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 September 30, 1999
------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ ------
Commission file number: 1045281
-------
CAPTEC NET LEASE REALTY, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware
--------
(State or other jurisdiction of incorporation or organization)
38-3368333
----------
(IRS Employer Identification Number)
24 Frank Lloyd Wright Drive, Ann Arbor, Michigan 48106
------------------------------------------------------
(Address of principal executive offices,
including zip code)
(734) 994-5505
--------------
(Registrant's telephone number)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the registrant's classes of common equity, as of the
latest practicable date.
9,508,108 share of Common Stock, $.01 par value, outstanding
as of November 15, 1999.
1
2
CAPTEC NET LEASE REALTY, INC.
AND SUBSIDIARIES
CONTENTS
ITEM NO. PAGE
-------- ----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Consolidated Notes to Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II OTHER INFORMATION
Other Information 13 - 16
2
3
CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
---- ----
ASSETS (unaudited)
Cash and cash equivalents $ 1,582,454 $ 4,488,565
Investments:
Properties subject to operating leases, net 221,155,070 221,349,661
Properties subject to financing leases, net 4,369,655 3,128,824
Loans to affiliates, collateralized by mortgage loans 9,598,752 8,915,523
Investment in joint venture 7,144,808 -
Investment in affiliated limited partnerships 4,395,000 4,395,000
Other loans, related party 394,466 405,775
-------------- -------------
Total investments 247,057,751 238,194,783
Short-term loans to affiliates 1,809,026 2,505,294
Unbilled rent, net 5,591,785 3,710,487
Accounts receivable 303,270 144,642
Due from affiliates 436,511 1,242,675
Other assets 1,299,250 1,724,283
-------------- -------------
Total assets $ 258,080,047 $ 252,010,729
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 120,972,699 $ 113,984,988
Accounts payable and accrued expenses 409,979 1,428,041
Due to affiliates 88,308 76,513
Federal income tax payable 719,000 719,000
Security deposits held on leases 280,906 194,406
-------------- -------------
Total liabilities 122,470,892 116,402,948
-------------- -------------
Stockholders' Equity:
Common stock, ($.01 par value) authorized: 40,000,000
shares; issued and outstanding: 9,508,108 95,081 95,081
Paid in capital 134,711,056 134,711,056
Retained earnings 803,018 801,644
-------------- -------------
Total stockholders' equity 135,609,155 135,607,781
-------------- -------------
Total liabilities and stockholders' equity $ 258,080,047 $ 252,010,729
============== =============
The accompanying notes are an integral part of the consolidated financial
statements.
3
4
CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
Revenue:
Rental income from operating leases $ 6,165,542 $ 6,329,897 $ 18,332,955 $ 16,591,995
Earned income from financing leases 161,231 - 476,777 47,880
Interest income on loans to affiliates 320,634 511,991 951,005 1,449,851
Other income, principally affiliated ventures 724,277 570,683 1,695,106 1,359,068
----------- ----------- ------------ ------------
Total revenue 7,371,684 7,412,571 21,455,843 19,448,794
----------- ----------- ------------ ------------
Expenses:
Interest 2,347,837 2,087,771 6,831,505 4,502,375
Management fees, affiliates 52,426 342,862 (23,102) 883,973
General and administrative 421,734 342,928 1,146,769 1,140,880
Depreciation and amortization 850,527 825,364 2,532,602 2,173,983
Provision for unbilled rent - 865,311 - 865,311
----------- ----------- ------------ ------------
Total expenses 3,672,524 4,464,236 10,487,774 9,566,522
----------- ----------- ------------ ------------
Net income before equity income of
joint venture, gain (loss) on
sale of properties and accounting change 3,699,160 2,948,335 10,968,069 9,882,272
Equity income of joint venture 95,636 - 95,636 -
Gain (loss) on sale of properties 127,665 (891,722) 66,246 (1,144,891)
----------- ----------- ------------ -----------
Net income before accounting change 3,922,461 2,056,613 11,129,951 8,737,381
Cumulative effect of accounting change - - (336,875) -
----------- ----------- ------------ -----------
Net Income $ 3,922,461 $ 2,056,613 $ 10,793,076 $ 8,737,381
=========== =========== ============ ============
Basic and Diluted EPS:(1)
Income before accounting change $ 0.41 $ 0.22 $ 1.17 $ 0.92
=========== =========== ============ ============
Accounting change $ - $ - $ (0.04) $ -
=========== =========== ============ ============
Net Income $ 0.41 $ 0.22 $ 1.14 $ 0.92
=========== =========== ============ ============
Weighted average number of common shares
outstanding 9,508,108 9,508,108 9,508,108 9,508,108
=========== =========== ============ ===========
(1) Calculated independently for each item, and consequently, the sum of the
items may differ from actual amount due to the effects of rounding.
The accompanying notes are an integral part of the consolidated financial
statements.
4
5
CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(unaudited)
Common Stock Total
----------------------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
------ ------ ------- -------- ------
BALANCE, JANUARY 1, 1999 9,508,108 $ 95,081 $ 134,711,056 $ 801,644 $ 135,607,781
Net Income - - - 10,793,076 10,793,076
Common stock dividends - - - (10,791,702) (10,791,702)
--------- ---------- -------------- ----------- --------------
BALANCE, SEPTEMBER 30, 1999 9,508,108 $ 95,081 $ 134,711,056 $ 803,018 $ 135,609,155
========= ========== ============== =========== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
5
6
CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
----------------------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,793,076 $ 8,737,381
Adjustments to net income:
Depreciation and amortization 2,532,602 2,173,984
Accounting change 336,875 -
Amortization of debt issuance costs 474,628 264,202
Equity income of joint venture (95,636) -
(Gain) loss on sale of property (66,246) 891,722
Increase in unbilled rent (1,881,298) (902,247)
Decrease (increase) in accounts receivable and other assets 177,600 (129,852)
(Decrease) increase in accounts payable and accrued expenses (1,018,062) 934,731
------------ -----------
Net cash provided by operating activities 11,253,539 11,969,921
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties subject to operating leases (14,712,463) (74,495,244)
Acquisition of properties subject to financing leases (1,153,037) -
Collection (advances) on short-term loans to affiliates, net 696,268 (1,452,511)
Proceeds from the transfer of properties to
joint venture 3,385,972 -
Investment in joint venture (7,113,000) -
Proceeds from the disposition of properties 9,062,193 1,475,935
Advances (collection) on loans to affiliates, collateralized by
mortgage loans, net (683,229) 7,043,045
Collection of principal on other loans 11,309 716,494
Investments in affiliated partnerships - (4,395,000)
Distributions from joint venture 63,828 -
Lease security deposits 86,500 52,514
------------ -----------
Net cash used in investing activities (10,355,659) (71,054,767)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock (10,791,702) (8,985,161)
Notes payable borrowings 11,000,000 109,984,988
Debt issuance costs - (1,438,954)
Repayments of notes payable (4,012,289) (42,746,189)
------------ -----------
Net cash (used in) provided by financing activities (3,803,991) 56,814,684
------------ -----------
NET CASH FLOWS (2,906,111) (2,270,162)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,488,565 3,528,129
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,582,454 $ 1,257,967
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 7,022,623 $ 2,683,944
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
6
7
CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION: Captec Net Lease Realty, Inc., a Delaware corporation
(the "Company"), which operates as a real estate investment trust
("REIT"), was formed in August 1997 to invest in high-quality
freestanding properties leased principally on a long-term triple-net
basis to national and regional and franchised restaurants and
retailers. The Company completed its initial public offering in
November 1997 and has subsequently operated as a REIT.
UNAUDITED INTERIM FINANCIAL INFORMATION: The consolidated balance sheet
as of September 30, 1999 and the consolidated statements of operations
and cash flows for the three and nine months ended September 30, 1999
and 1998 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 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, 1998 as filed with the United States Securities and
Exchange Commission on March 30, 1999.
NEW PRONOUNCEMENTS: In June 1998 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
is effective for all quarters of all fiscal years beginning after June
15, 2000 (January 1, 2001 for the Company). The statement requires that
all derivative instruments be recorded at fair value on the balance
sheet with changes in fair value recorded each period in current
earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Management has not yet determined the
impact, if any, that the adoption of the statement will have on the
Company's earnings or statement of financial position.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". This statement requires start-up activities and
organization costs to be expensed as incurred. In accordance with the
provisions of the statement, the Company has recorded a $337,000
non-cash charge during the three months ended March 31, 1999 for the
balance of unamortized organization costs.
RECLASSIFICATIONS: Certain prior period financial statement amounts
have been reclassified to conform to the 1999 presentations.
2. PROPERTIES SUBJECT TO OPERATING LEASES:
The Company's real estate portfolio is leased to tenants under
long-term net operating leases. The lease agreements generally provide
for monthly rents based upon a percentage of the property's cost. The
initial term of the leases typically ranges from 15 to 20 years,
although the Company in certain cases will enter into leases with terms
that are shorter or longer. 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 window periods during
the fifth to seventh lease years.
7
8
CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's investment in real estate 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 as of September 30, 1999 is
comprised of the following:
Land $ 85,007,096
Buildings and improvements 135,061,836
Construction draws on properties 8,101,241
---------------
228,170,173
Less accumulated depreciation (7,015,103)
---------------
Total $ 221,155,070
===============
The Company periodically invests in properties under construction. All
construction draws are subject to the terms of standard lease
agreements with the Company which fully obligate the tenant to the
long-term lease for all amounts advanced under construction draws. At
September 30, 1999 the Company had approximately $3.9 million of
unfunded commitments on properties under construction.
3. FINANCING LEASES:
Properties subject to financing leases is comprised of four properties
whereby the company owns only the building and the land is subject to
a ground lease between the tenant and an unrelated third party. The
net investment in financing leases as of September 30, 1999 is
comprised of the following:
Minimum lease payments to be received $ 10,270,037
Estimated residual value -
--------------
Gross investment in financing leases 10,270,037
Unearned income (5,900,382)
--------------
Net investment in financing leases $ 4,369,655
==============
4. JOINT VENTURE:
During 1999 the Company has invested in a 22.6% membership interest in
FC Venture I, LLC ("FC Venture"). The investment is accounted for under
the equity method. Summarized financial information of the Company's
joint venture investment for the nine months ended September 30, 1999
is set forth below:
Investment in properties subject to leases $ 30,617,059
Total assets 30,983,182
Members equity 30,665,267
Revenues 746,888
Net income 423,166
5. NOTES PAYABLE:
The Company's credit facility, as amended (the "Credit Facility"),
provides up to $125 million for the acquisition of properties and
working capital. The Credit Facility has a three year term and is
subject to certain borrowing base restrictions. The Company had
approximately $121 million of aggregate outstanding borrowings under
the Credit Facility at September 30, 1999.
8
9
CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EARNINGS PER SHARE:
Stock options currently outstanding under the Company's Long-Term
Incentive Plan were excluded from the computation of diluted earnings
per share because their exercise price was in excess of the average
market price of the Common Stock during the three and nine months ended
September 30, 1999.
7. RELATED PARTY TRANSACTIONS:
The Company is party to an Advisory Agreement with Captec Net Lease
Realty Advisors, Inc. ("Captec Advisors") an affiliate, whereby the
Company pays to Captec Advisors a management fee. In December 1998 the
Advisory Agreement was amended to reduce the management fee to Captec
Advisors by the amount of acquisition and other fees paid directly to
Captec Advisors as a result of acquisitions made by affiliates of the
Company (which acquisition fees were previously paid to the Company).
During the nine months ended September 30, 1999 the Company incurred
approximately $957,000 in management fees prior to reductions. Captec
Advisors earned approximately $980,000 of fees resulting in an equal
reduction in the management fee paid by the Company to Captec Advisors.
8. SUBSEQUENT EVENTS:
In October 1999, the Company declared dividends to its shareholders of
$3,613,081, or $0.38 per share of Common Stock, which was paid on
October 15, 1999.
9
10
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. 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 triple-net leases
(the "Leases") typically provide for minimum rent plus specified fixed
periodic rent. Other revenues are derived primarily from interest
income on loans to affiliates and fee income earned from affiliated
ventures.
As of September 30, 1999, the Company owned 167 properties, located in
30 states, subject to long-term net Leases with 63 different lessees
(the "Lessees") under major restaurant and retail concepts including
Bennigan's, Applebee's, Denny's, Best Buy, Athlete's Foot, Blockbuster
Video, and Office Depot.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999. During the three months ended
September 30, 1999 (the "Quarter") total revenue was $7.4 million which
remained consistent with the three months ended September 30, 1998 (the
"1998 Quarter"). Rental revenue from operating leases for the Quarter
decreased 3% to 6.2 million as compared to $6.3 million for the 1998
Quarter primarily due to rental revenues related to vacant properties
(principally from properties formerly leased to Boston Chicken, Inc.),
partially offset by the benefit of a full period of rental revenue from
properties acquired and leased in preceding periods. Earned income
from financing leases for the Quarter increased to $161,000 as compared
to $0 for the 1998 Quarter as a result of the addition of four
financing leases that began lease payments on January 1, 1999. Interest
income on loans to affiliates decreased 37% to $320,000 for the Quarter
as compared to $512,000 for the 1998 Quarter as a result of principal
payments received on loans to affiliates in preceding periods. Other
income increased 27% to $724,000 for the Quarter as compared to
$571,000 for the 1998 Quarter primarily due to fees earned for the
acquisition, development and management of properties on behalf of it's
affiliated ventures.
Interest expense for the Quarter increased 13% to $2.4 million as
compared to $2.1 million for the 1998 Quarter. The increase was
principally due to the increased borrowings under the Credit Facility
used to fund the acquisition and development of properties. General and
administrative expenses, including management fees to affiliates,
decreased 31% to $474,000 for the Quarter as compared to $686,000 for
the 1998 Quarter primarily due to offsetting reductions in management
fees to affiliates due to acquisitions and other fees earned by Captec
Advisors (see Note 7 of the Financial Statements). Depreciation and
amortization increased 3% to $851,000 for the Quarter as compared to
$825,000 for the 1998 Quarter, 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 preceding periods.
Provision for unbilled rent decreased 100% with no provision for the
Quarter as compared to $865,000 for the 1998 Quarter due to a one-time
non-cash charge related to unbilled rents on properties leased to
Boston Chicken, Inc. and its subsidiaries and affiliates recorded in
the 1998 Quarter.
The Company invested in a 22.6% membership interest in FC Venture I,
LLC ("FC Venture") and recorded $96,000 representing its proportionate
share of FC Venture's income during the Quarter (see Note 4 of the
Financial Statements for summarized financial information of FC
Venture).
The Company sold three properties for $6.1 million during the Quarter
for a gain of $128,000.
10
11
As result of the foregoing, the Company's net income increased 91% to
$3.9 million for the Quarter as compared to $2.1 million for the 1998
Quarter.
NINE MONTHS ENDED SEPTEMBER 30, 1999. During the nine months ended
September 30, 1999 total revenue increased 10% to $21.5 million as
compared to $19.4 million for the nine months ended September 30, 1998.
Rental revenue from operating leases for the nine months ended 1999
increased 11% to 18.3 million as compared to $16.6 million for the nine
months ended 1998 primarily from the benefit of a full period of rental
revenue from properties acquired and leased in preceding periods,
offset by the elimination of rental revenues related to vacant
properties (principally from properties formerly leased to Boston
Chicken, Inc.). Earned income from financing leases for the nine months
ended September 30, 1999 increased to $477,000 as compared to $48,000
for the nine months ended September 30, 1998 as a result of the
addition of four financing leases during the nine months ended
September 30, 1999. Interest income on loans to affiliates decreased
34% to $951,000 for 1999 as compared to $1.4 million for 1998 as a
result of principal payments received on loans to affiliates in
preceding periods. Other income increased 25% to $1.7 million for the
nine months ended September 30, 1999 as compared to $1.4 million for
the nine months ended September 30, 1998 primarily due to fees earned
for the acquisition, development and management of properties on behalf
of its affiliated ventures.
Interest expense for the nine months ended September 30, 1999 increased
52% to $6.8 million as compared to $4.5 million for the nine months
ended September 30, 1998. The increase was principally due to the
increased borrowings under the Credit Facility used to fund the
acquisition and development of properties. General and administrative
expenses, including management fees to affiliates, decreased 45% to
$1.1 million for the nine months ended September 30, 1999 as compared
to $2.0 million for the nine months ended September 30, 1998 primarily
due to offsetting reductions in management fees to affiliates due to
acquisitions and other fees earned by Captec Advisors (see Note 7 of
the Financial Statements). Depreciation and amortization increased 17%
to $2.5 million for the nine months ended September 30, 1999 as
compared to $2.2 million for the nine months ended September 30, 1998,
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. Provision for unbilled rent decreased
100% with no provision for the nine months ended September 30, 1999 as
compared to $865,000 for the nine months ended September 30, 1998 due
to a one-time non-cash charge related to unbilled rents on properties
leased to Boston Chicken and its subsidiaries and affiliates recorded
in the 1998 Quarter.
The Company invested in a 22.6% membership interest in FC Venture I,
LLC, a joint venture, ("FC Venture") and recorded $96,000 representing
its portion of FC Venture's equity earnings for the nine months ended
September 30, 1999 (see Note 4 of the Financial Statements for
summarized financial information of FC Venture).
The Company sold six properties for $9.0 million during the nine months
ended September 30, 1999 for a gain of $66,000.
As result of the foregoing, the Company's net income before accounting
change increased 27% to $11.1 million for the nine months ended
September 30, 1999 as compared to $8.7 million for the nine months
ended September 30, 1998.
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 for the balance of unamortized organization costs which resulted
in net income for the nine months ended September 30, 1999 of $10.8
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. The Company anticipates
that cash flows from operating activities will continue to provide
adequate funds for interest expense, operating expenses and dividend
payments in accordance with REIT requirements. Property acquisition and
development has been typically funded out of proceeds from borrowings
available under the Credit Facility. The Company expects to
11
12
obtain the necessary capital to achieve continued growth (principally
property development and acquisition) through cash on hand, borrowings
available under the Credit Facility, as well as select property
dispositions and other debt and equity alternatives, including joint
venture capital.
The Leases generally provide for specified periodic rent increases
including fixed increase amounts and, in limited circumstances
indexation to CPI and/or percentage rent. In addition, most of the
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 properties.
At September 30, 1999 the Company had cash and cash equivalents of $1.6
million. For the nine months ended September 30, 1999 the Company
generated cash from operations of $11.3 million as compared to $12.0
million for the same period in 1998. Cash generated from operations
provides funds for interest expense, operating expenses and
distributions to stockholders in the form of quarterly dividends. Any
excess cash from operations may also be used for investment in
properties.
CREDIT FACILITY. In February 1998, the Company entered into the Credit
Facility, which is used 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
Credit Facility was amended to provide up to $125.0 million of debt
which is secured by the Company's properties. At September 30, 1999 the
Company had $121.0 million of aggregate outstanding borrowings under
the Credit Facility.
The Credit Facility has a three year term and the revolving credit
borrowings are subject to borrowing base restrictions. The Credit
Facility is subject to covenants which, among other restrictions,
require the Company to maintain a minimum net worth, a maximum leverage
ratio, and specified interest and fixed charge coverage ratios. The
Credit Facility bears interest at an annual rate of LIBOR plus a spread
ranging from 1.25% to 1.75%, set quarterly depending on the Company's
leverage ratio or, at the Company's option, the lender's base rate. In
connection with the Credit Facility the Company incurred issuance costs
of $1.7 million and is also required to pay an unused commitment fee
ranging from .125% to .20% per annum on the unused amount of the
commitment.
The Credit Facility expires in February 2001 and may be renewed
annually thereafter, one year in advance of maturity subject to the
consent of the lender. Upon expiration, the entire outstanding balance
of the Credit Facility will mature and become immediately due and
payable. At that time, the Company expects to refinance such debt
either through additional debt financings secured by individual
properties or groups of properties, by unsecured private or public debt
offerings or by additional equity offerings.
JOINT VENTURE. In April 1999, the Company, through a wholly-owned
subsidiary, formed FC Venture with an affiliate of Fidelity Management
Trust Company ("Fidelity"). FC Venture was formed to acquire and
develop net-leased restaurant and retail properties similar to those
which the Company acquires and develops. FC Venture's objective is to
leverage its capital through borrowing to acquire and develop up to
$100 million in properties. At September 30, 1999 the Company had
contributed $7.1 million in equity capital and the FC Venture has
invested $30.6 million in properties subject to leases. During the nine
months ended September 30, 1999 the Company received $63,828 in cash
distributions from FC Venture.
PROPERTY ACQUISITIONS AND COMMITMENTS. During the nine months ended
September 30, 1999 the Company invested $15.9 million to acquire and
develop properties and transferred to FC Venture as part of the initial
capital contribution two properties with aggregate costs of $3.4
million. As of September 30, 1999, the Company had entered into
commitments to acquire or develop 87 properties totaling $203.2
million. The commitments are subject to various conditions to closing
which are described in the contracts or letters of intent relating to
those properties. In addition, in the ordinary course of business the
Company negotiates regarding the acquisition of other properties and
related co-development opportunities. The Company may enter into
commitments to acquire or develop some of these prospective properties
in the future. The Company expects to finance its acquisition and
development commitments through cash on hand, borrowings under the
Credit Facility as
12
13
well as select property dispositions and other debt and equity
alternatives, including joint venture capital.
Property acquisition commitments are expected to generate the primary
demand for additional capital in the future.
DIVIDENDS. The Company intends to pay a regular quarterly dividend on
its common stock of $.38 per share (annually $1.52 per share).
Dividends of $3,613,081 were paid on October 15, 1999 with respect to
the dividend declared by the Board of Directors on October 1, 1999 for
the second quarter of 1999. The Company expects to pay future dividends
from cash available for distributions. 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
The Year 2000 issue is a result of the way computer programs manipulate
date information based on a two-digit year ("99" instead of "1999").
The issue is that the "00" year designation can potentially cause
miscalculations or failures within the computer system if "00" is
interpreted as the year 1900 instead of the year 2000. These failures
could potentially lead to temporary disruption of operations and the
inability to conduct normal business activities.
The Company predominantly uses standard application software supported
by third party vendors. Information has been obtained from key
third-party financial software vendors that comprise the core business
applications indicating the core software systems are currently Year
2000 compliant.
The Company has collected Year 2000 readiness information from its key
business suppliers such as financial institutions, and currently no
issues have been identified. The Company continues to monitor the
readiness of each business partner based on the relative importance of
the business relationship.
The Company's major software applications are currently Year 2000
compliant, and the core computing infrastructure including personal
computers and network server hardware and software are all compliant.
The Company does not anticipate that the total cost of Year 2000
compliance will have a material adverse effect on the Company's
business or results of operations. The Company has incurred minimal
costs to date related to Year 2000 compliance.
The failure to identify and correct material Year 2000 problems
adequately could result in an interruption to or failure of certain
normal business activities or operations. These interruptions or
failures could adversely affect the Company's financial condition;
however, the extent of the impact cannot presently be determined. The
Company is dependent upon the Year 2000 readiness information provided
by its vendors and external business partners, and their ability to
achieve Year 2000 compliance with their computer systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
13
14
ITEM 2. CHANGES IN SECURITIES.
On September 17, 1999, the Company's Board of Directors adopted a
Stockholder Rights Agreement (the "Rights Agreement"). The following
description of the Rights (as defined herein) does not purport to be
complete and is qualified in its entirety by reference to the Rights
Agreement, including the exhibits thereto, which are incorporated
herein by reference and included in a Form 8-A Registration Statement
filed by the Company with the United States and Exchange Commission on
October 21, 1999. Pursuant to the Rights Agreement, the Board of
Directors declared a dividend distribution of one Preferred Stock
Purchase Right (a "Right") for each outstanding share of common stock,
par value $.01 per share, of the Company (the "Common Stock") to
stockholders of record as of the close of business on October 11, 1999
(the "Record Date") and for each share of Common Stock issued between
the Record Date and the Distribution Date (as defined herein). Each
Right entitles the registered holder thereof to purchase from the
Company a unit (a "Preferred Unit") consisting of one one-thousandth of
a share of Class A Series 1999-A Cumulative Preferred Stock, par value
$.01 per share (the "Preferred Stock"), at a cash exercise price of
$45.00 per Preferred Unit (the "Exercise Price"), subject to
adjustment.
Initially, the Rights are not exercisable and are attached to and trade
with the Common Stock outstanding as of, and all Common Stock issued
after, the Record Date. The Rights will separate from the Common Stock,
separate certificates will be distributed to holders of the Common
Stock and the Rights will become exercisable upon the earlier of (i)
the close of business on the 10th calendar day following the first
public announcement (the date of that announcement, the "Stock
Acquisition Date") that a person or a group of affiliated or associated
persons has acquired beneficial ownership of 15% or more of the
outstanding Common Stock (an "Acquiring Person"), or (ii) the close of
business on the 10th business day following the commencement of a
tender offer or exchange offer that would result, upon its
consummation, in a person or group becoming the beneficial owner of 15%
or more of the outstanding Common Stock (the earlier of (i) and (ii),
the "Distribution Date"). The Rights Agreement exempts from the
definition of Acquiring Person any person who the Board of Directors
determines acquired in excess of 15% of the Common Stock inadvertently,
if that person promptly divests enough Common Stock to reduce the
number of shares beneficially owned by that person to below the 15%
threshold. The Rights Agreement provides that, FREAM No. 17 LLC, a
,member of FC Venture, will not become an Acquiring Person solely as a
result of an acquisition of shares acquired under its agreements
entered into with the Company in March 1999, in connection with the
formation of FC Venture.
Until the Distribution Date (or the earlier redemption, exchange or
expiration of the Rights): (i) the Rights will be evidenced by the
Common Stock certificates and will be transferred only with the Common
Stock certificates, (ii) new Common Stock certificates issued after the
Record Date will include a notation incorporating the Rights Agreement
by reference, and (iii) the surrender for transfer of any certificate
for Common Stock also will constitute the transfer of the Rights
associated with the Common Stock represented by that certificate.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on September 17, 2009, unless
previously redeemed or exchanged by the Company as described below.
Upon a Stock Acquisition Date, provision will be made so that each
holder of a Right (other than an Acquiring Person or associates or
affiliates thereof, whose Rights will become null and void) thereafter
has the right to receive upon exercise that number of Preferred Units
having a market value of two times the exercise price of the Right
(that right being referred to as the "Subscription Right"), any time
following the Stock Acquisition Date: (i) the Company consolidates
with, or merges with and into, any Acquiring Person or any associate or
affiliate thereof, and the Company is not the continuing or surviving
corporation, (ii) any Acquiring Person or any associate or affiliate
thereof consolidates with the Company, or merges with and into the
Company and the Company is the continuing or surviving corporation of
that merger and, in connection with that merger, all or part of the
Common Stock is changed into or exchanged for stock or other securities
of any other person or cash or any other property, or (iii) 50% or more
of the Company's assets or earning power is sold or otherwise
transferred, each holder of a Right will thereafter have the right to
receive, upon exercise, capital stock of the acquiring company having a
market value equal to two times the exercise price of the Right (that
right being referred to as the "Merger Right"). Each holder of a Right
will continue to have the Merger Right whether or not that holder has
exercised the Subscription Right, but Rights that are or were
beneficially owned by an Acquiring Person may (under certain
circumstances specified in the Rights Agreement) become null and void.
14
15
At any time after a Stock Acquisition Date, the Board of Directors may,
at its option, exchange Common Stock or Preferred Units for all or any
part of the then outstanding and exercisable Rights (which excludes
Rights held by an Acquiring Person) at an exchange ratio of one share
of Common Stock or one Preferred Unit per Right. The Board of Directors
generally will not be empowered to effect any such exchange at any time
after any person becomes the beneficial owner of 50% or more of the
Common Stock.
The Exercise Price payable, and the number of Preferred Units or other
securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the
event of a share dividend on, or a subdivision, combination or
reclassification of, the Preferred Stock, (ii) if holders of the
Preferred Stock are granted certain rights or warrants to subscribe for
Preferred Stock or convertible securities at less than the current
market price of the Preferred Stock, or (iii) upon the distribution to
holders of the Preferred Stock of evidences of indebtedness or assets
(excluding regular quarterly cash dividends) or of subscription rights
or warrants (other than those referred to in (i) and (ii)).
The Rights may be redeemed in whole, but not in part, at a price of
$0.01 per Right (payable in cash, Common Stock or other consideration
considered appropriate by the Board of Directors) by the Board of
Directors only until the earlier of (i) the close of business on the
calendar day after the Stock Acquisition Date, and (ii) the expiration
date of the Rights Agreement. Immediately upon any action of the Board
of Directors ordering redemption of the Rights, the Rights will
terminate and thereafter the only right of the holders of Rights will
be to receive the redemption price.
The Rights Agreement may be amended by the Board of Directors in its
sole discretion until the earlier of the Distribution Date and the date
on which the Rights become nonredeemable, as described above. After the
earlier of those two dates, the Board of Directors may, subject to
certain limitations set forth in the Rights Agreement, amend the Rights
Agreement only to cure any ambiguity, defect or inconsistency, to
shorten or lengthen any time period, or to make changes that do not
adversely affect the interests of Rights holders (excluding the
interests of an Acquiring Person or associates or affiliates thereof).
Until a Right is exercised, the holder will have no rights as a
stockholder of the Company (beyond those as an existing stockholder),
including the right to vote or to receive dividends. While the
distribution of the Rights will not be taxable to stockholders or to
the Company, stockholders may, depending upon the circumstances,
recognize taxable income if the Rights become exercisable for Preferred
Units, other securities of the Company or other consideration, or for
capital stock of an acquiring company.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Company in a transaction not approved by the Board of Directors of the
Company. The Rights should not interfere with any merger or other
business combination approved by the Board of Directors of the Company,
since the Rights Agreement may be amended prior to the Distribution
Date, as described above, and the Rights may be redeemed until the
calendar day after a Share Acquisition Date, as described above.
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.
Exhibits
--------
Exhibit 27 Financial Data Schedule.
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
15
16
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.
16
17
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.
November 15, 1999 By: /s/ Patrick L. Beach
--------------------------------
Patrick L. Beach
Chief Executive Officer and President
November 15, 1999 By: /s/ W. Ross Martin
--------------------------------
W. Ross Martin
Chief Financial Officer and
Executive Vice President
17
18
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule