<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN
PROXY STATEMENT
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:
[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
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
(Name of registrant as specified in its charter)
N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which
transaction applies:_____________________________________
(2) Aggregate number of securities to which transaction
applies:_________________________________________________
(3) Per unit price or other underlying value of
transaction computed pursuant to Exchange Act Rule 0-11:
_________________________________________________________
(4) Proposed maximum aggregate value of transaction:_________
(5) Total fee paid:__________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] 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:__________________________________
(2) Form, schedule or registration statement no.:____________
(3) Filing party:____________________________________________
(4) Date filed:______________________________________________
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<PAGE> 2
[CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III LETTERHEAD]
February __, 1998
Dear Limited Partner:
This letter (the "Letter") is being furnished to holders (the "Investors")
of limited partnership interests (the "Units") of Captec Franchise Capital
Partners L.P. III, a Delaware limited partnership (the "Partnership"), in
connection with the solicitation by the Partnership of written consents to,
effective January 1, 1998, transfer the Units owned by the general partners of
the Partnership to Captec Net Lease Realty, Inc., a Delaware corporation ("Net
Lease"), and elect Net Lease as general partner of the Partnership. The
proposal (the "Proposal") to which this Letter and the enclosed consent form
relates is more fully set forth below. This letter and the enclosed consent
form are first being furnished on or about February __, 1998, to Investors
reflected on the Partnership's list of record and beneficial holders of Units
dated February __, 1998. The Partnership has established February __, 1998 as
the record date (the "Consent Record Date") for Investors to act by written
consent as contemplated hereby.
INVESTORS ARE BEING ASKED TO CONSENT TO THE PROPOSAL BY SIGNING, DATING
AND PROMPTLY MAILING THE ENCLOSED CONSENT FORM no later than
_____________________. At such time as the Partnership receives unrevoked
written consents representing at least a majority of the Units outstanding, the
Proposal shall take effect. Only Investors of record on the Consent Record Date
are eligible to give their consent to the Proposal and the enclosed consent
form may only be utilized by such Investors.
The Proposal provides for, effective January 1, 1998, (1) the transfer of
the general partnership interests owned by the current and original general
partners, Patrick L. Beach and Captec Franchise Capital Corporation III, a
Michigan corporation (collectively, the "Current General Partners"), to Net
Lease, (2) the election of Net Lease as general partner of the Partnership, and
(3) the continuation of the business of the Partnership by Net Lease as a
successor general partner of the Partnership, without dissolution.
The Partnership is in favor of this proposal because it results in: (1) a
significant increase in the net worth of the general partner, and (2) a general
partner that is a public company traded on the NASDAQ that is subject to the
financial reporting requirements regulated by the Securities and Exchange
Commission (SEC). Further, these results are achieved while effectively
maintaining the existing management of the Partnership. These results are
described in more detail below.
If the Proposal is approved, effective January 1, 1998, the general
partnership interests owned by the current General Partners will be transferred
and assigned to Net Lease. Simultaneously with the transfer of the general
partnership interests owned by the Current General Partners to Net Lease, Net
Lease will become the successor General Partner of the Partnership and the
business of the Partnership will continue without dissolution.
The Agreement of Limited Partnership of the Partnership (the "Partnership
Agreement") sets forth the respective rights, duties and obligations of the
general partners and the Investors. Section 15.1.1(g) provides that the
General Partners must obtain the approval of the Limited Partners by Majority
Vote prior to assigning a General Partner's interest in the Partnership. Upon
withdrawal of the last remaining General Partner, the Limited Partners by a
Majority Vote may elect to continue the business of the Partnership and
elect a successor General Partner pursuant to section 18.1.1 of the Partnership
Agreement. In determining the existence of the vote of a Majority of the
Limited Partners, the Units owned by the Current General Partners and their
Affiliates (as defined in the Partnership Agreement) will not be included
pursuant to section 15.1.2 of the Partnership Agreement.
The Partnership was organized in 1994 to acquire, hold, lease, mortgage,
operate, sell or otherwise dispose of properties and equipment to be leased
primarily on a "triple-net" basis to operators of national chain and nationally
franchised fast-food, family style and dinner house restaurants as well as
other franchised or service-type businesses such as automotive and specialty
retail franchises. Since its
<PAGE> 3
Limited Partner
February __, 1998
Page 2
inception, the Partnership has spent $16.6 million to acquire eleven properties
and nine equipment packages
Net Lease is a corporation that intends to qualify as a real estate
investment trust ("REIT") and acquires, develops and owns high-quality free
standing properties leased principally on a long-term triple-net basis to
national and regional chain and franchised restaurants and retailers. On
November 14, 1997, Net Lease completed its initial public offering in which it
sold 8 million shares of common stock at a price of $18 per share, resulting in
net proceeds, after offering expenses, of $132.9 million. Net Lease is quoted
on the NASDAQ National Market under the symbol "CRRR".
As of September 30, 1997, Net Lease had a portfolio of 83 properties
located in 26 states. In addition, as of September 30, 1997, Net Lease had
agreements in principal for the acquisition, which Net Lease expects to be
substantially completed by September 1998, of 68 additional properties located
in 22 states. On a pro forma basis giving effect to the initial public
offering, as of September 30, 1997, Net Lease had total assets of $138.5
million, total stockholders' equity of $136.5 million, and total revenues for
the nine month period then ended of $9.6 million, each as set forth on the
unaudited pro forma financial statements contained in the Form 10-Q of Net
Lease for the quarter ended September 30, 1997 that is included with this
letter.
The executive officers and directors of Net Lease have extensive
experience in the acquisition, development and ownership of net leased
properties, particularly those used in restaurant and retail operations, and
have served in senior positions with large restaurant franchisees, retailers
and real estate companies. Additional information with respect to such
executive officers and directors is set forth on the attached Schedule I, which
is a reprint of information that was provided in the prospectus, dated November
13, 1997, for the initial public offering of Net Lease.
Upon approval and assignment of the Partnership's general partnership
interests to Net Lease, the individuals who have been responsible for the
management of the Partnership will continue to have a significant role in the
management as Patrick L. Beach, one of the Current General Partners, is also
the Chairman of the Board of Directors, President, and Chief Executive Officer
of Net Lease. Mr. Beach also holds officer positions with Captec Franchise
Capital Partners L.P. III, the other Current General Partner, and Captec
Financial Group, Inc. ("Captec Financial"), the sole shareholder of Captec
Franchise Capital Partners L.P. III. W. Ross Martin, the only other officer of
Captec Franchise Capital Partners L.P. III, is also an officer of each of
Captec Financial and Net Lease. Hence, the individuals managing the
Partnership as officers of the corporation that is a Current General Partner
will continue to participate in the management of the Partnership by virtue of
their officer positions with Net Lease.
Captec Net Lease Realty Advisors, Inc. and Captec Financial, both
affiliates of Net Lease, together manage the operations of Net Lease and
provide it with investment and financial advisory services pertaining primarily
to the acquisition, development and leasing of properties. Since 1981, Captec
Financial and its affiliates have developed substantial expertise in all
aspects of the franchise, chain restaurant and specialty retail finance
business, including business concept, property and lessee underwriting,
property acquisition, lessee credit analysis and monitoring, direct marketing,
portfolio management, accounting and other administrative functions. As of
June 30, 1997, Captec Financial employed over 60 people, including a senior
management team with substantial direct industry experience. Including Net
Lease, as of June 30, 1997, Captec Financial had assets under management of
approximately $350.0 million and combined debt and equity capital of
approximately $540.0 million including available, but unutilized, borrowing
capacity.
If the Proposal is approved, effective January 1, 1998, the Units owned by
the current General Partners will be transferred and assigned to Net Lease.
Simultaneously with the transfer of the Units owned by the Current General
Partners to Net Lease, Net Lease will become the successor General Partner of
the Partnership and the business of the Partnership will continue without
dissolution.
As of January , 1998, the Partnership had ________ Units outstanding,
and Affiliates of the Current General Partners owned an aggregate of 24 Units,
none of which will be considered in determining the existence of a majority of
the Units voting for the Proposal. The Partnership believes that written
consents representing at least _________ Units will constitute the requisite
number of
<PAGE> 4
Limited Partner
February __, 1998
Page 3
written consents to effectuate the Proposal. At such time as the
Partnership receives valid and unrevoked written consents representing at least
a majority of the Units outstanding, not including those held by the Current
General Partners and their Affiliates, the Proposal will take effect. We urge
you to read this Letter carefully and then sign, date and promptly mail the
enclosed consent form to the Partnership.
Each Unit entitles the Investor thereof to one vote with respect to the
written consent solicited hereby. Only Investors of Units of record may
consent to the Proposal. If your Units are held in the name of a brokerage
firm, bank, nominee or other institution, only such institution can sign a
written consent with respect to your Units and can do so only at your
direction. Accordingly, if your Units are so held, please contact your account
representative and give instructions to have the enclosed consent form executed
with respect to your Units. Notwithstanding the foregoing, with respect to any
Units owned by an IRA or other account of which you are the beneficiary and of
which MAVRICC Management Services, Inc. ("MAVRICC") is the servicer (the Units
would be held in the name of brokerage firm, bank or other institution which is
the custodian or trustee of the account), MAVRICC will obtain written
instructions from such custodian or trustee confirming your (the Investor's)
instructions as expressed on your consent form with respect to the voting of
your Units in connection with the Proposal and directing and authorizing the
Partnership to vote your Units as indicated by you on the consent form you
return to the Partnership.
Your consent is important. No matter how many Units you own, the
Partnership urges you to vote FOR the proposal by signing, dating, and promptly
mailing the enclosed consent form in the postage prepaid, self-addressed
envelope. If you have any questions or need assistance, please call Captec
Franchise Capital Partners L.P. III, toll-free at 1-888-422-7832.
Because approval of the Proposal requires the affirmative consent of
Investors owning of record at least a majority of the Units outstanding (not
including Units owned by the Current General Partners and their Affiliates),
abstentions and broker non-votes will have the effect of votes against the
proposal. The Partnership urges that Investors execute the enclosed consent
form FOR the Proposal.
It is the present intention of the Partnership to close this consent
solicitation at the earliest possible time. The earliest possible time that
this consent solicitation can be closed is that date on which the valid and
unrevoked written consents of at least a majority of the Units outstanding (not
including the Units owned by the Current General Partners and their Affiliates)
have been received by the Partnership. The Partnership is seeking, if
possible, to close this consent solicitation on or about
____________________________.
A consent signed, dated and mailed by an investor may be subsequently
revoked by written notice of revocation to the Partnership. A revocation may
be in any written form validly signed by the record holder as long as it
clearly states that such holder's consent previously given is no longer
effective. To prevent confusion, the notice of revocation must be dated. To
be effective, an Investor's written notice of revocation of his or her
previously executed and delivered consent must be delivered prior to the time
that the requisite number of signed unrevoked consent forms have been received
by the Partnership as set forth above. The revocation may be delivered to
Captec Franchise Capital Partners L.P. III at 24 Frank Lloyd Wright Drive,
Lobby L, 4th Floor, Ann Arbor, Michigan 48106.
If the Proposal is approved, effective January 1, 1998, the Units owned by
the current General Partners will be transferred and assigned to Net Lease,
and, simultaneously with such transfer Net Lease will become the successor
General Partner of the Partnership, the business of the Partnership will
continue without dissolution, and the Partnership Agreement will be amended
accordingly. Such amendment will reflect the transfer of the Units owned by
the Current General Partners to Net Lease, the withdrawal of the Current
General Partners from the Partnership and the admission of Net Lease as a
successor General Partner with respect to the transferred Units. The amendment
will be executed by Net Lease and by the Current General Partners on their own
behalves and as attorney-in-fact for the limited partners in accordance with
section 19.1 of the Partnership Agreement.
The expenses of this consent solicitation, including the cost of preparing
this Letter and the legal fees incurred by the Partnership in connection with
the preparation of this Letter and the consent form will be paid by Net Lease.
To date, the costs have been approximately $1,500, and the Partnership
<PAGE> 5
Limited Partner
February __, 1998
Page 4
estimates that it will incur additional costs of approximately $13,500. In
addition to solicitation by use of the mails, consents may be solicited by
agents of Net Lease in person or by telephone, telegram or other means of
communication. Such agents may have a variety of relationships with Net Lease
or the Partnership, but will not receive any compensation for their efforts.
Arrangements may also be made with custodians, nominees and fiduciaries for
forwarding of consent solicitation materials to the beneficial owner of the
Units, and Net Lease may reimburse such custodians, nominees and fiduciaries
for reasonable expenses incurred in connection therewith.
For additional information, please contact either MAVRICC Management
Systems by mail at 1845 Maxwell, Suite 101, Troy, Michigan 48084-4510 or
Maureen Giammara of Captec Franchise Capital Partners L.P. III by phone,
toll-free at 1-888-422-7832.
Sincerely,
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
<PAGE> 6
SCHEDULE I
The directors and executive officers of Net Lease are:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH NET LEASE
<S> <C> <C>
Patrick L. Beach .... 41 Chairman of the Board of Directors,
President and Chief Executive, Officer
W. Ross Martin....... 37 Director, Executive Vice President,
Chief Financial Officer and Treasurer
Ronald Max .......... 40 Vice President and Chief Investment Officer
H. Reid Sherard ..... 49 Director
Richard J. Peters ... 49 Independent Director
Creed L. Ford, III .. 45 Independent Director
William H. Krul, II . 48 Independent Director
Lee C. Howley ....... 50 Independent Director
</TABLE>
PATRICK L. BEACH is the Chairman of the Board of Directors, President and
Chief Executive Officer of Net Lease, Captec Financial, and Captec Net Lease
Realty Advisors, Inc. Since founding Captec Financial in 1981, Mr. Beach has
served as the Chairman of its Board of Directors, President and Chief Executive
Officer, as well as in similar capacities for various of its affiliates. Mr.
Beach has worked exclusively with Captec Financial and its affiliates since
1991. From 1989 to 1991 Mr. Beach also served as Chairman and President of
Illiana Printing, Inc., the master franchisor for American Speedy Printing
Centers, Inc. in the states of Illinois and Indiana. From 1986 until 1990 Mr.
Beach was the Chairman of Wendy's of San Diego, Inc., a 27-unit franchisee of
Wendy's International. Mr. Beach is a graduate of the University of Michigan
School of Business Administration (B.B.A. 1977).
W. ROSS MARTIN is a director, Executive Vice President, Chief Financial
Officer and Treasurer of Net Lease and a director, Executive Vice President and
Chief Financial Officer of Captec Financial and Captec Net Lease Realty
Advisors, Inc. Mr. Martin joined Captec Financial in 1985 as Controller, was
promoted to Vice President -- Finance in 1986 and Chief Financial Officer in
1994, and currently serves as a director and Executive Vice President and Chief
Financial Officer of Captec Financial and in a similar capacity for various of
its affiliates. From 1982 until 1985, he was employed by Deloitte Haskins &
Sells, most recently as senior consultant in the Emerging Business Services
practice. Mr. Martin is a graduate of the University of Michigan School of
Business Administration (B.B.A. 1982) and a Certified Public Accountant.
RONALD MAX is Vice President and Chief Investment Officer of Net Lease.
Mr. Max joined Captec Financial in 1995 to help establish a retail properties
acquisition and development program. From 1988 to 1995 Mr. Max held various
positions with Brauvin Real Estate Funds, including Chief Financial
Officer and Director of Acquisitions, where he was responsible for the
acquisition and funding of over $100.0 million of retail properties. Prior to
1988, Mr. Max had extensive experience in real estate and financing. Mr. Max
is a graduate of Northern Illinois University (B.S. 1979) and a Certified
Public Accountant.
H. REID SHERARD is a director and currently is Senior Vice President --
Sales and Marketing of Captec Financial, by which he has been employed since
1994. From 1986 to 1994 Mr. Sherard was employed by Franchise Finance
Corporation of America in several positions including Vice President,
Acquisitions. Mr. Sherard is a graduate of Charleston Southern University
(B.S. 1970).
I-1
<PAGE> 7
RICHARD J. PETERS is a director and currently serves as President of R.J.
Peters & Company, L.L.C., a privately held investment company. From 1986
through June 1997, Mr. Peters was a senior executive of Penske Corporation
("Penske"), a privately held transportation services company. Most recently,
Mr. Peters served as Executive Vice President and Chief Financial Officer of
Penske, and as President and Chief Executive Officer of Penske Motorsports,
Inc. Mr. Peters also is a director of Penske, Penske Motorsports, Inc. and Aon
Funds. Mr. Peters is a graduate of Wayne State University (B.B.A. 1969).
CREED L. FORD, III is a director and currently is the Chief Executive
Officer of Kona Restaurant Group which owns and operates Johnny Carino's
Italian Kitchen and Kona Ranch Steak House restaurants and is a Chili's Grill
and Bar franchisee. From 1976 until 1997 Mr. Ford served in numerous
capacities with Brinker International ("Brinker"), a multi-concept casual
dining company, most recently as its Chief Operating Officer and a director.
While with Brinker, Mr. Ford participated in the establishment of Chili's, the
development of 600 restaurants world-wide and the management of over 70,000
employees. Mr. Ford is a graduate of Texas A&M University (B.S. 1975).
WILLIAM H. KRUL is a director and has been associated for the past 28
years with the Miller-Valentine Group and its affiliates, most recently as
President of Miller-Valentine Construction, Inc. Mr. Krul is a director of
Mercy Siena Woods Nursing Home and Mercy Western Ohio. Mr. Krul is a graduate
of Wright State University in Dayton, Ohio (B.A. 1971).
LEE C. HOWLEY is a director and has been the sole owner and President of
Howley & Company, a real estate brokerage and development company, since 1981,
and has been the sole owner and Chairman of Coast Management Company, a
cleaning and real estate management company, since 1987. Mr. Howley is a
director of Boykin Lodging Company, International Total Services, Inc. and
LESCO, Inc., and currently serves as Co-Chairman of the Rock 'n Roll Hall of
Fame and Museum in Cleveland, Ohio. Mr. Howley is a graduate of Georgetown
University (B.A. 1970) and New York University (M.B.A. 1972).
I-2
<PAGE> 8
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
CONSENT
The undersigned, a holder of limited partnership interests (the "Units")
in Captec Franchise Capital Partners L.P. III, a Delaware limited partnership
(the "Partnership"), does hereby vote, with respect to all Units owned by the
undersigned, as follows:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
APPROVAL of the Proposal more particularly described in the letter
accompanying this Consent (the "Letter"), dated February __, 1998, receipt of
which is hereby acknowledged, to transfer the Units owned by each of the
general partners of the Partnership, Patrick L. Beach and Captec Franchise
Capital Corporation III, a Michigan corporation, to Captec Net Lease Realty,
Inc., a Delaware corporation ("Net Lease"), and elect, effective simultaneously
with such transfer, Net Lease as general partner of the Partnership, and
continuation of the business of the Partnership by Net Lease as a successor
general partner of the Partnership, without dissolution.
THIS CONSENT IS SOLICITED BY CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III.
WHEN THIS CONSENT FORM IS PROPERLY EXECUTED, THE UNITS REPRESENTED HEREBY WILL
BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE ON THIS CONSENT FORM, THE
UNITS REPRESENTED HEREBY WILL BE VOTED FOR THE PROPOSAL.
Dated: ____________________
____________________________
Signature
____________________________
Signature (if held jointly)
____________________________
Title
Please sign exactly as name appears on the envelope in which this material
is delivered. When Units are held by joint tenants, both should sign. When
signing as an attorney, as executor, administrator, trustee or guardian, please
give full title as such. If a corporation, please sign in corporate name by
President or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS CONSENT FORM PROMPTLY USING THE
ENCLOSED PREPAID ENVELOPE TO: MAVRICC Management Systems, Inc., 1845 Maxwell,
Suite 101, Troy, Michigan 48084-4510. If you have any questions, please call
Maureen Giammara of Captec Franchise Capital Partners L.P. III toll-free at
1-888-422-7832.
<PAGE> 9
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------------- --------------------
Commission file number: 333-34983
---------
CAPTEC NET LEASE REALTY, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 38-3368333
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
</TABLE>
24 Frank Lloyd Wright Drive, Ann Arbor, Michigan 48106
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(313) 994-5505
--------------
(Registrant's telephone number)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes No X
------- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of each of the registrant's classes of common
equity, as of December 19, 1997 (the latest practicable date).
<TABLE>
<S> <C> <C>
Common Stock, $.01 par value 9,508,108
- ---------------------------- ---------
(Class) (Number of shares)
</TABLE>
Total number of pages: 19
<PAGE> 10
CAPTEC NET LEASE REALTY, INC.
CONTENTS
<TABLE>
<CAPTION>
ITEM NO. PAGE
<S> <C>
PART I FINANCIAL INFORMATION
1 Financial Statements:
Balance Sheet 3
Statement of Operations 4
Statement of Changes in Stockholders' Equity 5
Statement of Cash Flows 6
Notes to Financial Statements 7 - 12
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 17
PART II OTHER INFORMATION
Other Information 18
</TABLE>
2
<PAGE> 11
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 753,937 $ 3,862,159
Investments:
Properties subject to operating leases, net 109,373,946 70,175,031
Loans to Affiliates, collateralized by mortgage loans 12,143,038 9,101,714
Impaired mortgage loans 788,479 4,066,168
Other loans 725,223 788,512
Other loans, related party 421,920 421,920
Financing leases, net 1,240,991 1,181,900
General partner interests - -
-------------- -------------
Total investments 124,693,597 85,735,245
Short-term loans to Affiliates 5,636,901 6,637,537
Unbilled rent 1,815,720 622,354
Accounts receivable 466,581 135,451
Due from Affiliates - 269,780
Other assets 1,057,453 1,351,954
-------------- -------------
Total assets $ 134,424,189 $ 98,614,480
-------------- -------------
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 78,439,040 $ 48,160,231
Accounts payable 752,794 375,544
Due to Affiliates 381,272 -
Federal income tax payable 435,000 268,000
Deferred income tax 284,000 284,000
Security deposits held on leases 141,892 126,769
-------------- -------------
Total liabilities 80,433,998 49,214,544
-------------- -------------
Redeemable preferred stock (mandatory redemption amount
of $59,885,984 and $56,651,395) 48,828,191 49,398,936
-------------- -------------
Stockholders' Equity:
Common stock; authorized: 40,000,000 shares; issued
and outstanding: 980,330 9,803 1,000
Paid in capital 5,152,197 -
-------------- -------------
Total stockholders' equity 5,162,000 1,000
-------------- -------------
Total liabilities & stockholders' equity $ 134,424,189 $ 98,614,480
-------------- -------------
</TABLE>
3
<PAGE> 12
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Rental income $ 2,978,121 $ 1,391,826 $ 7,974,798 $ 3,003,920
Interest income on loans to Affiliates 179,130 392,949 522,745 1,297,506
Interest income on investments 97,424 - 339,079 -
Interest income on short-term loans to Affiliates 113,615 72,138 360,587 228,110
Other 84,617 7,018 81,170 14,176
------------- ----------- ------------ ------------
Total revenue 3,452,907 1,863,931 9,278,379 4,543,712
------------- ----------- ------------ ------------
Expenses:
Interest 1,712,025 583,423 4,419,226 1,006,539
Management fees, Affiliates 523,288 273,852 1,347,086 672,577
General and administrative 213,841 130,411 464,769 242,904
Depreciation and amortization 398,394 148,444 1,076,043 411,185
------------- ----------- ------------ ------------
Total expenses 2,847,548 1,136,130 7,307,124 2,333,205
------------- ----------- ------------ ------------
Income before income tax 605,359 727,801 1,971,255 2,210,507
Provision for income tax 206,000 (188,000) 167,000 184,000
------------- ----------- ------------ ------------
Net income 399,359 915,801 1,804,255 2,026,507
Redeemable Preferred Stock dividend requirements:
Paid dividends - 1,050,000 2,375,000 2,675,000
Accrued dividends 1,875,000 825,000 3,250,000 2,950,000
------------- ----------- ------------ ------------
Loss attributable to Common Stock $ (1,475,641) $ (959,199) $ (3,820,745) $ (3,598,493)
============= =========== ============ ============
Loss per common share $ (1.51) $ (0.98) $ (3.90) $ (3.67)
============= =========== ============ ============
Weighted average number of common shares
outstanding 980,330 980,330 980,330 980,330
============= =========== ============ ============
</TABLE>
4
<PAGE> 13
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
----- ------- -------- ------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ 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 3,186 5,157,814 - 5,161,000
Adjustment to reflect $.01 per share par value of
Advisors Michigan historical shares 5,617 (5,617) - -
---------- ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1997 $ 9,803 $ 5,152,197 $ - $ 5,162,000
---------- ------------ ------------ ------------
</TABLE>
5
<PAGE> 14
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,804,255 $ 2,026,507
Adjustments to net income:
Depreciation and amortization 1,076,043 411,185
Amortization of debt issuance costs 393,750 306,250
Loss (gain) on sale of leased equipment 58,688 (7,018)
Increase in unbilled rent (1,193,366) (333,174)
(Decrease) increase in receivables and other assets (288,099) (2,089,952)
Increase in payables 925,522 489,734
----------- -----------
Net cash provided by operating activities 2,776,793 803,532
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties (32,157,979) (47,204,887)
Advances on loans to Affiliates, collateralized by
mortgage loans (6,959,526) (9,965,115)
Acquisition of other loans - (800,000)
Acquisition of financing leases (370,165) (405,619)
Advances on short-term loans to Affiliates (4,383,416) (2,350,861)
Collections on short-term loans to Affiliates 5,384,052 1,932,170
Proceeds from the sale of leased equipment 704,723 830,000
Collections on loans to Affiliates, collateralized by
mortgage loans 3,918,202 13,932,438
Collection of principal on other loans 63,289 2,614
Collection of principal on financing leases (3,127) -
Change in lease security deposits 15,123 38,775
----------- -----------
Net cash used in investing activities (33,788,824) (43,990,485)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Redeemable Preferred Stock - 10,000,000
Proceeds from the issuance of notes payable 30,342,875 36,137,525
Organization and offering costs - (600,000)
Debt issuance costs - (1,050,000)
Principal payments of notes payable (64,066) (25,864)
Dividends paid on Redeemable Preferred Stock (2,375,000) (2,675,000)
----------- -----------
Net cash provided by financing activities 27,903,809 41,786,661
----------- -----------
NET CASH FLOWS (3,108,222) (1,400,292)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,862,159 1,969,196
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 753,937 $ 568,904
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,837,033 $ 518,220
============ ===========
Cash paid for taxes $ - $ -
============ ===========
Non-cash transfers: From impaired mortgage loans to
properties subject to operating leases $ 3,277,689 $ -
============ ===========
</TABLE>
6
<PAGE> 15
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:
a. MERGER: Captec Net Lease Realty, Inc., a Michigan corporation,
("Net Lease Michigan") was formed in October 1994 for the purpose of
investing in restaurant and retail real estate and commenced operations
in February 1995. Captec Net Lease Realty Advisors, Inc., a Michigan
corporation, ("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. In connection with an
initial public offering of common stock (which was completed in November
1997), Captec Net Lease Realty, Inc., a Delaware corporation, ("Captec"
or the "Company") was formed in August 1997 and Net Lease Michigan and
Advisors Michigan were merged into the Company effective September 30,
1997 in exchange for 1,315,440 shares of Common Stock and 50,000 shares
of Redeemable Preferred Stock. In October 1997, a reverse split of
.745249 shares for each share of Common Stock was effected, resulting in
980,330 shares outstanding. The accompanying balance sheet as of
September 30, 1997 accounts for the merger as a purchase of Net Lease
Michigan by Advisors Michigan in accordance with Accounting Principles
Board Opinion No. 16. Accordingly, the cost of the acquisition was
$5,161,000 (318,607 split adjusted shares issued to the shareholders of
Advisors Michigan at an assumed fair value of $16.20) and the assets
acquired and liabilities assumed of Net Lease Michigan were recorded at
their estimated fair values (resulting in an increase to historical
recorded value of properties subject to operating leases of $5,161,000).
The 661,723 split adjusted shares issued to Advisors Michigan, as
purchaser, were recorded at historical cost of $1,000. In addition, as
the principal business activities of the continuing Company consist of
the activities performed by Net Lease Michigan, Net Lease Michigan is
deemed to be the "predecessor" company for financial reporting purposes
and the accompanying balance sheet as of December 31, 1996 and the
statements of operations and cash for the periods ended September 30,
1997 and 1996 are of Net Lease Michigan. All intercompany transactions
between Net Lease Michigan and Advisors Michigan were eliminated in these
financial statements.
b. UNAUDITED INTERIM FINANCIAL INFORMATION: The balance sheet as of
September 30, 1997 and the statements of operations and cash flows for
the periods ended September 30, 1997 and 1996 have not been audited. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been reflected herein. Results of operations for the interim periods are
not necessarily indicative of results expected for the full year.
2. PROPERTIES SUBJECT TO OPERATING LEASES:
The Company's real estate portfolio is leased to tenants under long-term
net operating leases. The lease agreements generally provide for monthly
rents based upon a percentage of the property's cost. The initial term
of the leases typically ranges from 15 to 20 years, although the Company
in certain cases will enter into leases with terms that are shorter or
longer. Most leases also provide for one or more five year renewal
options. In addition, certain leases provide the tenant one or more
options to purchase the properties
7
<PAGE> 16
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
from the Company at a predetermined price, generally only during stated
window periods during the fifth to seventh lease years.
The Company's investment in real estate includes capitalized acquisition
and interest costs, 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 as of September 30, 1997 is
comprised of the following:
<TABLE>
<S> <C>
Land $ 41,577,795
Buildings and improvements 64,516,288
Construction draws on properties 4,844,635
----------------
110,938,718
Less accumulated depreciation ( 1,564,772)
----------------
Total $ 109,373,946
================
</TABLE>
The Company periodically invests in properties under construction. All
construction draws are subject to the terms of a standard lease agreement
with the Company which fully obligates the tenant to the long-term lease
for all amounts advanced under construction draws.
3. NOTES PAYABLE:
In February 1996, the Company entered into a $100 million revolving
credit agreement, which is used to provide funds for the acquisition of
properties. Borrowings under the credit facility are collateralized by a
first mortgage on the properties financed. The credit facility agreement
requires monthly installments of interest only at LIBOR plus 2.318
percent. The credit facility expires on February 1998, at which time the
Company may elect to extend the facility for one additional year, subject
to the payment of an extension fee equal to 0.5 percent of the loan
facility amount. In addition, the agreement provided for a commitment
fee and closing expenses totaling $1,050,000, which were paid in February
1996 and capitalized in other assets. These capitalized fees and
expenses are being amortized and treated as interest expense on a
straight-line basis over the initial term of the facility. The credit
facility agreement contains covenants which, among other restrictions,
require the Company to maintain a capitalization, as defined in the
agreement, of $40 million, liquid assets equal to the greater of $2
million or 5% of the outstanding borrowings under the credit facility,
and a loan-to-value ratio of not more than 75% on the properties financed
under the credit facility.
In June 1997, the credit facility was increased to $150 million. Amounts
borrowed under the credit facility totaled $76,207,975 as of September
30, 1997.
8
<PAGE> 17
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Company has a note payable to a financial institution with a
principal balance of $1,524,176 as of September 30, 1997. This note
bears interest at a fixed rate of 9.85 percent per annum and is payable
in equal monthly installments of $15,813, with a balloon payments for all
remaining principal, approximately $1,350,000, due in June 2001. This
note is collateralized by a first mortgage on one property.
The Company has a note payable to a financial institution with a
principal balance of $706,889 as of September 30, 1996. This note bears
interest at a fixed rate of 10.35 percent per annum and is payable in
equal monthly installments of $10,221, with a balloon payment for all
remaining principal, approximately $603,000, due in October 1999. This
note is collateralized by a first mortgage on two properties.
4. INCOME TAX:
The components of the provision for income tax for the nine months ended
September 30, 1997 are as follows:
<TABLE>
<S> <C>
Current $ 167,000
Deferred -
---------------
$ 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 for the nine months ended September 30, 1997
is summarized as follows:
<TABLE>
<S> <C>
Federal income taxes at statutory rates $ 670,227
Preferred stock dividends deducted as interest expense ( 503,227)
---------------
$ 167,000
===============
</TABLE>
The provision for income taxes does not bear the usual relationship to
pretax income for the nine months ended September 30, 1997 principally
as a result of the treatment of dividends paid on the Redeemable
Preferred Stock as deductible for interest expense for income tax
purposes. If deduction for interest is challenged by the Internal
Revenue Service, the Company could be assessed and ultimately required to
pay income and withholding taxes aggregating up to approximately
$3,400,000 for deductions taken through September 30, 1997. The Company
has provided an allowance, consisting of currently payable taxes and a
valuation allowance on deferred taxes, of approximately $875,000 through
September 30, 1997 to reflect its estimate of the minimum settlement of
this matter, should a claim be asserted by the Internal Revenue Service.
There is no assurance that if any claim is asserted, it could be settled
for the amounts provided as of September 30, 1997 or any amount less than
the aggregate amounts.
9
<PAGE> 18
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. PRO FORMA FINANCIAL STATEMENTS:
The following pro forma balance sheet as of September 30, 1997 and pro
forma statements of operations for the periods ended September 30, 1997
and 1996 have been prepared to reflect the transactions and adjustments
related to the Company's initial public offering (the "Offering"), which
transactions and adjustments are described in detail in the pro forma
financial statements contained in the Prospectus dated November 13, 1997.
The pro forma financial information is based on the historical financial
statements contained herein and should be read in conjunction with those
financial statements and the other notes thereto. The pro forma balance
sheet was prepared as if transactions related to the Offering and the
application of proceeds therefrom occurred on September 30, 1997. The
pro forma statements of operations were prepared as if transactions
related to the Offering and the application of proceeds therefrom
occurred on January 1, 1996. The pro forma financial information is not
audited and is not necessarily indicative of the results which actually
would have occurred if the transactions had been consummated on the dates
described, nor does it purport to represent the Company's future
financial position or results of operations.
10
<PAGE> 19
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
------
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 753,937 $ 3,779,976 $ 4,533,913
Investments:
Properties subject to operating leases, net 109,373,946 - 109,373,946
Loans to Affiliates, collateralized by mortgage loans 12,143,038 - 12,143,038
Impaired mortgage loans 788,479 - 788,479
Other loans 725,223 - 725,223
Other loans, related party 421,920 - 421,920
Financing leases, net 1,240,991 - 1,240,991
General partner interests - 3,315,000 3,315,000
--------------- ------------- -------------
Total investments 124,693,597 3,315,000 128,008,597
Short-term loans to Affiliates 5,636,901 (3,000,000) 2,636,901
Unbilled rent 1,815,720 - 1,815,720
Accounts receivable 466,581 - 466,581
Other assets 1,057,453 - 1,057,453
--------------- ------------- -------------
Total assets $ 134,424,189 $ 4,094,976 $ 138,519,165
-------------- ------------- -------------
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 78,439,040 $(78,439,040) $ -
Accounts payable 752,794 - 752,794
Due to Affiliates 381,272 - 381,272
Federal income tax payable 435,000 284,000 719,000
Deferred income tax 284,000 (284,000) -
Security deposits held on leases 141,892 - 141,892
--------------- ------------- -------------
Total liabilities 80,433,998 (78,439,040) 1,994,958
--------------- ------------- -------------
Redeemable preferred stock (mandatory redemption amount
of $59,885,984) 48,828,191 (48,828,191) -
--------------- ------------- -------------
Stockholders' Equity:
Common stock, $.01 par value; authorized: 40,000,000
shares; issued and outstanding: 9,508,108 9,803 85,278 95,081
Paid in capital 5,152,197 131,276,929 136,429,126
--------------- ------------- -------------
Total stockholders' equity 5,162,000 82,534,016 136,524,207
--------------- ------------- -------------
Total liabilities & stockholders' equity $ 134,424,189 $ 4,094,976 $ 138,519,165
-------------- ------------- -------------
</TABLE>
Pro Forma information reported above is presented in accordance with the
methods utilized in the pro forma financial statements included in the
Company's Prospectus dated November 13, 1997, as discussed in the footnotes
thereto.
11
<PAGE> 20
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
------
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Rental income $ 2,978,121 $ 1,391,826 $ 7,974,798 $ 3,003,920
Interest income on loans to Affiliates 179,130 392,949 522,745 1,297,506
Interest income on investments 97,424 - 339,079 -
Interest income on short-term loans to Affiliates 113,615 72,138 360,587 228,110
Other 237,617 140,018 385,170 348,176
----------- ----------- ----------- -----------
Total revenue 3,605,907 1,996,931 9,582,379 4,877,712
----------- ----------- ----------- -----------
Expenses:
Interest - - - -
Management fees, Affiliates 172,000 82,000 450,000 202,000
General and administrative 278,841 279,811 838,444 838,904
Depreciation and amortization 430,394 180,444 1,172,043 507,185
----------- ----------- ----------- -----------
Total expenses 881,235 542,255 2,460,487 1,548,089
----------- ----------- ----------- -----------
Net income $ 2,724,672 $ 1,454,676 $ 7,121,892 $ 3,329,623
----------- ----------- ----------- -----------
Net Income per share $ 0.29 $ 0.15 $ 0.75 $ 0.35
----------- ----------- ----------- -----------
Depreciation and amortization 430,394 180,444 1,172,043 507,185
----------- ----------- ----------- -----------
FFO $ 3,155,066 $ 1,635,120 $ 8,293,935 $ 3,836,808
----------- ----------- ----------- -----------
FFO per share $ 0.33 $ 0.17 $ 0.87 $ 0.40
----------- ----------- ----------- -----------
Net effect of straight-line rents 395,765 154,645 1,193,366 333,174
----------- ----------- ----------- -----------
FAD $ 2,759,301 $ 1,480,475 $ 7,100,569 $ 3,503,634
----------- ----------- ----------- -----------
FAD per share $ 0.29 $ 0.16 $ 0.75 $ 0.37
----------- ----------- ----------- -----------
Weighted average shares outstanding 9,508,108 9,508,108 9,508,108 9,508,108
----------- ----------- ----------- -----------
</TABLE>
Pro Forma information reported above is presented in accordance with the methods
utilized in the pro forma financial statements included in the Company's
Prospectus dated November 13, 1997, as discussed in the footnotes thereto.
12
<PAGE> 21
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Captec Net Lease Realty, Inc. ("Captec" or the "Company") acquires, develops
and owns freestanding properties which are leased on a long-term triple-net
basis to operators of national and regional chain restaurants and retailers.
Triple-net leases generally impose on the lessee all of the obligations of
repairs, maintenance, real property taxes, assessments, utilities and
insurance. The Company's leases typically provide for minimum rent plus
specified fixed periodic rent increases or, in certain limited circumstances,
indexation to CPI and/or percentage rent. As of September 30, 1997, Captec
owned 83 properties, located in 26 states, subject to long-term net leases with
39 different tenants operating 26 restaurant and retail concepts. The Company
completed an initial public offering (the "Offering") of 8,000,000 shares of
its common stock in November 1997. In conjunction with the Offering, the
Company intends to qualify as a real estate investment trust ("REIT").
The following discussions should be read in conjunction with the historical and
pro forma financial statements appearing elsewhere in this report. The
historical financial data include certain interest, general and administrative
and income tax expenses which will not be incurred by the Company after the
Offering which are excluded from the pro forma financial data. Conversely, the
historical financial data does not include certain revenues from two affiliated
partnerships (the "Affiliated Partnerships") which are being purchased by the
Company in conjunction with the Offering which are included in the pro forma
financial data.
HISTORICAL RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997. During the three months ended September
30, 1997 (the "Quarter"), total revenue increased 85% to $3.4 million as
compared to $1.9 million for the comparable quarter of 1996 (the "1996
Quarter"). Rental revenue increased 114% to $3.0 million for the Quarter as
compared to $1.4 million for the 1996 Quarter. The increase in rental revenue
resulted principally from the acquisition of 25 net leased properties and the
benefit of a full period of rental revenue from properties acquired and leased
in preceding periods. Interest income on investments, including interest
income on loans to Affiliates, decreased by 16% to $390,000 for the Quarter as
compared to $465,000 for the 1996 Quarter, as the Company's other investments
and short-term loans declined.
Interest expense increased by 193% to $1.7 million for the Quarter as compared
to $583,000 for the 1996 Quarter. The increase was primarily due to interest
on $41.5 million of additional debt used to fund the acquisition of properties
which was incurred during the twelve months ended September 30, 1997, as well
as a full period of interest on debt incurred in prior periods. General and
administrative expenses, including management fees to Affiliates, increased 82%
to $737,000 for the Quarter as compared to $404,000 for the 1996 Quarter,
primarily due to an increase in management fees paid to Affiliates.
Depreciation and amortization increased 169% to $398,000 for the Quarter as
compared to $148,000 for the 1996 Quarter, primarily due to the
13
<PAGE> 22
continued acquisition of net leased properties and the effect of a full period
of depreciation of properties acquired and leased in the preceding periods.
Since the Company has not historically been a REIT, a provision for income tax
has been recorded. The provision for income tax does not bear the usual
relationship to pretax income as a result of the treatment of dividends paid on
the redeemable preferred stock as deductible interest expense for tax purposes.
See Note 4 to the Financial Statements. The provision for income tax for the
Quarter reflects an expense of $206,000 as compared with a credit of $188,000
for the 1996 Quarter.
As a result of the foregoing, the Company's net income before income tax
declined 17% to $605,000 for the Quarter as compared to $728,000 for the 1996
Quarter. Most notably, the Company's high level of borrowings prior to the
Offering and the higher management fee structure, prior to the application of
the new advisory fee agreements which took effect after the end of the Quarter,
exceeded the increases in revenues. Similarly, the Company's net income prior
to preferred stock dividend requirements declined 56% to $399,000 for the
Quarter as compared to $916,000 for the 1996 Quarter, as further impacted by
the provision for income tax.
NINE MONTHS ENDED SEPTEMBER 30, 1997. During the nine months ended September
30, 1997 ("1997"), total revenue increased 104% to $9.3 million as compared to
$4.5 million for the comparable nine month period of 1996 ("1996"). Rental
revenue increased 166% to $8.0 million for 1997 as compared to $3.0 million for
1996. The increase in rental revenue resulted principally from the acquisition
of 25 net leased properties and the benefit of a full period of rental revenue
from properties acquired and leased in preceding periods. Interest income on
investments, including interest income on loans to Affiliates, decreased by 20%
to $1.2 million for 1997 as compared to $1.5 million for 1996, as the Company's
other investments and short-term loans declined.
Interest expense increased by 339% to $4.4 million for 1997 as compared to $1.0
million for 1996. The increase was primarily due to interest on $41.5 million
of additional debt used to fund the acquisition of properties which was
incurred during the twelve months ended September 30, 1997, as well as a full
period of interest on debt incurred in prior periods. General and
administrative expenses, including management fees to Affiliates, increased 98%
to $1.8 million for 1997 as compared to $915,000 for 1996, primarily due to an
increase in management fees paid to Affiliates. Depreciation and amortization
increased 162% to $1.1 million for 1997 as compared to $411,000 for 1996,
primarily due to the continued acquisition of net leased properties and the
effect of a full period of depreciation of properties acquired and leased in
the preceding periods. The provision for income tax decreased by 9% to
$167,000 for 1997 as compared to $184,000 for 1996, as a result in the decrease
in income before income tax.
As a result of the foregoing, the Company's net income before income tax
declined 11% to $2.0 million for 1997 as compared to $2.2 million for 1996, and
net income prior to preferred stock dividend requirements declined 11% to $1.8
million for 1997 as compared to $2.0 million for 1996.
14
<PAGE> 23
PRO FORMA RESULTS OF OPERATIONS
Pro forma net income was $2.7 million for the Quarter, compared to $1.5 million
for the 1996 Quarter, or an increase of 87%. Pro forma net income was $7.1
million for 1997, compared to $3.3 million for 1996, or an increase of 114%.
Pro forma revenue increased by $153,000 and $304,000 for the Quarter and for
1997, respectively, as a result of the inclusion of revenues from the
Affiliated Partnerships. Pro forma expenses declined by $2.0 million and $4.8
million for the Quarter and for 1997, respectively, as a result of: (i) the
elimination of interest expense based on repayment of the entire outstanding
balance of the notes payable; (ii) a reduction in management fees to conform
with the terms of the new advisory agreement negotiated in conjunction with the
Offering; and (iii) elimination of the provision for income tax based upon the
intent of the Company to qualify as a REIT, the aggregate effects of which were
offset in part by an increase in general and administrative expenses to reflect
the commencement of salaries and benefits and other incremental costs related
to operating as a public REIT and an increase in depreciation expense to
reflect the increase in recorded values of properties subject to operating
leases. The pro forma adjustments were assumed to have occurred on January 1,
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal use of funds is for property development and
acquisition, payment of interest on its outstanding indebtedness, and payment
of operating expenses and dividends. Historically, interest expense, operating
expenses and dividends have been paid out of cash flows from operations.
Property acquisitions have typically been funded out of proceeds from equity
offerings and its credit facility. The Company expects to meet its long-term
liquidity requirements (principally property development and acquisition and
scheduled debt maturities) through a variety of future sources of capital,
including long-term secured and unsecured indebtedness and the issuance of
additional equity or debt securities.
The Company's leases generally provide for specified periodic rent increases
including fixed increase amounts, and in limited circumstances indexation to
CPI and/or percentage rent. In addition, most of the Company's leases require
the lessee to pay all operating costs and expenses including repairs,
maintenance, real property taxes, assessments, utilities and insurance, thereby
substantially reducing the Company's exposure to increases in costs and
operating expenses. Based upon these factors, the Company does not anticipate
significant capital demands related to the management of its properties.
At September 30, 1997, the Company had cash and cash equivalents of $754,000
and $73.8 million available on its credit facility. Furthermore, on a pro
forma basis cash and cash equivalents increased to $4.5 million and the entire
$150 million was available on its credit facility. For the nine month period
ended September 30, 1997, the Company generated cash from operations of $2.8
million as compared to $804,000 in 1996. Cash generated from operations
provides funds for distributions to shareholders in the form of quarterly
dividends. Any excess cash from operations may also be used for investment in
properties.
INITIAL PUBLIC OFFERING. At September 30, 1997, the Company was in
registration for the Offering, which was subsequently completed on November 14,
1997. In the Offering the Company sold 8 million common shares at a price of
$18 per share. Net proceeds from the offering totaled $132.9 million, after
underwriting commissions and offering expenses. The Company has used the net
proceeds of the Offering to repay $80.1 million of its existing notes
15
<PAGE> 24
payable and to redeem $40.5 million of the redeemable preferred stock and pay
$10.9 million of accrued dividends thereon. The remaining $9.5 million of
redeemable preferred stock was exchanged for 527,778 shares of common stock.
CREDIT FACILITY. At September 30, 1997, on a pro forma basis assuming
completion of the Offering, the Company had no debt outstanding. After
completion of the Offering, the Company had outstanding $17.7 million of
borrowings under its $150.0 million credit facility. The Company expects that
the credit facility will primarily be used to acquire properties, although up
to $5.0 million may be borrowed to make dividend payments. The credit facility
is secured by a first lien on properties and other assets financed thereunder.
Upon completion of the Offering, the interest rate on the credit facility was
reduced from LIBOR plus 2.32% to LIBOR plus 1.75%. Furthermore, the Company
was granted the right to extend the expiration date of the credit facility from
February 26, 1998 to November 1999. During the term of the credit facility,
the Company is required to make monthly payments of interest only, and the
credit facility may be prepaid without premium or penalty at any time provided
that certain conditions of the credit facility are met. The Company may also
be required to make principal payments in order to maintain certain ratios
between the Company's aggregate indebtedness under the credit facility and the
value of the collateral pledged as security for the credit facility. The
credit facility imposes certain limitations upon the Company's ability to incur
additional financing.
The credit facility will expire in November 1999 (assuming extension of the
expiration date as described above), at which time the entire outstanding
balance of the credit facility will mature. At that time, the Company expects
to refinance such debt either through additional debt financings secured by
individual properties or groups of properties, by unsecured private or public
debt offerings or by additional equity offerings.
PROPERTY ACQUISITIONS AND COMMITMENTS. During the Quarter, the Company
acquired $8.5 million of completed properties and the balance of investments in
properties under construction declined $2.2 million, resulting in a net
increase in investments in properties of $6.3 million. For 1997 the Company
acquired $36.3 million of completed properties and the balance of investments
in properties under construction declined $1.2 million, resulting in a net
increase in investments in properties of $35.1 million.
As of September 30, 1997 the Company had entered into commitments to acquire 68
properties totaling $100 million. The commitments are subject to various
conditions to closing which are described in the contracts or letters of intent
relating to these properties. On a pro forma basis, the Company had
availability under its credit facility to meet the entire funding obligation
under these commitments.
In addition, in the ordinary course of business the Company is in negotiations
regarding the proposed acquisition of other properties and related
co-development opportunities. The Company may enter into commitments to
acquire some of these prospective properties in the future. Property
acquisition commitments arising out of these negotiations are expected to
generate the primary demand for additional capital in the future.
DIVIDENDS. The Company has historically paid quarterly dividends on its
redeemable preferred stock. In anticipation of the Offering, the Company did
not make any preferred stock dividend payments during the Quarter. After
payment of the accrued preferred stock dividends and the redemption and
exchange of the Company's outstanding redeemable preferred stock
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out of the proceeds of the Offering, the Company's preferred stock dividend
requirement has been eliminated.
Subsequent to the completion of the Offering, the Company intends to
pay a regular quarterly dividend on its common stock of $.375 per share (which
if annualized would be $1.50 per share). The first quarterly dividend will be
paid with respect to the quarter ended December 31, 1997, which dividend will
be paid on a pro rata basis for that portion of the quarter in which the common
shares have been outstanding. The Company expects to pay these dividends from
cash available for distributions, which the Company believes will exceed
historical cash available for distributions due to the reduction in debt
service and preferred stock dividend requirements, the decrease in advisory fee
rates and other factors indicated in the pro forma results of operations, as
well as the anticipated growth of the portfolio of net leased properties. The
Company believes that cash from operations will be sufficient to allow the
Company to make distributions necessary to enable the Company to continue to
qualify as a REIT.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 27.1 Financial Data Schedule.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPTEC NET LEASE REALTY, INC.
December 29, 1997 By: /w/ Patrick L. Beach
--------------------------------------
Patrick L. Beach
Chief Executive Officer and President
December 29, 1997 By: /w/ W. Ross Martin
--------------------------------------
W. Ross Martin
Chief Financial Officer and
Executive Vice President
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