1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 1045281
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CAPTEC NET LEASE REALTY, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
38-3368333
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(IRS Employer Identification Number)
24 Frank Lloyd Wright Drive, Ann Arbor, Michigan 48106
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(Address of principal executive offices,
including zip code)
(734) 994-5505
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(Registrant's telephone number)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the registrant's classes of common equity, as of the
latest practicable date.
9,508,108 shares of Common Stock, $.01 par value, outstanding as of
August 14, 2000.
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CAPTEC NET LEASE REALTY, INC.
AND SUBSIDIARIES
CONTENTS
ITEM NO. PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Report on Form 8-K 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2000 1999
---- ----
ASSETS (unaudited)
Cash and cash equivalents $ 970,322 $ 1,035,607
Investments:
Properties subject to operating leases, net 207,318,918 217,615,654
Properties subject to financing leases, net 4,475,703 4,407,195
Loans to affiliates, collateralized by mortgage loans 7,665,805 10,979,804
Investment in joint venture 7,239,371 7,305,894
Investment in affiliated limited partnerships, net 4,200,484 4,251,568
Other loans, related party 382,351 390,520
------------ ------------
Total investments 231,282,632 244,950,635
Short-term loans to affiliates 3,664,634 398,471
Unbilled rent, net 7,184,966 6,027,221
Accounts receivable 591,389 491,052
Due from affiliates 816,665 1,326,307
Other assets 1,862,068 1,292,399
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Total assets $246,372,676 $255,521,692
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $106,480,027 $116,921,555
Accounts payable and accrued expenses 3,352,334 2,672,529
Federal income tax payable -- 719,000
Security deposits held on leases 262,861 272,943
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Total liabilities 110,095,222 120,586,027
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Stockholders' Equity:
Common stock, ($.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 1,471,317 129,528
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Total stockholders' equity 136,277,454 134,935,665
------------ ------------
Total liabilities and stockholders' equity $246,372,676 $255,521,692
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenue:
Rental income from operating leases $ 6,066,499 $ 6,214,835 $ 12,205,248 $ 12,219,913
Earned income from financing leases 154,658 163,339 311,507 315,546
Interest income on loans to affiliates 315,033 311,016 631,094 630,371
Other income, principally affiliated ventures 507,499 359,337 1,527,204 918,328
------------ ------------ ------------ ------------
Total revenue 7,043,689 7,048,527 14,675,053 14,084,158
------------ ------------ ------------ ------------
Expenses:
Interest 2,567,252 2,243,787 5,113,444 4,483,667
Management fees, affiliates, net - (7,515) - (75,528)
General and administrative 388,268 294,130 730,864 725,035
Depreciation and amortization 867,545 848,666 1,732,513 1,682,075
Non-recurring merger costs - - 1,143,000 -
------------ ------------ ------------ ------------
Total expenses 3,823,065 3,379,068 8,719,821 6,815,249
------------ ------------ ------------ ------------
Income before equity in joint venture,
gain/(loss) on sale of properties, other
non-recurring and accounting change 3,220,624 3,669,459 5,955,232 7,268,909
Equity in net income of joint venture 144,535 - 295,077 -
Gain/(loss) on sale of properties 985,574 (10,446) 1,611,221 (61,419)
Other non-recurring 706,421 - 706,421 -
------------ ------------ ------------ ------------
Income before accounting change 5,057,154 3,659,013 8,567,951 7,207,490
Cummulative effect of accounting change - - - (336,875)
------------ ------------ ------------ ------------
Net Income $ 5,057,154 $ 3,659,013 $ 8,567,951 $ 6,870,615
============ ============ ============ ============
Basic and Diluted EPS:
Income before accounting change $ 0.53 $ 0.38 $ 0.90 $ 0.76
============ ============ ============ ============
Accounting change $ - $ - $ - $ (0.04)
============ ============ ============ ============
Net Income 0.53 $ 0.38 $ 0.90 $ 0.72
============ ============ ============ ============
Weighted average number of common shares
outstanding 9,508,108 9,508,108 9,508,108 9,508,108
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(unaudited)
Common Stock Total
----------------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
------ ------ ------- -------- ------
BALANCE, JANUARY 1, 2000 9,508,108 $ 95,081 $ 134,711,056 $ 129,528 $ 134,935,665
Net Income - - - 8,567,951 8,567,951
Common stock dividends ($0.38 per share) - - - (7,226,162) (7,226,162)
--------- ------------- ------------- ------------- -------------
BALANCE, JUNE 30, 2000 9,508,108 $ 95,081 $ 134,711,056 $ 1,471,317 $ 136,277,454
========= ============= ============= ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
----------------------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,567,951 $ 6,870,615
Adjustments to net income:
Depreciation and amortization 1,732,513 1,682,075
Accounting change - 336,875
Amortization of debt issuance costs 509,193 295,977
Equity in net income of joint venture (295,077) -
(Gain)/loss on sale of property (1,640,470) 61,419
Increase in unbilled rent (1,157,745) (1,303,463)
Increase in accounts receivable and other assets (681,201) (178,763)
Decrease in accounts payable and accrued expenses (39,195) (964,532)
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Net cash provided by operating activities 6,995,969 6,800,203
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties subject to operating leases (6,187,101) (6,219,165)
Acquisition of properties subject to financing leases - (1,153,037)
Advances on short-term loans to affiliates, net (3,266,163) (4,448,935)
Proceeds from the transfer of properties to
joint venture 3,385,972
Proceeds from the disposition of properties 16,454,522 2,936,896
Collections on loans to affiliates, collateralized by
mortgage loans 3,313,999 4,448,935
Collection of principal on other loans 8,169 7,453
Investment in joint venture (2,712,000)
Proceeds from joint venture distribution 361,600 -
Collection of principal on financing leases (68,508) -
Lease security deposits (10,082) 86,500
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Net cash provided by (used in) investing activities 10,606,436 (3,667,381)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock (7,226,162) (7,178,621)
Borrowings of notes payable 4,500,000 565,594
Repayments of notes payable (14,941,528) -
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Net cash used in financing activities (17,667,690) (6,613,027)
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NET CASH FLOWS (65,285) (3,480,205)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,035,607 4,488,565
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 970,322 $ 1,008,360
============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 4,894,568 $ 4,848,712
============== =============
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION: The Company, which has operated as a REIT since November
1997, acquires, develops and owns freestanding properties which are
leased on a long-term triple-net basis to operators of national and
regional chain restaurants and national retailers. Triple-net leases
generally impose on the lessee responsibility for all operating costs
and expense of the property, including the costs of repairs,
maintenance, real property taxes, assessments, utilities and insurance.
The Company's leases typically provide for minimum rent plus specified
fixed periodic rent increases.
OTHER INFORMATION: On December 20, 1999 the Company executed an Omnibus
Agreement and Plan of Merger by and among the Company, Captec
Acquisition, Inc., a wholly-owned subsidiary of the Company, Captec
Financial Group, Inc., and Captec Advisors. The merger agreement
provided for the merger of Captec Acquisition with and into Financial
Group and of Captec Advisors with and into the Company. On May 1, 2000
the merger agreement was terminated by the mutual agreement of the
parties thereto.
UNAUDITED INTERIM FINANCIAL INFORMATION: The consolidated balance sheet
as of June 30, 2000 and the consolidated statements of operations,
stockholders' equity and cash flows for the three and six months ended
June 30, 2000 and 1999 have not been audited. In the opinion of
management, all adjustments (including normal recurring adjustments)
considered necessary for a fair presentation have been reflected
therein. Results of operations for the interim periods are not
necessarily indicative of results for the full year. These unaudited
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 filed with the United
States Securities and Exchange Commission on March 30, 2000.
NEW PRONOUNCEMENTS: In June 1998 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
is effective for the first quarter of the first fiscal year beginning
after June 15, 2000 (January 1, 2001 for the Company). The statement
requires that all derivative instruments be recorded at fair value on
the balance sheet with changes in fair value recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Management of the Company has not yet
determined the impact that the adoption of the statement will have on
its earnings or statement of financial position.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." This statement requires start-up activities and
organization costs to be expensed as incurred. In accordance with the
provisions of the statement, the Company has recorded a $336,875
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 2000 presentations.
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTIES SUBJECT TO OPERATING LEASES:
Properties subject to operating leased represent various properties
leases to tenants under long-term net operating leases. The lease
agreements generally provide for monthly rents based upon a percentage
of the property's cost. The initial term of the leases typically ranges
from 15 to 20 years, although the Company in certain cases will enter
into leases with terms that are shorter or longer. Most leases also
provide for one or more five year renewal options. In addition, certain
leases provide the tenant one or more options to purchase the
properties at a predetermined price, generally only during stated
periods during the fifth to seventh lease years.
The Company's investment in properties subject to operating leases
includes capitalized acquisition and interest costs which have been
allocated between land and buildings and improvements on a pro rata
basis. The net investment in properties subject to operating leases is
comprised of the following as of:
June 30, December 31,
2000 1999
---- ----
Land $ 82,933,181 $ 83,344,971
Buildings and improvements 130,845,047 131,211,643
Construction draws on properties 2,317,390 10,653,762
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216,095,618 225,210,376
Less accumulated depreciation (8,776,700) (7,594,722)
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Total $ 207,318,918 $ 217,615,654
============= =============
The Company periodically invests in properties under construction. All
construction draws are subject to the terms of a standard lease
agreement with the Company which fully obligates the tenant to the
long-term lease to all construction related costs advanced through
construction draws, including interest during the construction period.
Upon completion of construction and when the tenant lease payments
begin, the construction draws are then capitalized as land and
building. At June 30, 2000 the Company had approximately $833,000 of
unfunded commitments on properties under construction.
3. FINANCING LEASES:
Properties subject to financing leases is comprised of four properties
whereby the Company owns only the building and the land is subject to a
ground lease between the tenant and an unrelated third party. The net
investment in financing leases is comprised of the following as of:
June 30, December 31,
2000 1999
---- ----
Minimum lease payments to be received $ 9,911,887 $ 10,189,037
Estimated residual value - -
------------ ------------
Gross investment in financing leases 9,911,887 10,189,037
Unearned income (5,436,184) (5,781,842)
------------ ------------
Net investment in financing leases $ 4,475,703 $ 4,407,195
============ ============
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT IN JOINT VENTURE:
In 1999 the Company invested $7.1 million for a 22.6% membership
interest in FC Venture I, LLC. The investment is accounted for under
the equity method. Summarized financial information of the Company's
joint venture investment as of and for the six months ended June 30,
2000 is set forth below:
Investment in properties subject to leases, net $45,714,093
Total assets 48,340,447
Notes payable 16,517,252
Total liabilities 17,256,521
Members' equity 31,083,926
Revenues 1,257,869
Net income 639,536
5. NOTES PAYABLE:
The Company's credit facility expires in February 2001 and provides up
to $125 million for the acquisition and development of properties and
working capital. The credit facility is subject to certain borrowing
base restrictions. The Company had approximately $106.5 million of
aggregate outstanding borrowings under the credit facility at June 30,
2000.
6. EARNINGS PER SHARE:
Stock options currently outstanding were excluded from the computation
of diluted earnings per share because their exercise price was in
excess of the average market price of the Company's common stock during
the three and six months ended June 30, 2000 and 1999.
7. NON-RECURRING ITEMS:
As described in Note 1 above, the Company terminated a merger agreement
on May 1, 2000 that resulted in the Company recognizing expense of $1.1
million in non-recurring merger costs in the three month period ended
March 31, 2000. Merger costs of approximately $700,000 which represent
services that have near term potential benefit are included in other
assets as of June 30, 2000.
Other non-recurring income for the three months ended June 30, 2000 of
approximately $706,000 represents the reversal of a previously provided
allowance for an estimated income tax obligation which is no longer
required due to the recent completion of an IRS audit that resulted in
no additional tax payment.
8. RELATED PARTY TRANSACTIONS:
The Company is party to an advisory agreement, as amended, with Captec
Net Lease Realty Advisors, Inc., an affiliate, whereby the Company pays
to Captec Advisors a management fee which is subject to a reduction in
management fees paid to Captec Advisors based on the acquisition levels
of Family Realty, Inc. and Family Realty II, Inc. each of which the
Company owns a 60% non-voting common stock. During the six months ended
June 30, 2000 the Company incurred approximately $746,000 in management
fees and received an equal reduction in the management fees from Captec
Advisors.
In 1999 Family Realty II, Inc. was formed and as a result the Company
received $100,000 for formation costs incurred during the six months
ended June 30, 2000. In addition, the Company received $200,000 in
management fees from Family Realty II during the six months ended June
30, 2000. Both the formation cost and management fee have been recorded
in other income.
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS:
In July 2000, the Company declared dividends to its shareholders of
$3,613,081, or $0.38 per share of common stock, which was paid on July
19, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company, which operates as a REIT, acquires, develops and owns
freestanding properties which are leased on a long-term triple-net
basis to operators of national and regional chain restaurants and
retailers. The Company's triple-net leases generally impose on the
lessee responsibility for all operating costs and expense of the
property, including the costs of repairs, maintenance, real property
taxes, assessments, utilities and insurance. The Company's leases
typically provide for minimum rent plus specified fixed periodic rent.
Other revenues are derived primarily from fee income earned from
affiliates and interest income on loans to affiliates.
As of June 30, 2000, the Company owned 150 properties, located in 27
states, subject to long-term net leases with 60 different lessees under
major restaurant and retail concepts including Bennigan's, Applebee's,
Denny's, Best Buy, Athlete's Foot, Blockbuster Video, and Jared
Jewelers.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000. During the three months ended June
30, 2000 total revenue remained unchanged at $7.0 million as compared
to the three months ended June 30, 1999. Rental revenue from operating
leases for the three months ended June 30, 2000 decreased 2.4% to $6.1
million as compared to $6.2 million for the three months ended June 30,
1999, due to the reduction of the Company's property portfolio as a
result of property sales. Earned income from financing leases for the
three months ended June 30, 2000 decreased 5.3% to approximately
$155,000 for the three months ended June 30, 2000 as compared to
approximately $163,000 for the three months ended June 30, 1999. The
decrease is the result of the amortization of principal balances. Other
income increased 41.2% to approximately $507,000 for the three months
ended June 30, 2000 as compared to $359,000 for the three months ended
June 30, 1999 due to fees earned for the acquisition, development and
management of properties on behalf of its affiliated ventures. The
amount of fees earned for the acquisition, development and management
of properties on behalf of its affiliated ventures are subject to
variations, principally by the amount of new properties identified and
acquired by the affiliated ventures.
Total expenses increased 13.1% to $3.8 million for the three months
ended June 30, 2000 as compared to $3.4 million for the three months
ended June 30, 1999. Interest expense increased 14.4% to $2.6 million
for the three months ended June 30, 2000 as compared to $2.2 million
for the three months ended June 30, 1999. The increase was due to a 61
basis point increase in the weighted average interest rate, slightly
offset by an approximately $500,000 decrease in the average outstanding
borrowings under the Company's credit facility used to fund the
acquisition and development of properties. General and administrative
expenses, including management fees to affiliates, increased 35.5% to
approximately $388,000 for the three months ended June 30, 2000 as
compared to approximately $287,000 for the three months ended June 30,
1999 as a result of increases in marketing and convention expenses. The
Company's management fee was equally offset due to acquisitions of its
affiliated ventures during the three months ended June 30, 2000. The
management fee paid and reductions received are subject to variations,
principally changes in the Company's property portfolio balance caused
by property acquisitions and dispositions, and the amount of new
properties identified and acquired by the affiliated ventures.
Depreciation and amortization increased 2.2% to approximately $868,000
for the three months ended June 30, 2000 as compared to approximately
$849,000 for the three months ended June 30, 1999 principally due to
the amortization of goodwill in connection with the Company's
investment in Captec Franchise Capital Partners L.P. III and Captec
Franchise Capital Partners L.P. IV.
In 1999 the Company invested $7.1 million in a 22.6% membership
interest in FC Venture I, LLC, a joint venture. During the three months
ended June 30, 2000 the Company recorded approximately $145,000 as its
portion of FC Venture's equity earnings.
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The Company sold 11 properties during the three months ended June 30,
2000, collecting total net proceeds of $10.6 million and reflected a
gain totaling approximately $1.0 on the sale of these properties. In
addition, the Company recorded an impairment loss of $56,000 during the
three months ended June 30, 2000 which is netted against the gain on
sale of properties.
During the three months ended June 30, 2000 an IRS audit of periods
prior to the Company's initial public offering was completed resulting
in no additional tax payment. As a result of the completed audit the
Company recorded other non-recurring income of approximately $706,000
representing a previously provided allowance for an estimated tax
obligation.
As a result of the foregoing, the Company's net income increased 38.2%
to $5.1 million for the three months ended June 30, 2000 as compared to
$3.7 million for the three months ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000. During the six months ended June 30,
2000 total revenue increased 4.2% to $14.7 million as compared to $14.1
million for the six months ended June 30, 1999. Rental revenue from
operating leases for the six months ended June 30, 2000 remained
unchanged at $12.2 million as compared to the six months ended June 30,
1999. Earned income from financing leases for the six months ended June
30, 2000 decreased to approximately $312,000 as compared to
approximately $316,000 for the six months ended June 30, 1999. The
decrease is the result of the amortization of principal balances.
Interest income on loans to affiliates remained unchanged at
approximately $631,000 for the six months ended June 30, 2000 as
compared to the six months ended June 30, 1999. Other income increased
66% to $1.5 million for the six months ended June 30, 2000 as compared
to approximately $918,000 for the six months ended June 30, 1999
primarily due to fee income earned from affiliates. The amount of fees
earned for the acquisition, development and management of properties on
behalf of its affiliated ventures are subject to variations,
principally by the amount of new properties identified and acquired by
the affiliated ventures.
Interest expense for the six months ended June 30, 2000 increased 14.1%
to $5.1 million as compared to $4.5 million for the six months ended
June 30, 1999. The increase was due to a 62 basis point increase in the
weighted average interest rate as well a $1.4 million increase in the
average outstanding borrowings under the Company's credit facility used
to fund the acquisition and development of properties. General and
administrative expenses, including management fees to affiliates,
increased 12.5% to approximately $731,000 for the six months ended June
30, 2000 as compared to approximately $650,000 for the six months ended
June 30, 1999 primarily due to offsetting reductions in management fees
to affiliates due to acquisitions and other fees earned by Captec
Advisors in 1999. The management fee paid and reductions received are
subject to variations, principally changes in the Company's property
portfolio balance caused by property acquisitions and dispositions, and
the amount of new properties identified and acquired by the affiliated
ventures. Depreciation and amortization increased 3.0% for the six
months ended June 30, 2000 as compared to the six months ended June 30,
1999 principally due to the amortization of goodwill in connection with
the Company's investment in Captec Franchise Capital Partners L.P. III
and Captec Franchise Capital Partners L.P. IV, slightly offset by the
elimination of depreciation as a result of property sales.
The Company sold 14 properties during the six months ended June 30
2000, collecting total net proceeds of $16.5 million and reflecting a
gain of $1.6 million on the sale of these properties. In addition, the
Company recorded an impairment loss of $56,000 during the six months
ended June 30, 2000 which is netted against the gain on sale of
properties.
In 1999 the Company invested $7.1 million in a 22.6% membership
interest in FC Venture I, LLC, a joint venture. During the six months
ended June 30, 2000 the Company recorded approximately $295,000 as its
portion of FC Venture's equity earnings.
During the six months ended June 30, 2000 an IRS audit of periods prior
to the Company's initial public offering was completed resulting in no
additional tax payment. As a result of the completed audit the Company
recorded other non-recurring income of approximately $706,000
representing a previously provided allowance for an estimated tax
obligation.
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As result of the foregoing, the Company's income before accounting
change increased 18.9% to $8.6 million for the six months ended June
30, 2000 as compared to $7.2 million for the six months ended June 30,
1999.
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 recorded a $336,875 non-cash
charge during the six months ended June 30, 1999 representing the
balance of unamortized organization costs which resulted in net income
for the six months ended June 30, 1999 of $6.9 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal use of funds is for property development and
acquisition, payment of interest on its outstanding indebtedness, and
payment of operating expenses and dividends. Historically, interest
expense, operating expenses and dividends have been paid out of cash
flows from operations. Property acquisition and development have been
typically funded out of proceeds from borrowings. The Company expects
to meet its liquidity requirements, which are principally property
acquisition and development and scheduled debt maturities, through a
variety of future sources of capital, including long-term
collateralized and uncollateralized indebtedness, the issuance of
additional equity or debt securities and "off-balance sheet" financing
through the formation of joint ventures.
The Company's leases generally provide for specified periodic rent
increases. In addition, most of the Company's leases require the lessee
to pay all operating costs and expenses including repairs, maintenance,
real property taxes, assessments, utilities and insurance, thereby
substantially reducing the Company's exposure to increases in costs and
operating expenses. Based upon these factors, the Company does not
anticipate significant capital demands related to the management of its
properties other than potential costs of re-leasing vacant Boston
Chicken properties which it anticipates not exceeding $300,000.
At June 30, 2000 the Company had cash and cash equivalents of
approximately $970,000. For the six months ended June 30, 2000, the
Company generated cash from operations of $7.0 million as compared to
$6.8 million for the six months ended June 30, 1999. Cash generated
from operations provides funds for dividends. Any excess cash from
operations may also be used for investment in properties. For the six
months ended June 30, 2000 the Company generated $10.6 million from
investing activities as compared to using $3.7 million during the six
months ended June 30, 1999. The Company used $17.7 million in financing
activities during the six months ended June 30, 2000 as compared to
using $6.6 million during the six months ended June 30, 1999.
CREDIT FACILITY. In February 1998, the Company entered into a
syndicated credit facility with First Union National Bank, as agent, to
provide funds for the acquisition and development of properties and
working capital, and repaid all amounts outstanding under a prior
credit facility. On December 1, 1998 the Company amended the credit
facility to provide up to $125.0 million of debt which is
collateralized by the properties. At June 30, 2000 the Company had
$106.5 million of aggregate outstanding borrowings under the credit
facility.
The credit facility has a three year term and the revolving credit
borrowings are subject to borrowing base restrictions. The credit
facility is subject to covenants which, among other restrictions,
require the Company to maintain a minimum net worth, a maximum leverage
ratio, and specified interest and fixed charge coverage ratios. At June
30, 2000 the Company is in compliance with all debt covenants. The
credit facility bears interest at an annual rate of LIBOR plus a spread
ranging from 1.25% to 1.75%, set quarterly depending on the Company's
leverage ratio, or at the Company's option, the bank's base rate. In
connection with the credit facility the Company incurred issuance costs
of $1.7 million and is also required to pay an unused commitment fee
ranging from .125% to .20% per annum on the unused amount of the
commitment.
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The credit facility expires in February 2001 and may be renewed subject
to the consent of the lender. Upon expiration, the entire outstanding
balance of the credit facility will mature and become immediately due
and payable. At that time, the Company expects to refinance such debt
either through additional debt financings collateralized by individual
properties or groups of properties, by uncollateralized private or
public debt offerings or by additional equity offerings. No assurances
can be made that the Company will be able to refinance such debt.
PROPERTY ACQUISITIONS AND COMMITMENTS. During the three months ended
June 30, 2000 the Company acquired properties for an aggregate
acquisition cost of $2.2 million. As of June 30, 2000, the Company had
entered into commitments to acquire 65 properties totaling $106.1
million. The commitments are subject to various conditions to closing
which are described in the contracts or letters of intent relating to
these properties. In addition, in the ordinary course of business the
Company is in negotiations regarding the proposed acquisition of other
properties and related co-development opportunities. The Company may
enter into commitments to acquire some of these prospective properties
in the future. The Company expects to finance its acquisition
commitments through a variety of sources of capital, including
borrowings under the credit facility, other long-term collateralized
and uncollateralized indebtedness, "off-balance sheet" financing
through the formation of joint ventures and the issuance of additional
equity or debt securities. Property acquisition commitments are
expected to generate demand for additional capital in the future.
PROPERTY SALES. During the six months ended June 30, 2000 the Company
sold 14 properties collecting total net proceeds of $16.5 million and
reflecting a gain of $1.6 million on the sale of these properties. The
Company will assess the additional need for future property sales as a
means of generating capital to meet its current commitments of future
property acquisitions and developments.
DIVIDENDS. During the six months ended June 30, 2000 the Company paid
dividends of $7,226,162. In July 2000, the Company declared a second
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
July 12, 2000 and was paid on July 19, 2000. The Company expects to pay
future dividends from cash available for distribution. The Company
believes that cash from operations will be sufficient to allow the
Company to make distributions necessary to enable the Company to
continue to qualify as a REIT.
YEAR 2000
As a result of the Company's Year 2000 efforts and the timely
completion of all related projects, the Company did not experience any
disruption in its business operations in January 2000. In addition, the
Company was not adversely affected by any of its key business vendors,
lessees or other partners not being Year 2000 ready.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents a risk of loss arising from adverse changes in
market prices and interest rates. The Company's market risk arises from
interest rate risk inherent in its financial instruments. The Company
is not subject to foreign currency exchange rate risk or commodity
price risk.
The Company monitors and manages interest rate exposure as an integral
part of its overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the
potentially adverse effect on its results. At June 30, 2000
substantially all of the Company's debt bears interest at variable
rates of LIBOR rate plus 1.25% to 1.75%.
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The following table presents certain information on the Company's
assets and liabilities which are sensitive to interest rate changes at
June 30, 2000:
MATURITY
------------------------------------------
0 TO 3 1 TO 5
MONTHS YEARS TOTAL
----------- ------------- -------------
Assets:
Cash and cash equivalents........................................... $ 970,322 $ - $ 970,322
Properties subject to operating leases, net(1)...................... - 2,317,390 2,317,390
----------- ------------- -------------
Total assets..................................................... $ 970,322 $ 2,317,390 $ 3,287,712
=========== ============= =============
Liabilities
Notes payable....................................................... $ - $ 106,480,027 $ 106,480,027
=========== ============= =============
Reprice difference.................................................. $ 970,322 $(104,162,637)
Cumulative gap...................................................... $ 970,322 $(103,192,315)
(1) Represents leases that are under construction and sensitive to interest
rate fluctuations.
A 1% increase in the variable interest rate for the six months ended
June 30, 2000 would have resulted in additional interest expense of
approximately $371,000.
The Company uses derivative financial instruments in the normal course
of business to manage its exposure to fluctuations in interest rates.
Those instruments involve, to varying degrees, market risk, as the
instruments are subject to rate and price fluctuations, and elements of
credit risk in the event the counterparty should default. The Company
does not enter into derivative transactions for trading purposes. At
June 30, 2000 the Company had an interest rate swap contract
outstanding with a total notional amount of $50 million, and an
interest rate cap contract outstanding with a total notional amount of
$31.5 million. The notional amounts serve solely as a basis for the
calculation of payments to be exchanged and are not a measure of the
exposure of the Company through the use of derivatives. Under the
interest rate swap contract, the Company agrees to pay a fixed rate of
5.8% and the counterparty agrees to make payments based on 3-month
LIBOR. Under the interest rate cap agreement the counterparty agrees to
make payments to the Company if LIBOR exceeds 6.5% through July 1, 1999
or 7.5% thereafter. The interest rate swap contract terminates July
2001 and the interest rate cap contract terminates January 2001.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On April 24, 2000, the Company was notified that two lawsuits had
been filed against the Company in the Court of Chancery of the State of
Delaware in and for New Castle County.
Steiner v. Beach, et al., C.A. 18005NC (Delaware Chancery Court)
A complaint has been served on Captec by William Steiner, a
stockholder, individually and on behalf of an alleged class consisting
of the public stockholders of the Company, other than the defendants
and any person related to or affiliated with the defendants, against
the Company, Captec Financial Group Inc., Captec Advisors and each of
the Company's directors individually in the Court of Chancery of the
State of Delaware in and for New Castle County. The allegations of the
complaint arise from the December 20, 1999 Omnibus Agreement and Plan
of Merger by and among Captec, Captec Acquisition, Inc., Captec
Financial Group and Captec Advisors, which provided for the merger of
Captec Acquisition with and into Captec Financial Group and of Captec
Advisors with and into the Company. The complaint alleges, among other
things, that the defendants breached their fiduciary duties and other
common law duties owed to the alleged class in approving the merger,
the merger is unfair to the Company's stockholders, and the alleged
class will be approving the merger, the merger is unfair to the
Company's stockholders, and the alleged class will be irreparably
damaged if the merger is consummated. The complaint seeks a declaration
that the suit is properly maintainable as a class action, the
certification of Mr. Steiner as representative of the alleged class, a
preliminary and permanent injunction against the merger, rescission of
the merger in the event the merger is consummated prior to disposition
of the claim, and compensatory damages and reasonable attorneys fees
and expenses incurred by the alleged class.
Bailey v. Beach, et. al., C.A. 18006NC (Delaware Chancery Court)
A complaint was filed by John W. Bailey, a stockholder
individually and on behalf of an alleged class consisting of the public
stockholders of the Company, other than the defendants, against Captec,
Captec Financial Group, Captec Advisors and each of the Company's
directors individually in the Court of Chancery of the State of
Delaware in and for New Castle County. The allegations of this
complaint also arise from the December 20, 1999 merger agreement. The
complaint alleges, among other things, that the defendants breached
their fiduciary duties to the alleged class, the defendants failed to
disclose material facts about the merger in seeking stockholder action
with respect to the merger, the merger is unfair to the Company's
stockholders, and the alleged class will be irreparably damaged if the
merger is consummated. The complaint seeks a declaration that the suit
is properly maintainable as a class action, the certification of Mr.
Bailey as representative of the alleged class, a preliminary and
permanent injunction against the merger, an order compelling the
defendants to correct misrepresentations and omissions in the
defendants' disclosures to stockholders concerning the merger, an order
compelling the defendants to seek, consider and develop alternatives to
the merger that would provide the best value available to the public
stockholders, rescission of the merger in the event the merger is
consummated prior to disposition of the claim, and compensatory damages
and attorneys fees and expenses incurred by the alleged class. The
Company has not been served with the complaint in this action.
On May 1, 2000, the merger agreement was terminated and the
mergers provided for therein were abandoned.
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Registrant filed the following Current Reports on Form
8-K during the three months ended June 30, 2000:
Current Report on Form 8-K dated April 24, 2000 as filed
with the United States Securities and Exchange Commission
on May 4, 2000 included information regarding the
Company's termination of the merger agreement with its
affiliates, Captec Financial Group, Inc. and Captec Net
Lease Realty Advisors, Inc.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain "forward-looking statements" which
represent the Company's expectations or beliefs, including, but not
limited to, statements concerning industry performance and the
Company's operations, performance, financial condition, plans, growth
and strategies. Any statements contained in this Form 10-Q which are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words
such as "may," "will," "expect," "anticipate," "intend," "could,"
"estimate" or continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks
and uncertainties, certain of which are beyond the Company's control,
and actual results may differ materially depending on a variety of
important factors many of which are beyond the control of the Company.
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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.
August 14, 2000 By: /s/ Patrick L. Beach
-----------------------
Patrick L. Beach
Chief Executive Officer and President
August 14, 2000 By: /s/ W. Ross Martin
-----------------------
W. Ross Martin
Chief Financial Officer and
Executive Vice President
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Exhibit Index
Exhibit No. Description
27 Financial Data Schedule