real estate investment trust under the Code as a consequence
of its acquisition of CFG and CA. In any such CFG Tax Issue or CA Tax
Issue, the Company or the Special Committee may at its expense engage
counsel, accountants, or other representatives. Any CFG or CA tax or
financial information revealed to the Company, the Special Committee, its
employees or any of its representatives in connection with matters
described in this Section 7.09(c) shall be treated as strictly confidential
by the Company, the Special Committee, its employees and such
representatives.
(d) After the Effective Time, the Company shall make available to CFG and
CA and their respective shareholders, as reasonably requested, all information,
records or documents relating to tax liabilities or potential tax liabilities of
CFG and CA as the case may be and shall preserve all such information, records
and documents until the expiration of any applicable statute of limitations or
extensions thereof.
SECTION 7.10 Reorganization. From and after the date hereof and prior to
the Effective Time, except for the transactions contemplated or permitted
herein, none of the Company, Acquisition, CFG or CA shall take any action that
would be inconsistent with the representations and warranties made by it herein,
including, but not limited to, taking any action, or failing to take any action,
that is known to cause disqualification of the Mergers as a reorganization
within the meaning of Section 368(a) of the Code. Furthermore, from and after
the date hereof and prior to the Effective Time, except for the transactions
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contemplated or permitted herein or as otherwise mutually agreed by the Company,
CFG and CA, each of the Company, CFG and CA shall use reasonable efforts to
conduct its business and file Tax Returns in a manner that would not jeopardize
the qualification of the Company after the Effective Time as a real estate
investment trust as defined within Section 856 of the Code.
SECTION 7.11 Further Actions; Cooperation. Subject to the terms and
conditions provided in this Agreement, each party shall use reasonable
commercial efforts to take promptly, or cause to be taken, all actions, and to
do promptly, or cause to be done, all things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated hereby, to obtain all necessary waivers, consents and
approvals and to effect all necessary registrations and filings, and to remove
any injunctions or other impediments or delays, legal or otherwise, in order to
consummate and make effective the transactions contemplated by this Agreement
for the purpose of securing to the parties hereto the benefits contemplated by
this Agreement and to cooperate with the other parties hereto; provided,
however, that notwithstanding anything to the contrary in this Agreement, no
party nor any of its Affiliates shall be required to make any disposition of, or
enter into any agreement to hold separate, any asset or business and no party
hereto nor any of their Affiliates shall be required to make any payment of
money nor shall any party or its Affiliates be required to comply with any
condition or undertaking or take any action which, individually or in the
aggregate, would materially adversely affect the economic benefits to such party
of the transactions contemplated hereby, taken as a whole, or materially
adversely affect any other business of such party.
SECTION 7.12 Notice of Certain Events. Each party hereto shall promptly
notify the other party of: (i) any notice or other communication from any Person
alleging that the consent of such Person is or may be required in connection
with the transactions contemplated by this Agreement; (ii) any notice or other
communication from any Governmental Authority in connection with the
transactions contemplated by this Agreement; (iii) any actions, suits, claims,
investigations or proceedings commenced or, to its knowledge, threatened
against, relating to, or involving or otherwise affecting, such party which, if
pending on the date of this Agreement, would have been required to have been
disclosed or which relate to the consummation of the transactions contemplated
by this Agreement, and (iv) any event or matter known to or directly involving
such party that would result in a breach of this Agreement, is reasonably likely
to result in a Material Adverse Effect on such party or impair the ability of
such party to consummate the transactions contemplated hereby.
SECTION 7.13 Certain Actions.
(a) Neither CFG nor CA (i) shall solicit, initiate, participate in
discussions of, or encourage or take any other action to facilitate (including
by way of the disclosing or furnishing of any information that it is not legally
obligated to disclose or furnish) any inquiry or the making of any proposal
relating to any Acquisition Proposal (as hereinafter defined) with respect to
itself or (ii) shall (A) solicit, initiate, participate in discussions of, or
encourage or take any other action to facilitate any inquiry or proposal, or (B)
enter into any agreement, arrangement, or understanding (whether written or
oral) regarding any proposal or transaction providing for or requiring it to
abandon, terminate or fail to consummate this Agreement, or compensating it
under any of the instances described in this clause. CFG and CA shall
immediately instruct and otherwise use its reasonable best efforts to cause its
directors, officers, employees, agents, advisors (including, without limitation,
any investment banker, attorney, or accountant retained by it), consultants and
other representatives to comply with such prohibitions. CFG and CA shall
immediately cease and cause to be terminated any existing activities,
discussions, or negotiations with any parties conducted heretofore with respect
to such activities. CFG and CA shall promptly notify the Company orally and in
writing in the event it receives any such inquiry or proposal and shall provide
reasonable detail of all relevant facts relating to such inquiries.
(b) "Acquisition Proposal" shall, with respect to CFG and CA, mean any of
the following (other than the Mergers): (i) a merger or consolidation, or any
similar transaction of any entity with either CFG or CA or any Subsidiary of CFG
or CA or party that owns the capital stock of CFG or CA, (ii) a purchase, lease
or other acquisition of a material portion of all the assets of either CFG or CA
or any Subsidiary of CFG or CA, (iii) a purchase or other acquisition of
"beneficial ownership" by any "person" or "group" (as such terms are defined in
Section 13(d)(3) of the Exchange Act) (including by way of merger,
consolidation, share exchange, or otherwise) which would cause such person or
group to become the beneficial owner of any
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securities of either CFG or CA or any Subsidiary of CFG or CA, (iv) the filing
of an application or notice with any federal or state regulatory authority
(which application has been accepted for processing) seeking approval to engage
in one or more of the transactions referenced in clauses (i) through (iv) above.
SECTION 7.14 Current Information. During the period from the date of this
Agreement to the Effective Time, each party shall promptly furnish the other
parties hereto with copies of all monthly and other interim financial statements
produced in the ordinary course of business as the same become available and
shall cause one or more of its designated representatives to confer on a regular
and frequent basis with representatives of the other party.
SECTION 7.15 Reservation of Shares to Satisfy Contingent Payment
Obligation. The Company shall take all corporate action necessary to reserve
for issuance a sufficient number of shares of Company Common Stock as may be
required to be issued pursuant to the terms of Section 4.06.
SECTION 7.16 Indemnification and Insurance. From and after the Effective
Time, the Company shall at its cost and expense cause the individuals serving as
officers and directors of CFG and CA immediately prior to the Effective Time to
be covered for a period for two (2) years from the Effective Time by directors'
and officers' liability insurance policies maintained by CFG and CA, as
applicable, prior to the Effective Time (provided that the Company may
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions which are not less advantageous than either of
such policies) with respect to acts or omissions occurring prior to the
Effective Time that may have been committed by such officers and directors in
their capacity as such; provided, however, that in no event shall the Company be
required to expend more than 150% of the current amount expended by CFG and CA
(the "Insurance Amount") to maintain or procure insurance coverage pursuant
hereto; and provided, further that if the Company is unable to maintain or
obtain the insurance called for in this Section 7.16, the Company shall use its
reasonable best efforts to obtain as much comparable insurance as available for
the Insurance Amount.)
SECTION 7.17 Certain Employment Matters. Until such time as the Company
enters into new employment agreements with the key employees of CFG, if ever,
such key employees shall continue to receive compensation from CFG in a manner
consistent with past practice, irrespective of any covenants or agreements to
the contrary contained in any existing agreements or commitments between such
key employees and the Company.
SECTION 7.18 Disclosure Schedule. Notwithstanding any provision in this
Agreement to the contrary, the Disclosure Schedule and the signatures of the
individual shareholders of both CFG and CA listed on the signature pages hereto
not otherwise provided on the date hereof shall be delivered by CFG and CA to
the Company not later than ten (10) Business Days following the date of
execution of this Agreement. Upon delivery, the Disclosure Schedule and such
signatures shall be deemed for all purposes under this Agreement to have been
delivered effective as of the date of this Agreement. The Company shall have
seven (7) Business Days following the date of delivery of the Disclosure
Schedule to review the Disclosure Schedule. If, CFG or CA do not provide the
Disclosure Schedule or such signatures as provided herein, or if, prior to 5:00
p.m. on the seventh Business Day following the date of delivery of the
Disclosure Schedule, the Company determines, in its sole and absolute
discretion, that it wishes to terminate this Agreement it shall be entitled to
do so in accordance with the terms and provisions of Section 10.01. If the
Company fails to terminate this Agreement by 5:00 p.m. on the seventh Business
Day following the date of delivery of the Disclosure Schedule then the Company
shall be deemed to have irrevocably waived such right of termination referred to
herein.
SECTION 7.19 Tax Certificates. The parties agree that, prior to the
Effective Time, they shall exchange such certificates or other documentation
with regard to certain tax matters related to the CFG Merger and the CA Merger
as shall be mutually agreed to by the parties.
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ARTICLE VIII
CONDITIONS TO THE MERGERS
SECTION 8.01 Conditions to Each Party's Obligations. The performance of
the obligations of each of the Company and Acquisition and CFG and CA to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Effective Time of each of the following
conditions, which conditions may be waived only with the consent of both (x) the
Company and Acquisition, and (y) CFG and CA:
(a) Effectiveness of Proxy Statement. The Proxy Statement shall have
been declared effective by the SEC under the Exchange Act, and no stop
order suspending the effectiveness of the Proxy Statement shall have been
issued by the SEC and no proceedings with respect thereto shall have been
initiated or threatened by the SEC.
(b) Company Shareholder Approval. This Agreement and the transactions
contemplated hereby shall have been duly approved by the requisite holders
of Common Stock of the Company in accordance with applicable provisions of
the DGCL and the Company's Certificate of Incorporation and Bylaws;
provided, however, that the shares of Company Common Stock beneficially
owned by any officer, director, or Affiliate of the Company who or that is
also an officer, director or Affiliate of either CFG or CA shall not be
counted for purposes of determining whether the requisite holders shall
have approved this Agreement and the transactions contemplated hereby.
(c) Governmental Filings and Consents. Except for the filing of the
Certificates of Merger, all governmental filings required to be made prior
to the Effective Time by the Company, Acquisition, CFG, and/or CA with, and
all governmental consents required to be obtained prior to the Effective
Time by the Company, Acquisition, CFG, and/or CA from, Governmental
Authorities in connection with the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby shall have
been made or obtained, except where the failure to make such filing or
obtain such consent would not reasonably be expected to have a Material
Adverse Effect on the Company, Acquisition, CFG, and/or CA or the ability
of such parties to consummate the transactions contemplated hereby, and any
waiting periods or extensions thereof under the HSR Act shall have expired
or been terminated.
(d) Third-Party Consents. All required authorizations, consents and
approvals of any third party (other than a Governmental Authority), the
failure of which (either individually or in the aggregate) to obtain would
have Material Adverse Effect on the Company, Acquisition, CFG, and/or CA or
the ability of such party to consummate the transactions contemplated
hereby, shall have been obtained.
(e) No Injunction or Proceedings. There shall not be in effect any
judgment, writ, order (including any temporary restraining order),
injunction or decree (collectively, an "Order") of any court or
Governmental Authority of competent jurisdiction restraining, enjoining or
otherwise preventing consummation of the transactions contemplated by this
Agreement or permitting such consummation only subject to a condition or
restriction unacceptable to either of (x) the Company, or (y) CFG and CA,
each in its reasonable judgment, nor shall there be pending or threatened
by any Governmental Authority any suit, action or proceeding seeking to
restrain or restrict the consummation of the transactions contemplated
hereby or seeking damages in connection therewith, which, in the reasonable
judgment of either (x) the Company, or (y) CFG or CA, could have (i) a
Material Adverse Effect on (x) the Company or Acquisition, or (y) CFG or CA
after the Effective Time, or (ii) a material adverse effect on the ability
of (x) the Company or Acquisition, or (y) CFG or CA to perform their
respective obligations under this Agreement, nor shall there be pending any
cause of action or other proceeding commenced by a Governmental Authority
of competent jurisdiction seeking the imposition of an Order.
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SECTION 8.02 Additional Conditions to Obligation of the Company and
Acquisition.
The performance of the obligations of each of the Company and Acquisition
hereunder is subject to the fulfillment at or prior to the Effective Time of the
following conditions (all or any of which may be waived in whole or in part by
the Company and Acquisition acting by unanimous written consent):
(a) Representations and Warranties. Each of the representations and
warranties of each of CFG or CA made in this Agreement which are not, by
their terms, qualified by a materiality standard, shall have been true and
correct in all material respects as of the date hereof and shall be true
and correct in all material respects on and as of the Effective Time as
though made on and as of the Effective Time (and the representations and
warranties of each of CFG and CA contained in this Agreement which are, by
their terms, qualified by a materiality standard, shall have been true and
correct on the date hereof and shall be true and correct on and as of the
Effective Time as though made on and as of the Effective Time), except for
representations and warranties specifically relating to a time or times
other than the date hereof or thereof, which shall be true and correct in
all material respects (to the extent they are not, by their terms,
qualified by a materiality standard, and shall be true and correct to the
extent they are so qualified) at such specified time or times, and except
for changes thereto permitted or contemplated by this Agreement.
(b) Compliance with Covenants and Agreements. Each of CFG and CA
shall have performed and complied in all material respects with all terms,
covenants, agreements, undertakings, acts, conditions and obligations
required by this Agreement to be performed or complied with by them prior
to or at the Effective Time.
(c) Officer's Certificate. The Company shall have received a
certificate from each of CFG and CA, dated as of the Effective Time,
executed by the President or any Senior Vice President of each of CFG and
CA, certifying that (i) the board of directors thereof has duly adopted
resolutions, copies of which shall be attached to such certificate,
authorizing and approving the transactions contemplated hereby (A)
approving the terms of this Agreement and any agreement to be delivered in
accordance with this Agreement and authorizing the consummation of the
transactions contemplated hereby and thereby, and (B) authorizing an
officer thereof to execute and deliver this Agreement and all ancillary
documents, (ii) all of such resolutions are in full force and effect, and
(iii) none of such resolutions has been amended or modified. The Company
shall also have received a certificate from such officer of each of CFG and
CA certifying that the representations and warranties of such party
contained in this Agreement that are not, by their terms, qualified by a
materiality standard, were true and correct in all material respects when
made and are true and correct in all material respects on and as of the
Effective Time as though made on and as of the Effective Time (and that the
representations and warranties of such party contained in this Agreement
that are, by their terms, qualified by a materiality standard, were true
and correct when made and are true and correct on and as of the Effective
Time as though made on and as of the Effective Time), except to the extent
they relate to a particular date and except for changes permitted or
contemplated by this Agreement, and that such party has complied with or
performed in all material respects all terms, covenants, agreements,
undertakings, acts, conditions and obligations to be complied with or
performed by it on or prior to the Effective Time.
(d) Incumbency Certificate. The Company shall have received a
certificate from each of CFG and CA, signed by its Secretary or Assistant
Secretary and dated the Effective Time, certifying as to the person
executing this Agreement on behalf of such party that (i) such person is an
officer thereof holding the office or offices specified therein, and (ii)
the signature of each such person set forth on such certificate is his or
her genuine signature.
(e) Material Adverse Change. No event, change or development shall
exist or have occurred since March 31, 1999 with regard to CFG or CA,
including the filing of any action, claim, suit, cause of action, or
litigation commenced by any third party against either of CFG or CA, that
has had or reasonably could be expected to have a Material Adverse Effect
on CFG or CA or on the Company or Acquisition assuming the transactions
contemplated hereby were consummated, or on the ability of (x) the Company
or Acquisition, or (y) CFG or CA to consummate the transactions
contemplated hereby.
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(f) Approvals; Fairness Opinion.
(i) The Board of Directors of the Company, at a meeting duly called
and held, shall have (A) determined that this Agreement, the Mergers and
the transactions contemplated hereby are fair to, and in the best
interest of the Company and its shareholders, and (B) approved this
Agreement, the Mergers, and the transactions contemplated hereby and
thereby and such action shall not have been withdrawn, modified, or
revoked in any manner.
(ii) The Board of Directors of the Company shall have received an
opinion from Bradford to the effect that the consideration to be paid by
the Company to the shareholders of CFG and CA in the Mergers is fair,
from a financial point of view, and such opinion shall not have been
withdrawn, modified or revoked in any manner.
(g) Disclosure Schedules; Other Signatures. CFG and CA shall have
delivered the Disclosure Schedule and signatures referenced in Section
7.18.
SECTION 8.03 Additional Conditions to Obligation of CFG and CA. The
performance of the obligations of each of CFG and CA hereunder is subject to the
fulfillment at or prior to the Effective Time, of each of the following
conditions (all or any of which may be waived in whole or in part by CFG and CA
acting by unanimous consent):
(a) Representations and Warranties. Each of the representations and
warranties of the Company and Acquisition made in this Agreement which are
not, by their terms, qualified by a materiality standard, shall have been
true and correct in all material respects as of the date hereof and shall
be true and correct in all material respects on and as of the Effective
Time as though made on and as of the Effective Time (and the
representations and warranties of each of the Company and Acquisition
contained in this Agreement which are, by their terms, qualified by a
materiality standard, shall have been true and correct on the date hereof
and shall be true and correct on and as of the Effective Time as though
made on and as of the Effective Time), except for representations and
warranties specifically relating to a time or times other than the date
hereof or thereof, which shall be true and correct in all material respects
(to the extent they are not, by their terms, qualified by a materiality
standard, and shall be true and correct to the extent they are so
qualified) at such specified time or times, and except for changes thereto
permitted or contemplated by this Agreement.
(b) Compliance with Covenants and Agreements. The Company and
Acquisition shall have performed and complied in all material respects with
all terms, covenants, agreements, undertakings, acts, conditions and
obligations required by this Agreement to be performed or complied with by
them prior to or at the Effective Time.
(c) Officer's Certificate. Each of CFG and CA shall have received a
certificate from each of the Company and Acquisition, dated as of the
Effective Time, executed by the President or any Vice-President of the
Company and Acquisition, certifying that: (i) the board of directors
thereof has duly adopted resolutions, copies of which shall be attached to
such certificate, (A) approving the terms of this Agreement and any
agreement to be delivered in accordance with this Agreement and authorizing
the consummation of the transactions contemplated hereby and thereby, and
(B) authorizing an officer thereof to execute and deliver this Agreement
and all necessary ancillary documents, (ii) all of such resolutions are in
full force and effect, and (iii) none of such resolutions has been amended
or modified. Each of CFG and CA shall also have received a certificate from
such person certifying that the representations and warranties of the
Company and Acquisition contained in this Agreement that are not, by their
terms, qualified by a materiality standard, were true and correct in all
material respects when made and are true and correct in all material
respects on and as of the Effective Time as though made on and as of the
Effective Time (and that the representations and warranties of such party
contained in this Agreement that are, by their terms, qualified by a
materiality standard, were true and correct when made and are true and
correct on and as of the Effective Time as though made on and as of the
Effective Time), except to the extent they relate to a particular date and
except for changes permitted or contemplated by this Agreement, and that
the Company and Acquisition has complied with or performed
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in all material respects all terms, covenants, agreements, undertakings,
acts, conditions and obligations to be complied with or performed by it on
or prior to the Effective Time.
(d) Incumbency Certificate. Each of CFG and CA shall have received a
certificate from each of the Company and Acquisition, signed by its
Secretary or Assistant Secretary and dated as of the Effective Time,
certifying as to the person executing this Agreement on behalf of such
party that (i) such person is an officer thereof holding the office or
offices specified therein, and (ii) the signature of each such person set
forth on such certificate is his or her genuine signature.
(e) Registration Rights Agreement. The CFG Preferred Shareholders and
the Company shall have executed and delivered the Registration Rights
Agreement.
ARTICLE IX
INDEMNIFICATION
SECTION 9.01 CFG and CA Indemnities to the Company. Subject to Section
9.03 and Section 9.06 hereof, from and after the Effective Time, the CFG Common
Shareholders, the Option Holders and the Individual Warrant Holders with respect
to CFG, and the CA Shareholders with respect to CA shall, severally but not
jointly, based on the percentage interests represented in Schedule 9.01
indemnify, defend and hold harmless the Company, its officers, directors,
Affiliates and their respective successors and permitted assigns (collectively,
the "Company Indemnitees"), from and against any and all demands, claims,
actions, losses, damages, liabilities, and expenses (including reasonable
attorneys' fees and disbursements related thereto) (collectively, "Company
Losses"), based upon, arising out of or otherwise resulting from:
(a) any material inaccuracy in any representation or any material
breach of any warranty by CFG or CA, as the case may be, in this Agreement
or in any agreement or instrument delivered in connection herewith; and
(b) any nonfulfillment of any material covenant or agreement of CFG or
CA, as the case may be, contained in this Agreement or in any agreement
delivered in connection herewith by CFG or CA; provided, however, that, in
order to qualify to receive indemnification under this Agreement, (x) any
claim for indemnification under clause (a) and (b) of this Section 9.01
shall be made no later than the date that is the earlier of (i) 15 months
following the date of the Effective Time, or (ii) 20 Business Days
following the date of delivery to the Company of its audited financial
statements with respect to the fiscal year ended December 31, 2000, and (y)
any claim for indemnification with respect to Section 5.13 shall be made no
later than the date that is three (3) months after the expiration date of
the longest statute of limitations applicable to any such Taxes. For
purposes of this Article IX, all representations and warranties of CFG and
CA shall be deemed to have been made at the dates on which they are
required to be true and correct in all material respects for the purposes
of Section 8.02.
SECTION 9.02 Company's Indemnities to CFG and CA. Subject to Section 9.03
hereof and Section 9.06 hereof, from and after the Effective Time, the Company
shall indemnify, defend and hold harmless the CFG Shareholders, the Option
Holders, the Individual Warrant Holders and the CA Shareholders and their
respective officers, directors, Affiliates, successors and permitted assigns, if
any ("Seller Indemnitees"), from and against any and all demands, claims,
actions, losses, damages, liabilities, and expenses (including reasonable
attorneys' fees and disbursements related thereto) (collectively, "Seller
Losses"), based upon, arising out of or otherwise resulting from:
(a) any material inaccuracy in any representation or any material
breach of any warranty by the Company or Acquisition in this Agreement or
in any agreement delivered in connection herewith; and
(b) any nonfulfillment of any material covenant or agreement of the
Company or Acquisition contained in this Agreement or in any agreement
delivered in connection herewith by the Company or Acquisition; provided,
however, that, in order to qualify to receive indemnification under this
Agreement, any claim for indemnification under clause (a) and (b) of this
Section 9.02 shall be made no later than the date that is the earlier of
(i) 15 months following the date of the Effective Time, or (ii) 20 Business
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Days following the date of delivery to the Company of its audited financial
statements with respect to the fiscal year ended December 31, 2000. For the
purposes of this Section 9.02, all representations and warranties of the
Company shall be deemed to have been made at the dates on which they are
required to be true and correct in all material respects for the purposes
of Section 8.03.
SECTION 9.03 Notice and Opportunity to Defend. Promptly after receipt by
any of CFG, CA, or the CFG Shareholders, Option Holders or Individual Warrant
Holders or the CA Shareholders on the one hand or the Company on the other hand
(in any case, the "Indemnitee") of the commencement of, or notice of any demand,
claim or circumstance that, with the lapse of time, would give rise to a claim
or the commencement (or threatened commencement) of, any action, proceeding,
litigation, or investigation against it by a third party (an "Asserted
Liability") that may give rise to any indemnification obligation under Section
9.01 or 9.02, the Indemnitee shall promptly give written notice thereof to the
Company, CFG or CA, or the CFG Shareholders Option Holders or Individual Warrant
Holders or the CA Shareholders, as the case may be (the "Indemnifying Party"),
describing the Asserted Liability in reasonable detail and indicating the amount
(estimated, if necessary) for which the Indemnitee may be liable. Failure to
give timely notice under this Section 9.03 shall not preclude the Indemnitee
from receiving indemnification from the Indemnifying Party unless the
Indemnitee's failure has materially prejudiced the Indemnifying Party's ability
to defend against the Asserted Liability.
(a) Opportunity to Defend. The Indemnifying Party shall have fifteen
(15) days (or earlier if required to avoid a default judgment) after
receipt of the aforementioned notice to undertake to settle or defend, at
its own expense and by counsel of its own choosing, which counsel shall be
reasonably satisfactory to the Indemnitee, such Asserted Liability. If the
Indemnifying Party so elects to settle or defend such Asserted Liability,
it shall promptly notify the Indemnitee of its intent to do so. So long as
the Indemnifying Party is reasonably contesting such Asserted Liability in
good faith, the Indemnitee may not settle or pay such Asserted Liability.
After notice from the Indemnifying Party to the Indemnitee of its election
to assume the defense of such claim or action, the Indemnifying Party will
not be liable to the Indemnitee for any legal or other expenses
subsequently incurred by the Indemnitee in connection with the defense
thereof; provided, however, that the Indemnitee may participate, at its
sole expense, in the settlement of, or defense against, such Asserted
Liability provided that the Indemnifying Party in all such instances shall
be responsible for directing and controlling the settlement of, or defense
against, such action. If the Indemnifying Party elects not to undertake to
settle or defend against the Asserted Liability, fails to notify the
Indemnitee of its election as herein provided, or does not accept its
obligation to indemnify under this Agreement, the Indemnitee may settle,
compromise or defend such Asserted Liability in the exercise of its
exclusive discretion at the expense of the Indemnifying Party and the
Indemnifying Party shall promptly reimburse the Indemnitee for the amount
of all costs and expenses incurred by the Indemnitee in connection with the
settlement of or defense against the Asserted Liability to the extent
provided in Section 9.01 or 9.02, as the case may be. If no settlement of
the Asserted Liability is entered into, the Indemnifying Party shall
promptly reimburse the Indemnitee for the amount of any judgment rendered
with respect to such Asserted Liability and all related and bona fide
expenses incurred by the Indemnitee in defense against such action to the
extent recoverable under Section 9.01 or 9.02, as the case may be.
(b) Other Matters. Neither the Indemnifying Party nor the Indemnitee
shall, in the defense of any Asserted Liability, consent to entry of any
judgment or enter into any settlement agreement, except with the written
consent of the other party, which does not include as an unconditional term
thereof the giving by the claimant or the plaintiff to both the Indemnitee
and the Indemnifying Party of a release from all liability in respect of
such Asserted Liability. The Indemnifying Party and the Indemnitee shall
each use all commercially reasonable efforts to cooperate with each other
in connection with the settlement of, or the defense against, any Asserted
Liability and make available to the other all books, records and other
documents within its control that are reasonably necessary or appropriate
for such defense. Notwithstanding anything contained in this Agreement, the
Indemnitee shall have the right to pay or settle at any time any Asserted
Liability, provided that (as a result thereof, and except where the
Indemnifying Party elects not to undertake to settle or defend against the
Asserted Liability, fails to notify the Indemnitee of its
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election, or does not accept its obligation to indemnify under this
Agreement), the Indemnitee shall also be deemed to have waived any right to
indemnification therefor by the Indemnifying Party.
SECTION 9.04 Survival of Representations and Warranties. The
representations and warranties of the parties contained herein or in any
certificate or other document or instrument delivered pursuant hereto or in
connection herewith shall not survive the Closing, but any claim with respect
thereto shall survive for the periods specified in the provisos contained in
Sections 9.01(b) and 9.02(b) respectively. The covenants and agreements set
forth in this Agreement shall not survive the Closing except in such cases where
such covenants and agreements by their terms contemplate performance after the
Effective Time. Notwithstanding the preceding sentences, any covenant,
agreement, representation or warranty in respect of which indemnity may be
sought shall survive the time at which it would otherwise terminate pursuant to
the preceding provisions of this Section 9.04, if written notice of the
inaccuracy or breach thereof shall have been given to the party against whom
such indemnity may be sought prior to the expiration of such time period. If any
Governmental Authority asserts a deficiency with respect to a Tax matter which,
if accurate or conceded, could result in a claim for which indemnity could be
sought pursuant to Section 5.13, the Company shall be permitted to give notice
of the breach of a representation, warranty, covenant, or agreement of CFG or
CA, as the case may be, and specify Company Losses in the amount so asserted
(including applicable interest and penalties), notwithstanding Company's intent
to dispute such claims. The amount of the claim shall be deemed to be the amount
of the settlement or adjudicated damages.
SECTION 9.05 Right of Set-off. The parties acknowledge and agree that,
subject to the limitations set forth in Section 9.06, in the event the Company
has made a claim for indemnification hereunder, which claim is determined to be
recoverable, the Company's right to any such indemnification shall include the
right to set-off such amount against any unissued Earnout Shares the Company may
be obligated to issue to the CFG Common Shareholders, the Option Holders, and
the Warrant Holders under Section 4.06 hereof. In the event the Company
exercises its right of set-off provided for in this Section 9.05, the number of
shares of Company Common Stock (rounded up to the next highest whole number)
equaling the aggregate dollar amount of any indemnification to be provided to
the Company hereunder (based on the average sale price of the Company Common
Stock for the 20 Business Days immediately preceding the date of such set-off
using for each such Business Day the last reported sales price of the Company
Common Stock on the NASDAQ National Market System) shall be subtracted from the
aggregate number of shares of the Company Common Stock that otherwise would be
issuable pursuant to the terms of Section 4.06.
SECTION 9.06 Limitations on Indemnification.
(a) Indemnification pursuant to the terms of Section 9.01 and 9.02 shall be
the sole and exclusive remedy of the Company Indemnitees and the Seller
Indemnitees under this Agreement; provided, however, that nothing in this
Agreement will limit the availability of specific performance or other equitable
remedies to any party hereto.
(b) The amount of any Company Losses or Seller Losses as to which Company
Indemnitees or Seller Indemnitees may seek indemnification hereunder shall be
reduced by proceeds from any insurance policies maintained by the Company
Indemnitees or the Seller Indemnitees and actually received by such party to the
extent that such proceeds are attributable to the act, event, state of facts,
condition or circumstance giving rise to such party's right to such
indemnification hereunder.
(c) The CFG Common Shareholders, the Option Holders, the Individual Warrant
Holders and the CA Common Shareholders shall not have any liability to the
Company Indemnitees, and the Company shall not have any liability to the Seller
Indemnitees, unless and until the aggregate of all Company Losses and Seller
Losses, as the case may be, exceeds the sum of $500,000, in which event any
amounts in excess of such $500,000 shall be recoverable.
(d) Any indemnification obligation of the CFG Common Shareholders, the
Option Holders, the Individual Warrant Holders, and the CA Common Shareholders
may be satisfied in cash or with shares of Company Common Stock; provided that
at the time of any such election by the CFG Common Shareholders, the Option
Holders, the Individual Warrant Holders, and/or the CA Common Shareholders, the
Company
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shall have received the favorable opinion of its legal counsel that the Company
meets all statutory and other legal requirements to accept shares of the Company
Common Stock from the CFG Common Shareholders, the Option Holders, the
Individual Warrant Holders, and/or the CA Common Shareholders in satisfaction of
any such indemnification obligation. In the event the CFG Common Shareholders,
the Option Holders, the Individual Warrant Holders, and/or the CA Common
Shareholders elect to satisfy such indemnification obligation with shares of
Company Common Stock, the per share dollar value of such stock to be applied
against such indemnification claim shall be as mutually agreed between the
CFG/CA Representative and the Company (acting through the Special Committee). In
the event such parties cannot reach mutual agreement with respect to such dollar
value within ten Business Days of such election, the CFG Common Shareholders,
the CA Common Shareholders, the Option Holders, the Individual Warrant Holders,
and/or the CA Common Shareholders shall be required to use cash to satisfy such
claim.
(e) (i) The maximum aggregate amount of Company Losses that the Company
Indemnitees may recover under this Agreement from the CFG Common Shareholders,
the Option Holders, and the Individual Warrant Holders shall equal the lesser of
(i) 70% of the fair market value (determined as of the Effective Time) of the
shares of Company Common Stock received by the CFG Shareholders, the Option
Holders, and the Warrant Holders on or immediately after the date of the
Effective Time pursuant to the transactions contemplated hereby, but
specifically excluding the Earnout Shares, and (ii) 70% of the fair market value
(determined as of the date of indemnification) of the shares of Company Common
Stock received by the CFG Shareholders, the Option Holders, and the Warrant
Holders on or immediately after the date of the Effective Time pursuant to the
transactions contemplated hereby, but specifically excluding any Earnout Shares.
(ii) The maximum aggregate amount of Company Losses that the Company
Indemnitees may recover under this Agreement from the CA Common Shareholders
shall be equal to the lesser of (i) 100% of the fair market value (determined as
of the Effective Time) of the shares of Company Common Stock received by the CA
Common Shareholders on or immediately after the date of the Effective Time
pursuant to the transactions contemplated hereby, and (ii) 100% of the fair
market value (determined on the date of indemnification) of the shares of
Company Common Stock received by the CA Common Shareholders on or immediately
after the date of the Effective Time pursuant to the transactions contemplated
hereby, but specifically excluding the Earnout Shares.
(iii) The maximum aggregate amount of Seller Losses that the Seller
Indemnitees may recover from the Company shall be $1 million.
ARTICLE X
TERMINATION
SECTION 10.01 Termination. This Agreement may be terminated and the
transactions contemplated in this Agreement may be abandoned at any time prior
to the Effective Time, whether before or after approval by the stockholders of
the Company of this Agreement, the Mergers, and the issuance of the Company
Common Stock in accordance with Article IV:
(a) by mutual written consent of the Company, Acquisition, CFG, and
CA;
(b) by either CFG and CA (acting by unanimous written consent) or the
Company and Acquisition (acting by unanimous written consent) if, on the
Effective Time, any condition precedent to the obligations of the
terminating party set forth in Section 8.02 in the case of the Company and
Acquisition and Section 8.03 in the case of CFG and CA shall not have been
satisfied (or waived by the terminating party); provided, however, that no
party shall have the right to terminate this Agreement pursuant to this
Section 10.01(b) if such party is then in breach of any material
representation or warranty contained herein or is in default in any
material respect in the observance or in the timely performance of any of
its covenants or agreements contained herein;
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(c) by either CFG and CA (acting by unanimous written consent) or the
Company and Acquisition (acting by unanimous written consent) if there
shall be in effect any permanent injunction or action by a court of
competent jurisdiction or other Governmental Authority preventing the
consummation of the Mergers that shall have become final and nonappealable;
(d) by either CFG and CA (acting by unanimous written consent) or the
Company and Acquisition (acting by unanimous written consent) if the
Effective Time shall not have occurred on or before March 30, 2000 (time is
of the essence with respect to such date); provided, however, that no party
shall have the right to terminate this Agreement pursuant to this Section
10.01(d) if such party is then in breach of any material representation or
warranty contained herein or is in default in any material respect in the
observance or in the timely performance of any of its covenants or
agreements contained herein
(e) by either the Company and Acquisition (acting by unanimous written
consent) or CFG and CA (acting by unanimous written consent) if this
Agreement and the Mergers shall fail to receive the requisite vote for
approval and adoption by the stockholders of the Company at the
Stockholders Meeting;
(f) by CFG and CA (acting by unanimous written consent) if the Board
of Directors of the Company shall withdraw, modify or change its
recommendation of this Agreement or the Mergers in a manner adverse to CFG
and CA or shall have resolved to do any of the foregoing;
(g) by the Company if (i) the Board of Directors or the shareholders
of CFG or CA shall withdraw, modify or change its approval or
recommendation of this Agreement or the Mergers in a manner adverse to the
Company or shall have resolved to do any of the foregoing, or any Person
shall have acquired beneficial ownership or the right to acquire beneficial
ownership of, or any "group" (as such term is defined under Section 13(d)
of the Exchange Act and the rules and regulations thereunder) other than
the current shareholders of CFG and CA shall have been formed which
beneficially owns, or has the right to acquire beneficial ownership of, any
of the outstanding shares of capital stock of CFG or CA; or
(h) by the Company in accordance with the terms of Section 7.18.
SECTION 10.02 Notice. If a party elects to terminate this Agreement
pursuant to an applicable provision of Section 10.01, such party shall give
written notice of its election to the other parties hereto at least two (2)
Business Days before such termination shall become effective.
SECTION 10.03 Effect of Termination. Upon termination of this Agreement
pursuant to Section 10.01, (a) if none of the Company, Acquisition, CFG, or CA
is in breach of any material provision of this Agreement, this Agreement shall
become void and no longer be of any force or effect and there shall be no
liability on the part of any party or its respective directors, officers or
stockholders to the other parties hereto, and (b) if any of the Company,
Acquisition, CFG, or CA is in breach of any material provision of this
Agreement, which breach has caused the terminating party to terminate this
Agreement, or to the extent that such termination results from the willful and
material breach by a party of any of its representations, warranties, covenants
or agreements set forth in this Agreement, the non-breaching party or parties
will have such rights and remedies as are available to such party at law or in
equity.
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.01 Expenses. Except as otherwise expressly provided herein,
whether or not the transactions contemplated hereby are consummated, each party
shall bear its own expenses, including the fees and expenses of any attorneys,
accountants, investment bankers, brokers, finders or other intermediaries or
Persons engaged by it incurred in connection with the preparation, negotiation
and execution of this Agreement and the transactions contemplated hereby and no
other party shall have any liability with respect thereto; provided, however,
that the Company shall bear all costs and expenses arising out of or incurred in
connection with the preparation, negotiation and execution of the Proxy
Statement and the Shareholders
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Meeting, including all printing, mailing, solicitation, legal, accounting and
other fees and expenses incurred with respect thereto.
SECTION 11.02 Notices, Etc. All notices, requests, demands or other
communications required by or otherwise permitted with respect to this Agreement
shall be in writing and shall be deemed to have been duly given to any party if
delivered by any of the following means of delivery, and shall be deemed to have
been duly delivered and received on the date (or the next Business Day if
delivery is not made on a Business Day) of personal delivery or facsimile
transmission or on the date (or the next Business Day if delivery is not made on
a Business Day) of receipt, if mailed by registered or certified mail, postage
prepaid and return receipt requested, or on the date (or the next Business Day
if delivery is not made on a Business Day) of a stamped receipt, if sent by
overnight delivery service, and to the following addresses (or to such other
address as any party may request, in the case of the Company notifying CFG or
CA, and in the case of CFG or CA notifying the Company.
If to the Company:
Captec Net Lease Realty, Inc.
24 Frank Lloyd Wright Drive
Ann Arbor, Michigan 48160
Attention: W. Ross Martin
Facsimile: (734) 994-1376
with a copy to:
Brown & Wood LLP
1666 K Street, N.W.
Washington, DC 20006-4004
Attention: John K. Hughes
Facsimile: (202) 533-1399
and
Baker & Hostetler LLP
3200 National Center
1900 East 9th Street
Cleveland, Ohio 44114
Attention: Edward G. Ptaszek, Jr.
Facsimile: (216) 696-0740
If to CFG and/or CA:
Captec Financial Group, Inc.
24 Frank Lloyd Wright Drive
Ann Arbor, Michigan 48160
Attention: Gary A. Bruder
Facsimile: (734) 994-8355
with a copy to:
Shumaker Loop & Kendrick
1000 Jackson Street
Toledo, Ohio 43624
Attention: James F. White, Jr.
Facsimile: (419) 241-6894
SECTION 11.03 Binding Effect; No Assignment. This Agreement is binding
upon, shall inure to the benefit of, and be enforceable by, each of the parties
hereto and their respective successors and permitted assigns. Neither this
Agreement nor any of the rights and/or obligations of any party hereunder may be
assigned or delegated to any Person without the prior written consent of the
other parties hereto.
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SECTION 11.04 Entire Agreement. Except as otherwise specifically provided
herein, this Agreement, including the Schedules contained in the Disclosure
Schedule and any other written agreements by the parties hereto that are
expressly contemplated hereby to be entered into, constitutes the entire
agreement and understanding among the parties with regard to the subject matter
hereof and supersedes all prior negotiations, agreements, arrangements, or
understandings, written or oral, relating to the matters provided for herein or
therein.
SECTION 11.05 Remedies Cumulative; Specific Performance. Except as
expressly provided herein, all rights, powers and remedies provided under this
Agreement or otherwise available in respect hereof at law or in equity shall be
cumulative and not exclusive, and the exercise or commencement of the exercise
of any such remedies by any party hereunder shall not preclude the simultaneous
or subsequent exercise of any other such right, power or remedy by such party.
The parties acknowledge that money damages would not be adequate remedy for
violations of this Agreement and any party may, in its sole discretion, apply to
a court of competent jurisdiction for specific performance or injunctive or such
other relief as such court may deem just and proper to enforce this Agreement or
to prevent any violation hereof.
SECTION 11.06 Waiver. Any party to this Agreement may extend the time for
the performance of any of the obligations or other acts of any other party
hereto, or waive compliance with any of the agreements of any other party or
with any condition to the obligations hereunder, in any case only to the extent
that such obligations, agreements and conditions are intended for its benefit.
The failure of any party hereto to exercise any right, power or remedy provided
under this Agreement or otherwise available in respect hereof at law or in
equity or to insist upon compliance by any other party hereto with its
obligations hereunder, and any custom, practice, or course of dealing with the
parties at variance with the terms hereof, shall not constitute a waiver by such
party of its right at any time to exercise any such or other right, power or
remedy or to demand such compliance.
SECTION 11.07 No Third-Party Beneficiaries. Except as expressly provided
in this Agreement, nothing contained herein is intended to or shall confer on
any Person other than the parties hereto and their successors and permitted
assigns any rights, benefits, remedies, or claims under or by reason of this
Agreement.
SECTION 11.08 Governing Law. This Agreement and all disputes hereunder
shall be governed by, and interpreted and construed in accordance with, the
internal laws of the State of Delaware without regard to principles of conflict
of laws.
SECTION 11.09 Section Headings; Interpretation. Reference in this
Agreement to a Section, Article, or Schedule, unless otherwise indicated, shall
constitute references to a Section or an Article of this Agreement or a Schedule
to the Disclosure Schedule. The table of contents, section headings and article
titles contained in this Agreement are for convenience of reference only and do
not form a part thereof and shall not affect in any way the meaning or
interpretation of this Agreement. Wherever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation." The words "herein," "hereinafter," and
"hereunder," and words of similar import used in this Agreement shall refer to
this Agreement as a whole and not to any particular provision of this Agreement.
The parties agree that this Agreement is the product of negotiations among
sophisticated parties, all of whom were represented by counsel, and each of whom
had an opportunity to participate in, and did participate in the drafting of
each provision hereto. Accordingly, ambiguities in this Agreement, if any, shall
not be construed strictly against any party hereto but rather shall be given a
fair and reasonable construction without regard to the rule of contra
proferentem.
SECTION 11.10 Severability. If any term of this Agreement or the
application thereof to any party or circumstance shall be held invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such term to the other parties or circumstances shall not be affected thereby
and shall be enforced to the fullest extent permitted by applicable law,
provided that in such event the parties shall negotiate in good faith in an
attempt to agree to another provision (in lieu of the term or application held
to be invalid or unenforceable) that will be valid and enforceable and will
carry out the parties' intentions hereunder.
A-52
<PAGE> 226
SECTION 11.11 Amendment. This Agreement may be amended at any time by
written agreement signed by each of the parties hereto; provided, however, that
any amendment to this Agreement made subsequent to the adoption by the
shareholders of the Company of this Agreement shall not alter or change (i) the
amount or kind of consideration to be paid by the Company in exchange for all or
any of the securities of CFG or CA, (ii) any term of the Certificate of
Incorporation of the Company, or (iii) any of the terms and conditions of this
Agreement if such alteration or change would adversely affect the shareholders
of the Company.
SECTION 11.12 Further Assurances. Each of the parties hereto agrees that,
at any time and from time to time after the date hereof, it shall, upon written
request from any other party or parties hereto, and without further
consideration, perform such other and further acts, and execute, acknowledge and
deliver, or cause to be delivered, such further instruments, documents or
assurances as such other party or parties reasonably may request for the purpose
of carrying out this Agreement.
SECTION 11.13 Public Announcements. Each of the parties will consult with
each other party before issuing, and provide such other party the opportunity to
review and comment upon, any press release, advertisement or other public
announcement with respect to the transactions contemplated by this Agreement and
no such party shall issue any press release or news release or make any other
public statement prior to such consultation, review, and comment, except as may
be required in the written opinion of such party's counsel by applicable law,
court process, or the rules of any securities exchange or automatic quotation
system on which its securities are traded; provided, however, that even in such
circumstance the party required to make such statement shall use reasonable
efforts to provide a copy of any such statement to the other party prior to
release thereof and afford such party the opportunity to comment thereon.
SECTION 11.14 Exhibits and Schedules. The Exhibits and the Schedules
contained in the Disclosure Schedule are being separately delivered to the
Company and such receipt is being acknowledged by each of the parties to this
Agreement. All Exhibits and Schedules referred to in this Agreement are an
integral part of and are hereby incorporated into this Agreement by reference.
SECTION 11.15 CFG/CA Representative. Each of CFG and CA, as applicable,
represent to the Company that the CFG Shareholders, the Option Holders, the
Individual Warrant Holders, and the CA Shareholders have, pursuant to a separate
written agreement by and among such parties and CFG and CA (the "Representation
Agreement"), a copy of which shall have been provided to the Company prior to
the Effective Time, constituted and appointed Patrick L. Beach (the "CFG/CA
Representative") as their sole and exclusive representative with respect to all
matters arising out of, resulting from, pertaining to, or in any way connected
with, this Agreement, any documents or instruments executed or delivered in
connection herewith, and any of the transactions contemplated herein or therein.
After the date hereof, the Company and the Special Committee shall be entitled
to rely completely upon any actions taken or failed to be taken, or any
statement made by the CFG/CA Representative, without any investigation or
inquiry whatsoever, with respect to such aforementioned parties and matters. The
Company shall not incur any liability whatsoever as a result of such reliance
until further notified that Mr. Beach no longer acts as the CFG/CA
Representative.
SECTION 11.16 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, but all of
which taken together shall constitute one and the same instrument. Each
counterpart may consist of a number of copies, each signed by less than all, but
together signed by all, the parties hereto and this Agreement shall be effective
when each of the parties hereto has exchanged executed signature pages with each
of the other parties hereto.
[Signature Page Follows]
A-53
<PAGE> 227
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the day and year first above written.
CAPTEC NET LEASE REALTY, INC.
By: /s/ ALBERT T. ADAMS
------------------------------------
Name: Albert T. Adams
Title: Chairman, Special Committee
CAPTEC ACQUISITION, INC.
By: /s/ GARY A. BRUDER
------------------------------------
Name: Gary A. Bruder
Title: Secretary
CAPTEC FINANCIAL GROUP, INC.
By: /s/ W. ROSS MARTIN
------------------------------------
Name: W. Ross Martin
Title: Senior Vice President and
Chief Financial Officer
CAPTEC NET LEASE REALTY
ADVISORS, INC.
By: /s/ PATRICK L. BEACH
------------------------------------
Name: Patrick L. Beach
Title: President and Chief
Executive Officer
A-54
<PAGE> 228
The undersigned CFG Shareholders and
CA Shareholders join in this Agreement
solely for the purpose of being bound
by, and obtaining the benefits of, the
provisions applicable thereto in
Section 4.06 and Article IX.
By: /s/ PATRICK L. BEACH
------------------------------------
Name: Patrick L. Beach
By: /s/ W. ROSS MARTIN
------------------------------------
Name: W. Ross Martin
By: /s/ H. REID SHERARD
------------------------------------
Name: H. Reid Sherard
By: /s/ GARY A. BRUDER
------------------------------------
Name: Gary A. Bruder
By: /s/ GEORGE R. BEACH
------------------------------------
Name: George R. Beach
By: /s/ KENNETH S. MILNE
------------------------------------
Name: Kenneth S. Milne
By: /s/ JOANNA A. MILNE
------------------------------------
Name: Joanna A. Milne
By: /s/ ROBERT BRUCE
------------------------------------
Name: Robert Bruce
By: /s/ WILLIAM MCPHERSON
------------------------------------
Name: William McPherson
A-55
<PAGE> 229
By: /s/ BETH A. ABBOTT
----------------------------------
Name: Beth A. Abbott
By: /s/ LORI B. HOFFMAN
------------------------------------
Name: Lori B. Hoffman
By: /s/ ROBERT V. SCHRADAR
------------------------------------
Name: Robert V. Schradar
By: /s/ AARON ACKER
------------------------------------
Name: Aaron Acker
By: /s/ SUSAN PASSENO
------------------------------------
Name: Susan Passeno
By: /s/ MILTON TRUST
------------------------------------
Name: Milton Trust
A-56
<PAGE> 230
AMENDMENT NO. 1
TO
OMNIBUS AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 to the Omnibus Agreement and Plan of Merger, dated as
of December 20, 1999 (the "Merger Agreement"), is dated as of April , 2000
(the "Amendment") and is by and among Captec Net Lease Realty, Inc., a Delaware
corporation (the "Company"), Captec Acquisition, Inc., a Delaware corporation
("Acquisition") and a wholly-owned subsidiary of the Company, Captec Financial
Group, Inc., a Michigan corporation ("CFG"), and Captec Net Lease Realty
Advisors, Inc., a Delaware corporation ("CA").
RECITALS
WHEREAS, the Company, Acquisition, CFG, and CA have entered into the Merger
Agreement;
WHEREAS, pursuant to the Merger Agreement, CFG and Acquisition will merge
pursuant to applicable law, with CFG being the surviving entity;
WHEREAS, pursuant to the Merger Agreement, the Company and CA will merge
pursuant to applicable law, with the Company being the surviving entity;
WHEREAS, the parties desire to amend the Merger Agreement as herein
provided.
NOW, THEREFORE, in consideration of the premises and agreements contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this Amendment
intending to be legally bound, agree as follows:
1. Definitions. Each capitalized term used herein that is not otherwise
defined shall have the same meaning as set forth in the Merger Agreement unless
the definition thereof is changed by this Amendment.
2. Amendment of Article IV. Section 4.01(e) of the Merger Agreement is
hereby amended to delete the proviso in the final sentence of such section and
to replace it with a proviso to read in its entirety as follows: "provided,
however, that CA shall not be prohibited by reason of this Section 4.01(e) from
making a cash distribution in the aggregate amount of $145,000 to its officers,
directors and shareholders immediately prior to the CA Merger."
3. Amendment of Article VII. Section 7.01(n) of the Merger Agreement is
hereby amended to delete the language "except as previously disclosed to the
Company in writing" at the outset of such section. The parties further agree
that no such indebtedness referred to in such section has been forgiven,
converted or contributed, and no claims cancelled prior to the date hereof as
contemplated by such section. The parties further agree that Section 7.17 is
hereby amended to add a proviso to such section to read in its entirety as
follows: ";provided, however, that the annual base salaries to be paid to
Messrs. Beach and Martin pursuant to their respective employment agreements
shall be reduced as of the Closing Date to $450,000 and $325,000, respectively."
4. Amendment of Article X. Section 10.01(d) of the Merger Agreement is
hereby amended to delete the reference to "March 30, 2000" in such subsection
and to replace such reference with "June 30, 2000."
5. Omnibus Agreement and Plan of Merger. Except as otherwise amended
hereby, the Merger Agreement shall remain in full force and effect and except as
expressly contemplated hereby, the obligations set forth herein are in addition
to and not in lieu of those set forth in the Merger Agreement.
6. Binding Effect. This Amendment is binding upon, shall inure to the
benefit of, and be enforceable, by, each of the parties hereto and their
respective successors and assigns.
7. Governing Law. This Amendment and all disputes hereunder shall be
governed by, and interpreted and construed in accordance with, the internal laws
of the State of Delaware without regard to principles of conflicts of laws.
8. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
A-57
<PAGE> 231
IN WITNESS THEREOF, the parties have caused this Amendment to be approved
in accordance with the Merger Agreement and executed on the date first written
above by their respective officers thereunto duly authorized.
CAPTEC NET LEASE REALTY, INC.
By: /s/ ALBERT T. ADAMS
------------------------------------
Name: Albert T. Adams
Title: Chairman, Special Committee
CAPTEC ACQUISITION, INC.
By: /s/ GARY A. BRUDER
------------------------------------
Name: Gary A. Bruder
Title: Secretary
CAPTEC FINANCIAL GROUP, INC.
By: /s/ W. ROSS MARTIN
------------------------------------
Name: W. Ross Martin
Title: Senior Vice President and
Chief Financial Officer
CAPTEC NET LEASE REALTY
ADVISORS, INC.
By: /s/ PATRICK L. BEACH
------------------------------------
Name: Patrick L. Beach
Title: President and Chief
Executive Officer
A-58
<PAGE> 232
Exhibit B
December 17, 1999
Special Committee of the Board of Directors
Captec Net Lease Realty, Inc.
24 Frank Lloyd Wright Drive
Ann Arbor, MI 48104
Gentlemen:
We understand that Captec Net Lease Realty, Inc. (the "Company"), Captec
Acquisition, Inc. ("Acquisition"), Captec Financial Group, Inc. ("CFG"), and
Captec Net Lease Realty Advisors, Inc. ("CA") propose to enter into an Omnibus
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which (i) CA
will be merged with and into the Company, with the Company being the surviving
corporation, and (ii) Acquisition, which is a wholly owned subsidiary of the
Company, will be merged with and into CFG, with CFG being the surviving
corporation (collectively, the "Mergers"). For purposes of this opinion, we have
assumed that the "Execution Copy" of the Merger Agreement in the form provided
to us on December 17, 1999 will not vary in any material respect from the Merger
Agreement as signed by the parties thereto. Capitalized terms used herein, if
not otherwise defined herein, shall have the respective meanings set forth in
the Merger Agreement.
Pursuant to the Mergers, and as set forth more fully in the Merger
Agreement, an aggregate of 3,000,000 shares of Company Common Stock will be
issued to the current security- holders of CFG and CA as Initial Share
Consideration (with a portion of such securities being paid in cash to certain
securityholders of CFG), and up to 2,000,000 additional shares of Company Common
Stock may be issued to certain securityholders of CFG as Earnout Shares, but
only if certain financial performance levels in 2000 and 2001 are achieved. The
Initial Share Consideration and the Earnout Shares are collectively referred to
herein as the "Merger Consideration." It is also our understanding, and this
opinion assumes, that, in connection with the Mergers, the Company will make an
election to be taxed as a corporation under chapter C of the Internal Revenue
Code of 1986, as amended (the "Code"), and thereby terminate its status as a
real estate investment trust ("REIT") under the Code.
You have asked us whether, in our opinion, the Merger Consideration is
fair, from a financial point of view, to the Company. In conducting our analysis
and arriving at our opinion, we have reviewed the financial terms of the Mergers
as set forth in the Merger Agreement in relation to such financial and other
information as we deemed appropriate including, among other things, the
following: (i) the latest draft of the Merger Agreement and the related exhibits
and schedules thereto; (ii) certain publicly available business and financial
information related to the Company that we deemed to be relevant; (iii) the
historical and current financial condition and results of operations of the
Company, CFG, and CA; (iv) certain internal financial analyses and forecasts of
the Company, CFG, and CA for the years beginning January 1, 1999 and ending
December 31, 2002, prepared by their respective senior managements; (v) certain
financial and securities trading data of certain other companies, the securities
of which are publicly traded and that we believed to be comparable to the
Company or CFG or relevant to the transaction; (vi) the proposed financial terms
of the Mergers compared with the financial terms paid in certain other
acquisitions and transactions that we believed to be relevant; (vii) reported
market price, trading activity and valuation multiples for the Company Common
Stock; and (viii) such other financial studies, analyses, and investigations and
took account of such other matters as we deemed appropriate for purposes of our
opinion. We also have held discussions with members of the senior management of
the Company, CFG, and CA regarding the strategic rationale for and the potential
benefits of the Mergers and the transactions contemplated thereby and the past
and current business operations, financial condition, and future prospects of
the Company, CFG, and CA, respectively. We also participated in certain
discussions and negotiations among representatives of the Company, CFG, CA and
their financial and legal advisors. As part of our discussions, we have been
advised by management of the
B-1
<PAGE> 233
The Special Committee of the Board of Directors
December 17, 1999
Page 2
Company that the Mergers significantly advance the Company's overall strategic
goals in the real estate related commercial finance industry.
In rendering our opinion, we have taken into account the current trading
price of the Company Common Stock and the discount of the trading price to the
current per share book value and net asset value estimated by the Company's
management. We have also taken into account our assessment of general economic,
market, and financial and other conditions and our experience in other
transactions, as well as our experience in securities valuation and our
knowledge of the industries in which the Company, CFG, and CA operate generally.
Our opinion is necessarily based upon the information made available to us and
conditions as they currently exist and can be evaluated as of the date hereof.
We have relied upon the accuracy and completeness of all of the financial and
other information reviewed by us for purposes of our opinion and have not
assumed any responsibility for, nor undertaken an independent verification of,
such information. With respect to the internal operating data and financial
analyses and forecasts supplied to us or discussed with us, we have assumed that
such data, analyses, and forecasts have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of senior
management of the Company, CFG, and CA, as the case may be, as to the recent and
likely future performance of the respective companies. Accordingly, we express
no opinion with respect to such analyses or forecasts or the assumptions on
which they are based. Furthermore, our opinion is based on the assumption that
the Mergers will qualify as a tax-free reorganization under the Code for U.S.
federal income tax purposes.
We were not asked to consider, and our opinion does not address, the
relative merits of the Mergers as compared to any alternative business
strategies that might exist for the Company or the effect of any other
transactions in which the Company might engage. Furthermore, we have not made an
independent evaluation or appraisal of the assets and liabilities of the
Company, CFG, or CA or any of their subsidiaries or affiliates and have not been
furnished with any such evaluation or appraisal. In addition, we express no
opinion on the relative financial values of CFG and CA or the allocation of the
Merger Consideration among the shareholders of CFG and CA. Moreover, we are not
expressing any opinion as to what the value of the Company Common Stock will
actually be when issued pursuant to the Mergers or the prices at which the
Company Common Stock will trade subsequent to the announcement of the Mergers
and the transactions contemplated thereby, including the Company's election to
forgo REIT status.
J.C. Bradford has been retained by the Special Committee of the Board of
Directors of the Company to act as financial advisor to the Special Committee in
connection with the proposed Mergers and will receive a fee for such services, a
portion of which is contingent upon the consummation of the Mergers. J.C.
Bradford will also receive a fee in connection with the delivery of this
opinion. In addition, the Company has agreed to indemnify us for certain
liabilities arising out of our engagement. In the ordinary course of our
business, J.C. Bradford may hold or actively trade the securities of the Company
for our own account and for the accounts of our customers and, accordingly, may
at any time hold long or short positions in such securities.
This opinion is for the use and benefit of the Special Committee and the
Company. The Company is entitled to reproduce this opinion, in whole but not in
part, in the Proxy Statement as required by applicable law or appropriate;
provided, however, that any excerpt from or reference to this opinion (including
any summary thereof) in such document must be approved by us in advance in
writing. Notwithstanding the foregoing, this opinion does not constitute a
recommendation to any holder of the Company Common Stock as to how such
shareholder should vote on the Mergers or any other matter related thereto. We
do not believe that any person (including a shareholder of the Company) other
than the directors has the legal right to rely upon this opinion for any claim
arising under state law and, that, should any such claim be brought against us,
this assertion will be raised as a defense.
Based upon and subject to the foregoing, and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof and based
on conditions as they currently exist, the issuance of the
B-2
<PAGE> 234
The Special Committee of the Board of Directors
December 17, 1999
Page 3
Merger Consideration by the Company, in accordance with and pursuant to the
terms set forth in the Merger Agreement, is fair to the Company from a financial
point of view.
Very truly yours,
B-3
<PAGE> 235
CAPTEC NET LEASE REALTY, INC.
[ARROW] Tear at Perforation [ARROW]
The Special Meeting of Stockholders of Captec Net
Lease Realty, Inc. will be held , 2000,
at a.m., at
1. MERGER OF CAPTEC ACQUISITION, INC. WITH AND INTO CAPTEC FINANCIAL GROUP, INC.
AND OF CAPTEC NET LEASE REALTY ADVISORS, INC. WITH AND INTO CAPTEC NET LEASE
REALTY, INC.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. AMENDMENT OF CERTIFICATE OF INCORPORATION CHANGING THE NAME OF THE COMPANY TO
CAPTEC FINANCIAL GROUP, INC.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned hereby acknowledges receipt of a Notice of Special Meeting
of Stockholders of Captec Net Lease Realty, Inc. called for
, 2000, and a Proxy Statement for the Meeting prior to
the signing of this proxy.
Dated: , 2000
------------------
------------------------------
------------------------------
Please sign exactly as your
name(s) appear(s) on this
proxy. When signing in a
representative capacity,
please give title.
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD USING THE ENCLOSED
ENVELOPE.
<PAGE> 236
CAPTEC NET LEASE REALTY, INC.
24 Frank Lloyd Wright Drive
Ann Arbor, Michigan 48106 PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF CAPTEC
NET LEASE REALTY, INC. FOR USE ONLY AT THE
SPECIAL MEETING OF STOCKHOLD-
ERS TO BE HELD ON , 2000 AND ANY
ADJOURNMENT THEREOF.
The undersigned, being a stockholder
of CAPTEC NET LEASE REALTY, INC.
("Captec"), hereby authorizes Patrick L.
Beach and W. Ross Martin, and each of
them, as proxies, with the full power of
substitution, to represent the undersigned
at the Annual Meeting of Stockholders of
Captec to be held at
on , 2000 at 10:00 a.m., local time,
and at any adjournment thereof, and at the
meeting to act with respect to all votes
that the undersigned would be entitled to
cast, if then personally present, as
appears on the reverse side of this proxy.
In their discretion, the proxies are
authorized to vote with respect to matters
incident to the conduct of the meeting and
upon such other matters as may properly
come before the meeting. This proxy may be
revoked at any time before it is
exercised.
Shares of the Common Stock of Captec
will be voted as specified. If no
specification is made, shares will be
voted FOR the matters set forth on the
reverse side and IN ACCORDANCE WITH THE
DISCRETION OF THE PROXIES as to any other
matter which may properly come before the
Meeting.
CONTINUED ON OTHER SIDE
