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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CAPTEC NET LEASE REALTY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
24 FRANK LLOYD WRIGHT DRIVE
ANN ARBOR, MICHIGAN 48106
(313) 994-5505
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
PATRICK L. BEACH
24 FRANK LLOYD WRIGHT DRIVE
ANN ARBOR, MICHIGAN 48106
(313) 994-5505
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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With copies to:
ALBERT T. ADAMS, ESQ. THOMAS W. DOBSON, ESQ.
BAKER & HOSTETLER LLP LATHAM & WATKINS
3200 NATIONAL CITY CENTER 633 WEST 5TH STREET, SUITE 4000
CLEVELAND, OHIO 44114 LOS ANGELES, CALIFORNIA 90071
(216) 621-0200 (213) 485-1234
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
===========================================================================================================
TITLE OF EACH CLASS OF PROPOSED PROPOSED
SECURITIES TO BE AMOUNT BEING MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PRICE PER SHARE OFFERING PRICE(2) REGISTRATION FEE
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Common Stock, $.01 par
value.................. 13,023,750 $15.00 $195,356,250 $59,199
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(1) Includes 1,698,750 shares of Common Stock which may be purchased by the
Underwriters pursuant to an over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 1997
11,325,000 Shares
CAPTEC NET LEASE REALTY, INC.
COMMON STOCK
$0.01 PAR VALUE
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Captec Net Lease Realty, Inc. (the "Company"), a Delaware corporation which
intends to qualify as a real estate investment trust (a "REIT"), acquires,
develops and owns high-quality freestanding properties leased to operators of
national and regional chain and franchised restaurants and retailers (the
"Lessees"). As of June 30, 1997, the Company's portfolio consisted of 79
properties (the "Existing Properties") located in 24 states. The Existing
Properties were 96.2% leased principally pursuant to long-term, "triple-net"
leases (the "Leases"), with average remaining terms of approximately 16 years.
All of the shares of common stock, $.01 par value (the "Common Stock"), offered
hereby (the "Offering"), are being sold by the Company. Prior to the Offering,
there has been no public market for the Common Stock. It is anticipated that the
initial public offering price will be $15.00 per share. Upon completion of the
Offering, the shares of Common Stock offered hereby will represent 85.3% of the
outstanding Common Stock (87.0% if the Underwriters' over-allotment option is
exercised in full), with the balance owned by management and other Affiliates of
the Company. To assist the Company in obtaining and maintaining its
qualification as a REIT for federal income tax purposes, ownership by any person
is generally limited to 9.8% of the then outstanding Common Stock. For
information relating to the factors considered in determining the initial public
offering price, see "Underwriting". The Company will apply for listing of the
Common Stock on the New York Stock Exchange ("NYSE") under the symbol "CRR". See
"Glossary" commencing on page 78 for definitions of certain terms used in this
Prospectus.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING ON PAGE 12,
INCLUDING:
- Potential conflicts between the business interests of the Company and
Captec Net Lease Realty Advisors, Inc. and other Affiliates of the
Company.
- Dependence on the Advisor for significant investment and management
decisions.
- Dependence on Lessees for operating income and risk of Lessee defaults and
bankruptcies.
- Concentration of investment in certain Lessees and restaurant concepts.
- General business risks of investment in the foodservice and retail
industries.
- Risks associated with leasing, acquisition and development of commercial
real property, including potential environmental liabilities.
- Potential inability to complete some or all pending acquisitions due to
circumstances beyond the Company's control.
- Potential need to incur substantial indebtedness to fund future
operations, acquisitions, expansion and stockholder distributions.
- Intense competition, including for acquisitions of properties.
- Lack of operating history and experience in qualifying and operating as a
REIT.
- Adverse tax consequences of failing to qualify as a REIT.
- Potential tax reclassification of preferred stock dividends and resulting
tax liability.
- Payment of a substantial portion of the Offering proceeds to an Affiliate
of the lead managing Underwriter.
- Restrictions on stock ownership impeding potential changes of control.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
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Per Share........................................................ $ $ $
Total(2)......................................................... $ $ $
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(1) Before deduction of expenses payable by the Company estimated at $1,000,000.
(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 1,698,750
additional shares to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $ , Underwriting
Discounts and Commissions will be $ and Proceeds to Company will be
$ .
The Common Stock is offered by the several Underwriters when, as and if issued
by the Company, delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that the Common
Stock will be available for delivery on or about , 1997, against
payment in immediately available funds.
CREDIT SUISSE FIRST BOSTON MCDONALD & COMPANY
SECURITIES, INC.
PROSPECTUS DATED , 1997
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[insert color pictures here]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".
This Prospectus contains registered trademarks, service marks and trade
names of third parties.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial information and statements, and notes thereto,
appearing elsewhere in this Prospectus. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in "Risk Factors". Unless otherwise indicated, the
information contained in this Prospectus (i) gives effect to the merger of
Captec Net Lease Realty, Inc., a Michigan corporation ("Net Lease Michigan"),
and Captec Net Lease Realty Advisors, Inc., a Michigan corporation ("Advisors
Michigan"), into the Company in September 1997 (the "Merger") (see "-- History
and Formation of the Company"); (ii) assumes an initial public offering price of
$15.00 per share of Common Stock; and (iii) assumes no exercise of the
Underwriters' over-allotment option. See "Glossary" for the definition of
certain terms used in this Prospectus.
THE COMPANY
The Company, which intends to qualify as a REIT, acquires, develops and
owns high-quality freestanding properties leased principally on a long-term
triple-net basis to national and regional chain and franchised restaurants and
retailers. As of June 30, 1997, the Company had a portfolio of 79 Existing
Properties located in 24 states, which was 96.2% leased. In addition, as of
September 1, 1997, the Company had agreements in principle for acquisitions,
which the Company expects to be substantially completed by July 1998, of 62
properties located in 22 states for an aggregate cost of approximately $94.5
million (the "Acquisition Properties"). The Lessees of the Existing Properties
include operators of 24 different restaurant and retail concepts, including
Applebee's, Arby's, Baby Superstore, Black Angus, Blockbuster Music, Blockbuster
Video, Boston Market, Burger King, Church's, Denny's, Golden Corral Family
Steakhouses and Jack in the Box. The Acquisition Properties will expand the
Company's portfolio into five additional states, and further diversify its
property, concept and Lessee base to include operators of Circle K, Michael's
Crafts, Office Depot, SportsMart, Stop n Go, Taco Bell and Tony Roma's. The
Company anticipates that most future acquisitions will be newly constructed at
the time of acquisition.
The Company generally acquires properties from operators or developers in
locations which have exhibited growth in retail sales and population. Upon
acquiring a property, the Company normally enters into a long-term triple-net
Lease (typically 15 to 20 years plus one or more five-year renewal options) with
the Lessee who will operate the property. Under the terms of a typical Lease,
the Lessee is responsible for all operating costs and expenses including
repairs, maintenance, real property taxes, assessments, utilities and insurance.
In addition, the Lease generally provides for minimum rent plus specified fixed
periodic rent increases or, in certain circumstances, indexation to the Consumer
Price Index ("CPI") and/or percentage rent. The Company believes that the
structure of its Leases provides steady periodically escalating long-term
revenue while reducing operating expenses and capital costs, and that its
underwriting standards reduce the risk of default or non-renewal. The Existing
Properties average four years of age and are subject to Leases with an average
remaining term of 16 years.
The Company's senior management and Board of Directors 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. The Company's senior executives average 16 years
experience in the franchise and retail finance industry and have been primarily
responsible for the Company's acquisition, development and leasing of the
Existing Properties and agreements in principle to acquire the Acquisition
Properties.
The Company has retained Captec Net Lease Realty Advisors, Inc. ("Captec
Advisors"), an Affiliate which, together with Captec Financial Group, Inc.
("Captec Financial") and its Affiliates (collectively, the "Advisor"), will
manage the operations of the Company and provide it with investment and
financial advisory services pertaining primarily to the acquisition, development
and leasing of properties. The Advisor is a family of affiliated specialized
commercial finance companies providing a diverse line of financing products to
the franchise, chain restaurant and specialty retail industries. Since its
inception in 1981, the Advisor has developed
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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 over 60 years of direct industry
experience and an average tenure of over 10 years with Captec Financial.
Including the Company, 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. The Company's retention of the Advisor will be reviewed by the Board
of Directors annually.
Since commencing operations in 1995, the Company has experienced
substantial growth in its real estate portfolio, revenues and Funds From
Operations ("FFO"). As of June 30, 1997, the Company had total assets of $123.1
million. In addition, for the year ended December 31, 1996, total revenues and
FFO increased to $6.9 million and $3.6 million, respectively, from $1.9 million
and $1.0 million, respectively, for the year ended December 31, 1995. Similarly,
for the six months ended June 30, 1997, total revenues and FFO increased to $5.8
million and $2.1 million, respectively, from $2.7 million and $1.4 million,
respectively, for the six months ended June 30, 1996.
INDUSTRIES
The net lease industry is a large and rapidly expanding source of financing
to the restaurant and retail industries. The Company believes that net lease
financings will continue to grow because net lease transactions enable a
restaurant operator or retailer to realize the value of its owned real estate
while continuing long-term occupancy. Under the Company's typical net lease
structure, the Lease may be treated by the operator as an off-balance sheet
liability, providing additional financial benefits which may increase the
operator's earnings and borrowing capacity. The Company believes that, due to
the significant demand for net lease transactions, numerous opportunities for
the net leasing of properties through development or sale/leaseback transactions
will be available to the Company for the foreseeable future. See "Industries".
THE RESTAURANT INDUSTRY. The restaurant industry is estimated to have
reached $313.0 billion in sales (representing 4.1% of the gross domestic
product) in 1996 and is projected to exceed $330.0 billion in 1997 and $392.0
billion by 2000. According to the National Restaurant Association, there
presently are over 773,000 foodservice locations in the United States. The
franchise and chain restaurant industries are large and rapidly expanding.
International Franchise Association studies show that one out of every 12
business establishments is a franchise and one-third of all spending by
Americans for goods and services is to a franchised business, and suggest that
sales by franchised businesses could exceed $1.0 trillion by 2000. The Company
believes that the fast-food, family-style and casual dining segments, which are
the Company's primary restaurant focus, have grown rapidly in recent years.
According to the National Restaurant Association, 51.0% of American adults eat
at a fast-food restaurant and 42.0% of adults patronize a moderately priced
family restaurant at least weekly. The National Restaurant Association also
indicates that Americans spend approximately 55 cents of every food dollar on
dining away from home and projects that in 1997 fast-food restaurants will
outpace average industry real growth, with a 4.2% increase over 1996, and that
fast-food sales will increase to $110.8 billion from $105.0 billion in 1996. The
Company believes that the substantial fragmentation of its competition for the
acquisition of restaurant properties among large public corporations, private
companies and individuals results in additional opportunities for, and
advantages to, the Company. See "Industries -- The Restaurant Industry".
THE RETAIL INDUSTRY. The retail industry represents approximately
one-third of gross domestic product. According to the U.S. Department of
Commerce, total retail sales increased by 5.0% in 1996 to $2.465 trillion. The
International Council of Shopping Centers ("ICSC") projects that through 2000
retail sales will increase by nearly $500.0 billion (4.1% annually) to $2.9
trillion. Growth in retail sales has resulted in a growth in demand for retail
properties. ICSC projects that gradual obsolescence of existing facilities,
changes in location and tenant format preferences and increasing sales will
support the development of over 770.0 million additional square feet of retail
space through 2000. The retail industry also is undergoing significant change
which the Company believes it is well-positioned to exploit through its growth
and operating strategies. In order to meet changing consumer preferences, and as
a result of the relatively high cost of mall space, the Company believes that
retailers
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increasingly prefer smaller freestanding facilities which are more accessible
and facilitate the customized presentation of the retail concept. The Company
believes that it will benefit from these trends because its properties meet
these retailer preferences. See "Industries -- The Retail Industry".
GROWTH STRATEGY
The Company intends to maximize total returns to stockholders by increasing
cash flow per share and the value of its property portfolio. The Company
believes it can achieve these objectives primarily by acquiring additional
properties and structuring net leases on advantageous terms. As of September 1,
1997, the Company had agreements in principle to acquire the 62 Acquisition
Properties for approximately $94.5 million. The Company utilizes procedures and
methodologies which have been developed and refined by the Advisor to identify,
acquire and manage net leased properties, and seeks to avoid utilizing real
estate brokers or other commissioned intermediaries to reduce acquisition costs.
The Company's principal growth strategies include:
ACQUISITIONS FROM OPERATORS. The Company intends to purchase properties
from, and enter into net leases with, creditworthy multi-unit operators of
national and regional chain and franchised restaurants and retailers. The
Company will make such acquisitions when it can achieve escalating revenue and
targeted returns on its investment through base rent and periodic rent
increases. When possible these acquisitions are structured by the Company to
qualify as off-balance sheet liabilities of the Lessees. Occasionally the
Company will purchase from an operator a property undergoing development subject
to a Lease which commences upon completion of construction. See "Business --
Growth Strategy -- Acquisitions from Operators".
ACQUISITIONS FROM DEVELOPERS. The Company intends selectively to acquire
primarily retail properties from developers prior to the completion of the
development process but subsequent to execution of a net Lease with the
property's operator. By acquiring a property during, and assuming certain risks
of, development, the Company seeks to obtain a more favorable purchase price,
thereby enhancing its overall return. The Company intends, in limited
circumstances, to form joint ventures with developers for the ownership and
leasing of properties. See "Business -- Growth Strategy -- Acquisitions from
Developers".
INCREASES IN REVENUES AND OPERATING MARGINS. The Company will seek to
enhance the financial performance of its portfolio primarily through increasing
revenues, maintaining high Lessee retention and aggressively managing operating
expenses. To provide revenue growth, the Company's Leases require fixed periodic
increases in revenue over the term of the Lease, indexation to the CPI and/or
percentage rent. The Company believes that, as its portfolio grows, it will
realize additional operating efficiencies and benefit from its underwriting
policies which are designed to reduce defaults and non-renewals. See
"Business -- Growth Strategy -- Increases in Revenues and Operating Margins".
OPERATING STRATEGY
The Company continually monitors the success of its existing and targeted
restaurant and retail concepts, the financial condition of its Lessees, Lease
compliance and other factors affecting the financial performance of its
properties. The Company's operating strategies, which have resulted from years
of development and refinement by the Advisor, include:
UNDERWRITING RESTAURANT CHAINS AND RETAILERS. The Company undertakes a
thorough analysis in selecting the restaurant and retail concepts towards which
to direct its leasing activities. This analysis includes a review of publicly
available information concerning the franchisor or chain operator, a credit
analysis of the franchisor's or operator's financial statements and operating
history, evaluation of unit level performance including closure and business
failure statistics, analysis of concept penetration and name recognition, and,
for franchisors, a survey of representative franchisees. Once a business concept
has been approved, the Company, with the Advisor, reviews the ongoing
performance of the concept through monitoring of financial information and news
releases. Each concept is formally reviewed annually. See "Business -- Operating
Strategy -- Underwriting Restaurant Chains and Retailers".
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UNDERWRITING LESSEE CREDIT. The Company's Lessees are predominantly
experienced, multi-unit operators of fast-food, family-style and casual dining
restaurants and retailers. The Company subjects each proposed Lessee to a
thorough underwriting process designed to identify the most creditworthy Lessees
and minimize the Company's risk from defaults and business failures. The Company
targets only Lessees with the competitive position and financial strength to
meet their obligations throughout the Lease term. When appropriate the Company
enhances Lessee credit by requiring guarantees from principals, corporate
parents or third parties. See "Business -- Operating Strategy -- Underwriting
Lessee Credit".
UNDERWRITING SITE SELECTION. Prior to acquiring a property, the Company
engages in an extensive site review. The Company typically undertakes a
long-term viability and market value analysis, including an inspection of the
property and surrounding area by an acquisition specialist, and assessment of
market area demographics, consumer demand, traffic patterns, surrounding land
use, accessibility, visibility, competition and parking. The Company also (i)
obtains an independent appraisal of the property; (ii) obtains an independent
engineering report of the property's mechanical, electrical and structural
integrity; (iii) evaluates both the current and potential alternative uses of
the property; and (iv) obtains an independent Phase I environmental site
assessment. See "Business -- Operating Strategy -- Underwriting Site Selection".
MAINTENANCE OF RELATIONSHIPS WITH RESTAURANT CHAINS, RETAILERS AND
LESSEES. Once a business concept has been approved, the Company, with the
Advisor, seeks to develop a strong ongoing working relationship with national or
regional senior chain or retailer management. The Company believes that
establishing and maintaining such relationships with restaurant chains,
retailers and Lessees provides substantial advantages, including early
identification and resolution of problems affecting Lessees and referrals of
additional financing opportunities. See "Business -- Operating
Strategy -- Maintenance of Relationships with Restaurant Chains, Retailers and
Lessees".
ACTIVE MANAGEMENT OF LESSEE CREDIT. In addition to monitoring Lessee
compliance with Lease obligations, the Company regularly reviews the financial
condition of its Lessees and business, economic and market trends in order to
identify and anticipate problems with Lessee performance which could adversely
affect the Lessee's ability to meet Lease obligations. When potential problems
are identified, the Company seeks early intervention with its Lessees and, when
appropriate, national chain or retailer management in order to address and avoid
such problems. See "Business -- Operating Strategy -- Active Management of
Lessee Credit".
DIVERSIFICATION OF PROPERTY PORTFOLIO, RESTAURANT CHAINS, RETAIL CONCEPTS
AND LESSEES. The Company believes that it has achieved, and will continue to
emphasize, significant diversification of its portfolio both among retail and
restaurant concepts and Lessees. The Company's 79 Existing Properties located in
24 states currently are leased to 36 Lessees operating 18 different restaurant
and six retail concepts. The Company currently anticipates acquiring the 62
Acquisition Properties located in 22 states to be leased to 20 potential Lessees
operating 12 different restaurant and eight retail concepts, resulting in
further diversification of its portfolio. See "Business -- Operating
Strategy -- Diversification of Property Portfolio, Restaurant Chains, Retail
Concepts and Lessees ".
CREDIT FACILITY
Consistent with its investment policies the Company utilizes leverage to
enable it to fund its growth strategies, maintain operating flexibility and
enhance stockholder returns. The Company maintains a $150.0 million revolving
credit facility (the "Credit Facility") with an Affiliate of the lead managing
Underwriter. Upon completion of the Offering and the application of a
substantial portion of the net proceeds to repay the outstanding principal
balance and accrued interest under the Credit Facility, the Company will have no
material debt. The Company will continue to maintain the Credit Facility to fund
the future acquisition and development of properties. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
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FINANCING POLICY
Subject to economic conditions, the Company intends to maintain a policy
limiting its total indebtedness to 50.0% of the market value of its issued and
outstanding shares of capital stock plus the Company's total consolidated debt
("Market Capitalization"). This policy may be altered without the consent of the
Company's stockholders, and the Company's organizational documents do not limit
the amount of indebtedness that the Company may incur. When appropriate the
Company intends to utilize various sources of capital, including the Credit
Facility and the issuance of debt or equity securities in public or private
capital markets for future acquisitions, capital improvements and development.
See "Business -- Financing Policy".
RISK FACTORS
Prospective investors should carefully consider the matters discussed under
"Risk Factors" prior to investing in the Company. These risks include:
- Potential conflicts between the business interests of the Company and the
Advisor in the acquisition, selection, leasing and sale of the properties
and the operation of the Company.
- Dependence on the Advisor and Affiliates of the Company for significant
investment and management decisions.
- Dependence on Lessees for operating income and risks of Lessee defaults
on leases or franchise obligations resulting in the termination of
franchises, bankruptcy or other Lease termination events.
- Concentration of investment in certain Lessees and restaurant concepts.
- Risks inherent in investment in the foodservice and retail industries.
- The ownership, leasing, acquisition, development and expansion of the
properties, including risks of changes in economic and real estate market
conditions, changes in interest rates and the availability of financing,
impact of environmental laws and potential significant liabilities,
ongoing need for capital improvements and other factors beyond the
Company's control.
- Potential inability to acquire some or all of the Acquisition Properties.
- Potential need to incur substantial indebtedness to fund future
operations, acquisitions, expansion and stockholder distributions.
- Franchise relationships, including the possibility that a franchisor may
impose various increased costs, exercise options to buy or lease
properties and impose restrictions on a Lessee's ability to compete,
potential loss of franchises upon franchisee defaults and the uncertainty
and costs of renewing franchises upon their expiration.
- Intense competition, including for acquisition of properties.
- The Company's lack of experience in qualifying and operating as a REIT.
- Taxation of the Company as a corporation if it fails to qualify as a
REIT.
- Potential tax reclassification of preferred stock dividends and resulting
tax liability.
- Payment of a substantial portion of the Offering proceeds to an Affiliate
of the lead managing Underwriter.
- Restrictions on stock ownership impeding potential changes of control.
- Substantial and immediate dilution in the net tangible book value per
share to the purchasers of Common Stock in the Offering.
- The absence of a prior public market for the Common Stock.
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THE PROPERTIES
EXISTING PROPERTIES. The 79 Existing Properties are located in 24 states
and leased to 36 operators of 24 different restaurant and retail concepts. As of
June 30, 1997, the Existing Properties (which average four years of age) were
96.2% leased pursuant to Leases with an average remaining term (excluding
renewals) of approximately 16 years. The Existing Properties typically are
freestanding structures located on lots ranging from 20,000 to 80,000 square
feet for restaurant properties and up to 150,000 square feet for retail
properties. Typical building size ranges from 2,000 to 6,000 square feet for
restaurant properties and up to 40,000 square feet for retail properties. The
following is a summary description of the Existing Properties as of June 30,
1997. See "Business" for a detailed description of each Existing Property,
Lessee and related Lease terms.
ANNUALIZED
FACILITY NO. OF ACQUISITION LOCATION ACQUISITION RENT AT
CONCEPT TYPE PROPERTIES DATE (STATE) COST JUNE 30, 1997(1)
- ------------------ ----------- ---------- ----------- --------------- ----------- ----------------
Applebee's Restaurant 2 1996 MO,WA $ 3,876,444 $ 398,724
Arby's Restaurant 2 1997 GA,IN 1,292,807 128,009
Baby Superstore Retail 1 1996 MO 3,003,000 309,516
Black Angus Restaurant 4 1996 MN 9,219,000 1,005,108
Blockbuster Music Retail 1 1997 AL 1,449,000 147,480
Blockbuster Video Retail 2 1996 TX 1,554,000 160,500
BMW Retail 1 1997 GA 6,769,613 709,200
Boston Market Restaurant 27 1995-1997 IL,IN,MI,NJ 25,451,285 2,518,835
OH,OR,PA
SC,WA,WI
Burger King Restaurant 1 1997 WV 847,364 88,771
Carrows Restaurant 1 1996 CA 4,620,000 483,996
Church's Restaurant 1 1996 GA 835,321 87,516
Denny's Restaurant 9 1995-1997 AZ,FL,LA,NC,TX 8,017,134 824,867
Golden Corral Restaurant 2 1995-1997 FL,TX 3,829,309 387,322
Jack In The Box Restaurant 1 1996 CA 985,425 100,896
Kenny Rogers Restaurant 5 1995-1997 AZ,CA,FL 3,775,470 282,852
Roasters
Mountain Jack's Restaurant 3 1996-1997 MI,OH 4,105,500 426,192
Nissan Retail 1 1997 GA 3,092,250 323,952
Red Line Burgers Restaurant 2 1995 TX 533,994 30,000
Red Robin Restaurant 2 1996 CO,WA 6,124,417 679,224
Roadhouse Grill Restaurant 1 1995 NY 997,500 118,428
Stanford's Restaurant 1 1996 CO,WA 2,310,000 242,004
Taco Cabana Restaurant 3 1994-1996 GA,NV 3,631,975 380,868
Video Update Retail 2 1997 AZ,IL 2,311,108 243,648
Whataburger Restaurant 1 1997 NM 851,141 52,488
--
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Total 79 $99,483,057 $ 10,130,396
== =========== ============
% OF TOTAL LEASE
ANNUAL TERM
CONCEPT RENT EXPIRATION
- ------------------ ---------- ----------
Applebee's 3.9% 2016
Arby's 1.3 2017
Baby Superstore 3.1 2011
Black Angus 9.9 2021
Blockbuster Music 1.5 2006
Blockbuster Video 1.6 2005-2006
BMW 7.0 2017
Boston Market 24.9 2010-2025
Burger King 0.9 2012
Carrows 4.8 2016
Church's 0.9 2016
Denny's 8.1 2010-2017
Golden Corral 3.8 2009-2012
Jack In The Box 1.0 2009
Kenny Rogers 2.8 2005-2014
Roasters
Mountain Jack's 4.2 2016-2017
Nissan 3.2 2017
Red Line Burgers 0.3 2010
Red Robin 6.7 2016
Roadhouse Grill 1.1 2015
Stanford's 2.4 2016
Taco Cabana 3.7 2014-2016
Video Update 2.4 2012
Whataburger 0.5 2007
-----
Total 100.0%
=====
- ---------------
(1) Based upon monthly rent as of June 30, 1997 as annualized and without giving
effect to any future rent increases or percentage rent or deduction for the
effect of three presently non-revenue producing properties which in the
aggregate accounted for $346,716 or 3.4% of annualized rent at June 30,
1997.
ACQUISITION PROPERTIES. As of September 1, 1997, the Company had
agreements in principle to purchase the 62 Acquisition Properties which are
located in 22 states for an aggregate cost of approximately $94.5 million. The
Acquisition Properties will expand the Company's existing portfolio into five
additional states and will further diversify its property, concept and Lessee
base to include operators of Circle K, Michael's Crafts, Office Depot,
SportsMart, Stop n Go, Taco Bell and Tony Roma's. The Company expects the
acquisitions of the Acquisition Properties to be substantially completed by July
1998. There is no assurance that the Company will be successful in acquiring any
or all of the Acquisition Properties. See "Risk Factors -- Risk Related to
Acquisition Properties".
6
10
TAX STATUS OF THE COMPANY
The Company intends to elect to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ending December 31, 1997. If the Company
qualifies as a REIT, under current federal income tax law the Company generally
will not be subject to federal income tax on income distributed to stockholders
provided it distributes at least 95.0% of its REIT taxable income annually and
satisfies other organizational and operational requirements. If the Company
fails to qualify as a REIT in any taxable year, the Company will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at prevailing corporate rates, which effectively would impose on
the Company's stockholders the "double taxation" generally applicable to
investment in a corporation. The Company will receive an opinion of counsel
that, based on certain representations made by the Company and certain
assumptions, the Company will be organized in conformity with the requirements
for qualification as a REIT under the Code and that the method of operation of
the Company will permit the Company to continue to so qualify for its current
and future taxable years. See "Risk Factors -- Risk of Adverse Consequences of
Failure to Qualify as a REIT" and "Federal Income Tax Considerations". Even if
the Company qualifies for taxation as a REIT, it may be subject to certain state
and local taxes on its income and property and excise taxes on its undistributed
income, and will be subject to federal and state income tax on its undistributed
income.
THE OFFERING
All shares of Common Stock offered hereby are being offered by the Company.
Stockholders of the Company prior to the Offering will beneficially own 14.7% of
the Common Stock (13.0% if the Underwriters' over-allotment option is exercised
in full) outstanding immediately following the Offering.
Issuer....................................... Captec Net Lease Realty, Inc.
Offering..................................... 11,325,000 shares(1)
Shares outstanding after the Offering........ 13,273,773 shares(1)(2)
Use of Proceeds.............................. Repayment of indebtedness and redemption of,
and payment of accumulated dividends on,
Preferred Stock. See "Use of Proceeds".
Proposed NYSE Symbol......................... "CRR"
- ---------------
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Does not include 727,000 shares of Common Stock reserved for issuance
pursuant to the Company's Long-Term Incentive Plan, and 600,000 shares of
Common Stock reserved for issuance upon exercise of options to be granted to
Messrs. Beach and Martin pursuant to their employment agreements. See
"Management -- Long-Term Incentive Plan" "-- Executive Compensation and
Employment Contracts", and "-- Compensation of Directors".
7
11
DISTRIBUTION POLICY
In general, qualification as a REIT requires the annual distribution to
stockholders of at least 95.0% of the REIT's taxable income. Following the
completion of the Offering, the Company intends to pay regular quarterly
dividends to its stockholders. The Company anticipates, based on an assumed
initial public offering price of $15.00 per share, that the first dividend to
stockholders purchasing Common Stock in the Offering will be paid with respect
to the quarter ended December 31, 1997, based upon $ .2813 per share for a full
quarter (which if annualized, would be $1.125 per share or an annual
distribution rate of 7.5%). The Company does not intend to reduce the expected
dividend per share if the Underwriters' over-allotment option is exercised. The
Company has established its initial dividend policy based on information and
certain assumptions described herein. See "Distribution Policy". The Company
intends to maintain its initial distribution rate for the first 12 months
following the Offering, unless actual results of operations, economic conditions
or other factors differ from the assumptions used in its estimate, and to review
the dividend rate on a quarterly basis.
The Company intends to distribute annually approximately 80.0% of its Cash
Available for Distribution, although its initial distributions will approximate
97.1% of Cash Available for Distribution. In general, distributions by the
Company of its current or accumulated earnings and profits, other than capital
gain dividends, will be taxable to stockholders as ordinary income for federal
income tax purposes. The Company anticipates that approximately % of the
distributions intended to be paid by the Company for the 12-month period
following the completion of the Offering will represent a return of capital for
federal income tax purposes. For a discussion of the tax treatment of
distributions to stockholders, see "Federal Income Tax Considerations -- Other
Tax Considerations -- Taxation of Taxable Domestic Stockholders".
8
12
SUMMARY FINANCIAL DATA
The summary historical financial data set forth below as of December 31,
1996 and December 31, 1995 and for each of the two years in the period ended
December 31, 1996 have been derived from the financial statements of the Company
included elsewhere herein which have been audited by Coopers & Lybrand L.L.P.,
independent accountants, and should be read in conjunction with those financial
statements (including the notes thereto) and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", all appearing
elsewhere in this Prospectus. The statement of operations data for the six
months ended June 30, 1997 and June 30, 1996 and the selected balance sheet data
as of June 30, 1997 have been derived from the Company's unaudited financial
statements appearing elsewhere in this Prospectus which, in the opinion of
management, reflect all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation. Results of operations for
interim periods are not necessarily indicative of results expected for the full
year.
The summary unaudited pro forma balance sheet data as of June 30, 1997 set
forth below is presented as if the transactions contemplated by this Prospectus,
including the Offering and the application of proceeds therefrom, had occurred
on June 30, 1997. The unaudited pro forma statement of operations data for the
six months ended June 30, 1997 and the year ended December 31, 1996 are
presented as if the transactions contemplated by this Prospectus, including the
Offering and the application of proceeds therefrom, had occurred on January 1,
1996. See "Use of Proceeds". The pro forma financial data set forth below is not
necessarily indicative of what the actual results of operations or financial
position of the Company would have been, nor do they purport to represent the
Company's results of operations or financial position for future periods. The
pro forma financial data should be read in conjunction with the Company's pro
forma financial statements and related notes and historical financial statements
and related notes included elsewhere in this Prospectus.
9
13
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------------------ ------------------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
---------- ---------------------- ---------- ----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1997 1996 1996 1996 1995
---------- --------- --------- ---------- --------- ---------
STATEMENT OF OPERATIONS
DATA:
REVENUE:
Rental income.......... $ 4,996 $ 4,996 $ 1,612 $ 4,907 $ 4,907 $ 614
Interest income on
investments......... 585 585 815 1,691 1,691 541
Interest income on
short-term loans.... 247 247 246 302 302 714
Other.................. 148 (3) 7 486 18 --
---------- --------- --------- ---------- --------- ---------
Total revenue.......... 5,976 5,825 2,680 7,386 6,918 1,869
EXPENSES:
Interest............... -- 2,707 423 -- 1,977 112
General and
administrative...... 837 1,075 511 1,435 1,218 329
Depreciation and
amortization........ 677 677 263 649 649 88
---------- --------- --------- ---------- --------- ---------
Total expenses......... 1,514 4,459 1,197 2,084 3,844 529
---------- --------- --------- ---------- --------- ---------
Income before income
tax.................... 4,462 1,366 1,483 5,302 3,074 1,340
Provision (credit) for
income tax............. -- (39) 372 -- 95 457
---------- --------- --------- ---------- --------- ---------
Net income............. 4,462 1,405 1,111 5,302 2,979 883
Redeemable Preferred
Stock Dividend
Requirements........... -- 3,750 3,750 -- 7,495 3,619
---------- --------- --------- ---------- --------- ---------
Income/(loss)
attributable to
Common Stock........ $ 4,462 $ (2,345) $ (2,639) $ 5,302 $ (4,516) $ (2,736)
========== ========= ========= ========== ========= =========
Income/(loss) per share
of Common Stock..... $ .34 $ (1.78) $ (2.01) $ .40 $ (3.43) $ (2.08)
========== ========= ========= ========== ========= =========
Weighted average number
of shares of Common
Stock outstanding... 13,273,773 1,315,440 1,315,440 13,273,773 1,315,440 1,315,440
========== ========= ========= ========== ========= =========
OTHER DATA:
Funds From Operations
(1)................. $ 5,139 $ 2,082 $ 1,374 $ 5,951 $ 3,628 $ 971
Total properties (at
end of period)...... 79 79 45 63 63 18
JUNE 30 DECEMBER 31
----------------------- ----------------------
PRO FORMA HISTORICAL HISTORICAL
--------- ---------- ----------------------
(IN THOUSANDS)
1997 1997 1996 1995
--------- ---------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 33,765 $ 1,544 $ 3,862 $ 1,969
Properties subject to operating leases,
net....................................... 98,293 98,293 70,175 15,554
Total investments............................ 116,796 113,481 85,735 37,302
Total assets................................. 158,618 123,082 98,614 42,292
Notes payable................................ -- 72,922 48,160 1,588
Total liabilities............................ 1,730 74,652 49,215 2,121
Redeemable Preferred Stock (2)............... -- 48,429 49,399 40,000
Total stockholders' equity................... 156,888 1 1 171
- ---------------
10
14
(1) Industry analysts generally consider FFO to be an appropriate measure of the
performance of an equity REIT. In March 1995 the National Association of
Real Estate Investment Trusts ("NAREIT") adopted the NAREIT White Paper on
FFO (the "NAREIT White Paper") which provided additional guidance on the
calculation of FFO. FFO is defined by NAREIT as net income (computed in
accordance with generally accepted accounting principles ("GAAP")),
excluding gains (or losses) from debt restructuring and sales of property,
plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments for
unconsolidated partnerships and joint ventures. FFO does not represent cash
generated from operating activities in accordance with GAAP and is not
necessarily indicative of cash available to fund cash needs. In addition,
FFO should not be considered an alternative to net income as an indicator of
the Company's operating performance or as an alternative to cash flow as a
measure of liquidity or of the Company's ability to make distributions, nor
is it comparable to cash flows provided by operating activities determined
in accordance with GAAP. The Company computes FFO in accordance with the
NAREIT White Paper, which may differ from the methodology for calculating
FFO utilized by other equity REITs. Accordingly, the Company's FFO may not
be comparable to other equity REITs' FFO and does not represent amounts
available for distributions because of certain capital expenditures,
scheduled mortgage loan principal payments and other items. See
"Distribution Policy".
(2) Mandatory redemption value of $58,026, $56,651, and $42,905 at June 30,
1997, December 31, 1996 and December 31, 1995, respectively.
HISTORY AND FORMATION OF THE COMPANY
Net Lease Michigan was incorporated in Michigan in October 1994 and
commenced operations in February 1995. The Company was incorporated in Delaware
in August 1997 and in September 1997, Net Lease Michigan and Advisors Michigan
were merged into the Company. In this Prospectus, references to the "Company"
include the Company, Net Lease Michigan and Advisors Michigan as the context may
require.
The Company currently has outstanding 50,000 shares of Redeemable Preferred
Stock, $.01 par value (the "Preferred Stock"). Upon completion of the Offering,
40,500 shares of the Preferred Stock will be redeemed utilizing a substantial
portion of the net proceeds of the Offering and 9,500 shares of the Preferred
Stock will be exchanged for 633,333 shares of Common Stock, after which there
will be no Preferred Stock outstanding.
Captec Advisors was formed in August 1997 to provide, together with Captec
Financial and other Affiliates of the Company, daily management and investment
and financial advisory services to the Company pertaining primarily to the
acquisition, development and leasing of properties. See "Business -- The Advisor
and the Advisory Agreement".
Subsequent to completion of the Offering, the Company intends to acquire
the general partnership interests in each of Captec Franchise Capital Partners
L.P. III ("Captec III") and Captec Franchise Capital Partners L.P. IV ("Captec
IV") (each an "Affiliated Partnership", and collectively, the "Affiliated
Partnerships") from the corporate general partner of each Affiliated Partnership
and Patrick L. Beach, the Company's Chairman of the Board of Directors,
President and Chief Executive Officer. See "Business -- The Affiliated
Partnerships".
The Company's principal executive offices are located at 24 Frank Lloyd
Wright Drive, Ann Arbor, Michigan 48106, and its telephone number is (313)
994-5505.
11
15
RISK FACTORS
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE
RISKS DESCRIBED BELOW. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
SPECIFIC FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS, BEFORE DECIDING TO INVEST IN THE COMMON STOCK OFFERED HEREBY.
THIS PROSPECTUS 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 PROSPECTUS THAT 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, INCLUDING THOSE
DESCRIBED BELOW IN THIS "RISK FACTORS" SECTION AND ELSEWHERE IN THIS PROSPECTUS.
CONFLICTS OF INTEREST
The Company, the Advisor, and certain of the Company's directors and
executive officers will be subject to potential conflicts of interest arising
out of the relationships of the Company, the Advisor, such directors and
executive officers and the Affiliated Partnerships. The Company has adopted
certain procedures to limit or mitigate these potential conflicts and to promote
fair resolution of any conflicts which arise. See "Conflicts of
Interest -- Certain Conflict Resolution Procedures". There is no assurance that
these procedures will be effective or will not be changed, or that conflicts
will be resolved in the best interests of the Company and its stockholders. Any
failure to so resolve conflicts could have a material adverse effect on the
Company's financial condition and ability to make distributions to stockholders.
Potential conflicts include:
Business Opportunities. Affiliates of the Advisor have organized five real
estate investment funds, currently have other real estate holdings, and in the
future may form, offer interests in, and manage other real estate programs and
make additional real estate investments. Some of these have included, and may in
the future include, the acquisition and leasing of restaurant or retail
properties, including in transactions with existing or prospective Lessees of
the Company.
The Affiliated Partnerships are engaged in substantially the same business
as the Company, and their investments have included, and will include, the
acquisition and leasing of restaurant or retail properties, including in
transactions with existing or prospective Lessees of the Company.
Accordingly, future business opportunities which are suitable for, and
sought by, the Company also may be suitable for, and sought by, the Affiliated
Partnerships and Affiliates of the Advisor. The Advisor will be subject to
conflicts of interest in allocating opportunities among the Company and the
Advisor's Affiliates, and the Company will be subject to conflicts of interest
in allocating business opportunities between itself and each of the Affiliated
Partnerships. The Company has a fiduciary duty as general partner to the
Affiliated Partnerships. See "Risk as General Partner of Affiliated
Partnerships". The Advisor has disclaimed any fiduciary responsibility to the
Company in the Advisory Agreement, which further provides for certain
exculpation and indemnification of the Advisor by the Company. The directors and
executive officers of the Company who also are directors or executive officers
of the Advisor have fiduciary duties to each corporation for which they so
serve, and have been indemnified by the Company. See "Business -- The Advisor
and the Advisory Agreement".
12
16
Business opportunities which must be allocated may include properties
available for acquisition and lease, preferred lessees, preferred contractors
and service providers, interested buyers for properties available for sale,
sources of capital or financing, allocation of management time and corporate
resources, negotiation of terms, utilization of favorable business
relationships, sharing of information, diversification of risk, avoidance of
competition and other matters. See "Conflicts of Interest -- Prior and Future
Programs", "-- Acquisition of Properties", and "-- Joint Investment with
Affiliates".
Management Time and Advisor Resources; Advisor Compensation. Messrs. Beach
and Martin, executive officers of the Company, are also executive officers of
the Advisor and its Affiliates. See "-- Risk of Dependence on Key Personnel and
Limited Management Group". These individuals, who are also the principal
stockholders of the Advisor, will allocate their time among the Company (and the
Affiliated Partnerships) and the Advisor and its Affiliates. The Advisor also
will allocate its resources among the Company and its other Affiliates and
interests. In certain instances, time and resources may be insufficient to
satisfy all demands. Further, certain fee compensation of the Advisor and the
Company as general partner of the Affiliated Partnerships is dependent on the
occurrence of specified transactions, which may encourage transactions of
uncertain investment merit in order to generate fee compensation. See "Conflicts
of Interest -- Competition for Management Time" and "-- Compensation of the
Advisor".
RISK OF RELIANCE ON MANAGEMENT AND CAPTEC ADVISORS; LACK OF STOCKHOLDER CONTROL
Stockholders will be relying substantially on the ability of management of
the Company and the Advisor, particularly with respect to the Company's
restaurant properties. Both the Company and Captec Advisors are newly formed and
have limited operating histories. Captec Advisors (which will rely substantially
on Captec Financial and its Affiliates, subject to the Board of Directors'
oversight), will be responsible for all aspects of the acquisition, financing,
development and leasing of the Company's restaurant properties and certain
aspects of the Company's retail properties. Upon completion of the Offering,
senior management will have significant control over the operations of the
Company as a result of their senior management positions, which influence may
not be consistent with the interests of other stockholders. Stockholders have no
right or power to participate in the management of the Company except through
the exercise of voting rights. The investment and financing policies of the
Company and its policies with respect to certain other activities, including its
growth, capitalization, distributions, REIT status and operating policies are
determined by the Board of Directors. These policies may be changed from time to
time at the discretion of the Board of Directors without a vote of the
stockholders and any such change could be detrimental to the interests of the
stockholders.
RISK RELATING TO CREDITWORTHINESS OF LESSEES AND FINANCIAL INSTRUMENTS
Although the Company requires prospective Lessees to satisfy its
substantial financial and credit underwriting requirements, the Company will
remain subject to the economic risk inherent in the leasing of property,
including that the financial condition of a Lessee may deteriorate over the term
of the Lease resulting in a default, causing an interruption in revenue from the
property and requiring the Company to obtain a new tenant at substantial
expense. The Company also has invested in a small number of equipment and
financing leases which are subject to similar economic and business risks. The
Company holds various financial instruments, some of which are subordinated to
the interests of senior lenders and the borrowers under some of which are
delinquent in the performance of their obligations. There is no assurance that
the borrowers under these instruments will be able to fulfill their obligations
to the Company or that any of these instruments could be sold for the amounts at
which they are recorded on the Company's financial statements.
RISK OF DEPENDENCE ON KEY PERSONNEL AND LIMITED MANAGEMENT GROUP
The Company is dependent on the efforts of Patrick L. Beach, its Chairman,
President and Chief Executive Officer, W. Ross Martin, its Executive Vice
President and Chief Financial Officer and a director, and Ronald Max, its Vice
President and Chief Investment Officer. Because the Company is substantially
dependent on the services of Messrs. Beach, Martin and Max and there currently
are no other executive officers of the Company, the Company may be considered to
have limited management. The loss of the services of any of these executive
officers could have a material adverse effect on the Company's financial
condition and its ability to make
13
17
distributions to stockholders. Although the Company has entered into three-year
employment agreements with Messrs. Beach and Martin, those agreements may not
assure the continued service of either of them to the Company. See
"Management -- Executive Compensation and Employment Contracts". Moreover,
Messrs. Beach and Martin hold comparable positions with the Advisor, and
although the Advisor has many other employees, the services of Messrs. Beach and
Martin are equally important to the Advisor and to its ability to fulfill its
obligations to the Company. See "-- Conflicts of Interest".
RISK THAT ESTIMATED INITIAL CASH AVAILABLE FOR DISTRIBUTION MAY NOT BE
SUFFICIENT TO MAKE DISTRIBUTIONS AT EXPECTED LEVELS
The Company's proposed initial annual distributions following completion of
the Offering represent 97.1% of the Company's estimated initial Cash Available
for Distribution for the 12 months ending November 30, 1998. In the event that
the Company is not able to pay its estimated initial annual distribution of
$1.125 per share to stockholders out of Cash Available for Distribution, the
Company could be required to fund distributions from working capital, to attempt
to borrow for such distributions or to reduce the amount of such distributions.
Pending investment of the net proceeds, or in the event the Underwriters'
over-allotment option is exercised, the Company's ability to pay such
distribution out of Cash Available for Distribution may be further adversely
affected.
RISK OF OWNERSHIP AND LEASING OF PROPERTIES
Vulnerability to Market and Lessee Conditions. Investment in properties
leased to chain and franchised restaurants, specialty retailers or other
businesses may be affected by adverse changes in general or local economic or
market conditions, increased costs of energy or products, competitive factors,
fuel shortages, quality of management, ability of a franchisor to support its
franchisees, limited alternative uses for buildings, changing consumer habits or
foodservice or retailing trends, condemnation or uninsured losses, changing
demographics and traffic patterns, inability to remodel outmoded or limited
purpose properties as required by the franchise agreement or Lease due to
regulatory or other factors, voluntary or involuntary termination by a Lessee of
its obligations under a Lease or loss by a Lessee of its franchise or operating
rights and other factors. Real estate values also are affected by such factors
as government regulation, interest rates and the availability of financing and
potential liability under, and changes in, environmental, zoning, tax and other
laws.
The rent from the properties, which is the principal source of the
Company's income, and the Lessee's ability to pay rent are affected by these
general economic conditions within the franchise, foodservice and retail
industries as well as changes in consumer preferences and increased competition.
The failure of a particular franchise concept or a franchisor's inability to
support its franchisees could materially adversely affect the ability of a
franchisee to make lease payments, which could have a material adverse effect on
the Company's financial condition and its ability to make distributions to
stockholders. In the event of termination of a Lease or of a franchise agreement
between a Lessee and a franchisor, the Company may be unable to lease the
property on comparable terms and may incur a loss, and in any case is likely to
suffer an interruption of revenue and substantial expense as the property is
refurbished and relet. The Company will not be a party to franchise agreements
between franchisors and Lessees and such agreements could be modified or
canceled without notice to, or the prior consent of, the Company. Laws
regulating the franchise industry in various states may adversely affect the
ability of the Company to enforce contractual agreements or obtain remedies on
default. In the event of a default by a Lessee, the Company may experience
delays in enforcing, and incur substantial costs to enforce, its rights. A
default by the Lessee or other premature termination of a Lease could have a
material adverse effect on the Company's financial condition and its ability to
make distributions to stockholders. As a result of these and other factors,
including the cyclical nature of the real estate markets, the value of the
Company's properties could decrease. See "-- Risk Relating to Creditworthiness
of Lessees".
Market Illiquidity. The inherent illiquidity of real estate investment
will limit the ability of the Company to vary its portfolio expeditiously in
response to changing economic or other conditions. Pursuant to the Code and
related Treasury Regulations, the Company may incur adverse tax consequences in
connection with the sale of properties under certain circumstances. See "Federal
Income Tax Considerations".
14
18
RISK FROM LEVERAGE
Although upon completion of the Offering the Company will have no material
debt, the Company anticipates that in the future some or all of the Company's
properties, including the Acquisition Properties, will be acquired primarily
with borrowings under the Credit Facility. Amounts borrowed under the Credit
Facility are general obligations of the Company secured by a first priority lien
on substantially all of the Company's tangible and intangible assets, including
its properties, the Leases and all rents derived therefrom, accounts receivable
and bank accounts. In borrowing under the Credit Facility to acquire or develop
a property, the Company anticipates that the funds needed to service any debt
attributable to that property will be derived from the income to be produced
from the property for which the indebtedness is incurred. Any default by a
Lessee of a property which has been acquired and/or developed utilizing
borrowings under the Credit Facility will require the Company to divert funds
from other sources in order to service that portion of the Company's obligations
under the Credit Facility. Further, the rental from any re-letting or the
proceeds from the sale of any property may be insufficient to satisfy related
debt service. The use of leverage, while intended to provide a greater rate of
return to stockholders by permitting the Company to acquire properties of
greater aggregate cost than would otherwise be possible, also increases the
Company's risk of loss.
Upon completion of the Offering and the repayment of all amounts
outstanding under the Credit Facility, the Company will be able to borrow up to
$150.0 million under the Credit Facility subject to satisfaction of conditions
set forth in the Credit Facility for such borrowing, including with respect to
the value of property pledged as collateral. The Credit Facility will expire
approximately two years after the completion of the Offering, at which time the
entire outstanding balance of the Credit Facility will mature. Since the Company
intends to grow its portfolio aggressively through the acquisition of additional
properties utilizing funds from the Credit Facility and to lease those
properties on a long-term basis, it is likely the Company will not have
sufficient funds available to repay the outstanding balance of the Credit
Facility upon its maturity. Accordingly, the Company would be required to obtain
the funds necessary to repay the Credit Facility at maturity either through the
refinancing of the Credit Facility, the issuance of additional equity or debt
securities or the sale of properties. The Company has not received a commitment
from any institutional or other lender or investor to loan the funds or purchase
any of the Company's equity or debt securities which the Company may seek to
issue to refinance its indebtedness under the Credit Facility. If the Company
were unable to obtain funds to repay indebtedness on acceptable terms, or at
all, the Company might be forced to dispose of properties or take other actions
upon disadvantageous terms, which could result in losses to the Company and have
a material adverse effect on the Company's financial condition and its ability
to make distributions to stockholders. Pursuant to the Code and related Treasury
Regulations, the Company may incur adverse tax consequences in connection with
the sale of properties under certain circumstances. See "Federal Income Tax
Considerations". For these reasons, there is no assurance that the Company will
be able to repay the Credit Facility upon its maturity. Any default by the
Company under the Credit Facility would subject the Company to risk of
foreclosure on substantially all of its assets, including the properties, to the
extent necessary in order to repay any amounts due under the Credit Facility
including, but not limited to, principal, interest, penalties or other costs and
expenses incurred in the event of a default. Any such default would have a
material adverse effect on the Company's financial condition and its ability to
make distributions to stockholders.
RISK RELATED TO INTEREST RATE INCREASES
The interest rate on borrowings under the Credit Facility is a variable
rate based on prevailing short-term rates while the rents from Leases vary in
accordance with their terms, generally based primarily on periodic increases.
Changes in interest rates and rents are unlikely to be uniform, and increases on
interest rates on borrowings may exceed increases in related rents, potentially
for sustained periods of time. Similarly, interest rates or other costs of funds
to refinance the Credit Facility may be higher than those prevailing under the
Credit Facility without any corresponding increase in rental rates. Such
increases in costs of funds could have a material adverse effect on the
Company's financial condition and its ability to make distributions to
stockholders.
Increases in interest rates may also decrease the value of the Company's
properties, including as collateral, and the Company's ability to borrow.
Increases in interest rates also may adversely affect the value of the
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Common Stock as compared to alternative investments, and other REITs. See
"-- Risk of Ownership and Leasing of Properties".
RISK OF COMPETITION
The restaurant and retail chain finance industry is characterized by
intense competition. The Company will compete with other restaurant and retail
finance companies (some of which are REITs), commercial banks, other financial
institutions and certain franchisors which offer financing services directly to
their franchisees. The Company considers Franchise Finance Corporation of
America, Realty Income Trust and Commercial Net Lease Realty, Inc. to be its
primary competitors among REITs. Some of these competitors for investment
opportunities have substantially greater financial resources than the Company.
These entities generally may be able to accept more risk than the Company
prudently can manage, including risk with respect to the creditworthiness of
lessees or risk related to geographic or other concentration of investment. Such
competition may reduce the number of suitable investment properties available to
the Company and increase the bargaining position of the owners of those
properties.
RISK OF LESSEE AND CONCEPT CONCENTRATION
For the six months ended June 30, 1997, two of the Company's Lessees,
United Auto Group, Inc. (which leases two retail properties in Georgia) and ARG
Enterprises, Inc. (which leases four Black Angus restaurant properties in
Minnesota) accounted for 10.2% and 9.9%, respectively, of the Company's total
annual rent from its properties. At such date operators of Boston Market
restaurants were the Lessees of 27 of the Company's properties in 10 states
which accounted for 24.9% of the Company's total annual rent. Accordingly, the
Company is significantly dependent on revenues derived from these Lessees as
well as the continued success of the Boston Market and Black Angus restaurant
concepts. The loss of either of these significant Lessees or a material adverse
change in the popularity of either the Boston Market or Black Angus restaurants
could have a material adverse effect on the financial condition of the Company
and its ability to make distributions to stockholders. Although the Company
seeks to diversify its Lessee and concept base, there is no assurance it will be
successful in doing so and may continue to be substantially reliant on the
success of specific Lessees and concepts for the foreseeable future. See
"Business -- Properties".
RISK AS GENERAL PARTNER OF AFFILIATED PARTNERSHIPS
Subsequent to the completion of the Offering, the Company will become the
sole general partner of Captec III and Captec IV, each of which is a Delaware
limited partnership engaged in substantially the same business as the Company.
Both Affiliated Partnerships have publicly offered securities under the
Securities Act of 1933, as amended (the "Securities Act") and have numerous
limited partners. The offering of Captec IV is continuing at the date of this
Prospectus. See "Business -- The Affiliated Partnerships". As part of the
acquisition of general partnership interests in Captec III and Captec IV, and in
addition to their existing rights of indemnification from the Affiliated
Partnerships, the Company has agreed to indemnify the former general partners,
including Mr. Beach, from certain liabilities incurred in their capacity as
such, including liabilities under the Securities Act. See "-- Limited Liability
and Indemnification of Officers, Directors and the Advisor". The acquisition by
the Company of the general partnership interests in the Affiliated Partnerships
is contingent on the approval of a majority in interest of the limited partners
of each of the Affiliated Partnerships. There is no assurance that the limited
partners of either or both Affiliated Partnership(s) will approve the
transaction and that the Company will be successful in acquiring the general
partnership interest in either or both Affiliated Partnership(s).
The Company's rights, responsibilities and obligations as the general
partner of each Affiliated Partnership are set forth in the respective
partnership agreements or arise at law. As a general partner, the Company will
own a 1.0% interest in each Affiliated Partnership and be responsible for all
recourse obligations of each Affiliated Partnership to the extent of any
insufficiency of partnership assets. For a description of certain liabilities of
the Affiliated Partnerships, see "Business -- The Affiliated Partnerships". As
the general partner, the Company will also owe the limited partners of each
Affiliated Partnership a fiduciary duty; for the breach of this duty, or of
other obligations under the partnership agreements or at law, the Company may be
liable to the limited partners
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or others. Because the Company and the Affiliated Partnerships are engaged in
substantially the same business, conflicts of interest may arise between the
interests of the Company's stockholders and the interests of the limited
partners.
As general partner, the Company will be entitled to its allocable share of
partnership income or loss in respect of its 1.0% interest, certain additional
income or loss in certain circumstances, certain fees for its services, and the
reimbursement of certain expenses from the Affiliated Partnerships. See
"Business -- The Affiliated Partnerships". Generally, such income and fees
including certain income allocated to the Company with respect to its 1.0%
interest will not qualify for the 95.0% income test applicable to REITs, and all
such income and other non-qualifying income must aggregate less than 5.0% of the
Company's income in any year for the Company to qualify as a REIT. Moreover, for
purposes of the income and asset tests described in "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT", the Company will be
treated as owning a proportionate share of the assets of the Affiliated
Partnerships, and as earning a proportionate share of the income of the
Affiliated Partnerships, which own Affiliated Partnerships assets and have
income which are "nonqualifying" for certain REIT requirements under the Code.
The accumulation by the Affiliated Partnerships of such assets or accrual of
such income could result in the Company failing to meet these tests and failing
to qualify as a REIT. In addition, in the event either Captec III or Captec IV
loses its classification as a partnership for federal income tax purposes for
any reason (such as the excessive transferability of partnership interests) the
Company could cease to be qualified as a REIT which would have a material
adverse effect on the Company's financial condition and its ability to make
distributions to stockholders. See "Federal Income Tax Considerations --
Requirements for Qualification as a REIT". The need to resolve these matters in
the Company's interest may create additional conflicts of interest. See
"-- Conflicts of Interest".
RISK RELATED TO ACQUISITION PROPERTIES
As of September 1, 1997, the Company had agreements in principle to acquire
the 62 Acquisition Properties located in 22 states for an aggregate cost of
approximately $94.5 million. The Acquisition Properties are material to the
Company's current growth strategy. Although the Company and sellers of the
Acquisition Properties have reached agreement on certain fundamental terms of
each of the proposed acquisitions, the consummation of each acquisition by the
Company remains contingent upon the negotiation, execution and closing of
definitive agreements and numerous other factors and contingencies, many of
which are beyond the control of the Company. For these reasons, there is no
assurance that the Company will be successful in acquiring any of the
Acquisition Properties. The Company's ability to make distributions may be
adversely affected if it is unsuccessful in acquiring some or all of the
Acquisition Properties and unable to obtain satisfactory alternative investments
for an extended period of time. There also is no assurance that any of the
Acquisition Properties which may be acquired by the Company will perform
satisfactorily.
RISK OF JOINT VENTURES
Some of the Company's future investments may be owned by joint ventures
between the Company and others, including Affiliates. Joint ventures are subject
to the potential risk of impasse in business decisions where the approval of
each venturer is required. Joint venture ownership of properties also may
involve risks not otherwise present in sole ownership, including that the
Company's co-venturer might become bankrupt or have economic or business
interests or goals inconsistent with those of the Company, or may act contrary
to the Company's interests, subjecting the joint venture to unanticipated
liabilities. See "Business -- Growth Strategy -- Acquisitions from Developers".
RISK OF ACQUIRING PROPERTIES UNDER CONSTRUCTION
Under certain circumstances the Company may acquire the site on which a
particular property is to be built prior to commencement or completion of
construction. To the extent the Company acquires property on which improvements
are to be constructed or completed, the Company may be subject to certain risks
from the builder's inability to control construction costs or to build in
conformity with plans, specifications and timetables. The builder's failure to
perform its contractual obligations may necessitate legal action by the Company
to rescind its
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purchase of a property (which may not be possible in the case of certain
property where the site is purchased prior to completion), to compel performance
or to seek damages. Any such legal action would result in increased costs to the
Company. In any case in which improvements are to be constructed or completed or
in which a property is not yet in operation, the Company will be subject to
additional risks, including the risks of delay in completion and the resulting
delay in receipt of rental income and that the Lessee will not be successful.
See "Business -- Operating Strategy -- Construction and Renovation".
RISK OF RECHARACTERIZATION OF SALE/LEASEBACK TRANSACTIONS
Frequently, the Company enters into sale/leaseback transactions, pursuant
to which the Company purchases a property and leases it back to the seller. In
the event of the bankruptcy of a seller-Lessee, a sale/leaseback transaction may
be recharacterized as either a financing or a joint venture resulting in adverse
economic consequences to the Company. If the transaction is recharacterized as a
loan, the Company may be required to recognize a repayment of principal, thereby
losing the benefit of any rent participation payments it would otherwise have
been entitled to receive. Similar adverse consequences can result if the
transaction is recharacterized as a joint venture between the Company and a
Lessee.
RISK OF UNINSURED LOSSES; COSTS AND AVAILABILITY OF INSURANCE
Each Lessee is required to obtain comprehensive insurance for the
properties, including casualty, liability, fire and extended coverage in amounts
and on other terms satisfactory to the Company. There are certain types of
losses (generally of a catastrophic nature, such as earthquakes, hurricanes,
floods and civil disorder) which are either uninsurable or not economically
insurable. The destruction of, or significant damage to, property due to an
uninsurable cause would result in an economic loss to the Company and could
result in the Company losing both its investment in, and anticipated profits
from, such property. Even in the event that a loss is insured, the coverage may
be insufficient in amount or duration (as in the case of business interruption
insurance), or a Lessee's customers may be lost, such that the Lessee cannot
resume its business after the loss at prior levels or at all, resulting in
reduced rent or a default under its Lease. Any such loss could have a material
adverse effect on the financial condition of the Company and its ability to make
distributions to stockholders.
The Company carries insurance against such risks and in such amounts as it
believes is customary for businesses of its kind. However, the costs and
availability of insurance change, and the Company is not covered presently, and
may not be covered in the future, against certain losses where the cost or
availability of coverage or the remoteness of perceived risk does not, in the
judgment of management, warrant it. There is no assurance that the Company's
insurance against loss is, or will be, sufficient.
RISK OF POTENTIAL ENVIRONMENTAL LIABILITY
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property and may be held liable to a governmental
entity or to private parties for property damage and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws typically impose clean-up responsibility and liability without regard
to whether the owner knew or caused the presence, of the contaminants, and the
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure properly to remediate the contamination on such property, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances at a disposal or treatment facility also may be
liable for the costs of removal or remediation of a release of hazardous or
toxic substances at such disposal or treatment facility, whether or not such
facility is owned or operated by such person. In addition, some environmental
laws create a lien on the contaminated site in favor of the government for
damages and costs incurred in connection with the contamination. Finally, the
owner of a site may be subject to common law claims by third parties for damages
and costs resulting from environmental contamination emanating from such site.
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Certain federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials
("ACM") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACM and may permit third parties to seek
recovery from owners or operators for personal injury resulting from ACM. In
connection with its ownership and operation of the properties, the Company may
be potentially liable for such costs.
In the past few years, independent environmental consultants have conducted
or updated environmental site assessments, including Phase I and Phase II site
assessments, and other environmental investigations as appropriate
("Environmental Site Assessments") at the Existing Properties. These
Environmental Site Assessments have included, among other things, a visual
inspection of the Existing Properties and the surrounding area, employee
interviews and a review of relevant state, federal and historical documents.
Soil and groundwater sampling was performed where warranted and remediation, if
necessary, has been or is being conducted. The Company currently is not
directing or paying the costs of any remediation or monitoring work at any
Existing Property. In addition, where possible, the Company has entered into
indemnification agreements with current Lessees and/or prior owners at certain
of the Existing Properties where potential environmental issues have been
raised, but have been remediated or otherwise resolved.
The Environmental Site Assessments of the Existing Properties have not
revealed any environmental liability that the Company believes would have a
material adverse effect on the Company's financial condition or ability to make
distributions to stockholders, nor is the Company aware of any such material
environmental liability. Nevertheless, it is possible that the Company's
Environmental Site Assessments do not reveal all environmental liabilities and
that there are material environmental liabilities of which the Company is
unaware. Moreover, there is no assurance that (i) future laws, ordinances or
regulations will not impose any material environmental liability or (ii) the
current environmental condition of the Existing Properties or any future
properties, including the Acquisition Properties, will not be affected by
Lessees, by the condition of land or operations in the vicinity of the
properties (such as the presence of underground storage tanks), or by third
parties unrelated to the Company.
The Company has not been notified by any governmental authority, and is not
otherwise aware, of any material noncompliance, liability or claim relating to
hazardous or toxic substances or petroleum products in connection with ownership
of any of the Existing Properties. As part of its underwriting procedures, the
Company will obtain Environmental Site Assessments for all future properties,
including the Acquisition Properties.
RISK RELATED TO AMERICANS WITH DISABILITIES ACT COMPLIANCE
Under the American with Disabilities Act (the "ADA"), places of public
accommodation or commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. Although the Company
believes the Existing Properties are materially in compliance with the present
requirements of the ADA, the Company may incur additional costs in connection
with ADA compliance in the future. Also, the ADA and other federal, state and
local laws and regulations concerning access by disabled persons may require
modifications to the Company's properties. Non-compliance with the ADA could
result in the imposition of fines, awards of damages to private litigants or an
order to correct non-compliance. Although under the Company's Leases, the
Lessees are responsible for ensuring that the properties comply with all laws
and regulations, including the ADA, this contractual responsibility does not
relieve the Company of its obligations under the ADA in the event of any
non-compliance by a Lessee and, notwithstanding the provisions of the Leases,
the Company may be required to make substantial capital expenditures to comply
with the ADA.
RISK RELATED TO SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, all 11,325,000 shares of Common Stock
offered hereby will be eligible for public sale under the Securities Act,
without restriction, except for shares acquired in the Offering by Affiliates.
In addition, of the remaining shares of Common Stock to be outstanding
immediately after the Offering, 1,315,440 will be eligible for immediate resale
under Rule 144 promulgated under the Securities Act ("Rule 144"), subject to
Rule 144's volume, manner of sale and other restrictions, and 633,333 shares
will be so eligible upon satisfaction of such conditions and of a one year
holding period. The Company also may, at any
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time following the completion of the Offering, register 1,327,000 shares of
Common Stock reserved for issuance pursuant to its Long-Term Incentive Plan and
upon exercise of options to be granted to Messrs. Beach and Martin pursuant to
their employment agreements. The Company also has agreed to register 633,333
shares of the Common Stock to be issued to an Affiliate in exchange for shares
of unredeemed Preferred Stock in the event of a subsequent public offering of
Common Stock by the Company or upon demand at any time subsequent to 180 days
following the completion of the Offering. In addition, the Company has the
authority to issue additional shares of Common Stock and shares of one or more
series of the Preferred Stock. The issuance of such shares could result in the
dilution of voting power of the shares of Common Stock purchased in the Offering
and could have a dilutive effect on earnings per share. The Company currently
has no plans to designate and/or issue any additional shares of Preferred Stock.
Future sales of substantial amounts of Common Stock, or the potential for such
sales, could adversely affect prevailing market prices. The Company and its
officers, directors and all current stockholders each have agreed that they will
not, without the prior written consent of Credit Suisse First Boston
Corporation, the lead managing Underwriter, offer, sell, contract to sell, grant
any option to purchase or otherwise dispose of any shares of Common Stock or any
securities convertible into, exercisable or exchangeable for such Common Stock
or in any other manner transfer all or a portion of the beneficial ownership of
such Common Stock for a period of 180 days from the date of this Prospectus. See
"Shares Eligible for Future Sale".
RISK OF ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company intends to operate to qualify as a REIT under the Code
commencing with its taxable year ending December 31, 1997. The Company does not
have any operating history or experience in qualifying, or operating in
accordance with the requirements for maintaining qualification, as a REIT and
there is no assurance that the Company will qualify or, once qualified will
remain qualified, as a REIT. There is no assurance that new legislation,
regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. Qualification as a REIT
involves the application of highly technical and complex Code provisions for
which there are only limited judicial and administrative interpretations. The
determination of various factual matters and circumstances not entirely within
the Company's control may affect the Company's ability to qualify as a REIT. For
example, in order to qualify as a REIT, at least 95.0% of the Company's gross
income in any year must be derived from qualifying sources, and the Company must
make distributions to stockholders aggregating annually at least 95.0% of its
REIT taxable income (excluding capital gains). The Company intends to make
distributions to its stockholders to comply with the distribution provisions of
the Code. Although the Company anticipates that its cash flows from operations
will be sufficient to pay its operating expenses and meet distribution
requirements, no assurance can be given in this regard.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates, and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its stockholders. Unless entitled to relief under certain
statutory provisions, the Company also would be ineligible for qualification as
a REIT for the four taxable years following the year during which qualification
was lost. Such disqualification would reduce the net earnings of the Company
available for investment or distribution to its stockholders due to the
additional tax liability of the Company for the years involved. See "Federal
Income Tax Considerations -- Requirements for Qualification as a REIT -- Failure
to Qualify".
RISK RELATED TO REIT MINIMUM DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company generally will be required to
distribute to stockholders annually at least 95.0% of its net taxable income
(excluding any net capital gain). The Company will be subject to a 4.0%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of 85.0% of
its ordinary income plus 95.0% of its capital gain net income for that year plus
amounts not distributed in prior years. The Company intends to make
distributions to its stockholders to comply with the 95.0% distribution
requirement and to avoid the nondeductible excise tax. The Company's income will
consist primarily of its income from the properties. Differences in timing
between taxable income and receipt of Cash Available for Distribution and the
seasonality of certain industries or a default
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or Lease termination could cause the Company to have taxable income without
sufficient cash to make the annual distributions required of a REIT under the
Code. In such cases, the Company could be compelled to seek to borrow, or to
liquidate investments on disadvantageous terms, in order to meet the
distribution requirements. See "Business" and "Federal Income Tax
Considerations". Distributions will be determined by the Board of Directors and
will depend on a number of factors, including the amount of Cash Available for
Distribution, the Company's financial condition, any decision by the Board of
Directors to reinvest rather than distribute available funds, the Company's
capital expenditures, the annual distribution requirements under the REIT
provisions of the Code and any other factors the Board of Directors deems
relevant. See "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT -- Annual Distribution Requirements".
RISK RELATED TO FAILURE TO DISTRIBUTE NON-REIT EARNINGS AND PROFITS
The Company was incorporated in Delaware in August 1997 and in September
1997 Net Lease Michigan and Advisors Michigan were merged into the Company in a
transaction in which the Company succeeded to the earnings and profits of the
merged companies. Under the Code, a company with earnings and profits
accumulated in a non-REIT year must distribute all of such earnings and profits
by the end of the year in which it elects to be taxed as a REIT in order to
qualify as a REIT. If for any reason the Company fails to distribute all such
earnings and profits by December 31, 1997, the Company will fail to qualify as a
REIT. See " -- Risk of Adverse Consequences of Failure to Qualify as a REIT" and
"Federal Income Tax Considerations -- Requirements for Qualification as a
REIT -- Failure to Qualify".
RISK RELATED TO OTHER TAX LIABILITIES
Even if the Company qualifies as a REIT for federal income tax purposes, it
may be subject to certain federal, state and local taxes on its income and
property and excise taxes on its undistributed income, and will be subject to
federal and state income taxes on its undistributed income. See "Federal Income
Tax Considerations -- Other Tax Considerations -- State and Local Taxes".
The Company has deducted from its income for federal income tax purposes
the dividends paid on the Preferred Stock as interest expense, and has not
withheld any amounts in respect of such distributions to the holder of the
Preferred Stock. If the deduction or failure to withhold is challenged by the
Internal Revenue Service (the "IRS"), the Company could be assessed and
ultimately required to pay income and withholding taxes which, as of June 30,
1997, could aggregate up to $3.4 million, plus interest and costs of defense.
The Company's financial statements reflect as of June 30, 1997 an aggregate
provision of $875,000 which represents, in accordance with GAAP, the minimum
amount (exclusive of costs of defense) the Company believes would be necessary
to settle any claim brought by the IRS. There is no assurance that if any claim
is asserted, it could be settled for $875,000 or any amount less than the entire
claim. See Note 9 to Financial Statements.
RISK OF CHANGES IN TAX LAWS
The discussion of the federal income tax aspects of the Offering is based
on current law, including the Code, the Regulations, certain administrative
interpretations thereof and court decisions. Future events that modify or affect
prevailing law may result in federal income tax treatment of the Company and the
stockholders that is materially and adversely different from that described in
this Prospectus, both for taxable years arising before and after such events.
There is no assurance that future legislation and administrative interpretations
will not be retroactive in effect.
RISK RELATED TO REPAYMENT OF INDEBTEDNESS TO AFFILIATE OF LEAD MANAGING
UNDERWRITER
Credit Suisse First Boston Mortgage Capital, L.L.C. ("CSFBMC"), an
Affiliate of Credit Suisse First Boston Corporation, will receive approximately
$107.1 million of the net proceeds of the Offering for the repayment of the
outstanding principal balance of, and accrued interest on, the Credit Facility.
See "Underwriting".
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RISK RELATED TO CERTAIN ANTI-TAKEOVER EFFECT OF LIMITATION ON OWNERSHIP OF
COMMON STOCK
In order for the Company to maintain its qualification as a REIT, not more
than 50.0% in value of the outstanding Common Stock of the Company may be owned,
directly or indirectly, by five or fewer individuals. The Company's Certificate
of Incorporation (the "Certificate") prohibits ownership of more than 9.8% of
the Common Stock by any single stockholder following completion of the Offering,
with certain exceptions. A holder of Common Stock may be prohibited from
increasing its holdings of Common Stock. Generally prohibiting any stockholder
from owning more than 9.8% of the Common Stock may (i) discourage a change in
control of the Company; (ii) deter tender offers for the Common Stock, which may
otherwise be beneficial to the Company's stockholders; or (iii) limit the
opportunity for stockholders to receive a premium for their Common Stock that
could be obtained from an investor attempting to assemble a block of Common
Stock in excess of 9.8% or to effect a change in control of the Company.
Certain tender offers and invitations for tender for more than 10.0% of the
outstanding shares of the Company's Common Stock also may be subject to Section
203 of the Delaware General Corporation Law (the "GCL"). See "Capital Stock of
the Company -- Delaware Business Combination Provisions".
The Certificate authorizes the Board of Directors to issue up to 10,000,000
shares of Preferred Stock and to designate certain preferences and rights of any
such shares. Upon completion of the Offering, a substantial portion of the net
proceeds of which will be utilized to redeem 40,500 shares of Preferred Stock
from an Affiliate, and the Affiliate will exchange 9,500 shares of Preferred
Stock for 633,333 shares of the Common Stock, after which no Preferred Stock
will be outstanding. The Company has no current intention to issue any
additional Preferred Stock. The future issuance of any Preferred Stock with
preferential dividend rights would reduce the Cash Available for Distribution to
the holders of Common Stock. The issuance of shares of Preferred Stock also
could delay or prevent a change in control of the Company even if a change in
control otherwise was in the stockholders' interest. See "Capital Stock of the
Company -- Preferred Stock".
RISK RELATED TO NO LIMITATION ON DEBT
Although the Board of Directors has adopted a policy to limit the Company's
indebtedness to 50.0% of Market Capitalization, the organizational documents of
the Company do not limit the amount or percentage of indebtedness that the
Company may incur. The Board of Directors, without stockholder approval, could
alter the Company's borrowing policy at any time. If this policy were changed,
the Company could become more highly leveraged, resulting in an increase in debt
service expense that could materially adversely affect the Company's financial
condition and its ability to make distributions to stockholders and increase the
Company's risk of default on its obligations. See "-- Risks from Leverage" and
"Business -- Financing Policy".
LIMITED LIABILITY AND INDEMNIFICATION OF OFFICERS, DIRECTORS AND THE ADVISOR
The Certificate and Bylaws of the Company (the "Bylaws") provide that an
officer or director's liability to the Company, its stockholders or third
parties for monetary damages may be limited. Generally, the Company is obligated
under the Certificate and the Bylaws to indemnify its officers and directors
against certain liabilities incurred in connection with their service in such
capacities. The Company has executed indemnification agreements with each
officer and director requiring indemnification by the Company for most
liabilities incurred. Pursuant to the Advisory Agreement, the Company has agreed
that the Advisor, which includes Captec Advisors, Captec Financial and other
Affiliates, will not be liable to the Company, its stockholders or others,
except for acts constituting fraud, willful misconduct or reckless disregard of
its obligations under the Advisory Agreement, and will not be responsible for
any action of the Board of Directors in following or declining to follow any
advice or recommendation given by the Advisor. The Company also has agreed to
indemnify the Advisor with respect to acts or omissions of the Advisor
undertaken in good faith, in accordance with, and pursuant to, the requirements
of the Advisory Agreement. The foregoing provisions and agreements could limit
the legal remedies available to the Company and its stockholders against such
persons, and could require the Company to pay amounts, which could be material,
to such persons for their defense or in satisfaction of their obligations. See
"Management -- Indemnification and Limitation of Liability".
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RISK RELATED TO DILUTION
Purchasers of the Common Stock in the Offering will experience immediate
and substantial dilution of $3.25 per share from the initial public offering
price in the net tangible book value per share of the Common Stock. See
"Dilution".
ABSENCE OF PRIOR PUBLIC MARKET FOR THE COMMON STOCK
Prior to the Offering, there has been no public market for the Common
Stock. There is no assurance that an active trading market will develop or be
sustained following the Offering or that at any time the Common Stock may be
resold at or above the initial public offering price. The initial public
offering price will be determined through negotiations between the Company and
the representatives of the Underwriters (the "Representatives") without
independent appraisals or other valuations and may not be indicative of the
value of the Company's assets or the market price of the Common Stock after the
Offering. See "Underwriting".
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USE OF PROCEEDS
The net proceeds to the Company from the Offering, after payment of
Offering expenses, are estimated to be approximately $157.0 million ($180.7
million if the Underwriters' over-allotment option is exercised in full), based
on the assumed initial public offering price of $15.00 per share.
The Company will use the net proceeds approximately as follows:
APPROXIMATE
APPROXIMATE PERCENTAGE OF NET
APPLICATIONS OF PROCEEDS DOLLAR AMOUNT PROCEEDS
- --------------------------------------------------------------- ------------- -----------------
(IN THOUSANDS)
Repayment of Credit Facility(1)................................ $ 107,050 68.2%
Redemption of, and payment of accrued dividends on, the
Preferred Stock(1)........................................... 47,686 30.4
Repayment of notes payable..................................... 2,248 1.4
------------- ------
Total........................................................ $ 156,984 100.0%
============= ======
- ---------------
(1) Projected balances at October 31, 1997.
The Company will use approximately $107.1 million of the net proceeds of
the Offering to repay the outstanding principal balance of and accrued interest
on, the Credit Facility with CSFBMC, an Affiliate of the lead managing
Underwriter. The Credit Facility currently accrues interest on its outstanding
principal balance at a variable annual rate of LIBOR for U.S. dollar deposits
with 30 day maturities (the "Benchmark Rate") in effect from time to time plus
2.318% (the "Revolving Loan Rate"). As of June 30, 1997, the Benchmark Rate was
5.691% and the Revolving Loan Rate was 8.009%. Upon completion of the Offering,
the Revolving Loan Rate will be reduced to the Benchmark Rate plus 1.75% and the
expiration date of the Credit Facility (currently February 26, 1998) will be
extended until the second anniversary of the completion of the Offering.
The Company will use approximately $47.7 million of the net proceeds of the
Offering to redeem Preferred Stock from an Affiliate, and for the payment of
approximately $7.2 million in accumulated but unpaid dividends on the Preferred
Stock for 1997, 1996 and 1995.
The Company will use approximately $2.3 million of the net proceeds of the
Offering to repay the outstanding principal balance of, and accrued interest on,
two notes payable to Heller Financial. These notes bear interest at fixed annual
rates of 9.85% and 10.35%, respectively, and mature in 1999 and 2001,
respectively.
If the Underwriters' over-allotment option is exercised, the additional net
proceeds will be used for working capital and general corporate purposes,
including possible financing of the Acquisition Properties. Pending the
described uses, the net proceeds may be invested in interest-bearing accounts
and short-term interest-bearing securities consistent with the Company's
intention to qualify as a REIT. These investments may include government and
government agency securities, certificates of deposit, and interest-bearing bank
deposits.
DISTRIBUTION POLICY
Subsequent to the Offering, the Company intends to make quarterly
distributions to stockholders. The first dividend, for the period commencing
upon the completion of the Offering and ending December 31, 1997, is anticipated
to be in a prorated amount approximately equivalent to a quarterly distribution
of $.2813 per share (which, if annualized, would equal $1.125 per share), or an
annual yield of 7.5% per share based on an assumed initial public offering price
of $15.00 per share. The Company does not intend to reduce the expected
distribution per share if the Underwriters' over-allotment option is exercised.
The Company intends to distribute annually approximately 80.0% of its Cash
Available for Distribution, although its initial distributions will approximate
97.1% of its estimated Cash Available for Distribution. Such distribution amount
could change if actual results from operations, economic conditions or other
factors differ significantly from the assumptions used by the Company in
calculating estimated Cash Available for Distribution.
24
28
While the Company believes that its estimate of Cash Available for
Distribution constitutes a reasonable basis for setting the initial distribution
rate, such estimate is made solely for such purpose and is not intended to be a
projection or forecast of the Company's results of operations or its liquidity.
The Company's actual return, if any, will be affected by a number of factors,
including the revenue received from its properties, operating expenses, the
interest expense incurred on borrowings, the ability of Lessees to meet Lease
obligations and unanticipated capital expenditures. See "Risk Factors -- Risk of
Ownership and Leasing of Properties".
The following table illustrates the adjustments made by the Company to its
pro forma FFO for the 12 months ended June 30, 1997 in order to calculate
estimated Cash Available for Distribution for the 12 months ending November 30,
1998:
IN THOUSANDS
------------
Pro forma net income for the year ended December 31, 1996....................... $ 5,302
Plus: Pro forma net income for the six months ended June 30, 1997............... 4,462
Less: Pro forma net income for the six months ended June 30, 1996............... (1,939)
Plus: Pro forma depreciation for the 12 months ended June 30, 1997(1)........... 1,063
--------
Pro forma FFO for the 12 months ended June 30, 1997............................. 8,888
Adjustments:....................................................................
Net increase from Existing Leases and new leases(2)........................... 9,094
Net change in interest expense(3)............................................. (438)
Net increase from Affiliated Partnerships(4).................................. 46
Net change in general and administrative expenses(5).......................... (496)
Pro forma FFO for the 12 months ended November 30, 1998......................... 17,094
--------
Net effect of straight-line rents(6)............................................ (1,721)
--------
Estimated adjusted pro forma cash flows from operating activities for the 12
months ended November 30, 1998................................................ 15,373
Capital expenditures and scheduled debt payments................................ 0
--------
Estimated Cash Available for Distribution for the 12 months ended November 30,
1998.......................................................................... $ 15,373
========
Total estimated initial distributions........................................... $ 14,933
========
Estimated initial annual distributions per share................................ $ 1.125
========
Payout ratio based on estimate Cash Available for Distribution.................. 97.1%
- ---------------
(1) Pro forma depreciation of $649,000 for the year ended December 31, 1996 plus
$677,000 for the period ended June 30, 1997 less $263,000 for the period
ended June 30, 1996.
(2) Represents the incremental increase in FFO attributable to rental revenue
from the Existing Properties and rental revenue from that portion of the
Acquisition Properties for which rental income is expected to commence by
December 1, 1997, for the 12 month period ending November 30, 1998.
(3) Represents the incremental decrease in FFO attributable to a net increase in
interest expense from the pro forma 12 months ended June 30, 1997 to the pro
forma 12 months ending November 30, 1998, resulting from debt estimated to
be incurred prior to December 1, 1997 and subsequent to the repayment of the
outstanding principal balance of the Credit Facility.
(4) Represents the incremental increase in FFO attributable to a net increase in
other revenue from the Affiliated Partnerships from the pro forma 12 months
ended June 30, 1997 to the pro forma 12 months ending November 30, 1998.
(5) Represents the incremental decrease in FFO attributable to a net increase in
general and administrative expense resulting from increases in asset
management fees from the pro forma 12 months ending June 30, 1997 to the pro
forma 12 months ending November 30, 1998 for acquisitions to be completed
prior to December 1, 1997.
(6) Represents the effect of adjusting straight-line rental income included in
the 12 months ending November 30, 1998 from accrual basis under GAAP to a
cash basis.
In order to qualify to be taxed as a REIT, the Company must make annual
distributions to stockholders of at least 95.0% of its REIT taxable income
(determined without regard to the dividends received deduction and by excluding
any net capital gains). See "Federal Income Tax Considerations -- Taxation of
the Company as a REIT -- Annual Distribution Requirements". The Company
anticipates that its estimated Cash Available for
25
29
Distribution will exceed its REIT taxable income due to non-cash expenses,
primarily depreciation and amortization, to be incurred by the Company. It is
possible, however, that the Company occasionally may not have sufficient cash or
other liquid assets to meet these distribution requirements due to timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of the Company. In the event that such
timing differences occur, in order to meet the distribution requirements, the
Company may find it necessary to arrange for short-term, or possibly long-term,
borrowings or to pay dividends in the form of taxable stock dividends.
Distributions by the Company to the extent of its current and adjusted earnings
and profits for federal income tax purposes, other than capital gain dividends,
will be taxable to stockholders as ordinary dividend income. Capital gain
distributions generally will be treated as long-term capital gains.
Distributions in excess of earnings and profits generally will be treated as
non-taxable return of capital to the extent of each stockholder's basis in the
Common Stock and thereafter as taxable gain. The non-taxable distributions will
reduce each stockholder's tax basis in the Common Stock and, therefore, the gain
(or loss) recognized on the sale of such Common Stock or upon liquidation of the
Company will be increased (or decreased) accordingly. For a discussion of the
tax treatment of distributions to holders of Common Stock, see "Federal Income
Tax Considerations -- Taxation of Taxable Domestic Stockholders" and
"-- Taxation of Foreign Stockholders".
Financing activities such as repayment or refinancing of loans also may
affect the Company's assets and liabilities and the amount of Cash Available for
Distribution for future periods. Management will seek to control the timing and
nature of investing and financing activities in order to maximize the Company's
return on invested capital.
Future distributions by the Company will be subject to the requirements of
the GCL and the annual distribution requirements under the REIT provisions of
the Code (see "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT -- Annual Distribution Requirements") and will depend on
the actual cash flow of the Company, its financial condition, its capital
requirements and such other factors as the Board of Directors deems relevant.
There is no assurance that any distributions will be made or that the expected
level of distributions will be maintained by the Company. See "Risk
Factors -- Risk of Ownership and Leasing of Properties" and "-- Risk that
Estimated Initial Cash Available for Distribution May Not be Sufficient to Make
Distributions at Expected Levels". If future revenues generated by the Company's
properties decrease materially from current levels, the Company's ability to
make expected distributions would be materially adversely affected, which could
result in a decrease in the market price of Common Stock.
The Company may in the future implement a distribution reinvestment program
under which holders of shares of Common Stock may elect automatically to
reinvest distributions in additional shares of Common Stock. The Company may
repurchase or arrange for the repurchase of shares of Common Stock in the open
market for purposes of fulfilling its obligations under this distribution
reinvestment program, if adopted, or may elect to issue additional shares of
Common Stock. There can be no assurance that the Company will adopt such a
program.
26
30
CAPITALIZATION
The following table sets forth as of June 30, 1997, the capitalization of
the Company and the pro forma capitalization of the Company as adjusted to
reflect the sale of shares of Common Stock pursuant to the Offering at an
assumed initial public offering price of $15.00 per share, the application of
the net proceeds therefrom as described under "Use of Proceeds", and the
redemption of the Preferred Stock and the exchange of Common Stock for
unredeemed Preferred Stock. The information set forth in the following table
should be read in conjunction with "Selected Financial Data", the financial
statements of the Company and notes thereto, the pro forma financial statements
of the Company and notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
Credit Facility(1).................................................... $ 70,669 --
Notes Payable......................................................... 2,253 --
Redeemable Preferred Stock(2) (mandatory redemption
value -- $58,026)................................................... 48,429 --
Stockholders' Equity:
Preferred Stock, $.01 par value, 10,000,000 shares authorized(2).... -- --
Common Stock, $.01 par value, 40,000,000 shares authorized,
1,315,440 shares issued and outstanding; 13,273,773 shares as
adjusted(3)...................................................... 13 $ 132
(Capital Deficit) Paid-In Capital................................... (12) 156,756
-------- ---------
Total stockholders' equity............................................ 1 156,888
-------- ---------
Total capitalization............................................. $121,352 $ 156,888
======== =========
- ---------------
(1) Upon completion of the Offering and repayment of the outstanding principal
balance and accrued interest of the Credit Facility, the Company may,
subject to the provisions of the Credit Facility, borrow up to $150.0
million on a revolving credit basis. See "Risk Factors -- Risk from
Leverage" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations --Liquidity and Capital Resources".
(2) 50,000 shares of Redeemable Preferred Stock issued and
outstanding -- mandatory redemption value $1,000 per share, plus accumulated
and unpaid dividends; none issued or outstanding as adjusted.
(3) Does not include 1,327,000 shares of Common Stock reserved for issuance
pursuant to the Company's Long-Term Incentive Plan and upon exercise of
options to be granted to Messrs. Beach and Martin pursuant to their
employment agreements, and 1,698,750 shares of Common Stock which the
Underwriters may purchase pursuant to the over-allotment option. See
"Management -- Long-Term Incentive Plan", "-- Executive Compensation and
Employment Contracts", "-- Compensation of Directors" and "Underwriting".
27
31
DILUTION
At June 30, 1997, the Company's tangible book value (deficit) was
$(10,538,438), or $(8.01) per share. At June 30, 1997, giving effect to the
exchange of Common Stock for unredeemed Preferred Stock, the pro forma net
tangible book value per share was $(.53). The anticipated initial public
offering price per share of Common Stock exceeds the pro forma net tangible book
value per share, and stockholders of the Company immediately prior to the
Offering will realize an immediate increase in the net tangible book value of
their Common Stock upon completion of the Offering, while purchasers of Common
Stock sold in the Offering will realize immediate and substantial dilution from
the initial public offering price in the net tangible book value of their
shares. Net tangible book value per share is determined by subtracting the sum
of total liabilities plus the mandatory redemption value of the Preferred Stock
from total tangible assets and dividing the remainder by the number of shares of
Common Stock that will be outstanding before the Offering. Pro forma net
tangible book value per share is determined by subtracting total liabilities
from total tangible assets and dividing the remainder by the number of shares of
Common Stock that will be outstanding after the Offering. The following table
illustrates the dilution to purchasers of Common Stock sold in the Offering,
based on an assumed initial public offering price of $15.00 per share.
Initial public offering price per share.................................. $ 15.00
------
Pro forma net tangible book value per share before the Offering..... $ (.53)
Increase per share attributable to new investors.................... 12.28
------
Pro forma net tangible book value per share after the Offering........... 11.75
------
Dilution per share to new investors...................................... $ 3.25
======
The following table sets forth the number of shares of Common Stock to be
sold by the Company in the Offering, the total amount to be paid to the Company
by purchasers of Common Stock sold in the Offering (assuming an initial public
offering price of $15.00 per share), the number of shares of Common Stock
outstanding immediately prior to the Offering (giving effect to the exchange of
unredeemed Preferred Stock for Common Stock) and the total consideration paid
and average price per share paid for such shares by the existing stockholders.
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------------- ------- -------------
(IN THOUSANDS)
Existing stockholders......... 1,948,773 14.7% $ 9,501 5.3% $ 4.88
New investors................. 11,325,000 85.3% $169,875 94.7% $ 15.00
---------- ----- ------------ ----- -----
Total....................... 13,273,773 100.0% $179,376 100.0%
========== ===== ============ =====
28
32
SELECTED FINANCIAL DATA
The selected historical financial data set forth below as of December 31,
1996 and December 31, 1995 and for each of the two years in the period ended
December 31, 1996 have been derived from the financial statements of the Company
included elsewhere herein which have been audited by Coopers & Lybrand L.L.P.,
independent accountants, and should be read in conjunction with those financial
statements (including the notes thereto) and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", all appearing
elsewhere in this Prospectus. The statement of operations data for the six
months ended June 30, 1997 and June 30, 1996 and the selected balance sheet data
as of June 30, 1997 have been derived from the Company's unaudited financial
statements appearing elsewhere in this Prospectus which, in the opinion of
management, reflect all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation. Results of operations for
interim periods are not necessarily indicative of results expected for the full
year.
The selected unaudited pro forma balance sheet data as of June 30, 1997 set
forth below is presented as if the transactions contemplated by this Prospectus,
including the Offering and the application of the proceeds therefrom, had
occurred on June 30, 1997. The unaudited pro forma statement of operations data
for the six months ended June 30, 1997 and the year ended December 31, 1996 are
presented as if the transactions contemplated by this Prospectus, including the
Offering and the application of the proceeds therefrom, had occurred on January
1, 1996. See "Use of Proceeds". The pro forma financial data set forth below is
not necessarily indicative of what the actual results of operations or financial
position of the Company would have been, nor do they purport to represent the
Company's results of operations or financial position for future periods. The
pro forma financial data should be read in conjunction with the Company's pro
forma financial statements and related notes and historical financial statements
and related notes included elsewhere in this Prospectus.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------------ -------------------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
----------- ---------------------- ----------- -----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1997 1996 1996 1996 1995
----------- ---------- --------- ----------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
REVENUE:
Rental income.................... $ 4,996 $ 4,996 $ 1,612 $ 4,907 $ 4,907 $ 614
Interest income on investments... 585 585 815 1,691 1,691 541
Interest income on short-term
loans.......................... 247 247 246 302 302 714
Other............................ 148 (3) 7 486 18 --
----------- ---------- ---------- ----------- ---------- ----------
Total revenue.................... 5,976 5,825 2,680 7,386 6,918 1,869
EXPENSES:
Interest......................... -- 2,707 423 -- 1,977 112
General and administrative....... 837 1,075 511 1,435 1,218 329
Depreciation and amortization.... 677 677 263 649 649 88
----------- ---------- ---------- ----------- ---------- ----------
Total expenses................... 1,514 4,459 1,197 2,084 3,844 529
----------- ---------- ---------- ----------- ---------- ----------
Income before income tax........... 4,462 1,366 1,483 5,302 3,074 1,340
Provision (credit) for income
tax.............................. -- (39) 372 -- 95 457
----------- ---------- ---------- ----------- ---------- ----------
Net income....................... 4,462 1,405 1,111 5,302 2,979 883
Redeemable Preferred Stock Dividend
Requirements..................... -- 3,750 3,750 -- 7,495 3,619
----------- ---------- ---------- ----------- ---------- ----------
Income/(loss) attributable to
Common Stock................... $ 4,462 $ (2,345) $ (2,639) $ 5,302 $ (4,516) $ (2,736)
=========== ========== ========== =========== ========== ==========
Income/(loss) per share of Common
Stock.......................... $ .34 $ (1.78) $ (2.01) $ .40 $ (3.43) $ (2.08)
=========== ========== ========== =========== ========== ==========
Weighted average number of shares
of Common Stock outstanding.... 13,273,773 1,315,440 1,315,440 13,273,773 1,315,440 1,315,440
=========== ========== ========== =========== ========== ==========
OTHER DATA:
Funds From Operations(1)......... $ 5,134 $ 2,082 $ 1,374 $ 5,951 $ 3,628 $ 971
Total properties (at end of
period)........................ 79 79 45 63 63 48
29
33
JUNE 30 DECEMBER
------------------------ -----------------------
PRO FORMA HISTORICAL HISTORICAL
----------- ---------- -----------------------
(IN THOUSANDS)
1997 1997 1996 1995
----------- ---------- ---------- ----------
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 33,765 $ 1,544 $ 3,862 $ 1,969
Properties subject to operating leases, net............ 98,293 98,293 70,175 15,554
Total investments...................................... 116,796 113,481 85,735 37,302
Total assets........................................... 158,618 123,082 98,614 42,292
Notes payable.......................................... -- 72,922 48,160 1,588
Total liabilities...................................... 1,730 74,652 49,214 2,121
Redeemable Preferred Stock(2).......................... -- 48,429 49,399 40,000
Total stockholders' equity............................. 156,888 1 1 171
- ---------------
(1) Industry analysts generally consider FFO to be an appropriate measure of the
performance of an equity REIT. In March 1995, NAREIT adopted the NAREIT
White Paper which provided additional guidance on the calculation of FFO.
FFO is defined by NAREIT as net income (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of property,
plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments for
unconsolidated partnerships and joint ventures. FFO does not represent cash
generated from operating activities in accordance with GAAP and is not
necessarily indicative of cash available to fund cash needs. In addition,
FFO should not be considered an alternative to net income as an indicator of
the Company's operating performance or as an alternative to cash flow as a
measure of liquidity or of the Company's ability to make distributions, nor
is it comparable to cash flows provided by operating activities determined
in accordance with GAAP. The Company computes FFO in accordance with the
NAREIT White Paper, which may differ from the methodology for calculating
FFO utilized by other equity REITs. Accordingly, the Company's FFO may not
be comparable to other equity REITs' FFO and does not represent amounts
available for distributions because of certain capital expenditures,
scheduled mortgage loan principal payments and other items. See
"Distribution Policy".
(2) Mandatory redemption value of $58,026, $56,651, and $42,905 at June 30,
1997, December 31, 1996 and December 31, 1995, respectively.
30
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's historical and pro forma financial
statements and notes thereto appearing elsewhere in this Prospectus. 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 pro forma financial data. Conversely, the
historical financial data does not include certain revenues from the Affiliated
Partnerships which are included in the pro forma financial data.
The Company derives the preponderance of its revenues from the leasing of
restaurant and retail properties on a long-term triple net basis under Leases
which generally impose on the Lessee all obligations of repairs, maintenance,
real property taxes, assessments, utilities and insurance. The Leases typically
provide for minimum rent plus specified fixed periodic rent increases or, in
certain circumstances, indexation to the CPI and/or percentage rent. Other
revenues are derived primarily from interest income on long- and short-term
investments and will include fees and income from the Affiliated Partnerships.
The Company records rental revenue on a straight line basis over the term of
each Lease.
General and administrative expenses will include management fees paid to
the Advisor under the terms of the Advisory Agreement.
Substantially all of the Leases are treated as operating leases for
purposes of GAAP and the related properties are recorded at cost less
accumulated depreciation. All costs associated with the acquisition and
development of a property, including fees paid to the Advisor, are capitalized
at the time of the acquisition. Buildings acquired or developed are amortized on
a straight-line basis over a 40-year period.
Since the Company has not historically been a REIT, a provision for income
tax has been recorded. This provision does not bear the usual relationship to
pretax income as a result of the treatment of dividends paid on Preferred Stock
as deductible interest expense for tax purposes. See Note 9 to Financial
Statements and "Risk Factors -- Risks Related to Other Tax Liabilities".
The substantial change in revenues and expenses from year to year is the
result primarily of the acquisition and development of properties and the
commencement of Leases during the year of acquisition and the recognition of a
full year's operation in the year subsequent to acquisition.
HISTORICAL RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1997 TO JUNE 30,
1996
Total revenue increased to $5.8 million for the six months ended June 30,
1997 as compared to $2.7 million for the six months ended June 30, 1996.
Rental revenue increased to $5.0 million for the six months ended June 30,
1997 from $1.6 million for the six months ended June 30, 1996. The increase in
rental revenue resulted principally from the acquisition of 34 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 decreased to $585,000 for the six months
ended June 30, 1997 from $814,000 for the six months ended June 30, 1996, as the
Company's investments and short-term loans declined.
Interest expense increased to $2.7 million for the six months ended June
30, 1997 from $423,000 for the six months ended June 30, 1996. The increase was
primarily due to interest on $59.3 million of additional debt used to fund the
acquisition of properties which was incurred during the six months ended June
30, 1997, as well as a full period of interest on debt incurred in prior
periods.
General and administrative expenses increased to $1.1 million for the six
months ended June 30, 1997 from $511,000 for the six months ended June 30, 1996.
The increase was primarily due to an increase in management fees paid to
Affiliates.
31
35
Depreciation and amortization increased to $678,000 for the six months
ended June 30, 1997 from $263,000 for the six months ended June 30, 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 period.
The provision for income tax for the six months ended June 30, 1997
reflects a credit of $39,000 as compared to an expense of $372,000 for the
comparable period in the prior year. The 1997 amount reflects the benefit of a
loss-carryforward, net of a reserve for taxes, and the effect of treating
Preferred Stock dividends as deductible interest for tax purposes. See Note 9 to
Financial Statements and "Risk Factors -- Risk Related to Other Tax
Liabilities".
As a result of the foregoing, the Company's net income prior to Preferred
Stock dividend requirements increased to $1.4 million for the six months ended
June 30, 1997, from $1.1 million for the six months ended June 30, 1996, and FFO
increased to $2.0 million from $1.4 million for the same periods, respectively.
Loss after Preferred Stock dividend requirements deceased to $2.3 million for
the six months ended June 30, 1997 from $2.6 million in the comparable period of
the prior year.
HISTORICAL RESULTS OF OPERATIONS -- 1996 TO 1995
Total revenue increased to $6.9 million for the year ended December 31,
1996 from $1.9 million for the year ended December 31, 1995.
Rental revenue increased to $4.9 million for the year ended December 31,
1996 from to $614,000 for the year ended December 31, 1995. The increase in
rental revenue resulted principally from the acquisition of 45 net leased
properties and the benefit of a full period of rental revenue from properties
acquired and leased in the preceding period.
Interest income on investments increased to $1.7 million for the year ended
December 31, 1996 from $541,000 for the year ended December 31, 1995, primarily
as a result of the benefit of a full period of interest income from investments
made in the preceding period.
Interest expense increased to $2.0 million for the year ended December 31,
1996 from $112,000 for the year ended December 31, 1995. The increase was
primarily due to interest on $46.6 million of debt used to fund the acquisition
of properties which was incurred during 1996 and a full period of interest on
debt incurred in the preceding year.
General and administrative expense increased to $1.2 million for the year
ended December 31, 1996 from $329,000 for the year ended December 31, 1995. The
increase was primarily due to an increase in management fees paid to Affiliates.
Depreciation and amortization increased to $649,000 for the year ended
December 31, 1996 from $88,000 for the year ended December 31, 1995, 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
period.
The provision for income tax for 1996 decreased to $95,000 from $457,000 in
1996 primarily as a result of the increased amount of Preferred Stock dividends
in 1996 and their treatment as deductible interest for tax purposes. See Note 9
to Financial Statements and "Risk Factors -- Risk Related to Other Tax
Liabilities".
As a result of the foregoing, the Company's net income prior to Preferred
Stock dividend requirements increased to $2.98 million for 1996 from $883,000 in
1995, and FFO increased to $3.6 million from $971,000 for the same periods,
respectively. Loss after Preferred Stock dividend requirements increased to $4.5
million in 1996 from $2.7 million in 1995.
PRO FORMA RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1997
Pro forma net income was $4.5 million for the six months ended June 30,
1997, compared to historical net income of $1.4 million for the period. Pro
forma revenue increased by $151,000 as a result of the inclusion of revenues
from the Affiliated Partnerships. Pro forma expenses declined by $2.7 million as
a result of: (i) the elimination of interest expense based on repayment of the
entire outstanding principal balance of the Credit
32
36
Facility and other notes payable; (ii) a reduction in management fees to conform
with the terms of the Advisory Agreement; and (iii) elimination of the provision
for income tax based upon the intent of the Company to qualify as a REIT, the
aggregate effect 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. The pro forma
adjustments were assumed to have occurred on January 1, 1996.
PRO FORMA RESULTS OF OPERATIONS -- 1996
Pro forma net income was $5.3 million for the year ended December 31, 1996,
compared to historical net income of $3.0 million for the period. Pro forma
revenue increased by $468,000 as a result of the inclusion of revenues from the
Affiliated Partnerships. Pro forma expenses declined by $1.8 million as a result
of: (i) the elimination of interest expense based on repayment of the entire
outstanding principal balance of the Credit Facility and other notes payable;
(ii) a reduction in management fees to conform with the terms of the Advisory
Agreement; and (iii) elimination of the provision for income tax based upon the
intent of the Company to qualify as a REIT, which reductions 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. The pro forma adjustments were assumed to have
occurred on January 1, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company will use proceeds of the Offering to repay the Credit Facility
and its other notes payable, to redeem a substantial portion of the Preferred
Stock and pay the accrued dividends thereon; unredeemed shares of Preferred
Stock will be exchanged for Common Stock. As a result, cash required to service
debt and pay Preferred Stock dividends will decrease substantially. The Credit
Facility combined with the absence of leverage upon the completion of the
Offering will enhance the Company's ability to take advantage of acquisition
opportunities.
After the Offering and subject to the satisfaction of certain conditions,
the Company will be able to borrow up to $150.0 million under the Credit
Facility. The Company anticipates that the Credit Facility will be used
primarily to acquire properties, including the Acquisition Properties. The
Credit Facility is secured by a first lien on properties financed and other
assets of the Company. Upon completion of the Offering, the expiration date of
the Credit Facility will be extended from February 26, 1998 to the second
anniversary of the completion of the Offering, and the Revolving Loan Rate will
be reduced from LIBOR plus 2.318% to LIBOR plus 1.75%. 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 also may 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 approximately two years after the
completion of the Offering, at which time the entire outstanding balance of the
Credit Facility will mature. Since the Company intends to grow its portfolio
aggressively through the acquisition of additional properties utilizing funds
from the Credit Facility and to lease those properties on a long-term basis, it
is likely the Company will not have sufficient funds available to repay the
outstanding balance of the Credit Facility upon its maturity. Accordingly, the
Company would be required to obtain the funds necessary to repay the Credit
Facility at maturity either through the refinancing of the Credit Facility, the
issuance of additional equity or debt securities or the sale of properties. The
Company has not received a commitment from any institutional or other lender or
investor to loan the funds or purchase any of the Company's equity or debt
securities which the Company may seek to issue in order to refinance its
indebtedness under the Credit Facility. If the Company were unable to obtain
funds to repay indebtedness on acceptable terms, or at all, the Company might be
forced to dispose of properties or take other actions upon disadvantageous
terms, which could result in losses to the Company and have a material adverse
effect on the Company's financial condition and its ability to make
distributions to stockholders. See "Risk Factors -- Risk From Leverage".
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Subsequent to completion of the Offering, the Company expects to make
distributions from Cash Available for Distribution, which the Company expects
will exceed historical Cash Available for Distribution as a result of the
reduction in debt service and Preferred Stock dividend requirements, the
decreases in advisory fee rates, and other factors described in the pro forma
results of operations, as well as the anticipated growth of the portfolio of net
leased properties. See "Risk Factors -- Risk that Estimated Initial Cash
Available for Distribution May Not be Sufficient to Make Distributions at
Expected Levels," "Distribution Policy," and the pro forma financial statements.
The Company intends to meet its short-term liquidity requirements generally
through its working capital and net cash provided by operations. The Company
believes that net cash from operations will be sufficient to allow the Company
to make distributions necessary to enable the Company to qualify as a REIT. The
Company also believes that the foregoing sources of liquidity will be sufficient
to fund its short-term liquidity needs for the foreseeable future.
The Company intends to meet its long-term liquidity requirements such as
property acquisition and development and scheduled debt maturities through
long-term secured and unsecured indebtedness and the issuance of additional
equity or debt securities. Specifically, the Company expects to utilize the
Credit Facility to finance the acquisition and development of additional
properties, including the Acquisition Properties. For a discussion of certain
contingencies pertaining to the Company's income tax liabilities, see Note 9 to
Financial Statements.
INFLATION
The Company's Leases contain provisions which mitigate the adverse impact
of inflation. The Leases generally provide for specified periodic rent increases
including, fixed increased amounts, 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 resulting from
inflation.
The Credit Facility will bear interest at a variable rate, which will be
influenced by changes in short-term interest rates, and will be sensitive to
inflation.
ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT ADOPTED BY THE COMPANY
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement No.
128"), which establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock. Statement
No. 128 simplifies the standards for computing EPS previously found in APB
Opinion No. 15, "Earnings Per Share", and makes them comparable to international
EPS standards. It replaces the presentation of primary EPS with a presentation
of basic EPS.
In February 1997, SFAS No. 129, "Disclosure of Information about Capital
Structure," was issued. SFAS No. 129, which applies to all entities that have
issued securities, requires, in summary form, the pertinent rights and
privileges of the various securities outstanding. Examples of information that
shall be disclosed are dividends and liquidation preferences, participation
rights, call prices and dates, conversion or exercise prices or rates and
pertinent dates, sinking-fund requirements, unusual voting rights, and
significant terms of contracts to issue additional shares. SFAS No. 129 is
effective for financial statements issues for periods ending after December 15,
1997.
INDUSTRIES
The net lease industry is a large and rapidly expanding source of financing
to the restaurant and retail industries. The Company believes that net lease
financings will continue to grow because net lease transactions enable a
restaurant or retailer to realize the value of its owned real estate while
continuing long-term occupancy. Under the Company's typical net lease structure,
the Lease may be treated by the operator as an off-balance sheet
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liability, providing additional financial benefits which may increase the
operator's earnings and borrowing capacity. The Company believes that, due to
the significant demand for net lease transactions, numerous opportunities for
the net leasing of properties through development or sale/leaseback transactions
will be available to the Company for the foreseeable future.
THE RESTAURANT INDUSTRY
The foodservice industry is one of the largest industries in the United
States. In 1996 total foodservice industry revenue increased by $14.8 billion
from 1995 to $313.0 billion and represented 4.1% of gross domestic product.
According to the National Restaurant Association there presently are over
773,000 food service locations in the United States.
The Company invests primarily in properties for lease to operators of
select national and regional fast-food, family-style and casual dining chains.
Fast-food restaurants such as Burger King, Arby's and Jack in the Box feature
quality food and quick service, which often includes drive-through facilities,
and offer a variety of menu items such as hamburgers, pizza, chicken, hot and
cold sandwiches and salads. Family-style restaurants such as Denny's and Golden
Corral feature services generally associated with full-service restaurants such
as buffets or full table service and cooked to order food at value-conscious
prices. Casual dining restaurants such as Applebee's and Tony Roma's feature a
variety of popular contemporary foods, full table service, moderate prices and
surroundings that are appealing and entertaining to families and services
generally associated with full-service restaurants. The fast-food, family-style
and casual dining segments of the restaurant industry have demonstrated the
ability to adapt to changes in consumer influences such as health and dietary
issues, time constraints on working families and environmental awareness through
various innovations, including special value pricing and promotions, expansion
into non-traditional locations, menu expansion and new packaging.
The Company believes that the fast-food, family-style and casual dining
segments, which are the Company's primary restaurant focus, have grown rapidly
in recent years. The franchise and chain restaurant industries are large and
rapidly expanding. International Franchise Association studies show that one out
of every 12 business establishments is a franchise and one-third of all spending
by Americans for goods and services is to a franchised business. The National
Restaurant Association projects that for 1996 fast-food restaurants will have
outpaced average industry real growth with a 4.2% increase over 1995. Sales in
this segment of the restaurant industry are projected to increase from $105.0
billion in 1996 to $110.8 billion in 1997. According to Nation's Restaurant
News, the 100 largest restaurant chains posted average sales growth of 6.5% for
1996. Casual dining concepts are among the chains showing the strongest growth,
experiencing system-wide sales growth of 12.9% in 1995 and 14.6% in 1996.
Forecasts in the January 1, 1997 issue of Restaurants and Institutions project
that full service restaurant sales will experience 6.0% real growth in 1997 to
$102.0 billion. According to Nation's Restaurant News the 15 largest casual
dining chains have a total of 4,913 restaurants throughout the United States
with 1996 revenues in excess of $11.0 billion.
According to the National Restaurant Association, 51.0% of American adults
eat at a fast-food restaurant and 42.0% of adults patronize a moderately priced
family restaurant at least weekly. The National Restaurant Association indicates
that Americans spend approximately 55 cents of every food dollar on dining away
from home. Surveys published in Restaurant Business indicate that families with
children choose quick-service restaurants four out of every five times they dine
out.
The Company believes that it will have the opportunity to participate in
foodservice industry growth through the ownership of properties leased to
operators of these restaurant concepts. The Company also believes that the
substantial fragmentation of its competition for the acquisition of restaurant
properties among large public corporations, private companies and individuals
results in additional opportunities for, and advantages to, the Company.
THE RETAIL INDUSTRY
The retail industry represents approximately one-third of the gross
domestic product. According to the U.S. Department of Commerce, total retail
sales increased by 5.0% in 1996 to $2.465 trillion. The International Council of
Shopping Centers ("ICSC") projects that through 2000 retail sales will increase
by nearly
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$500.0 billion (4.1% annually) to $2.9 trillion. Growth in retail sales has
resulted in a growth in demand for retail properties. ICSC projects that gradual
obsolescence of existing facilities, changes in location and tenant format
preferences and increasing sales will support the development of over 770.0
million additional square feet of retail space through 2000. The retail industry
also is undergoing significant change which the Company believes it is
well-positioned to exploit through its growth and operating strategies. In order
to meet changing consumer preferences, and as a result of the relatively high
cost of mall space, the Company believes that retailers increasingly prefer
smaller, freestanding facilities which are more accessible and facilitate the
customized presentation of the retail concept. The typical retail property is
increasingly likely to be a freestanding facility of the size and type of
property which has been, and will continue to be, the focus of the Company's
retail acquisition strategy. The Company believes that it will benefit from
these trends because its properties meet these retailer preferences.
BUSINESS
GENERAL
The Company, which intends to qualify as a REIT, acquires, develops and
owns high-quality freestanding properties leased principally on a long-term
triple-net basis to national and regional chain and franchised restaurants and
retailers. As of June 30, 1997, the Company had a portfolio of 79 Existing
Properties located in 24 states, which was 96.2% leased. In addition, as of
September 1, 1997, the Company had agreements in principle for acquisitions of
the 62 Acquisition Properties located in 22 states for an aggregate cost of
approximately $94.5 million, which the Company expects to be substantially
completed by July 1998. The Lessees of the Existing Properties include operators
of 24 different restaurant and retailer concepts, including Applebee's, Arby's,
Baby Superstore, Black Angus, Blockbuster Music, Blockbuster Video, Boston
Market, Burger King, Church's, Denny's, Golden Corral Family Steakhouses and
Jack in the Box. The Acquisition Properties will expand the Company's portfolio
into five additional states, and further diversify its property, concept and
Lessee base to include operators of Circle K, Michael's Crafts, Office Depot,
SportsMart, Stop n Go, Taco Bell and Tony Roma's. The Company anticipates that
most future acquisitions will be newly constructed at the time of acquisition.
The Company generally acquires properties from operators or developers in
locations which have exhibited growth in retail sales and population. Upon
acquiring a property, the Company normally enters into a long-term triple-net
Lease (typically 15 to 20 years plus one or more five-year renewal options) with
the Lessee who will operate the property. Under the terms of a typical Lease,
the Lessee is responsible for all operating costs and expenses including
repairs, maintenance, real property taxes, assessments, utilities and insurance.
In addition, the Lease generally provides for minimum rent plus specified fixed
periodic rent increases or, in certain circumstances, indexation to the CPI
and/or percentage rent. The Company believes that the structure of its Leases
provides steady periodically escalating long-term revenue while reducing
operating expenses and capital costs, and that its underwriting standards reduce
the risk of Lessee default or non-renewal. The Existing Properties average four
years of age and are subject to Leases with an average remaining term of 16
years.
The Company's senior management and Board of Directors have extensive
experience in the acquisition, development and ownership of net leased
properties, particularly those used in restaurant and retail operations, have
served in senior positions with large restaurant franchisees, retailers and real
estate companies. The Company's senior executives average 16 years experience in
the franchise and retail finance industry and have been primarily responsible
for the Company's acquisition, development and leasing of the Existing
Properties and agreements in principle to acquire the Acquisition Properties.
The Company has retained the Advisor, which will manage the operations of
the Company and provide it with investment and financial advisory services
pertaining primarily to the acquisition, development and leasing of properties.
The Advisor is a family of affiliated specialized commercial finance companies
providing a diverse line of financing products to the franchise, chain
restaurant and specialty retail industries. Since its inception in 1981, the
Advisor has developed substantial expertise in all aspects of the franchise,
chain restaurant and specialty retail finance business, including business
concept, property and lessee underwriting, property
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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 over 60 years of direct industry experience and an average tenure of over
10 years with Captec Financial. Including the Company, Captec Financial had
assets under management of approximately $350.0 million and combined debt and
equity capital resources of approximately $540.0 million including available,
but unutilized, borrowing capacity. The Company's retention of the Advisor will
be reviewed by the Board of Directors annually.
Since commencing operations in 1995, the Company has experienced
substantial growth in its real estate portfolio, revenues and FFO. As of June
30, 1997, the Company had total assets of $123.1 million. In addition, for the
year ended December 31, 1996, total revenues and FFO increased to $6.9 million
and $3.6 million, respectively, from $1.9 million and $1.0 million,
respectively, for the year ended December 31, 1995. Similarly, for the six
months ended June 30, 1997, total revenues and FFO increased to $5.8 million and
$2.1 million, respectively, from $2.7 million and $1.4 million, respectively,
for the six months ended June 30, 1996.
GROWTH STRATEGY
The Company intends to maximize returns to stockholders by increasing cash
flow per share and the value of its property portfolio. The Company believes it
can achieve these objectives primarily by acquiring additional properties and
structuring net Leases on advantageous terms. As of September 1, 1997, the
Company had agreements in principle to acquire the 62 Acquisition Properties for
approximately $94.5 million. The Company utilizes procedures and methodologies
which have been developed and refined by the Advisor to identify, acquire and
manage net leased properties, and seeks to avoid utilizing real estate brokers
or other commissioned intermediaries to reduce acquisition costs. The Company's
principal growth strategies include:
Acquisitions from Operators. The Company intends to purchase properties
from, and enter into net leases with, creditworthy multi-unit operators of
national and regional chain and franchised restaurants and retailers. The
Company will make such acquisitions when it can achieve escalating revenue and
targeted returns on its investment through base rent and periodic rent
increases. When possible these acquisitions are structured by the Company to
qualify as off-balance sheet liabilities of the operators. Occasionally, the
Company will purchase from an operator a property undergoing development subject
to a Lease which commences upon completion of construction. In those
circumstances, the Lease is executed at the time the land is purchased and is
structured to provide the Company with rates of return based upon the Company's
total acquisition cost.
Acquisitions from Developers. The Company intends selectively to acquire
primarily retail properties from developers prior to the completion of the
development process but subsequent to execution of a net lease with the
property's operator. By acquiring a property during, and assuming certain risks
of, development, the Company seeks to obtain a more favorable purchase price,
thereby enhancing its overall return. The Company intends, in limited
circumstances, to form joint ventures with developers to combine the capital
resources of the Company with the developer's capability and property supply. It
is anticipated that in these joint ventures the Company typically will provide
some or all of the development capital in return for a market rate of return
plus a share of development profits. Upon completion of development the Company
may acquire some or all of the property from the joint venture net of the
Company's interest in the property with the objective of obtaining a higher
return than otherwise is realized when acquiring a developed property. See "Risk
Factors -- Risk of Joint Ventures".
Increases in Revenues and Operating Margins. The Company will seek to
enhance the financial performance of its portfolio primarily through increasing
revenues, maintaining high Lessee retention and aggressively managing operating
expenses. To provide revenue growth, the Company's Leases require fixed periodic
increases in revenue over the term of the Lease, indexation to the CPI and/or
percentage rent. The Company believes that as its portfolio grows, it will
realize additional operating efficiencies and benefit from its underwriting
policies which are designed to reduce defaults and non-renewals.
The Company intends to maintain significant flexibility with respect to the
form of its acquisition transactions, using cash available from operations or
the Credit Facility for sellers seeking immediate liquidity, as well as
tax-advantaged partnership structures to attract tax-motivated sellers. Such
structures may include joint
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ventures or other types of co-ownership with sellers, whether in the form of
limited partnerships, limited liability companies, or other entities expected to
be controlled by the Company. The sellers may be offered interests in the
ventures which are convertible or exchangeable for shares of Common Stock or
otherwise allow the seller to participate in the financial growth of the
Company. Although the Company has no present intention of doing so, the Company
may in the future acquire all or substantially all of the securities of other
REITs or similar entities when such investments would be consistent with the
Company's investment objectives.
OPERATING STRATEGY
The Company continually monitors the success of its existing and targeted
restaurant and retail concepts, the financial condition of its Lessees, Lease
compliance and other factors affecting the financial performance of its
properties. The Company's operating strategies, which have resulted from years
of development and refinement by the Advisor, include:
Underwriting Restaurant Chains and Retailers. The Company leases its
properties to franchisees and operators of select major regional and national
restaurants and retailers because the Company believes these widely recognized
and centrally supported chains possess significant advantages over their
independent competitors. These competitive advantages, which include the use of
nationally recognized trademarks and logos and substantial management, training,
advertising, market and product support from franchisors and national or
regional chain management, strengthen the business and financial position of the
Company's Lessees. The Company monitors many franchise, restaurant and retail
concepts, ranging from smaller newly created concepts to large, mature
nationally recognized concepts with established operating histories.
The Company employs thorough underwriting procedures which have been
developed and refined by the Advisor to select the franchise and chain business
concepts towards which to direct its leasing activities. This analysis includes
a review of publicly available information concerning franchisors or chain
operators; credit analysis of the franchisor's or operator's financial
statements for the three most recent fiscal years; assessment of business
strategies, operating history and key personnel; operational and financial
evaluation of unit level performance, including sales, costs, margins and
closure statistics; comparison of fee and expense structure to industry
averages; analysis of concept penetration and name recognition; assessment of
non-quantitative factors contributing to concept success; and, for franchisors,
surveys of representative franchisees to develop data on average sales,
profitability and satisfaction with franchisor support.
To be considered by the Company, a franchise concept generally must meet
the following requirements:
- Minimum of 50 units
- Minimum of five years franchising experience
- Franchisor net worth of $5.0 million
- Two consecutive years net operating profit
- Low unit closure rates
- Limited litigation history, especially with franchisees
Non-franchised concepts are subject to similar criteria except that a smaller
number of units generally is required.
The Company's concept underwriting procedures also result in the
establishment of credit standards for concept Lessees. Once selected, the
Company conducts ongoing review of the performance of the business concept
through monitoring of financial information and news releases. Each business
concept is formally reevaluated annually.
Underwriting Lessee Credit. The Company's Lessees predominantly are
experienced, multi-unit operators of fast-food, family-style and casual dining
restaurants and retailers. The Company subjects each proposed Lessee to an
underwriting process designed to identify the most creditworthy Lessees and
minimize the Company's risk from defaults and business failures. The Company
targets only Lessees with the competitive position and financial strength to
meet their obligations throughout the Lease term. The Company's Lessees, as
franchisees or operators of major national and regional franchised and chain
outlets, undergo rigorous scrutiny
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and training by national and regional franchisor and chain management and often
must make substantial capital investments prior to conducting business. This
provides additional assurance as to the quality of the Company's Lessees and
further reduces the Company's risk. The Company seeks to identify Lessees with
positive trends in sales and profits; positive cash flow sufficient to cover
current long-term debt and Lease obligations; moderate leverage position; and
satisfactory bank and trade references, personal and business financial
histories and credit reports. The Company favors applicants, the principals of
which can demonstrate previous operating success particularly within the same or
similar concept, and who have beneficial occupational expertise (such as a chief
financial officer who is a certified public accountant) and significant business
contacts and presence within the operating territory. The franchise agreement
also is reviewed and the term of the proposed financing must not exceed the
remaining term of the franchise agreement. When appropriate, the Company
enhances Lessee credit by requiring guarantees from principals, corporate
parents or third parties. The Company's Lessee underwriting process requires a
completed Lease application and application fee; two years of annual comparative
financial statements for existing operations on a consolidated and unit basis
and/or two years of tax returns; capitalization structure adequate to support
existing and planned units; credit application including bank and trade
references and verification of assets; demographic and site information; monthly
projections for 12 months of operations; and detailed statements of the business
experience of principals. The Company believes its success in attracting
high-quality Lessees is based on a number of factors, including the reputation
of Captec Financial and Messrs. Beach and Martin in the commercial net lease
property industry. See "Risk Factors -- Risk Relating to Creditworthiness of
Lessees".
Underwriting Site Selection. Prior to acquiring a property, the Company
engages in an extensive site review. The Company typically undertakes a
long-term viability and market value analysis, including an inspection of the
property and surrounding area by an acquisition specialist, and assessment of
market area demographics, consumer demand, traffic patterns, surrounding land
use, accessibility, visibility, competition and parking. The Company also (i)
obtains an independent appraisal of the property; (ii) obtains an independent
engineering report of the property's mechanical, electrical and structural
integrity; (iii) evaluates both the current and potential alternative use of the
property; and (iv) obtains an independent Phase I environmental site assessment.
In addition, many of the restaurant chain operators and franchisors have
sophisticated full-time staffs engaged in site selection, evaluation and
pre-approval of all new sites. As operators of national and regional franchised
and chain restaurants, the Company's Lessees typically are required to submit
their proposed locations to rigorous site evaluation pre-approval by franchisors
or national chain management, which typically includes assessments of many of
the factors considered by the Company in performing its analysis. These studies
often are made available to, and utilized by, the Company in analyzing a
potential acquisition. The retailers which become the Company's Lessees also
generally have full-time staffs engaged in site selection and evaluation and
typically develop new retail sites in conjunction with selected developers who
assist in site evaluation and selection. The retailers operating on the
Company's properties also submit their proposed locations to a rigorous site
evaluation and pre-approval process similar to that for restaurants. These
processes provide additional support and confirmation for the Company's site
selection process.
The Company ultimately determines to acquire or develop a property based
principally on an examination and evaluation of the site, the financial
condition and business history of the proposed Lessee, area demographics, the
proposed purchase price and Lease terms, geographic and market diversification
and potential sales. Although the purchase of each property is supported by an
independent appraisal, the Company makes an independent judgment in determining
whether to acquire a property. The purchase price of each property generally
does not exceed its appraised value. The Company makes an independent assessment
of both Lessees and properties and may decline to purchase certain properties or
accept certain Lessees notwithstanding satisfaction of franchisor or chain
standards.
Maintenance of Relationships with Restaurant Chains, Retailers and
Lessees. Once a business concept has been approved, the Company, with the
Advisor, seeks to develop a strong ongoing working relationship with national or
regional senior chain or retailer management. The Company believes that such
relationships facilitate
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the identification, negotiation and consummation of transactions, are beneficial
in resolving disputes or problems which arise during the terms of Leases and are
an excellent referral source of additional financing opportunities.
Active Management of Lessee Credit. In addition to monitoring Lessee
compliance with Lease obligations, the Company regularly reviews the financial
condition of its Lessees and business, economic and market trends in order to
identify and anticipate problems with Lessee performance which could adversely
affect the Lessee's ability to meet Lease obligations. When potential problems
are identified, the Company seeks early intervention with its Lessees and, when
appropriate, chain or retailer national chain management in order to address and
avoid such problems.
Diversification of Property Portfolio, Restaurant Chains, Retail Concepts
and Lessees. The Company believes that it has achieved, and will continue to
emphasize, significant diversification of its portfolio both among retail and
restaurant concepts and Lessees. The Company's 79 Existing Properties located in
24 states currently are leased to 36 Lessees operating 18 different restaurant
and six retail concepts. The Company currently anticipates acquiring the 62
Acquisition Properties located in 22 states to be leased to 20 potential Lessees
operating 12 different restaurant and eight retail concepts, resulting in
further diversification of its portfolio. Although the Company expects to
complete the acquisition of substantially all of the Acquisition Properties by
July 1998, there is no assurance the Company will be successful in acquiring any
of the Acquisition Properties. See "Risk Factors -- Risk Related to Acquisition
Properties" and "-- Risk of Lessee and Concept Concentration".
Construction. In certain circumstances, the Company will acquire a site on
which a property is to be built prior to the commencement or completion of
construction. In these circumstances, the Company typically acquires the
property subject to construction simultaneously with the execution of a Lease
which commences immediately upon the completion of construction. During
construction, the Company acts essentially as a construction lender providing
periodic progress advances and construction draws against fully documented and
completed project costs. Amounts advanced for construction prior to the
completion of the property and commencement of the Lease bear a market rate of
return which may be paid currently or capitalized into the cost of the property.
Acquiring properties under construction enables the Company to compete against
others engaged in real estate development and investment which provide similar
services and also benefits the Company by allowing it to invest its capital and
derive the resulting returns earlier in the development process. See "Risk
Factors -- Risk of Acquiring Properties Under Construction".
PROPERTIES
Existing Properties. The 79 Existing Properties are located in 24 states
and leased to 36 operators of 24 district restaurant and retail concepts. As of
June 30, 1997, the Existing Properties (which average four years of age) were
96.2% leased and subject to Leases with an average remaining term (excluding
renewals) of approximately 16 years. The Existing Properties typically are
freestanding structures located on lots ranging from 20,000 to 80,000 square
feet for restaurant properties and up to 150,000 square feet for retail
properties. Typical building size ranges from 2,000 to 6,000 square feet for
restaurant properties and up to 40,000 square feet for retail properties. The
following is a summary description of the Existing Properties and Lessees as of
June 30, 1997.
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ANNUALIZED
CORPORATE RENT AT
OR FACILITY NO. OF LOCATION JUNE 30,
LESSEE FRANCHISEE CONCEPT TYPE PROPERTIES (STATE) 1997
- ----------------------------------- ----------- ------------------------ ---------- ---------- ---------- -----------
United Auto Group, Inc............. F BMW/Nissan Retail 2 GA $ 1,033,152
ARG Enterprises, Inc............... C Black Angus Restaurant 4 MN 1,005,108
BC Northwest, Inc.................. F Boston Market Restaurant 6 WA, OR 635,496
BC Great Lakes LLC................. F Boston Market Restaurant 6 IL, IN 563,772
Family Restaurants, Inc............ C Carrows Restaurant 4 CA 483,996
DenAmerica Corp.................... F Denny's Restaurant 5 TX, NC 475,680
Boston Chicken, Inc................ C Boston Market Restaurant 3 IL, PA 457,304
Paragon Steakhouse Restaurant,
Inc............................... C Mountain Jack's Restaurant 3 MI, OH 426,192
P&L Food Services LLC.............. F Boston Market Restaurant 6 PA, OH 403,578
The Snyder Group Company........... F Red Robin Restaurant 1 CO 357,000
Red Robin International, Inc....... C Red Robin Restaurant 1 WA 322,224
Baby Superstore, Inc............... C Baby Superstore Retail 1 MO 309,516
Blockbuster Entertainment Inc...... C Blockbuster Video/Music Retail 3 TX, AL 307,980
Huntington Restaurant Group........ F Denny's Restaurant 3 TX, AZ, LA 266,193
Video Update, Inc.................. C Video Update Retail 2 IL, AZ 243,648
Pacific Coast Restaurant, Inc...... F Stanford's Restaurant 1 CO 242,004
Mid-Atlantic Restaurant Systems,
L.P............................... F Boston Market Restaurant 3 NJ, PA 229,677
Platinum Properties LLC............ F Boston Market Restaurant 3 PA, SC 229,008
Taco Cabana Atlanta JV............. F Taco Cabana Restaurant 2 GA 209,004
Gourmet Systems, Inc............... C Applebees Restaurant 1 MO 204,324
Corral South....................... F Golden Corral Restaurant 1 FL 197,566
Pacific Apple Oregon, Inc.......... F Applebees Restaurant 1 WA 194,400
Golden Corral Corporation.......... C Golden Corral Restaurant 1 TX 189,756
Tropical Taco Cabana, Ltd.(2)...... F Taco Cabana Restaurant 1 NV 171,864
Captec-Roasters LLC................ F Kenny Rogers Roasters Restaurant 3 AZ 108,000
Roadhouse Grill Buffalo LLC........ F Roadhouse Grill Restaurant 1 NY 118,428
KRR Realty, Inc.................... F Arby's Restaurant 1 FL 99,720
RTM Mid-America, Inc............... F Jack in The Box Restaurant 1 IN 101,472
Food Service Management, Inc....... F Kenny Rogers Roasters Restaurant 1 CA 100,896
Western Maryland Fast Foods........ F Burger King Restaurant 1 WV 88,771
America's Favorite Chicken
Company........................... C Church's Restaurant 1 GA 87,516
Crown Management Group, Inc........ F Denny's Restaurant 1 FL 82,994
Pacific Foods, L.P................. F Kenny Rogers Roasters Restaurant 1 CA 75,132
Whatco of New Mexico, Inc.......... F Whataburger Restaurant 1 NM 52,488
Red Line San Antonio One, Ltd...... F Red Line Burgers Restaurant 2 TX 30,000
Progressive Restaurant Concepts.... F Arby's Restaurant 1 GA 26,537
--
-----------
Total.............................. 79 $10,130,396
== ===========
PERCENT PRIMARY
OF TOTAL LEASE
ACQUISITION ANNUAL TERM
LESSEE COST(1) RENT EXPIRATION
- ----------------------------------- ----------- -------- ----------
United Auto Group, Inc............. $ 9,861,863 10.2% 2017
ARG Enterprises, Inc............... 9,219,000 9.9 2021
BC Northwest, Inc.................. 6,607,824 6.3 2011
BC Great Lakes LLC................. 5,712,051 5.5 2016
Family Restaurants, Inc............ 4,620,000 4.8 2016
DenAmerica Corp.................... 4,635,188 4.7 2015
Boston Chicken, Inc................ 4,566,588 4.5 2012
Paragon Steakhouse Restaurant,
Inc............................... 4,105,500 4.2 2016
P&L Food Services LLC.............. 4,112,928 4.0 2012
The Snyder Group Company........... 3,123,750 3.5 2016
Red Robin International, Inc....... 3,000,667 3.2 2016
Baby Superstore, Inc............... 3,003,000 3.0 2011
Blockbuster Entertainment Inc...... 3,003,000 3.0 2006
Huntington Restaurant Group........ 2,582,465 2.6 2017
Video Update, Inc.................. 2,311,108 2.4 2012
Pacific Coast Restaurant, Inc...... 2,310,000 2.4 2016
Mid-Atlantic Restaurant Systems,
L.P............................... 2,404,500 2.3 2011
Platinum Properties LLC............ 2,047,394 2.2 2012
Taco Cabana Atlanta JV............. 2,145,000 2.1 2016
Gourmet Systems, Inc............... 1,986,444 2.0 2016
Corral South....................... 1,903,160 1.9 2017
Pacific Apple Oregon, Inc.......... 1,890,000 1.9 2016
Golden Corral Corporation.......... 1,926,149 1.9 2009
Tropical Taco Cabana, Ltd.(2)...... 1,486,975 1.7 2014
Captec-Roasters LLC................ 2,426,548 1.1 2012
Roadhouse Grill Buffalo LLC........ 997,500 1.2 2015
KRR Realty, Inc.................... 933,647 1.0 2014
RTM Mid-America, Inc............... 1,039,500 1.0 2017
Food Service Management, Inc....... 985,425 1.0 2009
Western Maryland Fast Foods........ 847,364 0.9 2012
America's Favorite Chicken
Company........................... 835,321 0.9 2016
Crown Management Group, Inc........ 799,481 0.8 2017
Pacific Foods, L.P................. 415,275 0.7 2005
Whatco of New Mexico, Inc.......... 851,141 0.5 2007
Red Line San Antonio One, Ltd...... 533,994 0.3 2010
Progressive Restaurant Concepts.... 253,307 0.3 2017
----------- -----
Total.............................. $99,483,057 100.0%
=========== =====
- ---------------
(1) Based upon monthly rent as of June 30, 1997 as annualized and without giving
effect to any future rent increases or percentage rents or deduction for the
effect of three presently non-revenue producing properties which in the
aggregate account for $346,716 or 3.4% of annualized rent at June 30, 1997.
Acquisition Properties. As of September 1, 1997, the Company had
agreements in principle to purchase the 62 Acquisition Properties which are
located in 22 states for an aggregate acquisition cost of approximately $94.5
million. The Acquisition Properties will expand the Company's existing portfolio
into five additional states and will further diversify its property, concept and
Lessee base to include operators of Circle K, Michael's Crafts, Office Depot,
SportsMart, Stop n Go, Taco Bell and Tony Roma's. The acquisition of each of the
Acquisition Properties, which the Company expects to be substantially completed
by July 1998, is dependent upon numerous contingencies, many of which are beyond
the Company's control, including the negotiation, execution and closing of
definitive agreements for the acquisition of each property. There is no
assurance that any of the Acquisition Properties will be acquired by the
Company. See "Risk Factors -- Risk Related to Acquisition Properties".
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LEASE EXPIRATION
The following table sets forth as of June 30, 1997, scheduled Lease
expirations:
NUMBER OF PERCENTAGE
YEAR OF LEASES CURRENT TOTAL OF CURRENT
EXPIRATION(1) EXPIRING ANNUAL RENTS(2) TOTAL
------------- --------- --------------- ----------
1998-2004.................................... -- $ -- 0.0%
2005......................................... 2 152,628 1.5
2006......................................... 2 230,484 2.3
2007......................................... 1 52,488 0.5
2008 and
thereafter..................................... 74 9,694,796 95.7
--
----------- -----
TOTAL.......................................... 79 $10,130,396 100.0%
== =========== =====
- ---------------
(1) Assumes no early termination due to exercise of purchase options, defaults
or otherwise.
(2) Based on monthly rent as of June 30, 1997 annualized and without giving
effect to any future rent increases or deduction for the effect of three
currently non-revenue producing properties.
THE ADVISOR AND THE ADVISORY AGREEMENT
In September 1997 the Company retained Captec Advisors, a newly formed
Delaware corporation, pursuant to an Advisory Agreement (the "Advisory
Agreement"). Captec Advisors, together with Captec Financial and its Affiliates,
will provide certain management, advisory and administrative services to the
Company.
The directors and officers of Captec Advisors are:
NAME POSITION WITH CAPTEC ADVISORS
- ----------------------------- --------------------------------------------------------------------------
Patrick L. Beach............. Chairman of the Board of Directors, President and Chief Executive Officer
W. Ross Martin............... Director, Executive Vice President and Chief Financial Officer
George R. Beach.............. Director
For biographies of Patrick L. Beach and W. Ross Martin, see
"Management -- Directors and Executive Officers". George R. Beach is the father
of Patrick L. Beach and an attorney.
It is anticipated that Captec Financial and its Affiliates will perform
certain of the services required to be provided to the Company pursuant to the
Advisory Agreement. Any services provided to the Company by Captec Financial or
its Affiliates pursuant to the Advisory Agreement will be paid for by the
Advisor and will result in no additional expense to the Company. Initially
Captec Financial will provide substantially all of the services to be rendered
to the Company pursuant to the Advisory Agreement. Subject to the direction of
the Board of Directors, the Advisor's responsibilities will include (i)
selecting restaurant properties for acquisition, formulating and evaluating the
terms of each proposed acquisition, and arranging for the acquisition of
properties by the Company; (ii) identifying potential Lessees for the restaurant
properties and formulating, evaluating and negotiating the terms of Leases;
(iii) negotiating the terms of any borrowing; (iv) performing credit analyses of
prospective restaurant and retail Lessees; (v) conducting legal and business
diligence and overseeing the preparation of all legal documentation for the
development and leasing of all properties; and (vi) identifying restaurant
properties for sale consistent with the Company's investment objectives and
prevailing economic conditions. The Advisor also will provide all necessary and
reasonable billing and administrative functions with respect to the Leases; take
all actions necessary to cause the Company to comply with all applicable laws
and regulations; cooperate with the Company in preparing reports to, and meeting
materials for, stockholders; prepare and deliver to the Company periodic
financial statements; promptly notify the Company in writing upon the occurrence
of certain events including defaults under the Leases; and perform such other
administrative and managerial functions as may be requested by the Company.
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As compensation for its services the Company will pay to Captec Advisors
the Incentive Acquisition Fee ranging from 1.0% to 4.0% of the acquisition cost
of properties identified by the Advisor and acquired during the term of the
Agreement. The amount of the Incentive Acquisition Fee will be based upon the
extent to which, if at all, the Company's anticipated return on the property at
the time of acquisition (determined by dividing (i) annual straight line rent
adjusted for any CPI increases by (ii) the acquisition cost) exceeds the average
yield on 30-year U.S. Treasury obligations for the 30 days preceding the date of
acquisition by from at least 3.0% (for the minimum 1.0% fee) to 7.5% or more
(for the maximum 4.0% fee). Captec Advisors will refund the Incentive
Acquisition Fee to the Company for any property any rental payment due within
the first 12 months of the Lease becomes more than 90 days delinquent and is not
cured. The Company also will pay to Captec Advisors a Management Fee at the
annual rate of the lesser of (i) six-tenths of one percent (0.6%) of the
aggregate capitalized cost (excluding accumulated depreciation) of all assets in
the Company's portfolio, including all restaurant and other properties, mortgage
loans, leasehold mortgages, secured equipment leases and joint venture and
partnership interests, and, without duplication, assets of the Affiliated
Partnerships, or (ii) 5.0% of the Company's revenues, all determined in
accordance with GAAP. Captec Advisors also may receive from each Lessee a
commitment fee (the "Commitment Fee") of 1.0% of the value of each lease
proposed to be executed by Lessees identified and obtained by the Advisor during
the term of the Advisory Agreement. The Company will reimburse the Advisor for
all expenses incurred directly in connection with the services it provides to
the Company. If the Advisor or an Affiliate performs services beyond the scope
of the Advisory Agreement, it will be compensated at such rates and in such
amounts as may be agreed to by Captec Advisors and the Independent Directors of
the Company.
The Advisory Agreement expires on December 31, 1998, subject to successive,
automatic one-year renewals unless terminated by either party at the conclusion
of the then-applicable term, upon 90 days prior written notice. The Advisory
Agreement may be terminated for cause or by the mutual consent of the parties.
Captec Advisors shall be entitled to receive all accrued but unpaid compensation
and expense reimbursements in cash within 30 days of any termination date.
Captec Advisors has the right to assign the Advisory Agreement to an Affiliate
subject to approval by the Independent Directors of the Company. The Company has
the right to assign the Advisory Agreement to any successor to all of its
assets, rights and obligations.
The Advisory Agreement disclaims any fiduciary obligation of the Advisor to
the Company. The Advisory Agreement also provides that the Advisor will not be
liable to the Company or its stockholders or others except for fraud, willful
misconduct or reckless disregard of its responsibilities under the Advisory
Agreement, and will not be responsible for any action of the Board of Directors
in following or declining to follow, any advice or recommendation of the
Advisor. The Company has agreed in the Advisory Agreement to indemnify the
Advisor with respect to acts or omissions of the Advisor undertaken in good
faith, in accordance with the foregoing standards. See "Risk
Factors -- Limitation of Liability and Indemnification of Officers, Directors
and the Advisor".
FINANCING POLICY
Although its organizational documents contain no limitation on the amount
of debt it may incur, the Company, subject to the discretion of the Board of
Directors, intends to maintain a debt capitalization ratio (total consolidated
debt of the Company as a percentage of Market Capitalization) of not more than
50.0%. The Company may from time to time reevaluate its financing policies and
increase or decrease its ratio of debt to Market Capitalization in response to
changing economic conditions, relative costs of debt and equity capital, market
value of its properties, growth, development and expansion opportunities and
other factors. In addition to the Credit Facility, indebtedness incurred by the
Company may be in the form of purchase money obligations to the sellers of
properties, secured or unsecured bank borrowings and publicly or privately
placed debt instruments. The Affiliated Partnerships, of which the Company will
become the general partner subsequent to completion of the Offering, also may
incur various forms of indebtedness for which the Company will be liable unless
the lender's recourse is expressly limited to collateral pledged as security for
such indebtedness. As of June 30, 1997, the Affiliated Partnerships had no debt
as to which the creditor has a right of recourse against the general partners in
the event of a default. See "Risk Factors -- Risk as General Partners of
Affiliated Partnerships" and "Risk Factors -- Risk of Leverage".
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47
The Company may borrow to the extent necessary to permit the Company to
make distributions required to enable the Company to qualify as a REIT for
federal income tax purposes. The Company does not intend to borrow to return
capital to the stockholders unless necessary to eliminate corporate-level tax to
the Company. See "Risk Factors -- Risk Related to REIT Minimum Distribution
Requirements" and "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT -- Annual Distribution Requirements".
INVESTMENT POLICIES OF THE COMPANY
The types of property and property interests in which the Company invests
are described under "Business -- General -- Growth Strategy" and "-- Operating
Strategy". The Company's policy with respect to borrowing is described under
"Business -- Financing Policy". All of the outstanding loans from the Company
are described under "Business -- Investment in Financial Instruments". Although
the Company's policy is to acquire and own properties subject to long-term net
leases during which term the properties may appreciate, it is the policy of the
Company to acquire properties primarily for the production of income. Although
the Company believes it has achieved, and will continue to maintain, substantial
diversification of its property portfolio, the Company does not restrict the
percentage of its assets which may be invested in a single property. Although it
has no present intention of doing so, the Company anticipates that any loans
which it may make in the future will be secured by mortgages on real property.
The Company has not underwritten the securities of any other issuer,
invested in the securities of any other issuer for the purpose of exercising
control or offered its securities in exchange for properties. The Company does
not anticipate engaging in any of the foregoing activities except that it may
issue shares of Common Stock or other of its securities as consideration for the
acquisition of properties.
INVESTMENT IN FINANCIAL INSTRUMENTS
Loans to Affiliate Collateralized by Mortgage Loans. At June 30, 1997 the
Company had a master revolving note (the "Master Note") agreement with Captec
Financial with an outstanding principal balance of $9.7 million which bears
interest of the annual rate of 8.0%, and is payable on demand. The Note is
collateralized in part by a senior interest in a portfolio of first mortgage
loans and in part by a subordinate interest in portfolios of first mortgage and
other secured loans.
The Company also held a $2.0 million promissory note collateralized by a
subordinate class certificate issued by Captec Loans Receivables Trust -- 1996
(the "Captec Trust"), an Affiliate, bearing interest at an annual rate of 15.7%.
The subordinate class certificate was issued in conjunction with an asset-backed
securization of a pool of long-term, fixed rate mortgage loans and other
collateralized loans originated by Captec Financial. See Note 3 to Financial
Statements.
Delinquent Mortgage Loans. The Company acquired in 1996 five delinquent
mortgage loans in anticipation of a restructuring. At June 30, 1997 all but
$788,479 of the loans had been restructured as operating leases and the balance
is expected to be similarly restructured in the near future. See Note 4 to
Financial Statements.
Other Loans. At June 30, 1997 the Company had other loans with a principal
balance of approximately $1.2 million consisting of a subordinated note
collateralized by subordinated interests in real estate and a mortgage loan
secured by a first mortgage on real estate. See Note 5 to Financial Statements.
Financing Leases. At June 30, 1997 the Company had an investment in
financing leases of restaurant properties in the amount $1.5 million. See Note 6
to Financial Statements.
The Company will not make further loans to Affiliates. See "Conflicts of
Interest" and "Federal Income Tax Considerations -- Requirements for
Qualification a REIT -- Income Tests".
OTHER INVESTMENTS
The Company also is the lessor under four secured leases of equipment,
furniture and fixtures to restaurant operators. The equipment subject to these
leases was acquired by the Company for an aggregate cost of
44
48
approximately $1.6 million and the aggregate annual rental income from these
leases as of June 30, 1997, is $203,000.
EMPLOYEES
The Company's only employees are its executive officers. Day to day
services are provided to the Company by employees of the Advisor.
THE AFFILIATED PARTNERSHIPS
Subsequent to the completion of the Offering the Company will become the
sole general partner of Captec III and Captec IV, each of which is a Delaware
limited partnership engaged in substantially the same business as the Company.
The Company will acquire the general partnership interests from the current
general partners of the Affiliated Partnerships, which are wholly-owned
subsidiaries of Captec Financial and Patrick L. Beach, the Company's Chairman,
President and Chief Executive Officer. The Company will acquire the general
partnership interests in the Affiliated Partnerships for $3.3 million in the
aggregate, $315,000 of which will be paid to Mr. Beach in cash, and the balance
of which will be offset against amounts owed by Affiliates to the Company. As
part of the Company's acquisition of the general partnership interests and in
addition to rights of indemnification from the Affiliated Partnerships, the
current general partners, including Mr. Beach, will be relieved from, and
indemnified by the Company against, all liabilities of the Affiliated
Partnerships to which they may be subject as a result of having served as
general partners, other than for fraud, willful misconduct or breach of
fiduciary duty.
The following tables set forth certain information concerning Captec III's
and Captec IV's portfolios of properties and secured equipment leases as of June
30, 1997:
ORIGINAL
AFFILIATED PARTNERSHIP PRODUCT LINE NUMBER ASSET COST
- ---------------------------------------------------- ---------------------- ------ -----------
Captec Franchise Capital Partners L.P. III.......... Equipment Lease 10 $ 3,367,818
Net Lease Real Estate 11 14,806,758
---- -----------
Total 21 $18,174,576
==== ===========
Captec Franchise Capital Partners L.P. IV........... Equipment Lease 5 $ 1,529,130
Net Lease Real Estate 1 1,002,560
---- -----------
Total 6 $ 2,531,690
==== ===========
The public offering of limited partnership interests in Captec IV, which has
been registered under the Securities Act, is ongoing. As of June 30, 1997, $23.9
million in limited partnership interests in Captec IV remained unsold. The net
proceeds of any additional sales of partnership interests in Captec IV may be
used to invest in additional properties, resulting in certain conflicts of
interest. See "Risk Factors -- Conflicts of Interest" and "Conflicts of
Interest".
The Company's rights, responsibilities and obligations as the general
partner of each Affiliated Partnership are set forth in the respective
Affiliated Partnership's Amended and Restated Agreement of Limited Partnership
(each a "Partnership Agreement" and collectively the "Partnership Agreements").
As general partner of each of the Affiliated Partnerships, the Company will own
a 1.0% interest in each Affiliated Partnership and be responsible and liable for
all of the obligations of each Affiliated Partnership. As of June 30, 1997
neither Captec III or Captec IV had any indebtedness or other material
liabilities. The Company will owe a fiduciary duty to the limited partners of
each Affiliated Partnership similar to the fiduciary duty that it owes its
stockholders which could subject it to a conflict between the interests of the
Company's stockholders and those of the limited partners of the Affiliated
Partnerships. See "Risk Factors -- Conflicts of Interest" and "Conflicts of
Interest".
As compensation for its services as a general partner of the Affiliated
Partnerships, the Company will be entitled to receive compensation from each of
the Affiliated Partnerships pursuant to the Partnership Agreements. This
compensation (which in some cases is subordinated to prior distributions to the
limited partners of specified
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49
returns on their initial capital investment) includes real property and
equipment acquisition fees, a property management fee based on the gross rental
revenue of the Affiliated Partnerships, reimbursement of expenses and specified
percentages of the net proceeds from the sale, refinancing or liquidation of
property or equipment. Based upon its 1.0% general partnership interest in each
Affiliated Partnership, pursuant to the Partnership Agreement, the Company also
will receive 1.0% of all distributions of cash made by either Affiliated
Partnership (the amount and timing of which distributions will be determined by
Company as the general partner). Generally, income such as that which the
Company will receive from the Affiliated Partnerships in respect of its general
partnership interests will not qualify for the 95.0% income test applicable to
REITs and all such income and other qualifying income must aggregate less than
5.0% of the Company's income for the Company to qualify or remain qualified as a
REIT. See "Federal Income Tax Considerations -- Requirements for Qualification
as a REIT -- Income Tests".
The Company also will be allocated 1.0% of any taxable income, gain or loss
recognized by either Affiliated Partnership. Each Partnership Agreement
obligates the Affiliated Partnership to indemnify the general partner from and
against all liabilities except liabilities arising from misconduct, negligence
or violation of securities laws. Each Partnership Agreement further provides
that a general partner may be removed by a vote of a majority in interest of the
limited partners subject to the Affiliated Partnership's obligation to purchase
the interests of a removed or disqualified (as a result of insolvency or
bankruptcy) general partner for an amount to be agreed upon by the general
partner and its successor or fair market value as determined in arbitration.
The acquisition by the Company of the general partnership interests in the
Affiliated Partnerships is subject to the satisfaction of certain conditions,
including the approval of the majority in interest of the limited partners of
each of the Affiliated Partnerships. There is no assurance that a majority in
interest of the limited partners of either or both Affiliated Partnerships will
approve the transaction and that the Company will be successful in acquiring the
general partnership interests in either or both Affiliated Partnerships. See
"Risk Factors -- Risk as General Partner of Affiliated Partnerships".
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DESCRIPTION OF PROPERTIES AND LEASES
The 79 Existing Properties conform generally to the following
specifications for size, cost, and type of land and buildings. Based upon its
experience and knowledge of the fast-food, family-style and casual dining
restaurant and retail industries, the Company expects that a majority of its
future properties, including the Acquisition Properties, will conform generally
to these specifications, although the Company may purchase properties which vary
materially from these specifications.
LAND
Lot sizes generally range from 20,000 to 80,000 square feet for restaurant
properties and up to 150,000 square feet for retail properties, depending upon
building size and local demographics. Properties typically are freestanding and
may be located on smaller parcels if sufficient parking is available. Properties
purchased by the Company are in locations zoned for commercial use which have
been reviewed for traffic patterns and volume. Land costs vary but generally
range from $250,000 to $3.0 million, depending upon various factors including
the size of the parcel, competition for sites and local commercial real property
values generally.
BUILDINGS
The style and appearance of the buildings typically are dictated by the
franchisors and chain owners of the businesses which are operated from the
properties. The buildings generally are rectangular and constructed from various
combinations of stucco, steel, wood, brick and tile and typically range from
2,000 to 6,000 square feet for restaurant properties and up to 40,000 square
feet for retail properties. Building and site preparation costs, which generally
range from $300,000 to $4.0 million for each property, vary depending upon the
size of the building and the site and area in which the property is located. The
properties typically are freestanding, surrounded by paved parking areas, and
are convertible to various uses with certain modifications. Generally, the
properties acquired by the Company are improved with buildings although in some
instances the Company may acquire only land (even if improved) or only the
improvements. A Lessee generally is required to make capital expenditures
reasonably necessary to refurbish buildings, premises, signs and equipment so as
to comply with the Lessee's obligations under its franchise or other operating
agreement. The Company believes the size of its typical retail property is
especially well-suited to meet the fundamental change which is occurring in the
retail industry. In order to meet changing consumer preferences, and as a result
of the relatively high cost of mall space, retailers increasingly prefer
smaller, freestanding facilities which are more accessible and facilitate the
customized presentation of the retail concept. The Company believes that it will
benefit from these trends because its properties meet these retailer
preferences.
THE LEASES
The Company typically acquires only properties which are subject to
long-term (typically 15 - 20 years with one or more five-year renewals)
triple-net Leases with creditworthy multi-unit franchisees and operators of
national and regional restaurants and retailers. In limited circumstances the
Company's retail Leases are on a "double-net" basis pursuant to which the
Lessees are required to pay for all repairs, renovations (if permitted under the
Leases), certain maintenance, taxes, utilities, assessments and insurance, and
the Company generally is responsible for maintenance of the exterior walls and
roof of the property. The Company believes that its Leases significantly reduce
operating expenses because the Lessees are responsible for all costs of repairs,
maintenance, real property taxes, assessments, utilities and insurance on the
properties; minimize the risk of default because Lessees are experienced
multi-unit operators of major national and regional restaurant chains and
retailers; provide secure, predictable, periodically increasing revenue through
fixed rent increases or, in certain circumstances, indexation to the CPI and/or
percentage rent; and offer Lessees financial flexibility and the ability to
retain more of their capital for reinvestment in their business. The Company's
strategy of entering into 15- to 20-year Leases with creditworthy Lessees
operating well-located units of the most successful nationally franchised and
chain restaurants and retailers is intended to provide the Company with
long-term, steady and secure revenue growth.
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51
TERM OF LEASES
The Leases typically are for initial 15- to 20-year terms with up to three
five-year renewal options, although in some cases the Company will enter into
Leases for shorter terms. Upon termination, the Lessee surrenders possession of
the property to the Company, usually with any improvements made during the Lease
term, except for properties in which the Company owns only the land in which
case the Lessee may retain ownership of the building.
LEASE PAYMENTS
During the term of a Lease, the Lessee pays the Company minimum annual rent
which is determined based upon a specified percentage of the Company's cost of
the property including any costs of construction or renovation. Typically,
Leases provide automatic increases in the base rent at predetermined intervals
during the term of the Lease. In certain limited circumstances, in addition to
base rent, the Lessees may be required to pay percentage rent, which is computed
as a percentage of the Lessee's gross sales or revenues.
INSURANCE, TAXES, MAINTENANCE AND REPAIRS
All triple-net Leases require that the Lessee pay all costs and expenses
including repairs, maintenance, real property taxes, assessments, utilities and
insurance. The double-net Leases are similar to the triple-net Leases, but
require the Company to maintain the exterior walls and/or roof of the property
for which the Company reserves $.15 per square foot on an annual basis. Lessees
are required to maintain all properties in good order and repair. Lessees
generally also are required to maintain, for the benefit of both the Company and
the Lessee, casualty insurance in an amount not less than the full replacement
value of the building and other permanent improvements (or a percent of such
value in the case of certain Leases, but in no event less than an amount as
required to avoid co-insurance), as well as comprehensive general liability
insurance, generally in an amount not less than $1.0 million for each location
and loss occurrence. Lessees (other than those with a substantial net worth)
generally also are required to obtain "rental value" or "business interruption"
insurance for losses in operating revenue due to the occurrence of an insured
event for a specified period, generally six to 12 months.
ASSIGNMENT AND SUBLEASE
Leases may not be assigned or subleased without the Company's prior written
consent except to a Lessee's corporate franchisor, corporate affiliate or
subsidiary, a successor by merger or acquisition, or, in certain cases, another
franchisee, and provided such assignee or subtenant agrees to operate the same
type of business on the premises. The Leases set forth certain factors (such as
the financial condition of the proposed tenant or subtenant) that are deemed to
be reasonable grounds for the Company's refusal to consent. Where consent is
given, the Lessee typically remains fully liable for the performance of all
obligations under the Lease following assignment or sublease.
ALTERATIONS TO PREMISES
A Lessee generally has the right, without the prior consent of the Company,
to make certain immaterial structural modifications to the building and
improvements (with a cost of up to 10.0% of the purchase price of the property)
or, with the Company's prior written consent, to make material structural
modifications that may include demolition and rebuilding. Under certain Leases,
the Lessee may make any type of alterations to the leased premises without the
Company's consent but must provide the Company with plans of any proposed
structural modifications before construction commences. Certain Leases may
require the Lessee to post a payment and performance bond for any structural
alterations with a cost in excess of a specified amount. The Lessee is required
to pay for all permitted alterations.
LESSEE PURCHASE OPTION
In limited circumstances the Leases grant to Lessees a right of first
refusal to match any offer to buy the property prior to acceptance by the
Company. In many cases the Lease affords the Lessee the option to purchase the
property during one or more typically one-month window periods at designated
times during the fifth to
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52
tenth years of the Lease. Typically the purchase price applicable upon the
exercise of this option by the Lessee is intended to reflect fair market value
at the time the option is exercised and is equal to the contractual rent for the
year following the year in which the option is exercised divided by a percentage
rate which is lower than the current rate of return on the Lease. See "Federal
Income Tax Considerations".
SUBSTITUTION OF BUSINESS ACTIVITY
Under certain Leases, the Lessee, at its expense, is entitled to operate an
alternate approved business concept on the property, provided such alternate
concept has an operating history which reflects an ability to generate gross
sales and potential sales growth equal to, or greater than, that experienced by
the Lessee in operating the original concept. Certain Leases provide the Lessee
with the right to offer the substitution of another restaurant or retail
property selected by the Lessee in the event that (i) the property is not
producing rent pursuant to the terms of the Lease; and (ii) the Lessee
determines in good faith that the property is not economically viable (other
than as a result of an insured casualty loss or condemnation) for the Lessee's
continued use and occupancy in its business operation. If either event occurs,
the Lessee will have the right, pursuant to specified procedures, to offer the
Company the opportunity to change the use of the property for another national
or regional franchised chain or retail property, with a total cost for land and
improvements thereon (including overhead, construction interest, and other
related charges) equal to or greater than, the cost of the property to the
Company. The Lessee is required to pay all costs incurred by the Company in
connection with any substitution of business activity.
EVENTS OF DEFAULT
The Leases generally provide that the following events, among others,
constitute a default subject to applicable cure rights: (i) the insolvency or
bankruptcy of the Lessee; (ii) the failure of the Lessee to make timely payment
of rent or other charges due and payable under the Lease for a specified period
of time (generally three to seven days) after notice of such failure; (iii) the
failure of the Lessee to comply with any of its other obligations under the
Lease for a specified period of time (generally 20 to 30 days) after receipt of
notice from the Company; (iv) a default or termination of a franchise agreement
between the Lessee and its franchisor; (v) a default under, or termination of, a
development agreement for improvement of the property or indemnity agreement or
the failure to establish the minimum annual rent at the end of the development
period; and (vi) a "cross default" under any other Lease between the Lessee and
the Company for other properties.
Upon default by the Lessee, the Company generally has the right under the
Lease and most state laws to evict the Lessee, re-lease the property and hold
the Lessee responsible for any deficiency in Lease payments, or to attempt to
sell the property. In general, the Lessee remains liable for all amounts due
under the Lease to the extent not paid from a security deposit (if any) or by a
new Lessee. In the event of a default under a Lease, the Company either will
attempt to locate a replacement operator acceptable to the franchisor or
remarket the property. In lieu of obtaining a replacement operator, some
franchisors may have the option and may elect to operate the business directly.
The Company will have no obligation to operate the business, and no franchisor
will be obligated to permit the Company or a replacement operator to operate the
business. See "Risk Factors -- Risk of Ownership and Leasing of Properties" and
" -- Risk Relating to Creditworthiness of Lessees".
MANAGEMENT OF PROPERTY PORTFOLIO
The Company intends to monitor its property portfolio continually and will
seek to sell properties when warranted by property value and prevailing
economic, business and other conditions. The Company's general policy will be to
sell properties for cash. The terms of payment to the Company will be affected
by custom in the area in which the property is located and the then prevailing
economic conditions. The Company also may enter into tax free exchanges to
reposition its portfolio. The Company will be subject to those risks inherent in
the investment in real estate including numerous factors beyond the Company's
control affecting the value of its properties. See "Risk Factors -- Risk of
Ownership and Leasing of Properties".
The Company intends, to the extent consistent with its objective as
qualifying and maintaining its status as a REIT, to invest in additional
properties any proceeds of the sale of a property that are not required to be
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distributed to stockholders in order to preserve the Company's REIT status for
federal income tax purposes. The Company also may be required to sell a property
upon the exercise of any purchase options conferred upon Lessees under the
Leases, or pursuant to joint venture agreements. See " -- Description of
Leases -- Lessee Purchase Option". In selling properties, the Company may accept
purchase money obligations as partial payment of the sales price. The terms of
payment will be affected by custom in the area in which the property is located
and by prevailing economic conditions. If a purchase money obligation is
accepted in lieu of cash upon the sale of a property, the Company would continue
to hold a mortgage on the property and the proceeds of the sale would be
realized over a period of years rather than at closing of the sale.
MANAGEMENT
GENERAL
The Company operates under the direction of the Board of Directors, the
members of which are accountable to the Company as fiduciaries. The Company
currently has three directors; it may have no fewer than three directors and no
more than 15 directors. Directors are elected annually, and each director holds
office until the next annual meeting of stockholders or until his successor has
been duly elected and qualified. There is no limit on the number of times that a
director may be elected to office. Although the number of directors may be
increased or decreased as discussed above, a decrease shall not have the effect
of shortening the term of any incumbent director. Any director may resign at any
time and may be removed by the other directors with cause or by the stockholders
with or without cause upon the affirmative vote of at least a majority of all
the outstanding shares of the Common Stock entitled to vote at a meeting called
for this purpose. Officers are appointed and serve at the discretion of the
Board of Directors.
INDEPENDENT DIRECTORS
Under the Certificate, a majority of the Board of Directors must consist of
Independent Directors, except for a period of 90 days after the death, removal
or resignation of an Independent Director. An Independent Director may not be
employed by the Company, be an Affiliate of the Company or an Affiliate of one
of the Company's Affiliates. Prior to the completion of the Offering, the
current directors will elect the Independent Directors.
FIDUCIARY RESPONSIBILITY OF THE BOARD OF DIRECTORS
Although the Board of Directors will be responsible for the management and
control of the affairs of the Company, it will retain the Advisor to provide
certain management services and be responsible primarily for the Company's
restaurant properties and for certain activities relating to its retail
properties, subject at all times to the oversight of the Board of Directors. The
directors are required only to devote such time to the Company and are required
only to devote such time to the affairs of the Company as their duties require.
The Board of Directors will meet as required, but not less frequently than
quarterly. It is anticipated that the directors will rely heavily on the Advisor
with respect to the acquisition, development, financing and leasing of
restaurant properties. The Advisory Agreement states that the Advisor will not
be considered to be a fiduciary of the Company. The directors will monitor the
actions, performance and management of the Company and activities of the Advisor
to assure that such actions are in the best interests of the stockholders and
consistent with the policies and other directives established by the Board of
Directors.
A majority of the Independent Directors and a majority of disinterested
directors must approve each transaction with the Advisor or its Affiliates. The
Board of Directors also is responsible for reviewing and evaluating the
performance of the Advisor before entering into or renewing an advisory
agreement. The Independent Directors shall supervise the performance of the
Advisor and determine from time to time (and at least annually) that the
compensation of the Advisor is reasonable.
The liability of the officers and directors while serving in such capacity
is limited in accordance with the Certificate, the Bylaws and applicable law.
See "-- Indemnification and Limitation of Liability".
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DIRECTORS, PROPOSED DIRECTORS AND EXECUTIVE OFFICERS
The directors, proposed directors and executive officers of the Company
are:
NAME AGE POSITION WITH THE COMPANY
- ---------------------------------------- ---- -----------------------------------
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 Proposed Director
Creed L. Ford, III...................... 45 Proposed Director
William H. Krul, II..................... 48 Proposed Director
Prior to the completion of the Offering, the Company will add four additional
directors (including the individuals named herein) who will be Independent
Directors.
PATRICK L. BEACH is the Chairman of the Board of Directors, President and
Chief Executive Officer of the Company and Captec Advisors. 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). See "Risk Factors -- Conflicts of Interest -- Risks of Reliance on
Management and the Advisor" and "-- Dependence on Key Personnel and Limited
Management Group".
W. ROSS MARTIN is a director, Executive Vice President, Chief Financial
Officer and Treasurer of the Company and a director, Executive Vice President
and Chief Financial Officer of Captec Advisors. 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. See "Risk Factors -- Conflicts of Interest -- Risks of
Reliance on Management and the Advisor" and "-- Dependence on Key Personnel and
Limited Management Group".
RONALD MAX is Vice President and Chief Investment Officer of the Company.
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 ("Brauvin"), 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. See "Risk Factors -- Conflicts of Interest -- Risks of Reliance on
Management and the Advisor" and "-- Dependence on Key Personnel and Limited
Management Group".
H. REID SHERARD, a director, 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).
RICHARD J. PETERS, a proposed director, 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
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Corporation ("Penske"), a multi-billion dollar 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, a proposed director, 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, a proposed director, 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).
AUDIT COMMITTEE
The Audit Committee, which will consist of three Independent Directors,
recommends the engagement of independent public accountants, the plans for, and
results of, audit engagements, approves professional services provided by the
independent public accountants, considers the range of audit and nonaudit fees,
and reviews the independent public accountants' letter of comments and
management's responses thereto, the adequacy of the Company's internal
accounting controls, and major accounting or financial reporting matters.
COMPENSATION COMMITTEE
The Compensation Committee, which will consist of three Independent
Directors, determines compensation for senior management, advises the Board of
Directors on the adoption and administration of employee benefit and
compensation plans and administers the Company's Long-Term Incentive Plan.
INDEMNIFICATION AND LIMITATION OF LIABILITY
As permitted under the GCL, the Company's Certificate eliminates the
personal liability of a director to the Company and its stockholders for
monetary damages for breach of fiduciary duty of care as a director. Liability
is not eliminated or limited for (i) any breach of the director's duty of
loyalty to the Company or its stockholders; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) unlawful payment of dividends or stock purchases or redemptions pursuant
to Section 174 of the GCL; or (iv) any transaction from which the director
derived an improper personal benefit.
The Bylaws also provide for indemnification of officers and directors of
the Company and persons who serve at the request of the Company as a director,
officer, employee, agent or trustee of another corporation, partnership, joint
venture, trust or other enterprise, to the full extent allowed by Delaware law.
The GCL authorizes indemnification of officers, directors and persons serving
other entities in certain capacities at the request of the corporation, subject
to certain conditions and limitations set forth therein, against all expenses
and liabilities incurred by or imposed upon them as a result of actions, suits
and proceedings brought against them in such capacity if they acted in good
faith and in a manner they reasonably believed to be in, or not opposed to, the
best interests of the corporation.
The Company also has entered into indemnification agreements with its
directors and officers which provide for indemnification to the full extent
permitted under Delaware law and has agreed to indemnify the Advisor against
certain liabilities.
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INSURANCE
The Company has obtained a directors and officers liability insurance
policy in the aggregate amount of $5.0 million. Subject to typical exclusions,
the policy insures (i) the officers and directors of the Company from any claim
arising out of an alleged wrongful act by the directors and officers of the
Company in their respective capacities, and (ii) the Company to the extent that
the Company has indemnified the directors and officers for such losses.
EXECUTIVE COMPENSATION AND EMPLOYMENT CONTRACTS
During the year ended December 31, 1996, the Company did not pay
compensation to its officers or directors. In September 1997, Patrick L. Beach
and W. Ross Martin each entered into employment contracts with the Company.
Messrs. Beach's and Martin's agreements provide for initial three-year terms
that are extended automatically for an additional year at the end of each full
calendar year of the agreement, subject to the right of either party to
terminate the agreement at the end of the then applicable term by giving written
notice of termination on or before November 30 of any year. Mr. Beach will
receive an annual base salary of $150,000 and Mr. Martin will receive an annual
base salary of $100,000. Both Mr. Beach and Mr. Martin will be entitled to an
annual bonus on a sliding scale of from 10% to 100% of annual base salary
contingent, and based upon, the percentage increase of FFO per share in any
calendar year from the prior calendar year. For purposes of any bonuses payable
for 1997, the Compensation Committee of the Board of Directors will calculate
appropriate prorated amounts. Messrs. Beach and Martin will also be granted
10-year options to purchase 400,000 and 200,000 shares of Common Stock,
respectively, at the initial public offering price. The options will vest and
become exercisable in three equal annual installments on the first through third
anniversaries of the execution of the employment agreements. Each employment
agreement provides that upon the termination of the employee's employment by the
Company other than for "cause" (as defined in the employment agreements); by the
employee for certain actions of the Company, such as effecting a material
adverse change in the employee's responsibilities or the failure of the Company
to nominate Mr. Beach or Mr. Martin to the Board of Directors; or a "change in
control" of the Company (as defined in the employment agreements), the employee
will be entitled to all compensation and benefits payable under the employment
agreement for the remainder of its term.
COMPENSATION OF DIRECTORS
The Company intends to pay its Independent Directors an annual fee of
$16,000 and a fee of $1,000 for each directors' meeting and each committee
meeting attended and $250 for participation in each meeting by telephone. No
other directors will receive directors' fees. Each Independent Director will
receive a ten-year option for 5,000 shares of Common Stock pursuant to the
Long-Term Incentive Plan, exercisable at the initial public offering price of
the Common Stock and subject to vesting fully within the first two years of
issuance.
DIRECTORS' DEFERRED COMPENSATION PLAN
The purpose of the Company's Directors' Deferred Compensation Plan (the
"Deferred Plan") is to assist in attracting and retaining persons of competence
and stature to serve as Independent Directors by giving them the option to defer
receipt of the fees payable to them by the Company for their services as
directors. The Deferred Plan is (i) applicable to all director's fees payable
with respect to periods commencing with the Company's fiscal quarter that begins
October 1, 1997; (ii) limited to those directors who receive fees for services
as a director and are not employed by the Company, and (iii) administered by
Company officers or directors appointed by the Board of Directors, who are not
eligible to participate in the Deferred Plan.
LONG-TERM INCENTIVE PLAN
The purpose of the Company's Long-Term Incentive Plan (the "Plan") is to
promote the long-term growth and profitability of the Company by enabling it to
attract, retain and reward key employees and directors of the Company and to
strengthen the mutuality of interest between such key employees and the
Company's stockholders. Grants of incentive or nonqualified share options,
restricted shares, deferred shares, share purchase rights, share appreciation
rights in tandem with options ("SARs"), other share-based awards or any
combination
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thereof, may be made under the Plan. Eligible employees of the Company may
participate in the Plan. The Compensation Committee will administer the Plan,
and the members of the Compensation Committee are not eligible to participate in
the Plan. The Company has reserved 727,000 shares of Common Stock for issuance
under the Plan. The share limitations, shares reserved and the terms of
outstanding awards will be adjusted, as the Compensation Committee deems
appropriate, in the event of a share dividend, split or other change in the
corporate structure of the Company affecting the shares.
Share Options and Tandem SARs. The exercise price of share options granted
under the Plan may not be less than the fair market value (as defined in the
Plan) of the shares on the date the option is granted. The Compensation
Committee may grant tandem SARs to any person granted an option under the Plan.
Each tandem SAR will represent the right to receive, in cash or shares as the
Compensation Committee may determine, a distribution in an amount equal to the
excess of the fair market value of the option shares (to which the SAR
corresponds) on the date of exercise over the exercise price for those shares.
Each tandem SAR expires at the same time as its corresponding option. The
exercise of an option will cause an immediate forfeiture of its corresponding
SAR, and the exercise of an SAR will cause an immediate forfeiture of its
corresponding option. The Plan provides that all options and tandem SARs will
vest on a change in control of the Company (as defined in the Plan).
Share Awards. The Compensation Committee may award shares of the Common
Stock under the Plan and may place restrictions on the transfer or defer the
date of receipt of those shares. Each award will specify any applicable
restrictions or deferral date, the duration of those restrictions and the time
at which the restrictions lapse. Participants will be required to deposit shares
with the Company during the period of any restrictions. The Compensation
Committee also may grant share purchase rights for which the purchase price may
not be less than the fair market value (as defined in the Plan) on the date of
grant, except the purchase price may not be less than 85.0% of the fair market
value on the date of the grant if the grant is made in lieu of cash
compensation.
Other Share-Based Awards. The Compensation Committee may grant other awards
of shares and other awards that are valued or otherwise based on the Company's
Common Stock.
Miscellaneous. The Plan provides for vesting, exercise or forfeiture of
rights granted under the Plan on retirement, death, disability, termination of
employment or a change of control. The Board of Directors may modify, suspend or
terminate the Plan provided it does not impair the rights thereunder of any
participant. Under applicable law, the stockholders must approve any increase in
the maximum number of shares reserved for issuance under the Plan, any change in
the classes of employees eligible to participate in the Plan and any material
increase in the benefits accruing to participants. The Company also may, at any
time subsequent to completion of the Offering, register the 727,000 shares of
Common Stock reserved for issuance pursuant to the Plan creating additional
shares of Common Stock eligible to be sold in any public trading market which
may develop for the Common Stock. See "Risk Factors -- Risk Related to Shares
Eligible for Future Sale".
CERTAIN TRANSACTIONS
The Company is part of a family of affiliated specialized commercial
finance companies providing a diverse line of financing products to the
franchise, chain restaurant and specialty retail industries. Since the Company's
inception, Affiliates of Captec Advisors have managed all operations of the
Company, provided investment and financial advisory services and provided
financing to the Company. Prior to the Offering, the Company engaged in numerous
transactions with such Affiliates, including those set forth below.
In 1996 the Company acquired delinquent mortgage loans from Captec
Franchise Capital Partners L.P. II, an Affiliate, in anticipation of a
restructuring. At June 30, 1997, all but $788,479 of the delinquent mortgage
loans had been restructured as operating leases, and the balance is expected to
be similarly restructured in the near future. See "Business -- Investment in
Financial Instruments" and Notes 4 and 6 to Financial Statements.
At June 30, 1997, the Company had a Master Note with Captec Financial, an
Affiliate, collateralized in part by a $6.4 million senior interest in a
portfolio of loans under an assignment of contracts with Captec Financial, and
in part by a $3.3 million subordinate interest in a portfolio of loans owned by
Captec Funding, an Affiliate, under an assignment of contracts with Captec
Financial. This note bears interest at the annual rate of 8.0% and is
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payable on demand. The Company also holds a $2.0 million promissory note
collateralized by a subordinate class certificate issued by Captec Trust, an
Affiliate, which bears interest at an annual rate of 15.7%. See "Conflicts of
Interests" and Note 3 to Financial Statements.
The Company made a demand loan of $421,920 collateralized by a first
mortgage on a Blockbuster Video unit owned by the father-in-law of W. Ross
Martin, Executive Vice President and a director of the Company. This note bears
interest at a rate of 9.0% per annum. See Note 5 to Financial Statements.
Prior to its merger, Captec Michigan had an agreement with Advisors
Michigan whereby Advisors Michigan managed the operations of Captec Michigan and
received fees of $600,000 and $250,000 in 1996 and 1995, respectively, which it
in turn paid to Affiliates. During 1995 and 1996, the Company also made
short-term demand notes to several Affiliates. At June 30, 1997, such loans
aggregated $5.1 million. The notes bear interest at 8.0% and are payable on
demand. See "Business Investment in Financial Instruments" and Note 11 to
Financial Statements.
Creed L. Ford, III, a proposed director of the Company, is a prospective
Lessee with respect to two of the Acquisition Properties.
In September 1997, the Company entered into the Advisory Agreement,
pursuant to which Captec Advisors, an Affiliate, will perform various services
for the Company, particularly with respect to restaurant properties, and will
receive fees and compensation for such services. See "Business -- The Advisor
and the Advisory Agreement" and "Conflicts of Interest -- Compensation of the
Advisor".
The Company has agreed, subsequent to the completion of the Offering, to
acquire the general partnership interests of Captec III and Captec IV from the
current general partners, which are wholly-owned subsidiaries of Captec
Financial, and Patrick L. Beach, the Company's Chairman, President and Chief
Executive Officer. The Company will acquire such partnership interests for $3.3
million in the aggregate, $315,000 of which will be paid to Mr. Beach in cash,
and the balance of which will be offset against amounts owed to the Company by
Affiliates. See "Business -- The Affiliated Partnerships".
Upon completion of the Offering, the Company will redeem 40,500 shares of
Preferred Stock utilizing proceeds of the Offering and exchange 633,333 shares
of Common Stock for 9,500 shares of Preferred Stock. The Company has agreed to
register, at its expense, these shares of Common Stock in the event of a
subsequent public offering of the Common Stock by the Company or upon demand by
the owner of the shares at any time subsequent to 180 days following the
completion of the Offering. See "Prospectus Summary -- History and Formation of
the Company" and "Use of Proceeds".
The Company believes that each of the foregoing transactions is fair to the
Company and on terms no less favorable to the Company than those available from
unrelated third parties.
Subsequent to the Offering, the Company will not make loans to Affiliates
and will enter into transactions with Affiliates only if the transaction has
been approved by a majority of the directors (including a majority of the
Independent Directors) not otherwise interested in such transactions as fair and
reasonable to the Company and on terms and conditions no less favorable to the
Company than those available from unaffiliated third parties. See "Conflicts of
Interest -- Certain Conflict Resolution Procedures".
CONFLICTS OF INTEREST
The Company will be subject to various conflicts of interest arising out of
its relationship to the Advisor, its Affiliates and the Affiliated Partnerships,
as described below.
REPAYMENT OF INDEBTEDNESS TO AFFILIATE OF LEAD MANAGING UNDERWRITER
CSFBMC, an Affiliate of one of the lead managing Underwriters, will receive
approximately $107.1 million, which exceeds 10.0% of the net proceeds of the
Offering for the repayment of outstanding principal balance of, and accrued
interest on, the Credit Facility.
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PRIOR AND FUTURE PROGRAMS
Affiliates of the Company and the Advisor have organized five real estate
investment funds, currently have other real estate holdings, and in the future
expect to form, offer interests in, and manage other real estate programs in
addition to, the Company. Some of these programs involve and will involve
Affiliates of the Company in the ownership, operation, leasing, and management
of fast-food, family-style and casual dining restaurants, retailers and other
businesses that may be suitable for investment by the Company. Certain of these
affiliated public or private real estate programs invest or may invest, in some
cases solely, in restaurants and other retailers, may purchase properties
concurrently with the Company and may lease restaurant and retail properties to
operators who also lease or operate certain of the Company's properties. These
properties, if located in the vicinity of, or adjacent to, properties acquired
by the Company may affect the Company's gross revenues. Such conflicts between
the Company and affiliated programs may affect the value of the Company's
investments as well as its net income. The Company believes that it and the
Advisor have established adequate guidelines to minimize such conflicts. See
"-- Certain Conflict Resolution Procedures".
ACQUISITION OF PROPERTIES
Affiliates of the Company and the Advisor regularly have opportunities to
acquire restaurant and retail properties of a type suitable for acquisition by
the Company as a result of existing relationships and past experience with
various restaurant chains, retailers and franchisees. See "Business -- General".
A purchaser who wishes to acquire one or more of these properties must do so
within a relatively short period of time, occasionally at a time when the
Company (due to insufficient funds, for example) may be unable to make the
acquisition. The Advisor could experience potential conflicts of interest in
connection with the negotiation of the purchase price and other terms of the
acquisition of a property, as well as the terms of the Lease of a property, due
to its relationship with its Affiliates and the ongoing business relationship of
its Affiliates with restaurant operators and retailers. The Advisor or its
Affiliates also may be subject to potential conflicts of interest at such time
as the Company wishes to acquire a property that also would be a suitable
investment for an Affiliate. The Company also will be subject to such conflicts
of interest to the extent a potential property acquisition also would be
appropriate for either or both of the Affiliated Partnerships. Affiliates of the
Company and the Advisor serve as directors of the Company and, in this capacity,
have a fiduciary obligation to act in the best interest of the stockholders of
the Company and, as general partners or directors of Affiliates, to act in the
best interests of the stockholders in other programs with investments that may
be similar to those of the Company. See "Management -- Fiduciary Responsibility
of the Board of Directors". The Company has developed procedures to resolve
potential conflicts of interest in the allocation of properties between the
Company and certain of its Affiliates. See "-- Certain Conflict Resolution
Procedures".
JOINT INVESTMENT WITH AFFILIATES
The Company may invest in joint ventures with the Advisor or other
Affiliates if a majority of the directors, including a majority of the
Independent Directors, determines that the investment in the joint venture is
fair and reasonable to the Company and on terms no less favorable to the Company
then in comparable transactions between unaffiliated parties.
COMPETITION FOR MANAGEMENT TIME
The officers and directors of the Advisor and the officers and directors of
the Company currently are engaged, and in the future will engage, in the
management of other businesses and properties. They will devote only as much of
their time to the business of the Company as they, in their judgment, determine
is reasonably required, which will be substantially less than their full time.
These officers and directors of the Company and officers and directors of the
Advisor may experience conflicts of interest in allocating management time,
services and functions among the Company and the various entities, investor
programs (public or private) and any other business ventures in which any of
them are, or may become, involved.
COMPENSATION OF THE ADVISOR
Pursuant to the Advisory Agreement, the Advisor has been engaged to perform
various services for the Company, particularly with respect to restaurant
properties and will receive fees and compensation for such services. Although
the Advisory Agreement was approved by a majority of the Board of Directors,
including a
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majority of the Independent Directors, as being fair and reasonable to the
Company and on terms and conditions no less favorable than those which could be
obtained from non-Affiliates, the Advisory Agreement was not the result of
arms-length negotiations. The timing and nature of fees and compensation to the
Advisor could create a conflict between the interests of the Advisor and the
stockholders. A transaction involving the purchase, lease and sale of any
property may result in the realization by the Advisor and its Affiliates of
substantial fees, compensation or other income. Potential conflicts may arise in
connection with the determination by the Advisor on behalf of the Company of
whether to sell a property, as such determination could impact the timing and
amount of fees payable to the Advisor. See "Business -- The Advisor and the
Advisory Agreement".
CERTAIN CONFLICT RESOLUTION PROCEDURES
In order to reduce or eliminate certain potential conflicts of interest,
the Company Board of Directors has adopted a number of restrictions relating to
(i) transactions between the Company and the Advisor or its Affiliates; (ii)
certain future offerings; and (iii) allocation of restaurant properties, among
certain Affiliates. These restrictions include the following:
1. No goods or services will be provided by the Advisor or its
Affiliates to the Company except for transactions approved by a majority of
the directors (including a majority of the Independent Directors) not
otherwise interested in such transactions as fair and reasonable to the
Company and on terms and conditions not less favorable to the Company than
those available from unaffiliated third parties and not less favorable than
those available from the Advisor or its Affiliates in transactions with
unaffiliated third parties.
2. The Company will not purchase or lease properties in which the
Advisor or its Affiliates has an interest without the determination, by a
majority of the directors (including a majority of the Independent
Directors) not otherwise interested in such transaction, that such
transaction is competitive and commercially reasonable to the Company and
at a price to the Company no greater than the cost of the property to the
Advisor or its Affiliate unless there is substantial justification for any
amount that exceeds such cost and such excess amount is determined to be
reasonable. In no event shall the Company acquire any such property at an
amount in excess of its appraised value. The Company will not sell or lease
properties to the Advisor or its Affiliates unless a majority of the
directors (including a majority of the Independent Directors) not
interested in the transaction determines the transaction is fair and
reasonable to the Company.
3. The Company will not make any loans to Affiliates. The Advisor and
its Affiliates will not make loans to the Company, or to joint ventures in
which the Company is a co-venturer, for the purchase of properties. Any
loans to the Company by the Advisor or its Affiliates for other purposes
must be approved by a majority of the directors (including a majority of
the Independent Directors) not otherwise interested in such transaction as
fair, competitive, commercially reasonable and no less favorable to the
Company than comparable loans between unaffiliated parties.
4. The Company will have a right of first refusal pertaining to any
opportunity to invest in national or regional chain or franchised
restaurants or retail properties which may be presented to the Advisor. If
a majority of the directors (including a majority of the Independent
Directors) decline to invest in such opportunity, then the Company may, in
its capacity as sole general partner, assign its interest in such
opportunity to the Affiliated Partnerships. See "Business -- The Affiliated
Partnerships" and "Risk Factors -- Risk as General Partner of Affiliated
Partnerships."
5. In addition to any approvals required by applicable law, any matter
related to the removal of, or any transaction with, the Advisor, a director
or an Affiliate which is submitted to a vote of the stockholders will be
required to be approved by the holders of a majority of the voting stock
other than stock owned by the Advisor and its Affiliates (including
management but excluding Independent Directors).
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus and after
giving effect to the Offering, the redemption of the Preferred Stock and the
exchange of Common Stock for the unredeemed Preferred Stock, information
regarding the beneficial ownership of Common Stock by each person known by the
Company to be the beneficial owner of more than 5.0% of the outstanding Common
Stock, by each executive officer, director and
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proposed director of the Company, and by all executive officers and directors of
the Company as a group. To the knowledge of the Company, each person named in
the table has sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by such person. None of such
stockholders is selling any Common Stock in the Offering.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER TO THE OFFERING
NAME AND ADDRESS OF ---------------------- ----------------------
BENEFICIAL OWNER(1) SHARES PERCENTAGE SHARES PERCENTAGE
- -------------------------------------------------- ------- ---------- ------- ----------
Patrick L. Beach(2)............................... 617,600 47.0% 617,600 4.7%
W. Ross Martin(3)................................. 281,833 21.4 281,833 2.1
H. Reid Sherard................................... 44,396 3.4 44.396 0.3
Ronald Max(4)..................................... -- -- -- --
Richard J. Peters(5).............................. -- -- -- --
Creed L. Ford, III(5)............................. -- -- -- --
William H. Krul, II(5)............................ -- -- -- --
Captec Financial Group, Inc....................... 133,208 10.1 133,208 1.0
Michigan Corp..................................... 192,383 14.6 192,383 1.5
------- ----- ------- -----
All executive officers and directors as a group (8
persons)........................................ 943,829 71.8 943,829 7.1
- ---------------
(1) Unless otherwise indicated, the address of each such person is 24 Frank
Lloyd Wright Drive, Ann Arbor, Michigan 48016.
(2) Does not include 400,000 shares of the Common Stock subject to options which
are not exercisable within 60 days.
(3) Does not include 200,000 shares of the Common Stock subject to options which
are not exercisable within 60 days.
(4) Does not include 50,000 shares of Common Stock subject to options which are
not exercisable within 60 days.
(5) Does not include 5,000 shares of Common Stock subject to options which are
not exercisable within 60 days.
CAPITAL STOCK OF THE COMPANY
GENERAL
The Certificate authorizes the issuance of up to 40,000,000 shares of
Common Stock of which 1,315,440 shares are issued and outstanding, 10,000,000
shares of Preferred Stock, of which 50,000 shares currently are issued and
outstanding and none of which will be issued and outstanding upon completion of
the Offering, and 10,000,000 shares of Excess Stock, $.01 per share (the "Excess
Stock"), none of which are issued and outstanding. In addition, the Company will
exchange 633,333 shares of Common Stock for 9,500 shares of Preferred Stock upon
the consummation of the Offering and has reserved up to 727,000 shares of Common
Stock for issuance under the Plan and 600,000 shares of Common Stock for
issuance upon exercise of options to be granted to Messrs. Beach and Martin
pursuant to their employment agreements. Following completion of the Offering,
13,273,773 shares of Common Stock will be issued and outstanding (14,972,523 if
the Underwriters' overallotment option is exercised in full) and no shares of
Preferred Stock will be issued and outstanding.
There is no established trading market for the Common Stock. Application
will be made for the listing of the Common Stock on the NYSE under the symbol
"CRR".
will act as transfer agent and registrar for the Common
Stock.
The following description of the Company's capital stock and of certain
provisions of the Certificate is a summary of, and is qualified in its entirety
by reference to, the Certificate, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "Risk Factors --
Risk Related to Certain Anti-Takeover Effect of Limitation on Ownership of
Common Stock" and "Additional Information".
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COMMON STOCK
Holders of the Common Stock are entitled to receive dividends, when, as and
if declared by the Board of Directors of the Company, out of funds legally
available therefor. The holders of Common Stock, upon any liquidation,
dissolution or winding-up of the Company, are entitled to share ratably in any
assets remaining after payment in full of all liabilities of the Company and all
preferences of the holders of any outstanding Preferred Stock. The shares of
Common Stock possess ordinary voting rights, each share entitling the holder
thereof to one vote. Holders of Common Stock do not have cumulative voting
rights in the election of directors and do not have preemptive rights. All of
the shares of the Common Stock now outstanding are, and the shares of the Common
Stock offered hereby when issued and sold to the Underwriters in the manner
described in this Prospectus will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without stockholder approval, to
issue up to 10,000,000 shares of Preferred Stock from time to time in one or
more series, to establish the number of shares of Preferred Stock to be included
in each such series and to fix the designations, powers, preferences and rights
of the Preferred Stock of each such series and the qualifications, limitations
or restrictions thereof. The issuance of Preferred Stock may have the effect of
delaying or preventing a change in control of the Company, could decrease the
amount of earnings and assets available for distribution to the holders of the
Common Stock, could adversely affect the rights and powers, including voting
rights, of the holders of the Common Stock and in certain circumstances, could
have the effect of decreasing the market price of the Common Stock. As of the
date of this Prospectus, there are 50,000 shares of Preferred Stock outstanding,
40,500 of which will be redeemed upon completion of the Offering utilizing a
substantial portion of the net proceeds of the Offering and 9,500 of which will
be exchanged for 633,333 shares of Common Stock at a conversion rate per share
equal to the initial public offering price. Upon the completion of the Offering
there will be no Preferred Stock outstanding. The Company has not designated any
additional Preferred Stock and has no plans to issue any additional Preferred
Stock.
EXCESS STOCK AND RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares. Not more than
50.0% in value of the Company's outstanding shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year of the Company's existence) or during a proportionate part of a shorter
taxable year, and the Company must be owned beneficially by 100 or more persons
during at least 335 days of a taxable year (other than the first year) or during
a proportionate part of a shorter taxable year. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT". Because the Company
expects to qualify as a REIT, the Certificate limits the acquisition of shares
of the Company's capital stock (the "Ownership Limit").
The Ownership Limit provides that, subject to certain exceptions set forth
in the Certificate, no person may own, or be deemed to own, by vote or value, by
virtue of the applicable attribution provisions of the Code, more than 9.8% of
each class of the outstanding shares of the Company. The Board of Directors may,
but is not required to, waive the Ownership Limit if it determines that greater
ownership will not jeopardize the Company's status as a REIT. As a condition of
waiver, the Board of Directors may require opinions of counsel satisfactory to
it and undertakings or representations from the applicant with respect to
preserving the REIT status of the Company.
If any purported transfer of capital shares of the Company or any other
event would otherwise result in any person or entity violating the Ownership
Limit or would cause the Company to be owned beneficially by fewer than 100
persons, that transfer will be void and of no force or effect as to the number
of shares in excess of the Ownership Limit, and the purported transferee (the
"Prohibited Transferee") will acquire no right or interest (or, in the case of
any event other than a purported transfer, the person or entity holding record
title to shares in excess of the Ownership Limit (the "Prohibited Owner") will
cease to own any right or interest) in the excess shares. In addition, if any
purported transfer of shares of the Company or any other event would cause the
Company to
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become "closely held" under the Code or otherwise to fail to qualify as a REIT
under the Code, that transfer will be void and of no force or effect as to the
number of shares in excess of the number that could have been transferred
without that result, and the Prohibited Transferee will acquire no right or
interest (or, in the case of any event other than a transfer, the Prohibited
Owner will cease to own any right or interest) in the excess shares. Also, if
any purported transfer of shares of the Company or any other event would
otherwise cause the Company to own, or be deemed to own by virtue of the
applicable attribution provisions of the Code, 10.0% or more, by vote or value,
of the ownership interests in any Lessee or sublessee, that transfer or event
will be void and of no force or effect as to the number of shares in excess of
the number that could have been transferred or affected by that event without
that result, and the Prohibited Transferee will acquire no right or interest
(or, in the case of any event other than a transfer, the Prohibited Owner will
cease to own any right or interest) in the excess shares.
The Certificate further provides that notwithstanding the foregoing
restriction, in the event of any transfer or other change which results in any
Prohibited Owner owing in excess of the Ownership Limit, the number of shares so
in excess shall be converted automatically and without further action into the
same number of shares of the Excess Stock. Any shares of Excess Stock will be
transferred automatically to a trust of which the Company is trustee and of
which the beneficiary may be designated by the Prohibited Owner subject to
certain limitations (the "Beneficiary"). Shares of Excess Stock in the trust
will be exchanged for the same number and class of shares of stock as was the
subject of the Prohibited Transfer and issued to the Beneficiary providing such
transfer would not violate the Ownership Limit and other conditions are met. For
a 90 day period beginning on the date of a Prohibited Transfer, the resulting
shares of Excess Stock shall be deemed to be offered for sale to the Company for
a price equal to the lesser of the price per share of the transaction resulting
in the Excess Stock (or market price on the date of any gift or reverse
resulting in Excess Stock) or the market price on the date of acceptance by the
Company. Any shares of Excess Stock will not have voting rights (except as
required by law) and will not participate in any dividends. Any holders of
Excess Stock, upon liquidation, dissolution or winding-up of the Company will be
entitled to share ratably with holders of the Common Stock in any assets
remaining after payment in full of all liabilities of the Company and all
preferences of the holders of any outstanding Preferred Stock. All certificates
representing shares of the Company will bear a legend referring to the
restrictions described above.
Every owner of more than 5.0% (or such lower percentage as may be required
by the Code or Treasury Regulations) of the outstanding shares of the Company
must file no later than January 30 of each year a written notice with the
Company containing the information specified in the Certificate. In addition,
each stockholder will be required, upon demand, to disclose to the Company in
writing such information as the Company may request in order to determine the
effect, if any, of that stockholder's actual and constructive ownership on the
Company's status as a REIT and to ensure compliance with the Ownership Limit.
The Ownership Limit may have the effect of precluding an acquisition of
control of the Company without approval of the Board of Directors.
DELAWARE BUSINESS COMBINATION PROVISIONS
As a Delaware corporation, the Company is subject to Section 203 of the GCL
("Section 203") which may have the effect of significantly delaying a
purchaser's ability to acquire the entire interest in the Company if such
acquisition is not approved by the Company's Board of Directors. In general,
Section 203 prevents an "Interested Stockholder" (defined generally as a person
with 15.0% or more of a corporation's outstanding voting stock) from engaging in
a "Business Combination" (defined below) with a Delaware corporation for three
years following the date such person became an Interested Stockholder. For
purposes of Section 203, the term "Business Combination" is defined broadly to
include mergers and certain other transactions with or caused by the Interested
Stockholder, sales or other dispositions to the Interested Stockholder (except
proportionately with the corporation's other stockholders) of assets of the
corporation or a subsidiary equal to 10.0% or more of the aggregate market value
of the corporation's consolidated assets or its outstanding stock; the issuance
or transfer by the corporation or a subsidiary of stock of the corporation or
such subsidiary to the Interested Stockholder (except for transfers in a
conversion or exchange or a pro-rata distribution or certain other transactions,
none of which increase the Interested Stockholder's proportionate ownership of
any class or series of the corporation's or such subsidiary's stock); or receipt
by the Interested Stockholder (except proportionately as a stockholder),
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directly or indirectly, of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on Business Combinations by Section 203
does not apply if: (a) prior to the date on which a stockholder becomes an
Interested Stockholder, the Board of Directors approves either the Business
Combination or the transaction which resulted in the person becoming an
Interested Stockholder; (b) the Interested Stockholder owns 85.0% of the
corporation's voting stock upon consummation of the transaction which made him
or her an Interested Stockholder (excluding from the 85.0% calculation shares
owned by directors who are also officers of the corporation and shares held by
employee stock plans which do not permit employees to decide confidentially
whether to accept a tender or exchange offer); or (c) on or after the date a
person becomes an Interested Stockholder, the Board of Directors approves the
Business Combination, and it is also approved at a stockholders meeting by
two-thirds of the voting stock not owned by the Interested Stockholder. The
restrictions described above do not apply to certain Business Combinations
proposed by an Interested Stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation and a
person who had not been an Interested Stockholder during the previous three
years or who became an Interested Stockholder with the approval of a majority of
the corporation's directors.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering the Company will have outstanding
13,273,773 shares of Common Stock (assuming no exercise of the underwriters'
over-allotment option). All shares sold in the Offering (other than any shares
which may be acquired by an Affiliate) will be freely tradable in the public
market without restriction or further registration under the Securities Act.
The remaining 1,948,773 outstanding shares of Common Stock upon completion
of the Offering are "restricted securities" as that term is defined under Rule
144 and may be sold only pursuant to registration under the Securities Act or
pursuant to an exemption therefrom, such as that provided by Rule 144. In
general, under Rule 144, if one year has elapsed since the later of (i) the date
of acquisition of shares of Common Stock from the Company, or (ii) the date of
acquisition of shares of Common Stock from any Affiliate of the Company (as
defined in the Securities Act), the acquiror or subsequent holder is entitled to
sell within any three-month period a number of shares of Common Stock that does
not exceed the greater of 1.0% of the then-outstanding shares of Common Stock or
the average weekly trading volume of shares of Common Stock on all national
securities exchanges or reported through the consolidated transactions reporting
system during the four calendar weeks preceding the date on which notice of the
sale is filed with the Commission. Sales under Rule 144 also are subject to
certain restrictions on the manner of sales, notice requirements and the
availability of current public information about the Company. If two years have
elapsed since the date of acquisition of shares of Common Stock from the Company
or from any Affiliate of the Company, and the acquiror or subsequent holder
thereof is deemed not to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, such person would be entitled to sell such
shares of Common Stock in the public market under Rule 144(k) without regard to
the volume limitations, manner of sale provisions, public information
requirements or notice requirements. Of the shares of Common Stock to be
outstanding immediately after the Offering 1,315,440 will be eligible for
immediate resale under Rule 144 subject to Rule 144's volume, manner of sale and
other restrictions and 633,333 shares will be so eligible upon satisfaction of
such conditions and of a one year holding period.
After the completion of the Offering, the Company may file a Registration
Statement on Form S-8 under the Securities Act to register all of the shares of
Common Stock reserved for issuance under the Plan and upon exercise of stock
options to be granted to Messrs. Beach and Martin. The Company also has agreed
to register the 633,333 shares of the Common Stock to be issued in exchange for
the unredeemed Preferred Stock in the event of a subsequent public offering of
the Common Stock by the Company or upon demand by the owner of the shares at any
time subsequent to 180 days following the completion of the Offering. After the
date of any such registrations, such shares when issued will be immediately
eligible for sale in the public market, provided that shares owned by Affiliates
of the Company (as defined in the Securities Act), will be subject to the volume
limitations, manner of sale provisions, and public information and notice
requirements of Rule 144.
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Prior to the Offering, there has been no public market for the Common Stock
and the effect, if any, that future market sales of Common Stock or the
availability of such Common Stock for sale will have on the market price of the
Common Stock prevailing from time to time cannot be predicted. Nevertheless,
sales of substantial amounts of Common Stock in the public market (or the
perception that such sales could occur) might adversely affect the market price
for the Common Stock.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the federal income tax considerations
that materially affect a prospective stockholder who is a U.S. citizen or
resident or a tax-exempt organization (including individual retirement
accounts). The discussion is general in nature and not exhaustive of all
possible tax considerations, nor does the discussion give a detailed description
of any state, local, or foreign tax considerations. The discussion does not
address all aspects of federal income tax law that may be relevant to a
prospective stockholder of the Company in light of his or her particular
circumstances or to certain types of stockholders (including, for example,
insurance companies, financial institutions or broker-dealers, tax-exempt
entities, and (except to the limited extent discussed herein) foreign
corporations and persons who are not citizens or residents of the United States)
subject to special treatment under the federal income tax laws.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING
AND EACH PROSPECTIVE STOCKHOLDER OF THE COMPANY IS ADVISED TO CONSULT WITH HIS
OR HER TAX ADVISOR REGARDING THE SPECIFIC FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF THE COMPANY'S COMMON STOCK,
OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
GENERAL
The Company intends to elect to be taxed as a REIT for federal income tax
purposes, and expects that it will be organized and will operate in such a
manner so as to qualify for taxation as a REIT under Sections 856 through 860 of
the Code commencing with its taxable year ending December 31, 1997 and
thereafter. No assurance can be given, however, that the Company will operate in
a manner so as to qualify or remain qualified as a REIT.
Baker & Hostetler LLP, counsel to the Company ("Counsel"), has rendered its
opinion, subject to certain assumptions and qualifications and conditioned upon
certain factual representations by the Company, that (i) the Company will be
organized in conformity with the requirements for qualification as a REIT under
the Code and that the method of operation of the Company will permit the Company
to continue to so qualify for its current and future taxable years provided the
Company meets and continues to meet the asset composition, source of income,
shareholder diversification, distribution, record keeping and other requirements
of the Code necessary for the Company to qualify as a REIT, and (ii) the summary
of federal income tax considerations set forth in this Prospectus accurately
summarizes the federal income tax considerations that are likely to be material
to a holder of Common Stock. Unlike a tax ruling, an opinion of counsel is not
binding on the IRS, and no assurance can be given that the IRS will not
challenge the status of the Company as a REIT for federal income tax purposes.
With respect to Counsel's opinion relating to the qualification of the Company
as a REIT, it should be noted that the Company's continued qualification as a
REIT in current and future taxable years will depend upon whether the Company
continues to meet the various qualification tests imposed under the Code
(discussed in detail below). Counsel will not review compliance with these tests
on a periodic or continuing basis. Accordingly, no assurance is given that the
actual results of the Company's operations for the current or future taxable
years will satisfy such requirements. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT -- Failure to
Qualify".
The opinions and discussion herein are based upon the Code, as currently in
effect, applicable Treasury Regulations adopted thereunder, reported judicial
decisions, and IRS rulings, all as of the date hereof, and certain factual
representations and assumptions made by the Company concerning the organization
and proposed operation of the Company. There is no assurance, however, that the
legal authorities on which such opinions and this discussion are based will not
change (perhaps retroactively), that the Company's representations and factual
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assumptions underlying this discussion will be accurate, or that there will not
be a change in circumstances of the Company that would affect such opinions or
this discussion. Accordingly, there is no assurance that the IRS will not
challenge Counsel's opinions.
TAXATION OF THE COMPANY AS A REIT
If the Company qualifies for taxation as a REIT and distributes to its
stockholders at least 95.0% of its REIT taxable income, it generally will not be
subject to federal corporate income tax on the portion of its ordinary income or
capital gain that is timely distributed to stockholders. This treatment
substantially eliminates the "double taxation" (at the corporate and stockholder
levels) that generally results from investment in a corporation. If the Company
were to fail to qualify as a REIT, it would be taxed at rates applicable to
corporations on all of its income, whether or not distributed to its
stockholders. Even if the Company qualifies as a REIT, it may be subject to
federal income or excise tax as follows:
(i) The Company will be taxed at regular corporate rates on REIT
taxable income and net capital gains not distributed to its stockholders.
With respect to capital gains not distributed to stockholders, however, if
the Company makes a proper tax election (the "Deemed Distribution
Election") and pays the tax due within 30 days after the close of the
taxable year, (i) the stockholder will include in its taxable income, as
long-term capital gains, the amount which would have been included had the
income been distributed, and (ii) the stockholder will be deemed to have
paid the tax on such amount and will be allowed a credit or refund as the
case may be, for the tax so deemed to have been paid by it.
(ii) Under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its tax preference items, if any;
(iii) If the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property,
other than foreclosure property, held primarily for sale to customers in
the ordinary course of business) such income will be subject to a 100.0%
tax;
(iv) If the Company should fail to satisfy the 75.0% gross income test
(the "75.0% Test") or the 95.0% gross income test (the "95.0% Test") (each
as discussed below), but has maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a 100.0%
tax on the income attributable to the greater of the amount by which the
Company fails the 75.0% Test or the 95.0% Test, multiplied by a fraction
intended to reflect the Company's profitability;
(v) If the Company fails to distribute during each calendar year at
least the sum of (A) 85.0% of its REIT ordinary income for such year, (B)
95.0% of its REIT capital gain net income for such year (except to the
extent the Deemed Distribution Election has been made) and (C) any
undistributed taxable income from prior years, it would be subject to a
4.0% excise tax on the excess of such required distribution over the
amounts actually distributed;
(vi) If the Company has (A) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property
acquired by the Company by foreclosure or otherwise on default on a loan
secured by the property) which is held primarily for sale to customers in
the ordinary course of business or (B) other nonqualifying income from
foreclosure property, it will be subject to tax on such income at the
highest corporate rate; and
(vii) If the Company acquires assets from a C corporation (generally a
corporation subject to tax at the corporate level) in a transaction in
which the Company's bases of the acquired assets are determined by
reference to the bases of the assets (or any other property) of the C
corporation (as it did from the merged companies), and the Company
recognizes net gain on the disposition of such assets in any taxable year
during the 10-year period (the "Restriction Period") beginning on the date
on which such assets were acquired by the Company then, pursuant to IRS
guidelines, and assuming the Company makes an election pursuant to IRS
Notice 88-19, the excess of the fair market value of such property at the
beginning of the applicable Restriction Period over the Company's adjusted
basis in such property at the beginning of the Restriction Period will be
subject to a tax at the highest regular corporate rate.
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REQUIREMENTS FOR QUALIFICATION AS A REIT
General
The Code defines a REIT as a corporation, trust or association which:
(i) is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(iii) would be taxable as a domestic corporation but for Sections 856
through 859 of the Code;
(iv) is neither a financial institution nor an insurance company
subject to certain provisions of the Code;
(v) has the calendar year as its taxable year;
(vi) the beneficial ownership of which is held by 100 or more persons;
(vii) during the last half of each taxable year not more than 50.0% in
value of the outstanding shares of which is owned, directly or indirectly
(applying certain attribution rules), by five or fewer individuals (as
defined in the Code to include certain exempt entities);
(viii) makes an election to be a REIT (or made such an election in a
previous taxable year that is still valid) and satisfies all relevant
filing and other administrative requirements that must be met in order to
maintain REIT status; and
(ix) meets certain income and asset tests, described below.
Conditions (i) through (v), inclusive, must be met during the entire
taxable year and condition (vi) must be met during at least 335 days of a
taxable year of 12 months, or during an equally proportionate part of a taxable
year of less than 12 months. However, conditions (vi) and (vii) will not apply
until after the first taxable year for which an election is made to be taxed as
a REIT. The Company's taxable year will be the calendar year. Following the
consummation of the Offering, the Company will have satisfied the share
ownership requirements set forth in (vi) and (vii) above (respectively, the "100
Stockholder Requirement" and "Five or Fewer Requirement"). In order to assist
the Company in complying with the share ownership requirements, the Company has
placed certain restrictions on the transfer of its Common Stock to prevent
further concentration of share ownership. See "Capital Stock of the
Company -- Restrictions on Transfer". Moreover, to evidence compliance with
these requirements, the Company must maintain records which disclose the actual
ownership of its outstanding Common Stock. In fulfilling its obligation to
maintain these records, the Company must, and will, demand written statements
each year from the record holders of designated percentages of its Common Stock
disclosing the actual owners of such Common Stock. A list of those persons
failing or refusing to comply with such demand must be maintained as a part of
the Company's records. A stockholder failing or refusing to comply with the
Company's written demand must submit with his or her tax return a similar
statement and certain other information. If the Company (i) complies with all of
these requirements designed to ascertain the actual owners of the Company's
Common Stock, and (ii) does not know, or through the exercise of reasonable
diligence would not have known, of the Company's failure to meet the Five or
Fewer Requirement, then the Company will be treated as having met such
requirement for that taxable year.
Asset Tests
In order for the Company to maintain its qualification as a REIT, at the
close of each quarter of its taxable year, it must satisfy three tests relating
to the nature of its assets:
(i) At least 75.0% of the value of the Company's total assets must be
represented by any combination of interests in real property, interests in
mortgages on real property, shares in other REITs, cash, cash items, and
certain government securities;
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(ii) Not more than 25.0% of the Company's total assets may be
represented by securities other than those in the 75.0% asset class; and
(iii) Of the investments included in the 25.0% asset class, the value
of any one issuer's securities owned by the Company may not exceed 5.0% of
the value of the Company's total assets, and the Company may not own more
than 10.0% of any issuer's outstanding voting securities (excluding
securities of a qualified REIT subsidiary (as defined in the Code) or
another REIT).
Where the Company owns an interest in a partnership, it will be treated for
purposes of the asset tests as owning a proportionate part of the partnership's
assets. Except for certain equipment owned and leased by the Affiliated
Partnerships, the Company's investment in the properties through its interest in
the Affiliated Partnerships are expected to constitute qualified assets for
purposes of the 75.0% asset test. Notwithstanding the Affiliated Partnership's
ownership of such equipment, the Company has performed financial analyses to
confirm that more than 75.0% of the value of its assets will be real estate
assets.
Further, the Company does not expect to hold any securities representing
more than 10.0% of any issuer's voting securities, nor does the Company expect
to hold securities of any one issuer in an amount exceeding 5.0% of the value of
the Company's gross assets.
If the Company inadvertently fails one or more of the asset tests at the
end of a calendar quarter, such a failure would not cause it to lose its REIT
status, provided that (i) it satisfied all of the asset tests at the close of a
preceding calendar quarter, and (ii) the discrepancy between the values of the
Company's assets and the standards imposed by the asset tests either did not
exist immediately after the acquisition of any particular asset or was not
wholly or partly caused by such an acquisition. If the condition described in
clause (ii) of the preceding sentence was not satisfied, the Company could still
avoid disqualification by eliminating any discrepancy within 30 days after the
close of the calendar quarter in which it arose.
Income Tests
In order for the Company to maintain its qualification as a REIT, it must
satisfy two percentage tests relating to the source of its gross income in each
taxable year. For purposes of these tests, where the Company invests in a
partnership, the Company will be treated as receiving its proportionate share of
the gross income of the partnership, and such gross income will retain the same
character with the Company as it had with the partnership.
(i) The 75.0% Test. At least 75.0% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from specified real estate sources, including "rents from real
property" and interest and certain other income earned from mortgages on real
property, gain from the sale of real property or mortgages (other than in
prohibited transactions) or income from qualified types of temporary
investments.
(ii) The 95.0% Test. At least 95.0% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from the same items which qualify under the 75.0% Test or from
dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing.
Rents received by the Company will qualify as "rents from real property"
for purposes of the 75.0% Test and the 95.0% Test if the following requirements
are met:
(i) The amount of rent received must generally not be based in whole
or in part on the income or profits derived by any person from such
property. Amounts received or accrued generally will not be excluded from
the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales, or of being based on
the net income or profits of the tenant if (a) the tenant derives
substantially all of its income with respect to such property from the
leasing or subleasing of substantially all of such property and (b) such
tenant receives from subtenants only amounts which would be treated as
rents from real property if received directly by the Company;
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(ii) Rent attributable to personal property leased in connection with
a lease of real property will qualify as "rents from real property" unless
such rent is greater than 15.0% of the total rent received under the lease,
in which case none of the rent qualifies (the "15.0% Test"). The rent
attributable to such personal property is the amount that bears the same
ratio to total rent for the taxable year as the average of the adjusted
bases of such personal property at the beginning and at the end of the
taxable year bears to the average of the aggregate adjusted bases of both
the real and personal property of a lease at the beginning and at the end
of such taxable year (the "Adjusted Basis Ratio"). The Company must
generally apply the 15.0% Test to each Lease separately. The Company has
reviewed these requirements and has represented that rents attributable to
personal property will not exceed 15.0% of the total rents received under
any the Leases.
(iii) Rents must not be received from a tenant in which the Company or
a direct or indirect owner of 10.0% or more of the Company owns directly or
constructively a 10.0% or greater interest in the assets or net profits of
such tenant (a "Related Party Tenant"). However, a REIT and a Tenant will
not be related (and, therefore, rents paid by the tenant to the REIT will
be qualifying rents) if (i)(a) the REIT's shares are owned by a partnership
and (b) a partner owning (directly or indirectly) less than a 25.0%
interest in that partnership also owns an interest in the tenant, or (ii)
where owners of the REIT and owners of the tenant are partners in a
partnership and neither the owners of the REIT nor the owners of the tenant
are directly and indirectly 25.0% or greater partners in the partnership;
and
(iv) The Company must not operate or manage its property or furnish or
render directly services to its tenants unless such services are of a type
that a tax-exempt organization can provide its tenants without causing its
rental income to be unrelated business taxable income under the Code
("Qualifying Services"). If such services are not Qualifying Services, such
services must be rendered by an "independent contractor" that is adequately
compensated and from whom the Company derives no income. Receipts for
services furnished (whether or not rendered by an independent contractor)
that are not customarily provided to tenants of properties of a similar
class in the geographic market in which the Company's property is located
("Noncustomary Services") will not qualify as rents from real property.
However, the Company may provide non-Qualifying Services and Noncustomary
Services in an amount (not valued at less than 150.0% of the Company's
direct cost for the services) that does not exceed 1.0% of the gross income
from the property for which the services are provided (the "De Minimis
Service Amount"). Although the Company does provide certain management
services, the Company has represented to Counsel that, except to the extent
of certain services the Company performs for its Affiliated Partnerships,
these services are usual and customary management services provided by
landlords in the geographic areas in which the Company owns property, and
that such services are not primarily for the convenience of its tenants. To
the extent the provision of services would cause the Company to no longer
qualify as a REIT, the Company has represented that it will hire
independent contractors, from which the Company derives no income, to
perform such services.
If the sum of the income realized by the Company that does not satisfy the
requirements of the 75.0% Test and the 95.0% Test (collectively, "Non-Qualifying
Income"), exceeds 5.0% of the Company's gross income for any taxable year, the
Company's status as a REIT would be jeopardized. The Company has recognized that
it will have non-Qualifying Income from a number of sources including, but not
limited to, the following:
1. Income from services performed for Affiliated Partnerships;
2. Income allocation from the Company's general partner interest in
Affiliated Partnerships attributable to equipment leased by such
partnerships;
3. Income from certain equipment and furniture and fixture leases;
4. Rental income from Related Party Tenants; and
5. The proportionate share of the Company's income from its investment in a
REMIC to the extent such income is not derived from the REMIC's
investment in real estate assets.
Notwithstanding the foregoing, the Company has performed financial analysis
with regard to this non-Qualifying Income and has represented that the amount of
its Non-Qualifying Income will not exceed 5.0% of the
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Company's annual gross income for any taxable year. There is no guarantee,
however, that the 75.0% Test and the 95.0% Test will be met.
It is possible that, from time to time, the Company will enter into hedging
transactions with respect to one or more of its assets or liabilities. Any such
hedging transactions could take a variety of forms. If the Company enters into
any contract designed to hedge any indebtedness incurred or to be incurred to
acquire or carry real estate assets, any periodic income or gain from the
disposition of such contract should be qualifying income for purposes of the
95.0% Test, but not for the 75.0% Test. The Company intends to structure any
hedging transactions in a manner that does not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75.0% Test or the 95.0%
Test for any taxable year, it may still qualify as a REIT in such year if (i) it
attaches a schedule of the source and nature of each item of its gross income to
its federal income tax return for such year; (ii) the inclusion of any incorrect
information in its return was not due to fraud with intent to evade tax; and
(iii) the Company's failure to meet such tests is due to reasonable cause and
not due to willful neglect. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. Even if these relief provisions apply, the Company will still be
subject to a tax imposed with respect to the excess net income. See "-- Taxation
of the Company as a REIT".
Characterization of Property Leases
The Company currently leases the Existing Properties pursuant to leases of
the type described in "Description of Properties and Property Leases". The
Company intends to acquire additional properties, including the Acquisition
Properties, and has represented that it will consult with counsel and lease them
on terms substantially identical to the terms described in "Description of
Properties and Leases". The ability of the Company to claim certain tax benefits
associated with ownership of the properties, such as depreciation, depends on a
determination that the lease transactions engaged in by the Company are true
leases (under which the Company is the owner of the leased property for federal
income tax purposes), rather than a conditional sale of the property or a
financing transaction. A determination by the Service that the Company is not
the owner of the properties for federal income tax purposes may have adverse
consequences to the Company, such as the denying of the Company's depreciation
deductions. A denial of the Company's depreciation deductions could result in a
determination that the Company's Distributions to stockholders were insufficient
to satisfy the 95.0% distribution requirement for qualification as a REIT.
However, as discussed above, if the Company has sufficient cash, it may be able
to remedy any past failure to satisfy the distribution requirements by paying a
"deficiency dividend" (plus a penalty and interest). See "-- Annual Distribution
Requirements", below. Furthermore, if the leases are recharacterized as service
contracts, partnership agreements or some other form of arrangement, the rents
likely would be disqualified as "rents from real property." However, in the
event that the Company were determined not to be the owner of a particular
property, the income that the Company would receive pursuant to the
recharacterized lease likely would constitute interest and qualify under the
95.0% Test and 75.0% Test by reason of being interest on an obligation secured
by a mortgage on an interest in real property, because the legal ownership
structure of such property will have the effect of making the building serve as
collateral for the debt obligation.
The characterization of transactions as leases, conditional sales or
financings has been addressed in numerous cases. The courts have not identified
any one factor as being determinative of whether the lessor or the lessee of
property is to be treated as the owner, and courts have reached different
conclusions even where characteristics of two lease transactions were
substantially similar. Judicial decisions and pronouncements of the IRS with
respect to the characterization of transactions as either leases, conditional
sales or financing transactions have made clear that the characterization of
leases for tax purposes is a question which must be decided on the basis of a
weighing of many factors.
For example, a transaction generally will be treated as a lease and the
lessor will be treated as the owner of the property for federal income tax
purposes and will be entitled to claim depreciation and other tax benefits
associated with such ownership if the following conditions exist:
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1. The lessor owns an equity investment at least equal to 20% of the
cost of both the building (or buildings, if there is more than one
building) and the underlying land with respect to a property, such equity
investment remains at risk throughout the lease term, and the lessor's
commitment to make its equity investment and continue with the transaction
is unconditional at the time the lease commences;
2. The lessor and lessee intend for their relationship to be that of
lessor and lessee and such relationship is documented by lease agreements;
3. The lessor bears the risk of loss in value of the building or
buildings and the underlying land with respect to a property;
4. The lessor benefits from any appreciation in value of the building
or buildings and the underlying land with respect to a property;
5. The lessee is liable for repairs and to return the property in
reasonably good condition;
6. Insurance proceeds will be used to restore the property and, to the
extent not so used, will belong to the lessor;
7. Any lessee purchase option is exercisable only at an amount equal
to the then fair market value of the leased property;
8. The lease term is less than 30 years, excluding renewal options
exercisable at fair market value;
9. The property is reasonably expected to have, at the end of its
lease term (including all renewal periods), a fair market value of at least
20% of the lessor's cost;
10. The remaining useful life of a property, at the end of its lease
term (including all renewal periods), will have a remaining useful life of
at least 20% of the property's useful life at the beginning of its lease
term;
11. The lessee has the right to exclusive possession and use and quiet
enjoyment of a property during the term of the lease;
12. The lessee benefits from any savings in the costs of operating a
property during the lease term;
13. The lessee stands to incur substantial losses (or reap substantial
gains) depending on how successfully it operates a property;
14. Any lessee renewal option will provide for rents equal to the then
fair market rental value;
15. The rent is set at fair market rental value and the lessor expects
to receive a profit from the lease transaction exclusive of the benefits
derived from tax attributes associated with the lease or the leased
property;
16. No lessee (or person related to a lessee) will loan the lessor any
funds, guarantee any lessor debt, or have any investment interest in the
cost of the leased property.
While certain characteristics of the Leases suggest the Company might not
be the owner of the properties, such as the fact that most of such leases are
triple-net leases, a substantial number of other characteristics indicate the
bona fide nature of such leases and that the Company is the owner of the
Existing Properties. For example, under the types of leases described in
"Description of Properties and Leases," the Company will bear the risk of
substantial loss in the value of the Existing Properties because the Company
acquired an interest in the Existing Properties with an equity investment,
rather than with nonrecourse indebtedness. Further, the Company, rather than the
Lessee, will benefit from any appreciation in the Existing Properties, since the
Company has the right at any time to sell or transfer its properties, subject to
the tenant's right to purchase the property at a price intended to be not less
than the property's fair market value.
Other factors that are consistent with the ownership of the Existing
Properties by the Company are (i) the Company and the lessees intend for their
relationship to be that of a lessor and lessee and such relationship is
documented by lease agreements; (ii) the lessees have the right to exclusive
possession and use and quiet
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enjoyment of the Existing Properties during the term of the Leases; (iii) the
lessee bears the cost of, and is responsible for, day-to-day maintenance and
repair of the Existing Properties (other than the case of "double-net" leases,
where the Company bears the cost of maintaining exterior walls and/or roof of
the Existing Property) and dictates how the Existing Properties are operated,
maintained and improved; (iv) the tenants are generally liable for repairs and
to return the Existing Properties in reasonably good condition; (v) casualty
insurance proceeds generally are to be used to restore the Existing Properties
and, to the extent not so used, belong to the Company; (vi) the tenants agree to
subordinate their interest in the Existing Properties to the lien of any first
mortgage upon delivery of a nondisturbance agreement and agree to attorn to the
purchaser upon any foreclosure sale; (vii) the tenants may not assign or
sublease without the consent of the Company; and (viii) based on the Company's
representation that the Existing Properties and any Acquisition Properties can
reasonably be expected to have at the end of their lease terms (generally a
maximum of 30 to 35 years) a fair market value of at least 20.0% of the
Company's cost and a remaining useful life of at least 20.0% of their useful
lives at the beginning of the leases (and that no lessee will be permitted to
purchase a property for an amount intended to be less than the property's fair
market value at such time), the Company has not relinquished the Existing
Properties to the tenants for their entire useful lives, but has retained a
significant residual interest in them. Moreover, the Company will not be
primarily dependent upon tax benefits in order to realize a reasonable return on
its investments.
Concerning the Existing Properties for which the Company owns the buildings
and the underlying land, on the basis of the foregoing, assuming (i) the Company
leases the Existing Properties on substantially the same terms and conditions
described in "Description of Properties and Leases," and (ii) as is represented
by the Company, the residual value of the Existing Properties remaining after
the end of their lease terms (including all renewal periods) may reasonably be
expected to be at least 20.0% of the Company's cost of such properties, and the
remaining useful lives of the Existing Properties after the end of their lease
terms (including all renewal periods) may reasonably be expected to be at least
20.0% of the Existing Properties' useful lives at the beginning of their lease
terms, it is the opinion of Counsel that the Company will be treated as the
owner of the Existing Properties for federal income tax purposes and the Company
therefore will be entitled to claim depreciation and other tax benefits
associated with such ownership and may include rents from such leases as "rents
from real property" for purposes of the 75.0% Test and the 95.0% Test. In the
case of leases with respect to which the Company does not own the underlying
land, including, without limitation, equipment leases, and furniture and
fixtures leases and any leases not yet in place, Counsel cannot opine that such
transactions will be characterized as leases. As described above, the foregoing
conclusions and Counsel's opinion are based upon an analysis of all the facts
and circumstances and upon rulings and judicial decisions involving situations
that are considered to be analogous, as well as representations by the Company
and assumptions that are described above and set out in Counsel's opinion.
Opinions of counsel are not binding upon the IRS or a court. Accordingly, there
is no assurance that the IRS will not assert successfully a contrary position
and, therefore, prevent the Company from qualifying for taxation as a REIT.
The law governing the characterization of transactions as leases is
complicated and is in a state of change. Furthermore, for federal income tax
purposes, lease characterization is made on a property-by-property basis, based
on an analysis of each particular location including, among other factors, fair
rental value of the particular property and, in the case of any lease involving
a lessee purchase option, the fair market value of the property at the time the
option is exercisable. There are no controlling Treasury Regulations, published
rulings, or judicial decisions involving leases with terms substantially the
same as the Leases that discuss whether such leases constitute true leases for
federal income tax purposes. The foregoing conclusions with respect to the
relationship between the Company and the Lessees are based upon all of the facts
and circumstances and upon rulings and judicial decisions involving situations
that are considered to be analogous. There is no assurance that the IRS will not
successfully assert a contrary position. If the Leases are recharacterized as
service contracts or partnership agreements, rather than leases, part or all of
the payments that the Company receives from the Lessees may not be considered
rent or may not otherwise satisfy the various requirements for qualification as
"rents from real property." In that case, the Company likely would not be able
to satisfy either the 75.0% Test or the 95.0% Test and, as a result, would lose
its REIT status. See "-- Requirements for Qualification as a REIT -- Income
Tests".
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In summary, if the rents do not qualify as "rents from real property"
because (i) the percentage rent is based on income or profits of the Lessee,
(ii) the Company exceeds the Tenant Ownership Limitation, (iii) the Company
furnishes more than the De Minimis Service Amount of non-Qualifying Services to
the Lessees of the properties other than through a qualifying independent
contractor (or furnishes more than the De Minimis Service Amount of
Non-Customary Services (whether or not through an independent contractor) unless
separately charged for by the independent contractor), or (iv) for some other
reason, the Company likely would lose its REIT status because it would be unable
to satisfy either the 75.0% Test or the 95.0% Test. See "-- Requirements for
Qualification as a REIT -- Income Tests".
Annual Distribution Requirements
In order to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (A) the sum of (i) 95.0% of the Company's "REIT taxable
income" (computed without regard to the dividends paid deduction and the REITs
net capital gain) and (ii) 95.0% of the net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of noncash income. In
addition, if the Company disposes of any asset during its Restriction Period,
the Company will be required to distribute at least 95.0% of the built-in gain
(after tax), if any, recognized on the disposition of such asset. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that the Company does not distribute all
of its net capital gain (or make the Deemed Distribution Election) or
distributes at least 95.0%, but less than 100.0%, of its "REIT taxable income,"
as adjusted, it will be subject to tax on the undistributed amount at regular
corporate tax rates. Moreover, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85.0% of its REIT ordinary income for
such year, (ii) 95.0% of its REIT net capital gain income for such year (except
to the extent the Deemed Distribution Election is made) and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4.0% excise tax on the excess of such required distribution over the amounts
actually distributed.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements. From time to time, the Company may not have
sufficient cash or other liquid assets to meet the 95.0% distribution
requirements due to primarily to the expenditure of cash for nondeductible
expenses such as principal amortization or capital expenditures. In the event
that such timing differences occur, the Company may find it necessary to borrow
or liquidate some of its investments in order to meet the annual distribution
requirement or attempt to declare a consent dividend, which is a hypothetical
distribution to holders of shares of Common Stock out of the earnings and
profits of the Company. The effect of such a consent dividend (which, in
conjunction with dividends actually paid, must not be preferential to those
holders who agree to such treatment) would be that such holders would be treated
for federal income tax purposes as if they had received such amount in cash and
they then had immediately contributed such amount back to the Company as
additional paid-in capital. This would result in taxable income to those holders
without the receipt of any actual cash distribution but would also increase
their tax basis in their shares of Common Stock by the amount of the taxable
income recognized. In order to avoid any problem with the 95.0% distribution
requirement, the Company will closely monitor the relationship between its REIT
taxable income and cash flow and, if necessary, will borrow funds in order to
satisfy the distribution requirements.
If the Company fails to satisfy the 95.0% distribution requirement as a
result of an adjustment to the Company's tax return by the IRS, the Company may
be permitted to remedy such a failure by paying a "deficiency dividend" (plus
applicable interest and penalties) within a specified time.
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable corporate alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company, nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable to them as
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ordinary income, and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company also will be
ineligible for qualification as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief.
OTHER TAX CONSIDERATIONS
Taxation of Taxable Domestic Stockholders
Provided the Company qualifies as a REIT, distributions made to the
Company's taxable stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such stockholders as ordinary income. Domestic stockholders generally
are stockholders who are (i) citizens or residents of the United States; (ii)
corporations, partnerships or other entities created in, or organized under, the
laws of the United States or any political subdivision thereof; or (iii) estates
or trusts the income of which is subject to United States federal income
taxation regardless of its source. Corporate stockholders will not be entitled
to the dividends received deduction. Any dividend declared by the Company in
October, November or December of any year payable to a stockholder of record on
a specific date in any such month shall be treated as both paid by the Company
and received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by the Company during January of the following
calendar year.
Distributions that are designated as capital gain dividends will be taxed
as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the stockholder has held its shares. In addition, to the extent the
Company makes a Deemed Distribution Election, stockholders will be required to
include, in calculating their long-term capital gains for the taxable year, such
amount as the Company designates in respect of each stockholder's Common Stock
in a written notice to the stockholder mailed within 60 days of the close of the
Company's taxable year (or mailed with its annual report for the year). However,
the Company must pay tax on these capital gains within 30 days of the close of
the Company's taxable year, and each stockholder will be deemed to have paid the
portion of such tax imposed on the income that stockholder was required to
include in computing long-term capital gains and shall be entitled to a credit
or refund, as the case may be, for the tax so deemed to have been paid. As a
result, the adjusted basis of each stockholders's Common Stock will be
simultaneously increased by the amount of such includible gains, and decreased
by the amount of tax deemed paid by the stockholder on such gains.
Notwithstanding any of the foregoing, corporate stockholders may be required to
treat up to 20.0% of certain capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's Common Stock, but rather will reduce the
adjusted basis of such shares. To the extent that such distributions exceed the
adjusted basis of a stockholder's Common Stock, they will be included in income
as long-term capital gain assuming the shares are a capital asset of the
stockholder and have been held for more than one year.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. In general, a stockholder
will realize capital gain or loss on the disposition of Common Stock equal to
the difference between (a) the sales price for such shares and (b) the adjusted
tax basis of such shares. Gain or loss realized upon the sale or exchange of
Common Stock by a stockholder who has held such Common Stock for more than one
year (after applying certain holding period rules) will be treated as long-term
gain or loss, respectively, and otherwise will be treated as short-term capital
gain or loss. Under tax legislation passed in August 1997, capital gains rates
applicable to individuals were reduced to 20.0% for assets held longer than
eighteen months. However, losses incurred upon a sale or exchange of Common
Stock by a stockholder who has held such shares for six months or less (after
applying certain holding period rules) will be deemed a long-term capital loss
to the extent of any capital gain dividends received by the selling stockholder
with respect to such Common Stock.
Distributions from the Company and gain from the disposition of shares will
not be treated as passive activity income. Distributions from the Company (to
the extent they do not constitute a return of capital) will
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generally be treated as investment income for purposes of the investment
interest limitation. Gain from the disposition of shares and capital gain
dividends will not be treated as investment income unless the taxpayer elects to
have the gain taxed at ordinary income rates.
Backup Withholding
The Company will report to its domestic stockholders and the IRS the amount
of dividends paid during each calendar year, and the amount of tax withheld, if
any, with respect thereto. Under the backup withholding rules, a stockholder may
be subject to backup withholding at the rate of 31.0% with respect to dividends
paid unless such stockholder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A stockholder who does not provide the Company with its
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions made to any stockholders who
fail to certify their nonforeign status to the Company.
Taxation of Tax-Exempt Stockholders
Tax-exempt entities, including qualified employee pension and
profit-sharing trusts, individual retirement accounts and certain funded welfare
plan arrangements ("Exempt Organizations"), generally are exempt from federal
income taxation. However, they are subject to taxation on their unrelated
business taxable income ("UBTI"). While many investments in real estate generate
UBTI, the IRS has issued a published ruling that dividend distributions by a
REIT to an exempt employee pension trust do not constitute UBTI, provided that
the shares of the REIT are not otherwise used in an unrelated trade or business
of the exempt employee pension trust. Based on that ruling and on the intention
of the Company to invest its assets in a manner that will avoid the recognition
of UBTI by the Company, amounts distributed by the Company to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of the Common Stock with debt, a portion
of its income from the Company will constitute UBTI pursuant to the
"debtfinanced property" rules. Social clubs, voluntary employee benefits
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Code section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions from
the Company as UBTI. A pension trust that owns more than 10.0% of the Company is
required to treat a percentage of the dividends from the Company as UBTI (the
"UBTI Percentage") in certain circumstances. The UBTI Percentage is the gross
income derived from an unrelated trade or business (determined as if the Company
were a pension trust) divided by the gross income of the Company for the year in
which the dividends are paid. The UBTI rule applies only if (i) the UBTI
Percentage is at least 5.0%, (ii) the Company qualifies as a REIT by reason of
the modification of the 5/50 Rule that allows the beneficiaries of the pension
trust to be treated as holding shares of the Company in proportion to their
actuarial interests in the pension trust, and (iii) either (A) one pension trust
owns more than 25.0% of the value of the Company's stock or (B) a group of
pension trusts individually holding more than 10.0% of the value of the
Company's stock collectively own more than 50.0% of the value of the Company's
stock.
While an investment in the Company by an Exempt Organization generally is
not expected to result in UBTI except in the circumstances described in the
preceding paragraph, any gross UBTI that arises from such an investment will be
combined with all other gross UBTI of the Exempt Organization for a taxable year
and reduced by all deductions attributable to the UBTI plus $1,000. Any amount
then remaining will constitute UBTI on which the Exempt Organization will be
subject to tax. If the gross income taken into account in computing UBTI exceeds
$1,000, the Exempt Organization is obligated to file a tax return for such year
on an IRS Form 990-T. Neither the Company, its Board of Directors, nor any of
its Affiliates expects to undertake the preparation or filing of IRS Form 990-T
for any Exempt Organization in connection with an investment by such Exempt
Organization in the Common Stock. Generally, IRS Form 990-T must be filed with
the IRS by April 15 of the year following the year to which it relates.
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Taxation of Foreign Stockholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. STOCKHOLDERS SHOULD CONSULT THEIR TAX ADVISORS TO DETERMINE THE IMPACT
OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN THE
COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
It is currently anticipated that the Company will qualify as a
"domestically controlled REIT" (i.e., a REIT in which at all times during a
specified testing period less than 50.0% of the value of the shares is owned
directly or indirectly by Non-U.S. Stockholders) and therefore gain from the
sale of Common Stock by a Non-U.S. Stockholder would not be subject to United
States taxation unless such gain is treated as "effectively connected" with the
Non-U.S. Stockholder's United States trade or business.
Distributions that are not attributable to gain from the sale or exchange
by the Company of United States real property interests (and are not designated
as capital gain dividends) will be treated as dividends of ordinary income to
the extent that they are made out of current or accumulated earnings and profits
of the Company. Such distributions generally will be subject to a United States
withholding tax equal to 30.0% of the gross amount of the distribution, subject
to reduction or elimination under an applicable tax treaty. However, if
dividends from the investment in the shares are treated as "effectively
connected" with the Non-U.S. Stockholder's conduct of a United States trade or
business, such dividends will be subject to regular U.S. income taxation
(foreign corporations may also be subject to the 30.0% branch profits tax). The
Company expects to withhold United States income tax at the rate of 30.0% on the
gross amount of any such dividends made to a Non-U.S. Stockholder unless: (i) a
lower treaty rate applies and the Non-U.S. Stockholder files certain information
evidencing its entitlement to such lower treaty rate, or (ii) the Non-U.S.
Stockholder files an IRS Form 4224 with the Company claiming that the
distribution is "effectively connected" income. Distributions which exceed
current and accumulated earnings and profits of the Company will not be taxable
to the extent that they do not exceed the adjusted basis of a stockholder's
shares but, rather, will reduce (but not below zero) the adjusted basis of such
shares. To the extent that such distributions exceed the adjusted basis of a
Non-U.S. Stockholder's shares, they generally will give rise to United States
tax liability if the Non-U.S. Stockholder would otherwise be subject to tax on
gain from the sale or disposition of his or her shares in the Company, as
described above. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current and accumulated
earnings and profits, the distributions will be subject to withholding at the
same rate as dividends. However, amounts thus withheld are refundable if it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
Distributions by the Company to a Non-U.S. Stockholder that are
attributable to gain from sales or exchanges by the Company of a United States
real property interest are subject to income and withholding tax under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, these distributions, if any, that are treated as gain
recognized from the sale of a United States real property interest, are taxed as
income "effectively connected" with a United States business. Non-U.S.
Stockholders would thus be taxed at the normal capital gain rates applicable to
U.S. Stockholders (subject to the applicable alternative minimum tax and a
special alternative minimum tax for nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30.0% branch profits tax in
the hands of a foreign corporate stockholder not entitled to treaty exemption.
The Company is required by applicable Treasury Regulations to withhold 35.0% of
any distribution that could be designated by the Company as a capital gains
dividend. This amount is creditable against the Non-U.S. Stockholder's FIRPTA
tax liability. A refund may be available if the amount exceeds the Non-U.S.
Stockholder's federal tax liability.
State and Local Taxes
The Company or its stockholders or both may be subject to state, local or
other taxation in various state, local or other jurisdictions, including those
in which they transact business or reside. The tax treatment in such
jurisdictions may differ from federal income tax consequences discussed above.
Prospective stockholders should
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consult with their tax advisors regarding the effect of state, local and other
tax laws on an investment in the Common Stock of the Company.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit sharing, retirement, welfare or other
employee benefit plan ("ERISA Plan") subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), should consider the fiduciary
standards under ERISA in the context of the ERISA Plan's particular
circumstances before authorizing an investment of a portion of the ERISA Plan's
assets in the Common Stock. Accordingly, any such fiduciary should consider (i)
whether the investment satisfies the diversification requirements of Section
404(a)(1)(C) of ERISA, (ii) whether the investment is in accordance with the
documents and instruments governing the ERISA Plan as required by Section
404(a)(1)(D) of ERISA, and (iii) whether the investment is prudent under ERISA.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA, and the corresponding provisions of the
Code, prohibit a wide range of transactions involving the assets of the ERISA
Plan and persons who have certain specified relationships to the ERISA Plan
("parties in interest" within the meaning of ERISA or/and, "disqualified
persons" within the meaning of the Code). Thus, an ERISA Plan fiduciary
considering an investment in the Common Stock also should consider whether the
acquisition or the continued holding of the Common Stock might constitute or
give rise to a direct or indirect prohibited transaction.
The Department of Labor (the "DOL") has issued final regulations (the "DOL
Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. The DOL Regulations, by their terms do not apply to any interest in an
entity, which interest is either a "publicly offered security" or a security
issued by an investment company registered under the Investment Company Act of
1940, as amended. The DOL Regulations define a "publicly offered security" as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or sold pursuant to an effective registration
statement under the Securities Act (provided the securities are registered under
the Exchange Act within 120 days after the end of the fiscal year of the issuer
during which the public offering occurred). The Common Stock is being sold in an
offering registered under the Securities Act and will be registered under the
Exchange Act.
The DOL Regulations provide that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control. The
Company expects the Common Stock to be "widely held" on completion of the
Offering.
The DOL Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulations further provide that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as is the case with the Offering, certain restrictions ordinarily will
not, alone or in combination, affect the finding that those securities are
"freely transferable". The Company believes that the restrictions imposed under
its Certificate on the transfer of the Common Stock are limited to the
restrictions on transfer generally permitted under the DOL Regulations and are
not likely to result in the failure of the Common Stock to be "freely
transferable." The Company also believes that certain restrictions that apply to
the Common Stock to be held by the Company, or derived from contractual
arrangements requested by the Underwriters in connection with the Offering, are
unlikely to result in the failure of the Common Stock to be "freely
transferable." See "Shares Eligible for Future Sale" and "Underwriting." The DOL
Regulations establish only a presumption in favor of the finding of free
transferability and no assurance is given that the DOL and the U.S. Treasury
Department will not reach a contrary conclusion.
Assuming that the Common Stock will be "widely held" and "freely
transferable," the Company believes that the Common Stock will be publicly
offered securities for purposes of the DOL Regulations and that the assets of
the Company will not be deemed to be "plan assets" of any ERISA Plan that
invests in the Common Stock.
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UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1997 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom Credit Suisse First
Boston Corporation and McDonald & Company Securities, Inc. are acting as
representatives (the "Representatives"), have severally but not jointly agreed
to purchase from the Company the following respective numbers of Common Stock:
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
Credit Suisse First Boston Corporation...............................
McDonald & Company Securities, Inc...................................
----------
Total................................................................ 11,325,000
==========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the Common Stock offered
hereby (other than those shares covered by the over-allotment option described
below) if any are purchased. The Underwriting Agreement provides that, in the
event of a default by an Underwriter, in certain circumstances, the purchase
commitments of the non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, expiring at the
close of business on the 30th day after the date of this Prospectus, to purchase
up to 1,698,750 additional shares at the initial public offering price less the
underwriting discounts and commissions, all as set forth on the cover page of
this Prospectus. Such option may be exercised only to cover over-allotments in
the sale of the shares of Common Stock. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of Common
Stock as it was obligated to purchase pursuant to the Underwriting Agreement.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus and,
through the Representatives, to certain dealers at such price less a concession
of $ per share, and the Underwriters and such dealers may allow a
discount of $ per share on sales to certain other dealers. After the
initial public offering, the public offering price and concession and discount
to dealers may be changed by the Representatives.
The Representatives have informed the Company that it does not expect
discretionary sales by the Underwriters to exceed 5.0% of the number of shares
being offered hereby.
The Company and its officers, directors and stockholders have agreed that
they will not offer, sell, contract to sell, announce their intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Commission a registration statement under the Securities Act relating to, any
additional shares of Common Stock or securities convertible or exchangeable into
or exercisable for any shares of Common Stock without the prior written consent
of Credit Suisse First Boston Corporation for a period of 180 days after the
date of this Prospectus.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
Application will be made to list the Common Stock on the NYSE.
Prior to the Offering there has been no public market for the Common Stock.
The initial price to the public for the shares of Common Stock has been
negotiated among the Company and the Representatives. Such initial price is
based on, among other things in addition to prevailing market conditions, the
Company's financial and operating history and condition, its prospects and the
prospects for its industry in general, the management of the
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Company and the market prices for securities of companies in business similar to
that of the Company. See "Risk Factors -- Absence of Prior Public Market for the
Common Stock".
The Representatives, on behalf of the Underwriters, may engage in
over-allotments, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act. Over-
allotment involves syndicate sales in excess of the Offering size, which creates
a syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the Common Stock
in the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Representatives to reclaim a
selling concession from a syndicate member when the Common Stock originally sold
by such syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Common Stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the NYSE or otherwise and, if commenced,
may be discontinued at any time.
CSFBMC, an affiliate of Credit Suisse First Boston Corporation, currently
has a lending relationship with the Company. In February 1996, the Company
entered into the $150.0 million Credit Facility with CSFBMC for the purpose of
funding the acquisition of properties. At June 30, 1997, the Company was
indebted to CSFBMC in the amount of $70.7 million. Interest continues to accrue
on this debt at a variable rate which, as of June 30, 1997, was 8.0% per annum.
All amounts outstanding under the Credit Facility for principal and accrued
interest, at the date of the Offering, will be repaid to CSFBMC utilizing a
substantial portion of the proceeds of the Offering.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of Common Stock are effected. Accordingly, any resale of the Common
Stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the Common Stock.
REPRESENTATION OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from whom
such purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Common Stock without the
benefit of a prospectus qualified under such securities laws; (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent; and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
RIGHT OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
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ENFORCEMENT OF LEGAL RIGHTS
All of the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
Company or such persons. All or a substantial portion of the assets of the
Company and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the Company or such persons in
Canada or to enforce a judgment obtained in Canadian courts against the Company
or such persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to the Offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisers with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the shares for investment by the purchaser under relevant Canadian legislation.
LEGAL MATTERS
The legality of the shares of the Common Stock offered hereby will be
passed upon for the Company by Baker & Hostetler LLP, Cleveland, Ohio. In
addition, the description of federal income tax consequences contained in this
Prospectus entitled "Federal Income Tax Considerations" is based upon the
opinion of Baker & Hostetler LLP, Cleveland, Ohio. Certain legal matters related
to the Offering will be passed upon for the Underwriters by Latham & Watkins,
Los Angeles, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1995
and for each of the two years in the period ended December 31, 1996 included in
this Prospectus and the related financial statement schedule included elsewhere
in the Registration Statement have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as stated in their reports appearing herein and
elsewhere in the Registration Statement, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act, with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement. For further information with respect to
the Company and the Common Stock offered hereby, reference is hereby made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and, in
each instance, reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. Copies of the Registration Statement may be
obtained from the Commission's principal office at 450 5th Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission at 7 World
Trade Center, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, upon payment of the fees prescribed by the Commission,
or may be examined without
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charge at the offices of the Commission. In addition, copies of the Registration
Statement and related documents may be obtained through the Commission's
Internet address at http:\\www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements which have been certified by its
independent public accountants and quarterly reports containing an audited
summary financial information for each of the first three quarters of each
fiscal year.
GLOSSARY
Unless otherwise indicated or the context otherwise requires, the following
capitalized terms have the meanings set forth below for purposes of this
Prospectus.
"75.0% Test" means the requirement of the Code concerning the Company's
initial and continued qualification as a REIT that at least 75.0% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived from specified real estate sources, including
"rents from real property" and interest and certain other income earned from
mortgages on real property, gain from the sale of real property or mortgages
(other than in prohibited transactions) or income from qualified types of
temporary investments.
"95.0% Test" means the requirement of the Code concerning the Company's
initial and continued qualification as a REIT that at least 95% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from the sale of items which qualify under the
75.0% Test or from dividends, interest and gain from sale or disposition of
stock or securities, or from any combination of the foregoing.
"100 Stockholder Requirement" means requirement of the Code concerning the
Company's initial and continued qualification as a REIT that it be beneficially
owned by 100 or more persons.
"ACM" means asbestos-containing materials.
"Acquisition Properties" means the 62 Properties located in 22 states which
are subject to acquisition by the Company pursuant to agreements in principle
between the Company and the owners of the Acquisition Properties as of the date
of this Prospectus.
"ADA" means the Americans with Disabilities Act.
"Adjusted Basis Ratio" means the ratio to total rent for the taxable year
as the average of the adjusted basis of the personal property of a property at
the beginning and at the end of the taxable year bears to the average of the
aggregate adjusted basis of the real and personal property of a property at the
beginning and end of such taxable year.
"Advisor" means Captec Advisors, together with Captec Financial and its
Affiliates, or any person or entity with which Captec Advisors subcontracts, or
upon which it relies for the performance of its responsibilities pursuant to the
Advisory Agreement.
"Advisors Michigan" means Captec Net Lease Realty Advisors, Inc., a
Michigan corporation.
"Advisory Agreement" means the Advisory Agreement between the Company and
Captec Advisors pursuant to which the Advisor will provide specified management
and advisory services to the Company.
"Affiliate" of any person means (i) any person who directly or indirectly
controls or is controlled by or is under common control with that person, (ii)
any other person who owns, beneficially, directly or indirectly, five percent
(5.0%) or more of the outstanding capital stock, shares or equity interests of
that person, or (iii) any officer, director, employee, partner or trustee of
that person or any person controlling, controlled by or under common control
with that person (excluding trustees and persons serving in similar capacities
who are not otherwise an affiliate of that person). The term "person" means and
includes individuals, corporations, general and limited partnerships, stock
companies or associations, joint ventures, associations, companies, trust banks,
trust companies, land trusts, business trusts, or other entities and governments
and agencies and political subdivisions thereof. For purposes of this
definition, "control" (including the correlative meanings of the terms
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"controlled by" and "under common control with"), as used with respect to any
person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of that person, through the
ownership of voting securities, partnership interests or other equity interests.
"Affiliated Partnerships" means Captec III and Captec IV.
"Benchmark Rate" means the designated LIBOR for U.S. dollar deposits with
30 days' maturity which plus 2.318% (1.75% upon completion of the Offering)
equals the Revolving Loan Rate under the Credit Facility.
"Board of Directors" means the directors of the Company as amended time to
time.
"Bylaws" means the bylaws of the Company.
"Captec III" means Captec Franchise Capital Partners L.P. III, a Delaware
limited partnership.
"Captec IV" means Captec Franchise Capital Partners L.P. IV, a Delaware
limited partnership.
"Captec Advisors" means Captec Net Lease Realty Advisors, Inc., a Delaware
corporation.
"Captec Financial" means Captec Financial Group, Inc., a Michigan
corporation and an Affiliate of the Company and Captec Advisors.
"Captec Funding" means Captec Financial Group Funding Corporation.
"Captec Trust" means Captec Loans Receivables Trust -- 1996.
"Cash Available For Distribution" means FFO as adjusted for capital
expenditures and scheduled principal payments.
"Certificate" means the Certificate of Incorporation of the Company as
amended from time to time.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Commitment Fee" means the 1.0% of the value of each Lease proposed to be
executed by prospective Lessees identified and obtained by the Advisor during
the term of the Advisory Agreement.
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
"Company" means Captec Net Lease Realty, Inc., a Delaware corporation and,
as the context may require, Net Lease Michigan and Advisors Michigan.
"Consumer Price Index" means the "U.S. City Average, All Items" Consumer
Price Index for All Urban Consumers published by the Bureau of Labor Statistics
of the United States Department of Labor (Base: 1982-1984), or any successor
index thereto.
"Counsel" means Baker & Hostetler LLP, counsel to the Company.
"CPI" means the Consumer Price Index.
"Credit Facility" means the Company's $150.0 million revolving credit
facility with CSFBMC, an Affiliate of one of the managing Underwriters of the
Offering.
"CSFBMC" means Credit Suisse First Boston Mortgage Capital L.L.C., an
Affiliate of the lead managing Underwriter and the lender under the Credit
Facility.
"Deferred Plan" means the Company's Directors' Deferred Compensation Plan.
"De Minimis Service Amount" means the amount of Non-Qualifying Services and
Noncustomary Services which the Company may provide (which amount is not valued
at less than 150.0% of the Company's direct cost for service that does not
exceed 1.0% of the gross income from the property for which the services are
provided) so that rents received by the Company will qualify as rents from real
property for purposes of the 75.0% Test and the 95.0% Test.
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"DOL" means the U.S. Department of Labor.
"DOL Regulations" means the final regulations issued by DOL as to what
constitutes assets of an employee benefit plan under ERISA.
"Environmental Site Assessments" means environmental site assessments,
including Phase I and Phase II site assessments, and other environmental
investigations.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit-sharing, retirement, or other employee
benefit plan subject to ERISA.
"Excess Shares" means the excess shares exchanged for shares of Common
Stock or Preferred Stock, as the case may be, transferred or proposed to be
transferred in excess of the Ownership Limit or which would otherwise jeopardize
the Company's status as a REIT under the Code.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Properties" means the 79 Properties located in 24 states owned by
the Company as of June 30, 1997.
"FFO" means Funds From Operations.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"Five or Fewer Requirement" means the requirement of the Code concerning
the Company's initial and continued qualification as a REIT that during the last
half of each taxable year not more than 50.0% in value of the outstanding shares
of the Company be owned directly or indirectly (applying certain attribution
rules) by five or fewer individuals (as defined in the Code to include certain
exempt entities).
"Funds From Operations" means, as defined by the National Association of
Real Estate Investment Trusts, net income (loss) (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments for
unconsolidated partnerships and joint ventures.
"GAAP" means United States generally accepted accounting principles.
"GCL" means the Delaware General Corporation Law, as amended from time to
time.
"ICSC" means the International Council of Shopping Centers.
"Incentive Acquisition Fee" means the fee to be paid by the Company to
Captec Advisors pursuant to the Advisory Agreement in connection with the
acquisition of certain properties as described under the heading
"Business -- The Advisor and the Advisory Agreement".
"Independent Director" means a person who is not (i) employed by the
Company, (ii) an Affiliate of the Company, any subsidiary of the Company or any
entity in which the Company owns, beneficially or of record, a 10.0% or greater
equity interest, or (iii) an Affiliate of any Affiliate of the Company.
"IRA" means an Individual Retirement Account.
"IRS" means the Internal Revenue Service.
"Leases" means the (generally long-term triple-net) leases pursuant to
which the Existing Properties are, and the properties acquired by the Company in
the future (which may include some or all of the Acquisition Properties) will
be, leased to Lessees.
"Lessees" means the parties (generally operators of franchised and chain
restaurants and retailers) who operate the Existing Properties and the parties
who will operate any properties acquired by the Company in the future (which may
include some or all of the Acquisition Properties) pursuant to the Leases.
"LIBOR" means London Interbank Offered Rate.
80
84
"Management Fee" means the fee payable by the Company to Captec Advisors
for management and advisory services pursuant to the Advisory Agreement and
described under the heading "Business -- The Advisor and the Advisory
Agreement".
"Market Capitalization" means the market value of the issued and
outstanding shares of the Company's capital stock plus the Company's total
consolidated debt.
"Master Note" means the master revolving note agreement between the Company
and Captec Financial which bears interest at the annual rate of 8.07% and is
payable on demand.
"NAREIT" means National Association of Real Estate Investment Trusts.
"NAREIT White Paper" means the March 1995 NAREIT White Paper on FFO.
"NASD" means the National Association of Securities Dealers, Inc.
"Net Lease Michigan" means Captec Net Lease Realty, Inc. a Michigan
Corporation.
"Noncustomary Services" means services furnished (whether or not rendered
by an independent contractor) that are not customarily provided to tenants of
properties of a similar class in the geographic market, in which the Company's
property is located.
"Non-Qualifying Income" means the sum of the income realized by the Company
which does not satisfy the requirements of the 75.0% Test and the 95.0% Test.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the offering of shares of the Common Stock pursuant to and
as described in this Prospectus.
"Ownership Limit" means the beneficial or constructive ownership of 9.8% of
the outstanding Common Stock of the Company.
"Partnership Agreement" means the limited partnership agreements of each
Affiliated Partnership.
"Plan" means the Company's Long-Term Incentive Plan.
"Preferred Stock" means the preferred stock, par value $.01 per share and
in such series and classes and with such powers, preferences, and rights as may
be designated by the Board of Directors pursuant to the power granted to it by
the Certificate from time to time and applicable law.
"Prohibited Owner" means the person or entity holding record or title to
shares of the Company's capital stock in excess of the Ownership Limit.
"Prohibited Transferee" means the transferee of a purported transfer of the
Company's capital stock which resulted in a violation of the Ownership Limit and
who will acquire no right or interest in the excess shares.
"Prospectus" means the final prospectus included in the Company's
Registration Statement filed with the Commission, pursuant to which the Company
will offer shares of Common Stock to the public, as the same may be amended or
supplemented from time to time after the effective date of such Registration
Statement.
"Qualified Plans" means qualified pension, profit-sharing, and stock bonus
plans, including Keogh plans and IRAs.
"Qualifying Services" means service of a type that a tax-exempt
organization can provide its tenants without causing its rental income to be
UBTI under the Code.
"Regulations" means the Income Tax Regulations promulgated by the U.S.
Department of the Treasury under the Code.
"REIT" means real estate investment trust, as defined pursuant to Sections
856 through 860 of the Code.
81
85
"Related Party Tenant" means a tenant in which the Company or a direct or
indirect owner of 10.0% or more of the Company owns directly or constructively a
10.0% or greater interest in the assets or net profits of such tenant.
"Representatives" means collectively Credit Suisse First Boston Corporation
and McDonald & Company Securities, Inc.
"Revolving Loan Rate" means the Benchmark Rate plus 2.138% (1.70% upon
written notification from the Company to (SFBMC) of completion of the Offering).
"Rule 144" means Rule 144 of the Commission promulgated pursuant to the
Securities Act.
"SARs" means share appreciation rights granted under the Plan.
"Section 203" means Section 203 of the GCL.
"Securities Act" means the Securities Act of 1933, as amended.
"Tenant Ownership Limitation" means (i) the Company must not own, directly
or constructively, 10.0% or more of any tenant, (ii) where the REIT's shares are
owned by a partnership, no 25.0% or greater partner may own an interest in a
tenant, or (iii) where any of the Company's stockholders and the owners of a
tenant are partners in a partnership, neither the Company's stockholders nor the
owner of the tenant is a 25.0% a greater partner in a partnership.
"Treasury Regulations" means the Income Tax Regulations promulgated by the
U.S. Department of the Treasury under the Code.
"UBTI" means unrelated business taxable income as defined in Section 512(a)
of the Code.
"Underwriters" means the Underwriters named in this Prospectus.
"Underwriting Agreement" means the Underwriting Agreement dated
, 1997 between the Company and the Underwriters.
82
86
INDEX TO FINANCIAL STATEMENTS
PAGES
-------------
Captec Net Lease Realty, Inc. Unaudited Pro Forma Financial Statements......... F-2
Unaudited Pro Forma Balance Sheet as of June 30, 1997........................ F-3
Unaudited Pro Forma Statement of Operations for
the Six Months Ended June 30, 1997........................................ F-4
Unaudited Pro Forma Statement of Operations for
the Year Ended December 31, 1996.......................................... F-5
Notes to Unaudited Pro Forma Financial Statements............................ F-6
Captec Net Lease Realty, Inc. Historical Financial Statements:
Report of Independent Accountants............................................ F-8
Balance Sheet as of June 30, 1997 (unaudited) and December 31, 1996 and
1995...................................................................... F-9
Statement of Operations for the Six Months Ended June 30, 1997 and 1996
(unaudited) and for the Years Ended December 31, 1996 and 1995............ F-10
Statement of Changes in Stockholders' Equity for the Years Ended December 31,
1995 and 1996 and the Six Months Ended June 30, 1997 (unaudited).......... F-11
Statement of Cash Flows for the Six Months Ended June 30, 1997 and 1996
(unaudited) and for the Years Ended December 31, 1996 and 1995............ F-12
Notes to Financial Statements................................................ F-13 to F-20
Report of Independent Accountants............................................ F-21
Schedule III -- Properties and Accumulated Depreciation as of December 31,
1996...................................................................... F-22 to F-23
F-1
87
CAPTEC NET LEASE REALTY, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following pro forma balance sheet as of June 30, 1997 and pro forma
statements of operations for the six months ended June 30, 1997 and for the year
ended December 31, 1996 have been prepared to reflect the transactions and the
adjustments described in the accompanying notes. The pro forma financial
information is based on the historical financial statements listed in the index
on page F-1 and should be read in conjunction with those financial statements
and the notes thereto. The pro forma balance sheet was prepared as if
transactions contemplated by this Prospectus, including the Offering and the
application of the proceeds therefrom, occurred on June 30, 1997. The pro forma
statements of operations were prepared as if transactions contemplated by this
Prospectus, including the Offering and the application of the proceeds
therefrom, occurred on January 1, 1996. The pro forma financial information is
unaudited 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.
F-2
88
CAPTEC NET LEASE REALTY, INC.
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- ---------
ASSETS
Cash and cash equivalents............................... $ 1,544 $156,984(a) $ 33,765
(72,922)(b)
(48,526)(c)
(3,315)(e)
Investments:
Properties subject to operating leases, net........... 98,293 98,293
Loans to affiliate, collateralized by mortgage
loans.............................................. 11,684 11,684
Delinquent mortgage loans............................. 788 788
Other loans........................................... 1,185 1,185
Financing leases, net................................. 1,531 1,531
General partner interests............................. -- 3,315(e) 3,315
--------- --------- --------
Total investments............................. 113,481 3,315 116,796
Short-term loans to affiliates.......................... 5,155 5,155
Unbilled rent........................................... 1,420 1,420
Accounts receivable..................................... 429 429
Other assets............................................ 1,053 1,053
--------- --------- --------
Total assets.................................. $ 123,082 $ 35,536 $158,618
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable......................................... $ 72,922 $(72,922)(b) --
Accounts payable...................................... 703 $ 703
Due to affiliates..................................... 368 368
Federal income tax payable............................ 411 102(d) 513
Deferred income tax................................... 102 (102)(d) --
Security deposits held on leases...................... 146 146
--------- --------- --------
Total liabilities............................. 74,652 (72,922) 1,730
--------- --------- --------
Redeemable Preferred Stock (mandatory redemption
amount $58,026) (Note 1).............................. 48,429 (58,026)(c) --
9,597(c)
--------- --------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized (Note 1)................................... -- -- --
Common Stock, $.01 par value, 40,000,000 shares
authorized, 1,315,440 and 13,273,773 issued and
outstanding on a historical and pro forma basis,
respectively.......................................... 13 113(a) 132
6(c)
(Capital Deficit) Paid-In Capital....................... (12) 156,871(a) 156,756
9,494(c)
(9,597)(c)
Retained earnings....................................... -- --
--------- --------- --------
Total stockholders' equity.................... 1 156,887 $156,888
--------- --------- --------
Total liabilities and stockholders' equity.... $ 123,082 $ 35,536 $158,618
========= ========= ========
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
F-3
89
CAPTEC NET LEASE REALTY, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
HISTORICAL ADJUSTMENTS(2) PRO FORMA
----------- -------------- -----------
Investments:
Rental income..................................... $ 4,996 $ 4,996
Interest income on investments.................... 585 585
Interest income on short-term loans............... 247 247
Other............................................. (3) $ 151(f) 148
----------- -------- -----------
Total investments......................... 5,825 151 5,976
----------- -------- -----------
Expenses:
Interest.......................................... 2,707 (2,707) (a) --
General and administrative........................ 1,075 (546) (c) 837
308(d)
Depreciation and amortization..................... 677 677
----------- -------- -----------
Total expenses............................ 4,459 (2,945) 1,514
----------- -------- -----------
Income before income tax.................. 1,366 3,096 4,462
Provision for income tax............................ (39) 39(b) --
----------- -------- -----------
Net income..................................... 1,405 3,057 4,462
Preferred stock dividend requirements............... 3,750 (3,750) (e) --
----------- -------- -----------
(Loss) income attributable to common stock..... $ (2,345) $ 6,807 $ 4,462
=========== ======== ===========
(Loss) income per common share...................... $ (1.78) $ .34
=========== ===========
Weighted average common shares outstanding.......... 1,315,440 13,273,773(g)
=========== ===========
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
F-4
90
CAPTEC NET LEASE REALTY, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
HISTORICAL ADJUSTMENTS(2) PRO FORMA
---------- -------------- -----------
Investments:
Rental income..................................... $ 4,907 $ 4,907
Interest income on investments.................... 1,691 1,691
Interest income on short-term investments......... 302 302
Other............................................. 18 $ 468(f) 486
----------- -------- -----------
Total investments.............................. 6,918 468 7,386
----------- -------- -----------
Expenses:
Interest.......................................... 1,977 (1,977) (a) --
General and administrative........................ 1,218 (619) (c) 1,435
836(d)
Depreciation and amortization..................... 649 649
----------- -------- -----------
Total expenses................................. 3,844 (1,760) 2,084
----------- -------- -----------
Income before income tax....................... 3,074 2,228 5,302
Provision for income tax............................ 95 (95) (b) --
----------- -------- -----------
Net income..................................... 2,979 2,323 5,302
Preferred stock dividend requirements............... 7,495 (7,495) (e) --
----------- -------- -----------
(Loss) income attributable to common stock..... $ (4,516) $ 9,818 $ 5,302
=========== ======== ===========
(Loss) income per common share...................... $ (3.43) $ .40
=========== ===========
Weighted average common shares outstanding.......... 1,315,440 13,273,773(g)
=========== ===========
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
F-5
91
CAPTEC NET LEASE REALTY, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. BALANCE SHEET:
The accompanying unaudited balance sheet as of June 30, 1997 has been
prepared as if the following transactions had been consummated as of June 30,
1997:
(a) Sale of 11,325,000 shares of common stock in the Offering:
Proceeds from Offering...................................................... $169,875
Less, costs associated with the Offering.................................... (12,891)
--------
Net proceeds................................................................ $156,984
========
Par value of common stock to be issued in the Offering...................... $ 113
Additional paid-in capital from the net proceeds of the Offering............ 156,871
--------
$156,984
========
(b) Use of a portion of net proceeds of the Offering to retire debt as follows:
Credit Facility............................................................. $ 70,669
Other notes payable......................................................... 2,253
--------
$ 72,922
========
(c) Use of a portion of net proceeds of the Offering to redeem redeemable preferred stock
as follows:
Mandatory redemption amount................................................. $ 58,026
Less, preferred shares exchanged for common stock........................... (9,500)
--------
Cash redemption amount...................................................... $ 48,526
========
The excess of the mandatory redemption value of the Redeemable Preferred Stock over
its carrying value ($9,597 at June 30, 1997) was charged to paid-in capital.
At the Offering date, $9,500 of Redeemable Preferred Stock will be exchanged for
$9,500 of common stock at the offering price of $15 per share (633,333 shares).
Par value of common stock to be exchanged for Redeemable Preferred Stock.... $ 6
Additional paid-in capital from the exchange of Redeemable Preferred
Stock....................................................................... 9,494
--------
$ 9,500
========
(d) Reclassify net deferred tax liability as current as a result of conversion to REIT
status.
(e) Purchase of one percent general partner interest in Captec III and IV.
On a historical basis, 50,000 Redeemable Preferred Stock shares were issued
and outstanding; on a pro forma basis, none were issued or outstanding. No
shares of Preferred Stock were issued or outstanding on either a historical or
pro forma basis.
F-6
92
2. STATEMENTS OF OPERATIONS:
The accompanying unaudited pro forma statements of operations for the six
months ended June 30, 1997 and for the year ended December 31, 1996 presents
results as if the transactions described in Note 1 had been consummated on
January 1, 1996.
SIX MONTHS YEAR ENDED
ENDED JUNE 30, 1997 DECEMBER 31, 1996
------------------- -----------------
(a) Eliminate interest expense on debt retired by the
Company............................................... $ 2,707 $ 1,977
(b) Eliminate the provision for income taxes to reflect
qualification and operation as a REIT................. 39 (95)
(c) Reduce management fees from $824 to $278 and $935 to
$316, respectively, to reflect Advisory Agreement..... (546) (619)
(d) Increase general and administrative expenses to
reflect commencement of salaries and benefits and
other incremental costs related to operating as a
public REIT........................................... 308 836
(e) Eliminate redeemable preferred stock dividend
requirements for preferred stock redeemed and
exchanged............................................. (3,750) (7,495)
(f) Record revenues from general partner interests........ 151 468
(g) Weighted average outstanding common shares are as
follows:
Historical shares..................... 1,315,440
Shares exchanged for $9,500 Redeemable
Preferred Stock.................... 633,333
Sale of shares in the Offering........ 11,325,000
-----------
13,273,773 13,273,773 13,273,773
=========
F-7
93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Captec Net Lease Realty, Inc.
We have audited the accompanying balance sheet of Captec Net Lease Realty, Inc.
as of December 31, 1996 and 1995, and the related statements of operations,
changes in stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting financial statement amounts and disclosures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Captec Net Lease Realty, Inc.
as of December 31, 1996 and 1995, and the results of its operations, changes in
stockholders' equity and cash flows for the years then ended, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Detroit, Michigan
March 25, 1997, except for the first
paragraph of Note 1, for which
the date is September 5, 1997
F-8
94
CAPTEC NET LEASE REALTY, INC.
BALANCE SHEET
DECEMBER 31,
JUNE 30, ---------------------------
1997 1996 1995
------------ ----------- -----------
(UNAUDITED)
ASSETS
Cash and cash equivalents.......................... $ 1,544,019 $ 3,862,159 $ 1,969,196
Investments:
Properties subject to operating leases, net...... 98,292,754 70,175,031 15,554,325
Loans to affiliate, collateralized by mortgage
loans......................................... 11,684,080 9,101,714 21,747,755
Delinquent mortgage loans........................ 788,479 4,066,168 --
Other loans...................................... 1,184,704 1,210,432 --
Financing leases, net............................ 1,530,760 1,181,900 --
------------ ----------- -----------
Total investments........................ 113,480,777 85,735,245 37,302,080
Short-term loans to affiliates..................... 5,155,464 6,637,537 2,215,391
Unbilled rent...................................... 1,419,955 622,354 58,468
Accounts receivable................................ 428,693 135,451 20,800
Due from affiliates................................ -- 269,780 479,242
Other assets....................................... 1,052,845 1,351,954 246,875
------------ ----------- -----------
Total Assets............................. $123,081,753 $98,614,480 $42,292,052
============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable.................................... $ 72,921,864 $48,160,231 $ 1,587,623
Accounts payable................................. 703,178 375,544 203
Due to affiliates................................ 368,029 -- --
Federal income tax payable....................... 411,000 268,000 268,000
Deferred income tax.............................. 102,000 284,000 189,000
Security deposits held on leases................. 145,850 126,769 76,634
------------ ----------- -----------
Total liabilities........................ 74,651,921 49,214,544 2,121,460
------------ ----------- -----------
Redeemable preferred stock (mandatory redemption
amount of $58,026,395, $56,651,395 and
$42,905,493, respectively) (Note 8).............. 48,428,832 49,398,936 40,000,000
------------ ----------- -----------
Stockholders' Equity:
Preferred stock; authorized: 10,000,000 shares
(Note 8) -- -- --
Common stock; authorized: 40,000,000 shares;
issued and outstanding: 1,315,440 shares...... 13,154 13,154 13,154
Capital deficit.................................. (12,154) (12,154) (12,154)
Retained earnings................................ -- -- 169,592
------------ ----------- -----------
Total stockholders' equity............... 1,000 1,000 170,592
------------ ----------- -----------
Total Liabilities and Stockholders'
Equity................................. $123,081,753 $98,614,480 $42,292,052
============ =========== ===========
The accompanying notes are an integral part of the financial statements.
F-9
95
CAPTEC NET LEASE REALTY, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
--------------------------- ---------------------------
1997 1996 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED)
Revenue:
Rental income........................ $ 4,996,677 $ 1,612,094 $ 4,907,324 $ 614,166
Interest income on investments....... 585,271 814,308 1,691,369 541,275
Interest income on short-term
loans............................. 246,971 246,221 302,147 713,772
Other................................ (3,447) 7,158 17,510 83
----------- ----------- ----------- -----------
Total revenue................ 5,825,472 2,679,781 6,918,350 1,869,296
----------- ----------- ----------- -----------
Expenses:
Interest............................. 2,707,201 423,116 1,976,634 112,091
General and administrative........... 1,074,726 511,218 1,218,025 329,496
Depreciation and amortization........ 677,649 262,741 649,347 88,117
----------- ----------- ----------- -----------
Total expenses............... 4,459,576 1,197,075 3,844,006 529,704
----------- ----------- ----------- -----------
Income before income tax..... 1,365,896 1,482,706 3,074,344 1,339,592
Provision for income tax............... (39,000) 372,000 95,000 457,000
----------- ----------- ----------- -----------
Net Income................... 1,404,896 1,110,706 2,979,344 882,592
Redeemable preferred stock dividend
requirements:
Paid dividends....................... 2,375,000 625,000 3,750,000 713,000
Accrued dividends.................... 1,375,000 3,125,000 3,745,902 2,905,493
----------- ----------- ----------- -----------
Loss attributable to common
stock........................... $(2,345,104) $(2,639,294) $(4,516,558) $(2,735,901)
=========== =========== =========== ===========
Loss per common share............. $ (1.78) $ (2.01) $ (3.43) $ (2.08)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding................... 1,315,440 1,315,440 1,315,440 1,315,440
=========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-10
96
CAPTEC NET LEASE REALTY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE SIX MONTHS ENDED JUNE 30,
1997 (UNAUDITED)
TOTAL
COMMON CAPITAL RETAINED STOCKHOLDERS'
STOCK DEFICIT EARNINGS EQUITY
------- -------- ----------- -------------
BALANCE, JANUARY 1, 1995..................... -- -- -- --
Issuance of 1,315,440 shares of common
stock...................................... $13,154 $(12,154) $ 1,000
Net income................................... $ 882,592 882,592
Redeemable preferred stock dividends paid
from retained earnings (Note 8)............ (713,000) (713,000)
------- -------- ---------- ------------
BALANCE, DECEMBER 31, 1995................... 13,154 (12,154) 169,592 170,592
Net income................................... 2,979,344 2,979,344
Redeemable preferred stock dividends paid
from retained earnings (Note 8)............ (3,148,936) (3,148,936)
------- -------- ---------- ------------
BALANCE, DECEMBER 31, 1996................... 13,154 (12,154) -- 1,000
Net income................................... 1,404,896 1,404,896
Redeemable preferred stock dividends paid
from retained earnings (Note 8)............ (1,404,896) (1,404,896)
------- -------- ---------- ------------
BALANCE, JUNE 30, 1997 (unaudited)........... $13,154 $(12,154) -- $ 1,000
======= ======== ========== ============
The accompanying notes are an integral part of the financial statements.
F-11
97
CAPTEC NET LEASE REALTY, INC.
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------------------- -----------------------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 1,404,896 $ 1,110,706 $ 2,979,344 $ 882,592
Adjustments to net income:
Depreciation and amortization........... 677,649 262,741 649,347 88,117
Amortization of debt issuance costs..... 262,500 175,000 437,500 --
(Loss) Gain on sale of leased
equipment............................. 58,688 -- (10,351) --
Deferred income tax provision........... (182,000) -- 95,000 189,000
Increase in unbilled rent............... (797,601) (178,529) (563,886) (58,468)
(Decrease) increase in receivables and
other assets.......................... 296,176 (1,352,459) 32,232 (500,042)
Increase in payables.................... 470,635 688,595 375,341 268,203
------------ ------------ ------------ ------------
Net cash provided by operating
activities............................ 2,190,943 706,054 3,994,527 869,402
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties................. (25,976,893) (25,269,921) (55,879,245) (41,281,845)
Acquisition of delinquent mortgage
loans................................... -- -- (171,168) --
Advances on loans to affiliate,
collateralized by mortgage loans........ (5,123,234) (7,134,146) (10,055,492)
Acquisition of other loans................ -- -- (1,219,305) --
Acquisition of financing leases........... (370,164) (410,259) (1,181,900) --
Advances on short-term loans to
affiliates.............................. -- (561,624) (9,677,570) (2,215,391)
Collections on short-term loans to
affiliates.............................. 1,767,705 -- 5,255,424 --
Proceeds from the sale of leased
equipment............................... 200,522 -- 789,543 --
Collections on loans to affiliate,
collateralized by mortgage loans........ 2,540,234 11,838,900 18,806,533 3,894,773
Collection of principal on other loans.... 25,729 -- 8,873 --
Collection of principal of financing
leases.................................. 21,305 -- -- --
Change in lease security deposits......... 19,081 39,781 50,135 76,634
------------ ------------ ------------ ------------
Net cash used in investing activities... (26,895,715) (21,497,269) (53,274,172) (39,525,829)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of redeemable
preferred shares........................ -- 10,000,000 10,000,000 40,000,000
Proceeds from the issuance of common
shares.................................. -- -- -- 1,000
Proceeds from issuance of notes payable... 24,803,825 12,880,750 46,607,525 1,617,845
Organization and offering costs........... -- (600,000) (600,000) (250,000)
Debt issuance costs....................... -- (1,050,000) (1,050,000)
Principal payments of notes payable....... (42,193) (17,030) (34,917) (30,222)
Dividends paid on redeemable preferred
shares.................................. (2,375,000) (625,000) (3,750,000) (713,000)
------------ ------------ ------------ ------------
Net cash paid by financing activities... 22,386,632 20,588,720 51,172,608 40,625,623
------------ ------------ ------------ ------------
NET CASH FLOWS.............................. (2,318,140) (202,495) 1,892,963 1,969,196
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR...................................... 3,862,159 1,969,196 1,969,196 --
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR...... $ 1,544,019 $ 1,766,701 $ 3,862,159 $ 1,969,196
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest.................... $ 2,292,606 $ 170,415 $ 1,240,620 $ 112,091
============ ============ ============ ============
Cash paid for taxes....................... $ -- 12,579 $ 12,579 --
============ ============ ============ ============
Noncash transfers: From loans to
affiliate, collateralized by mortgage
loans to investment in delinquent
mortgage loans.......................... $ -- $ -- $ 3,895,000 --
============ ============ ============ ============
From delinquent mortgage loans to
properties subject to operating
leases.................................. $ 3,277,689 -- -- --
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-12
98
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:
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 throughout the United States 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 a proposed initial public offering of common
stock, Captec Net Lease Realty, Inc., a Delaware corporation ("CNLR" or the
"Company"), was formed in August 1997 and Net Lease Michigan and Advisors
Michigan were merged into the Company in September 1997 in exchange for
1,315,440 shares of common stock and 50,000 shares of Redeemable Preferred
Stock. The accompanying financial statements account for this reorganization of
affiliated entities in a manner similar to a pooling of interests. Transactions
between Net Lease Michigan and Advisors Michigan have been eliminated.
Following is a summary of CNLR's significant accounting policies:
a. CASH AND CASH EQUIVALENTS: Cash equivalents consists of
investments in government securities money funds which hold securities with
original maturities of less than 90 days.
b. PROPERTIES SUBJECT TO OPERATING LEASES: Properties subject to
operating leases are stated at cost less accumulated depreciation.
Buildings are depreciated on the straight-line method over their estimated
useful lives (40 years).
c. RENTAL INCOME FROM OPERATING LEASES: The Company's operating
leases have scheduled rent increases which occur at various dates
throughout the lease terms. CNLR recognizes the total rent, as stipulated
by the lease agreement, as income on a straight-line basis over the term of
each lease. To the extent rental income on the straight-line basis exceeds
rents billable per the lease agreement, an amount is recorded as unbilled
rent.
d. DELINQUENT MORTGAGE LOANS: Investments in delinquent mortgage
loans have been recorded at the lower of the current balance due or the
estimated fair value of the collateral.
e. AMORTIZATION OF ORGANIZATION COSTS: Organization costs are
recorded at cost and amortized using the straight-line method over a
five-year period.
f. INCOME TAXES: Deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Such differences arise principally from varying methods of
depreciating buildings and cash basis accounting for tax purposes. Deferred
tax liabilities and assets are recognized for the expected future tax
consequences of events that have been included in the financial statements
or tax returns, measured at the current tax rates. Deferred tax expense or
benefit represents the change in the deferred tax asset or liability
balance.
g. LOSS PER COMMON SHARE: Loss per common share is based on net
income reduced by redeemable preferred stock dividend requirements, divided
by the weighted average number of common shares outstanding.
h. ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
i. UNAUDITED INTERIM FINANCIAL INFORMATION: The balance sheet as of
June 30, 1997 and the statements of operations and cash flows for the six
months ended June 30, 1997 and 1996 have not been
F-13
99
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 interim periods are
not necessarily indicative of results expected for the full year.
2. PROPERTIES SUBJECT TO OPERATING LEASES:
CNLR'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 land and buildings at a
predetermined price, generally only during stated window periods during the
fifth to seventh lease years.
The net investment in real estate at December 31, 1996 and 1995 includes
capitalized acquisition and interest costs totaling approximately $3,250,000 and
$654,000, respectively, which costs have been allocated between land and
buildings and improvements on a pro rata basis. The net investment in real
estate under operating leases is comprised of the following:
DECEMBER 31,
JUNE 30, ---------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
Land........................................ $37,609,147 $25,647,078 $ 4,546,482
Buildings and improvements.................. 54,776,257 39,010,252 8,316,476
Construction draws on properties (including
land of $4,699,659, $4,861,012 and
$2,461,474 in 1997, 1996 and 1995,
respectively)............................. 7,097,653 6,071,689 2,776,359
----------- ----------- -----------
99,483,057 70,729,019 15,639,317
Less accumulated depreciation.......... (1,190,303) (553,988) (84,992)
----------- ----------- -----------
Total................................ $98,292,754 $70,175,031 $15,554,325
=========== =========== ===========
CNLR 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 of all
amounts advanced under construction draws. At December 31, 1996, the Company had
approximately $4,543,000 of unfunded commitments on properties under
construction.
The following is a schedule of future minimum lease payments to be received
on the noncancelable operating leases.
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
1997............................................ $ 4,680,548 $ 7,095,915
1998............................................ 10,144,324 7,370,146
1999............................................ 10,334,826 7,502,744
2000............................................ 10,424,597 7,577,415
2001............................................ 10,619,120 7,759,721
Thereafter...................................... 151,858,987 115,133,118
------------ ------------
Total........................................... $198,062,402 $152,439,059
============ ============
F-14
100
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LOANS TO AFFILIATE, COLLATERALIZED BY MORTGAGE LOANS:
The Company has a master revolving note agreement with Captec Financial
Group, Inc. ("CFG"), an affiliate of the Company. The master revolving note
bears interest at a rate of 8.0 percent and 9.0 percent per annum at December
31, 1996 and 1995, respectively, and is payable on demand.
At December 31, 1996 and 1995, the Company held a loan under the master
revolving note collateralized by a senior interest totaling $3,274,876 and
$21,747,755, respectively, in a portfolio of loans under an assignment of
contracts agreement with CFG. Under the terms of the assignment, the Company has
taken a security interest in the underlying loan agreements, and further, has
the right to record an assignment of the related mortgages. At December 31,
1996, the underlying loan portfolio was comprised of 5 first mortgage loans. At
December 31, 1995, the underlying loan portfolio was comprised of 21 first
mortgage loans representing 79 percent of the loan balances, with the remainder
of the loans being collateralized by leasehold mortgages and/or general liens on
the obligor's business. The underlying loan portfolios at December 31, 1996 and
1995 bear fixed rates of interest at a weighted average of 10.31 percent and
10.06 percent, respectively, per annum and mature in 7 to 15 years from the date
of origination.
At December 31, 1996, the Company held a loan under the master revolving
note, collateralized by a subordinate interest totaling $3,826,838, in a
portfolio of loans owned by an affiliate, Captec Financial Group Funding
Corporation ("CFGFC"), which interest was equal to approximately 10 percent of
the face value of the underlying loans. CFGFC's interest in these mortgage loans
is subordinate to that of a senior lender. The Company has invested in these
loans under an assignment of contracts agreement with CFG, the parent company of
CFGFC. The Company has taken a security interest in the underlying loan
agreements, and further, has the right to record an assignment of the related
mortgage, subject to the priority interest of the senior lender. At December 31,
1996, the underlying loan portfolio was comprised of fifty loans, with 68
percent of the loan balance collateralized by first mortgage loans and the
remainder of the loans being collateralized by leasehold mortgages and/or
general liens on the obligor's business. The underlying loan portfolio at
December 31, 1996 bears fixed rates of interest at a weighted average of 9.95
percent per annum and mature in 3 months to 15 years from the date of
origination.
The Company is the holder of a $2,000,000 promissory note collateralized by
a subordinate class certificate issued by Captec Loan Receivables Trust 1996-A
(the "Trust"), an affiliate of the Company, bearing interest at a rate of 15.74
percent per annum. The Subordinate class certificate was issued in conjunction
with an asset-backed securitization of a pool of long-term, fixed rate mortgage
loans and other collateralized loans originated by CFG. As of December 31, 1996,
the subordinate class certificate, which interest was equal to approximately 6
percent of the fair value of the underlying loans, was collateralized by a
portfolio of 58 loans aggregating $35,350,424 with a weighted average term of
approximately 170 months and a weighted average yield of 10.02 percent. Monthly
installment payments from the underlying loans will be used to pay both
principal and interest on the all classes of certificates, including the
subordinated class certificate held as collateral by the Company.
4. DELINQUENT MORTGAGE LOANS:
At December 31, 1996, the Company's investment in delinquent mortgage loans
was comprised of five mortgage loans to a single restaurant obligor. The loans
bear fixed rates of interest ranging from 10.41 to 10.67 percent per annum and
mature 15 years from the dates of origination. All loans are fully amortizing
with level installments of principal and interest due monthly. Installment
payments on these loans are delinquent by more than 120 days and income accrual
has been suspended by the Company. These loans were purchased by the Company in
1996 from an affiliate at the then outstanding balance, in anticipation of a
settlement agreement with respect to the loans which will result in the title to
the underlying properties being transferred to the Company by deed in lieu of
foreclosure. In conjunction with that settlement, the properties are expected to
be leased to a new tenant, under long-term net operating leases.
F-15
101
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to December 31, 1996, three of the properties, comprising
$2,426,548 of the balance, were leased to a new tenant under long-term operating
leases and the balances have been reclassified to properties subject to
operating leases in the accompanying balance sheet. The tenant is 50 percent
owned by an affiliate. Another of the properties, comprising $851,141 of the
balance, was leased to a non-related tenant under a long-term operating lease
and has also been reclassified.
5. OTHER LOANS:
The Company is the holder of a subordinated note with a principal balance
of $788,512 as of December 31, 1996, bearing interest at a rate of 12.5 percent
per annum. The loan is collateralized by a subordinate interest in nineteen real
estate properties, which properties are operated under the terms of long-term
net leases to a single tenant. The properties are being offered for sale to
third parties during a 24 month period. Monthly lease payments and proceeds from
the sale of individual properties will be used to pay both principal and
interest on the loan. The loan also provides for a participation interest in the
proceeds from the sale of individual properties which could result in a return
on the note in excess of the stated note rate. The Company also has a net
investment totaling $9,182,055 in four land and building properties subject to
operating leases with the same tenant.
As of December 31, 1996, the Company also has made a demand loan of
$421,920 collateralized by a first mortgage on a real estate property to a
related party. The loan bears interest at a rate of 9.0 percent per annum.
6. FINANCING LEASES:
The net investment in financing leases as of December 31, 1996 is comprised
of the following:
Minimum lease payments to be received.................................... $1,555,846
Estimated residual value................................................. 92,268
----------
Gross investment in financing leases................................... 1,648,114
Unamortized initial direct costs......................................... 16,984
Unearned income.......................................................... (483,198)
----------
Net investment in financing leases..................................... $1,181,900
==========
The following is a schedule of future minimum lease payments to be received
on the financing leases as of December 31, 1996.
1997..................................................................... $ 491,401
1998..................................................................... 250,507
1999..................................................................... 250,507
2000..................................................................... 250,507
2001..................................................................... 234,184
Thereafter............................................................... 78,740
----------
Total............................................................... $1,555,846
==========
The entire investment in financing leases is comprised of seven leases to a
single restaurant lessee. At December 31, 1996 rents on these leases are
delinquent by more than 120 days and income accrual has been suspended by the
Company. These leases were purchased by the Company in 1996 from an affiliate,
in anticipation of a settlement agreement with respect to the leases.
Subsequent to December 31, 1996, new leases were executed, replacing the
existing leases. The new leases, on which payments are current, are to an entity
which is 50 percent owned by an affiliate.
F-16
102
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE:
In February 1996, CNLR entered into a $100 million revolving credit
agreement, which is used to provide funds for the acquisition of properties.
Borrowings under this facility are secured by a first mortgage on the properties
financed. The credit agreement requires monthly installments of interest only at
LIBOR plus 2.318 percent. The acquisition facility expires in 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. Amortization during 1996 totaled $437,500. The
credit agreement contains covenants which, among other restrictions, require
CNLR to maintain a capitalization, as defined in the agreement, of $40 million,
liquid assets equal to the greater of $2 million or 5 percent of the outstanding
borrowings under the facility, and a loan-to-value ratio of not more than 75
percent on the properties financed under the credit facility. Amounts borrowed
under the credit facility totaled $46,607,525 as of December 31, 1996.
In June, 1997, the Revolving Credit Agreement was increased to $150
million. Amounts borrowed under the credit facility totaled $70,668,295 at June
30, 1997.
CNLR has a note payable to a financial institution with a principal balance
of $1,552,706 and $1,587,623 as of December 31, 1996 and 1995, respectively.
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 payment for all
remaining principal, approximately $1,350,059, due in June 2001. This note is
collateralized by a mortgage in one of CNLR's real estate investments. At June
30, 1997, the principal balance was $2,252,938, reflecting an additional note
payable to the same financial institution.
At December 31, 1996, annual maturities of the notes payable are as
follows:
1997............................................................ $ 38,517
1998............................................................ 46,650,011
1999............................................................ 46,866
2000............................................................ 51,696
2001............................................................ 1,373,141
-----------
Total...................................................... $48,160,231
===========
8. REDEEMABLE PREFERRED STOCK:
At December 31, 1996 and 1995, 50,000 and 40,000 shares of Redeemable
Preferred Stock ("RPS") were issued and outstanding, respectively. No Preferred
Stock shares were issued or outstanding at December 31, 1996 and 1995.
The RPS provides for mandatory redemption on December 31, 1999 at a price
of $1,000 per share plus all accrued dividends, whether or not then payable, and
any unpaid dividends. The Company has the right and option to redeem these
shares on or after December 31, 1996 at a price of $1,000 per share plus all
accrued and unpaid dividends.
The RPS provide for a cumulative, non-compounded dividend at the rate of
$37.50 per share per quarter, proportionally adjusted for any shares issued and
outstanding for less than a full calendar year. The preferred shareholders have
preferential liquidation rights which require the payment of all accrued and
unpaid dividends prior to the payment of any dividends or liquidation payments
to the common shareholders. Dividends are paid as declared by the Company's
Board of Directors based upon results of Company operations. Any dividend paid
in
F-17
103
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
excess of retained earnings has been accounted for as a return of capital to the
holders of the RPS. RPS dividends paid through June 30, 1997 were as follows:
RETURN
FROM OF CAPITAL
RETAINED (REDUCTION OF RPS
EARNINGS CARRYING VALUE) TOTAL
---------- ----------------- ----------
Paid in 1995, $22.46 per share............. $ 713,000 -- $ 713,000
Paid in 1996, $75.00 per share............. 3,148,936 $ 601,064 3,750,000
Paid in 1997, $47.50 per share............. 1,404,896 970,104 2,375,000
---------- ---------- ----------
$5,266,832 $ 1,571,168 $6,838,000
========== ========== ==========
Accumulated unpaid dividends were $8,026,395, $6,651,395 and $2,905,493 as
of June 30, 1997, and December 31, 1996 and 1995, respectively.
9. INCOME TAX:
The components of the provision for income taxes are as follows:
SIX
MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, --------------------
1997 1996 1995
-------- ------- --------
(UNAUDITED)
Current............................................. $143,000 $268,000
Deferred............................................ (182,000) $95,000 189,000
-------- ------- --------
$(39,000) $95,000 $457,000
======== ======= ========
The reconciliation of the federal income tax provision to the amount
computed by applying the statutory federal income tax rate to income before
federal income taxes is summarized as follows:
SIX
MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, -----------------------
1997 1996 1995
-------- ---------- --------
(UNAUDITED)
Federal income taxes at statutory rates........... $464,405 $1,045,276 $455,461
Preferred stock dividends deducted as interest
expense......................................... (503,500) (947,400) --
Other............................................. 95 (2,876) 1,539
-------- ---------- --------
$(39,000) $ 95,000 $457,000
======== ========== ========
The provision for income taxes does not bear the usual relationship to
pretax income for the six months ended June 30, 1997 and for the year ended
December 31, 1996 principally as a result of the treatment of dividends paid on
the Redeemable Preferred Stock as deductible interest expense for income tax
purposes. If deduction as 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 and $3,035,000 for
deductions taken through June 30, 1997 and December 31, 1996, respectively. The
Company has provided an allowance, consisting of currently payable taxes and a
valuation allowance on deferred taxes, of approximately $875,000 and $570,000
through June 30, 1997 and December 31, 1996, respectively, to reflect its
estimate of the minimum settlement of this matter, should a claim by 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 June 30, 1997 and
December 31, 1996 or any amount less than the aggregate amounts.
F-18
104
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of net deferred taxes consist of the following:
DECEMBER 31,
--------------------------------------------
JUNE 30,
1997 1996 1995
--------------------- --------------------- --------------------
ASSET LIABILITY ASSET LIABILITY ASSET LIABILITY
--------- --------- --------- --------- -------- ---------
(UNAUDITED)
Net operating loss
carryforward......... $945,000 -- $602,000 -- -- --
Other.................. -- $583,000 -- $583,000 $40,000 $229,000
Less: valuation
allowance............ (464,000) -- (303,000) -- -- --
-------- -------- -------- -------- ------- --------
Total deferred
income taxes.... $481,000 $583,000 $299,000 $583,000 $40,000 $229,000
======== ======== ======== ======== ======= ========
At December 31, 1996, the Company has a net loss carryforward for federal
income tax purposes of approximately $1,770,000 that will expire in 2011. Other
deferred assets and liabilities noted above arise principally from varying
methods of depreciating buildings and cash basis accounting for tax purposes.
10. FINANCIAL INSTRUMENTS:
The estimated fair value of financial instruments held by the Company at
December 31, 1996 and 1995, and the valuation techniques used to estimate the
fair value, were as follows:
1996 1995
--------------------------- ---------------------------
ESTIMATED ESTIMATED
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- -----------
Assets:
Cash and cash equivalents... $ 3,862,159 $ 3,862,159 $ 1,969,196 $ 1,969,196
Delinquent mortgage loans... 4,066,168 4,066,168 -- --
Loans to affiliate,
collateralized by
mortgage loans........... 9,101,714 9,101,714 21,747,755 21,747,755
Other loans................. 1,210,432 1,210,432 -- --
Short-term loans to
affiliates............... 6,637,537 6,637,537 2,215,391 2,215,391
Liabilities, notes payable.... 48,160,231 48,267,687 1,587,623 1,587,623
- CASH AND CASH EQUIVALENTS. The book value approximates fair value because
of the short maturity of these instruments.
- DELINQUENT MORTGAGE LOANS. The fair value of the investment in mortgage
loans is estimated to be equal to the current balance due on the loans
since title to the real property collateralizing these loans is in the
process of being transferred to the Company and the estimated value of the
property exceeds the loan balances.
- LOANS TO AFFILIATE, COLLATERALIZED BY MORTGAGE LOANS. The book value
approximates fair value because the fixed interest rates charged under
these investments approximate market interest rates commensurate with
this type of instrument and due to the short maturity of these loans.
- OTHER LOANS. The book value approximates fair value because the fixed
interest rates charged under these investments approximates market
interest rates commensurate with this type of instrument.
- SHORT-TERM LOANS TO AFFILIATES. The book value approximates fair value
because the fixed interest rate charged under these investments
approximates market interest rates commensurate with this type of
instrument and due to the short maturity of these loans.
F-19
105
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- NOTES PAYABLE. The fair value of floating rate debt approximates the
book value due to the short maturity of the pricing mechanism for this
debt. The fair value of fixed rate debt is estimated by discounting
future cash flows using an estimated discount rate which reflects the
rate at which the Company currently borrows under its credit facility.
11. RELATED PARTY TRANSACTIONS AND AGREEMENTS:
CNLR has an agreement which provides for the payment of an acquisition fee
equal to 5 percent of the aggregate purchase prices of properties originated on
behalf of the Company. During 1996 and 1995, CNLR incurred approximately
$2,630,000 and $654,000, respectively, in acquisition fees to CFG. The
acquisition fees were capitalized into the Company's investment in land and
building subject to operating leases.
The Company invested in mortgage loans held in the name of CFG and CFGFC
(see Note 3).
In addition, CNLR had the following short-term loans to affiliates at
December 31, 1996 and 1995:
1996 1995
---------- ----------
Captec Financial Group, Inc......................................... $6,442,004 $1,970,000
Others.............................................................. 195,533 243,391
---------- ----------
Total............................................................. $6,637,537 $2,213,391
---------- ----------
The above loans principally represent demand notes to affiliates, which
were entered into as a short-term investment by the Company. In particular, the
proceeds of the loans to Captec Financial Group, Inc. are principally used as
short-term warehouse financing for Captec's lending and leasing activities.
These loans bear interest at the rate of 8.0 percent per annum and are payable
on demand.
At December 31, 1996, the Company was owed interest accrued on the loans to
affiliates, collateralized by mortgage loans, and the investment in short-term
loans totaling approximately $873,000, which was offset by approximately
$603,000 of amounts payable to such affiliates, resulting in a net balance due
from affiliates of $269,780. Interest earned on the loans during 1996 and 1995
was $1,871,846 and $596,316, respectively.
F-20
106
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Captec Net Lease Realty, Inc.:
In connection with our audits of the financial statements of Captec Net
Lease Realty, Inc., as of December 31, 1996 and 1995, and each of the two years
in the period ended December 31, 1996, which financial statements are included
in the Prospectus, we have also audited the financial statement schedule listed
in the Index to Financial Statements contained in the Prospectus.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND, L.L.P.
Detroit, Michigan
March 25, 1997
S-1
107
CAPTEC NET LEASE REALTY, INC.
SCHEDULE III
PROPERTIES AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
COST
CAPITALIZED
INITIAL SUBSEQUENT
TYPE OF STATE COST TO TO
CONCEPT NAME PROPERTY LOCATION ENCUMBRANCES COMPANY ACQUISITION
------------------------- ----------- -------- ------------ ----------- ----------
COMMENCED LEASES
Golden Corral Restaurant TX $ 1,552,706 $ 1,926,149 --
Kenny Rogers Roasters Restaurant FL -- 338,310 --
Boston Market Restaurant SC -- 477,750 --
Kenny Rogers Roasters Restaurant NY -- 997,500 --
Denny's Restaurant TX 675,000 592,771 --
Denny's Restaurant TX 675,000 588,140 --
Denny's Restaurant NC 675,000 776,521 --
Denny's Restaurant NC 675,000 776,521 --
Kenny Rogers Roasters Restaurant CA -- 415,275 --
Denny's Restaurant TX 450,000 630,000 --
Taco Cabana Restaurant GA 675,000 1,016,000 --
Carrows Restaurant CA 825,000 1,155,000 --
Carrows Restaurant CA 825,000 1,155,000 --
Carrows Restaurant CA 900,000 1,260,000 --
Church's Restaurant GA 596,650 835,321 --
Boston Market Restaurant OH 750,000 892,500 --
Boston Market Restaurant WA 911,250 1,275,750 --
Boston Market Restaurant NJ 862,500 850,500 --
Boston Market Restaurant PA 697,500 682,500 --
Carrows Restaurant CA 750,000 1,050,000 --
Taco Cabana Restaurant GA 750,000 1,129,000 --
Blockbuster Video Retail TX 537,000 751,800 --
Blockbuster Video Retail TX 535,000 802,200 --
Stanford's Restaurant CO 1,650,000 2,310,000 --
Boston Market Restaurant IL 1,425,000 1,789,200 --
Red Line Burgers Restaurant TX -- 266,997 --
Red Line Burgers Restaurant TX -- 266,997 --
Red Line Burgers Restaurant TX -- 266,997 --
Boston Market Restaurant OR 885,000 1,159,616 --
Boston Market Restaurant PA 753,750 871,500 --
Red Robin Restaurant WA 2,302,500 3,000,667 --
Boston Market Restaurant IL 656,250 589,050 --
Applebees Restaurant WA 1,637,625 1,890,000 --
Applebees Restaurant MO 1,575,000 1,986,444 --
Boston Market Restaurant PA 862,500 844,200 --
Baby Superstore Retail MO 2,145,000 3,003,000 --
Black Angus Restaurant MN 1,931,250 2,698,500 --
Black Angus Restaurant MN 1,380,000 1,932,000 --
Black Angus Restaurant MN 1,597,500 2,236,500 --
Black Angus Restaurant MN 1,683,750 2,352,000 --
Boston Market Restaurant OR 967,500 1,295,700 --
Mountain Jack's Restaurant MI 1,042,500 1,459,500 --
Mountain Jack's Restaurant MI 765,000 1,071,000 --
Boston Market Restaurant IL 787,500 844,200 --
Red Robin Restaurant CO 2,250,000 3,123,750 --
Denny's Restaurant TX 825,000 1,155,000 --
Boston Market Restaurant OH 765,000 729,828 --
Boston Market Restaurant IN 1,117,500 1,564,500 --
Jack In The Box Restaurant CA 750,000 985,425 --
Boston Market Restaurant PA 862,500 787,500 --
Boston Market Restaurant WA 795,000 894,706 --
Boston Market Restaurant WA 870,000 982,886 --
Boston Market Restaurant WA 825,000 999,165 --
Boston Market Restaurant PA 735,000 925,994 --
------------ -----------
Subtotal -- Commenced Leases 48,160,231 64,657,330 --
------------ -----------
CONSTRUCTION DRAWS ON LEASES
Boston Market Restaurant WI -- 519,750 --
Boston Market Restaurant WI -- 577,500 --
Boston Market Restaurant PA -- 403,200 --
Denny's Restaurant LA -- 382,352 --
Boston Market Restaurant PA -- 455,700 --
Mountain Jack's Restaurant OH -- 1,383,144 --
Boston Market Restaurant IL -- 830,025 --
Boston Market Restaurant PA -- 643,650 --
Golden Corral Restaurant FL -- 876,368 --
-----------
Subtotal -- Construction Draws -- 6,071,689 --
------------ -----------
Grand Total -- All Real Estate Leases $48,160,231 $70,729,019 --
============ ===========
GROSS AMOUNT
AT WHICH
CARRIED AT DATE OF
CLOSE ACCUMULATED ACQUISITION/ ACQUISITION/
OF PERIOD DEPRECIATION CONSTRUCTION CONSTRUCTION DEPRECIATION
------------ ----------- ------------ ------------- ------------
COMMENC
$ 1,926,149 41,400 1995 Acquisition 40 Years
338,310 -- 1995 Acquisition 40 Years
477,750 55,738 1995 Acquisition 40 Years
997,500 15,316 1995 Acquisition 40 Years
592,771 6,117 1995 Acquisition 40 Years
588,140 6,323 1995 Acquisition 40 Years
776,521 13,376 1995 Acquisition 40 Years
776,521 15,605 1995 Acquisition 40 Years
415,275 5,675 1995 Acquisition 40 Years
630,000 18,413 1995 Acquisition 40 Years
1,016,000 14,360 1995 Acquisition 40 Years
1,155,000 17,069 1996 Acquisition 40 Years
1,155,000 14,212 1996 Acquisition 40 Years
1,260,000 14,175 1996 Acquisition 40 Years
835,321 9,520 1996 Acquisition 40 Years
892,500 9,128 1996 Acquisition 40 Years
1,275,750 13,731 1996 Acquisition 40 Years
850,500 7,139 1996 Acquisition 40 Years
682,500 4,086 1996 Acquisition 40 Years
1,050,000 14,766 1996 Acquisition 40 Years
1,129,000 11,307 1996 Acquisition 40 Years
751,800 10,296 1996 Acquisition 40 Years
802,200 9,055 1996 Acquisition 40 Years
2,310,000 31,929 1996 Acquisition 40 Years
1,789,200 12,063 1996 Acquisition 40 Years
266,997 7,231 1995 Acquisition 40 Years
266,997 7,231 1995 Acquisition 40 Years
266,997 7,231 1995 Acquisition 40 Years
1,159,616 11,801 1996 Acquisition 40 Years
871,500 6,867 1996 Acquisition 40 Years
3,000,667 26,926 1996 Acquisition 40 Years
589,050 4,476 1996 Acquisition 40 Years
1,890,000 12,892 1996 Construction 40 Years
1,986,444 13,889 1996 Construction 40 Years
844,200 3,534 1996 Acquisition 40 Years
3,003,000 13,684 1996 Acquisition 40 Years
2,698,500 10,302 1996 Acquisition 40 Years
1,932,000 9,125 1996 Acquisition 40 Years
2,236,500 9,383 1996 Acquisition 40 Years
2,352,000 8,135 1996 Acquisition 40 Years
1,295,700 3,898 1996 Acquisition 40 Years
1,459,500 7,218 1996 Acquisition 40 Years
1,071,000 4,267 1996 Acquisition 40 Years
844,200 3,308 1996 Acquisition 40 Years
3,123,750 4,506 1996 Construction 40 Years
1,155,000 1,695 1996 Construction 40 Years
729,828 919 1996 Construction 40 Years
1,564,500 2,450 1996 Construction 40 Years
985,425 959 1996 Acquisition 40 Years
787,500 -- 1996 Acquisition 40 Years
894,706 -- 1996 Construction 40 Years
982,886 -- 1996 Construction 40 Years
999,165 -- 1996 Construction 40 Years
925,994 1,262 1996 Construction 40 Years
------------ -----------
Su 64,657,330 553,988
------------ -----------
CO
519,750 -- 1996 Construction --
577,500 -- 1996 Construction --
403,200 -- 1996 Construction --
382,352 -- 1996 Construction --
455,700 -- 1996 Construction --
1,383,144 -- 1996 Construction --
830,025 -- 1996 Construction --
643,650 -- 1996 Construction --
876,368 -- 1996 Construction --
------------
Su 6,071,689 --
------------ -----------
Gr $70,729,019 553,988
============ ===========
S-2
108
CAPTEC NET LEASE REALTY, INC.
PROPERTIES AND ACCUMULATED DEPRECIATION (CONTINUED)
AS OF DECEMBER 31, 1996
NOTES:
The changes in total properties for the years ended December 31, 1996 and
1995 are as follows:
1996 1995
----------- -----------
Balance, beginning of year........................ $15,639,317 $ --
Acquisitions...................................... 55,879,245 15,639,317
Dispositions and other............................ (789,543) --
-------------- --------------
Balance, end of year.............................. $70,729,019 $15,639,317
============== ==============
The change in accumulated depreciation for the years ended December 31,
1996 and 1995 are as follows:
1996 1995
----------- -----------
Balance, beginning of year........................ $ 84,992 $ --
Depreciation for the period....................... 479,347 84,992
Disposition and other............................. (10,351) --
-------------- --------------
Balance, end of year.............................. $ 553,988 $ 84,992
============== ==============
S-3
109
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN AFFAIRS OF THE COMPANY
SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary....................... 1
Risk Factors............................. 12
Use of Proceeds.......................... 24
Distribution Policy...................... 24
Capitalization........................... 27
Dilution................................. 28
Selected Financial Data.................. 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 31
Industries............................... 35
Business................................. 36
Description of Properties and Leases..... 47
Management............................... 50
Certain Transactions..................... 54
Conflicts of Interest.................... 55
Principal Stockholders................... 57
Capital Stock of the Company............. 58
Shares Eligible for Future Sale.......... 61
Federal Income Tax Considerations........ 62
ERISA Considerations..................... 74
Underwriting............................. 75
Notice to Canadian Residents............. 76
Legal Matters............................ 77
Experts.................................. 77
Additional Information................... 77
Glossary................................. 78
Index to Financial Statements............ F-1
------------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
CAPTEC NET LEASE
REALTY, INC.
11,325,000 Shares
Common Stock
($0.01 par value)
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
MCDONALD & COMPANY
SECURITIES, INC.
- ------------------------------------------------------
110
PART II
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the approximate expenses (other than the
underwriting discounts and commission) expected to be incurred in connection
with the issuance and distribution of the Common Stock being registered.
SEC Registration Fee................................................... $ 59,194
NASD Fee............................................................... 20,036
NYSE Fee............................................................... 116,000
Printing and Engraving Expenses........................................ 200,000
Legal Fees and Expenses................................................ 400,000
Accounting Fees and Expenses........................................... 100,000
Blue Sky Fees and Expenses............................................. 6,500
Miscellaneous.......................................................... 98,270
------------
TOTAL........................................................ $1,000,000
============
ITEM 32. SALES TO SPECIAL PARTIES.
Not Applicable.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has made the following sales of its Common Stock and Preferred
Stock within the past three years to the following persons for the cash or other
consideration indicated, which sales were not registered under the Securities
Act.
CONSIDERATION
DATE OF ----------------------
NAME ISSUANCE TOTAL PER SHARE(2) # SHARES(3)
------------------------------------------ -------- ------ ------------ -----------
Patrick L. Beach (1)...................... 10-10-94 $ 470 $ 1.00 617,600
W. Ross Martin (1)........................ 10-10-94 214 1.00 281,833
George R. Beach........................... 10-10-94 15 1.00 19,738
H. Reid Sherard (1)....................... 10-10-94 34 1.00 44,396
Gary A. Bruder (1)........................ 10-10-94 20 1.00 26,282
Captec Financial Group, Inc............... 10-10-94 101 1.00 133,208
Michigan Corp............................. 10-10-94 146 1.00 192,383
---------
Totals............................... 10-10-94 $1,000 $1,000 1,315,440
=========
- ---------------
(1) Director or officer.
(2) Represents consideration paid for original issuance.
(3) Pursuant to the terms of the mergers of Net Lease Michigan and Advisors
Michigan into the Company (which was approved unanimously by the
stockholders of Net Lease Michigan and Advisors Michigan) the common shares,
without par value, of each of Net Lease Michigan and Advisors Michigan
became, without further action or consideration by the stockholders of Net
Lease Michigan and Advisors Michigan, the shares of the Company's Common
Stock. The 50,000 issued and outstanding redeemable preferred shares,
without par value, of Net Lease Michigan (originally issued from December
18, 1995 to January 24, 1996 for $10.00 per share) were exchanged for 50,000
shares of the Preferred Stock and subject to the holder's obligation to
exchange 9,500 unredeemed shares of the Preferred Stock for shares of the
Common Stock upon the terms described in the Prospectus and subject only to
completion of the Offering. These transactions were made pro rata to the
existing shareholders of Net Lease Michigan and Net Lease Advisors, each of
whom either are officers or directors of those companies, have a prior
business relationship with those companies and/or are accredited investors.
These transactions did not involve any public offering and were exempt
pursuant to Section 4(2) of the Securities Act.
II-1
111
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to the Certificate of Incorporation of the Company, as
amended from time to time (the "Certificate") (Exhibit 3.1) and the form of
Indemnification Agreement to be entered into with the Registrant's directors and
officers (Exhibit 10.7).
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate which provide that directors
of the Company shall not be personally liable for monetary damages to the
Company or its stockholders for a breach of fiduciary duty as a director, except
for liability as a result of (i) a breach of the director's duty of loyalty to
the Company or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of law, (iii) an act
related to the unlawful stock repurchase or redemption or payment of a dividend
under Section 174 of Delaware General Corporation Law, and (iv) transactions
from which the director derived an improper personal benefit.
The Company's Certificate and Bylaws also authorize the Company to
indemnify its officers, directors and persons who serve at the request of the
Company as a director, officer, employee, agent or trustee of another
corporation, partnership, joint venture, trust or other enterprise, to the
fullest extent permitted under Delaware law. The Company has entered into
separate indemnification agreements with its directors and officers which may,
in some cases, be broader than the specific indemnification provisions contained
in the Delaware General Corporation Law. The indemnification agreements require
the Company, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened or
proceeding which may result in a claim for such indemnification.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
See Item 37, "Undertakings."
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not Applicable.
ITEM 36. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a) EXHIBITS. The following is a list of exhibits in this Registration
Statement.
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- --------------------------------------------------------------------- --------
1.1 Underwriting Agreement.**............................................
3.1 Certificate of Incorporation of the Company.*........................
3.2 Bylaws of the Company.*..............................................
5.1 Opinion of Baker & Hostetler LLP regarding legality.**...............
8.1 Opinion of Baker & Hostetler LLP regarding tax matters.**............
10.1 February 26, 1996 Credit Facility between Credit Suisse First Boston
Mortgage Capital L.L.C. and the Company, and amendment thereto.*.....
10.2 September , 1997 Employment Agreement between the Company and
Patrick L. Beach.*...................................................
10.3 September , 1997 Employment Agreement between the Company and W.
Ross Martin.*........................................................
II-2
112
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- --------------------------------------------------------------------- --------
10.4 Agreement of Limited Partnership of Captec Franchise Capital Partners
L.P. III.*...........................................................
10.5 Amended and Restated Agreement of Limited Partnership of Captec
Franchise Capital Partners L.P. IV.*.................................
10.6 Advisory Agreement between the Company and Captec Net Lease Realty
Advisors, Inc.*......................................................
10.7 Form of Indemnification Agreement to be entered into by the Company's
directors and officers.**............................................
10.8 Form of Acquisition Agreement of General Partnership Interests in the
Affiliated Partnerships.*............................................
10.9 Long-Term Incentive Plan.*...........................................
10.10 Directors' Deferred Compensation Plan.*..............................
15.1 Letter regarding use of unaudited interim financial information.**...
23.1 September 2, 1997 Consent of Coopers & Lybrand, L.L.P.*..............
23.2 Consent of Baker & Hostetler LLP (included in Exhibit 5.1
hereto).**...........................................................
24.1 Powers of Attorney (included on page II-5 hereto).*..................
27.1 Financial Data Schedule.*............................................
(b) FINANCIAL STATEMENT SCHEDULE.
SCHEDULE NO. DESCRIPTION OF DOCUMENT PAGE NO.
------------ -------------------------------------------------------------------- --------
Independent Auditors Report on Financial Statement Schedule* S-1
III Properties and Accumulated Debt* S-2
- ---------------
* Filed herewith.
** To be filed by Amendment.
ITEM 37. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue.
II-3
113
(3) The undersigned Registrant hereby undertakes that:
(a) For determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4), or 497(h) under the Securities Act shall be deemed to be a part
of this registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed as the initial bona fide
offering thereof.
II-4
114
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT, OR AMENDMENT THERETO, TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF ANN ARBOR, STATE OF MICHIGAN, ON
SEPTEMBER 4, 1997.
CAPTEC NET LEASE REALTY, INC.
By: /s/ PATRICK L. BEACH
------------------------------------
Patrick L. Beach
Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
By: /s/ W. ROSS MARTIN
------------------------------------
W. Ross Martin
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Accounting Officer)
II-5
115
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW HEREBY SEVERALLY CONSTITUTES AND APPOINTS PATRICK L. BEACH AND W. ROSS
MARTIN, AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH
FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE
AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ALL DOCUMENTS
RELATING THERETO, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER
DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION,
GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, FULL POWER AND AUTHORITY TO DO
AND PERFORM EACH AND EVERY ACT AND THING NECESSARY OR ADVISABLE TO BE DONE IN
AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT OR
COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID
ATTORNEYS-IN-FACT AND AGENTS, OR HIS SUBSTITUTER SUBSTITUTES, MAY LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT, OR AMENDMENT THERETO, HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
DATE SIGNATURE TITLE
- ------------------ ---------------------------------------- --------------------------------
September 4, 1997 /s/ PATRICK L. BEACH Chairman of the Board of
---------------------------------------- Directors, President and Chief
Patrick L. Beach Executive Officer
September 4, 1997 /s/ W. ROSS MARTIN Director, Executive Vice
---------------------------------------- President, Chief Financial
W. Ross Martin Officer and Treasurer
September 4, 1997 /s/ H. REID SHERARD Director
----------------------------------------
H. Reid Sherard
II-6
116
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------- --------
1.1 Underwriting Agreement.**................................................
3.1 Certificate of Incorporation of the Company.*............................
3.2 Bylaws of the Company.*..................................................
5.1 Opinion of Baker & Hostetler LLP regarding legality.**...................
8.1 Opinion of Baker & Hostetler LLP regarding tax matters.**................
10.1 February 26, 1996 Credit Facility between Credit Suisse First Boston
Mortgage Capital L.L.C. and the Company, and amendment thereto.*.........
10.2 September , 1997 Employment Agreement between the Company and Patrick
L. Beach.*...............................................................
10.3 September , 1997 Employment Agreement between the Company and W. Ross
Martin.*.................................................................
10.4 Agreement of Limited Partnership of Captec Franchise Capital Partners
L.P. III.*...............................................................
10.5 Amended and Restated Agreement of Limited Partnership of Captec Franchise
Capital Partners L.P. IV.*...............................................
10.6 Advisory Agreement between the Company and Captec Net Lease Realty
Advisors, Inc.*..........................................................
10.7 Form of Indemnification Agreement to be entered into by the Company's
directors and officers.**................................................
10.8 Form of Acquisition Agreement of General Partnership Interests in the
Affiliated Partnerships.*................................................
10.9 Long-Term Incentive Plan.*...............................................
10.10 Directors' Deferred Compensation Plan.*..................................
15.1 Letter regarding use of unaudited interim financial information.**.......
23.1 September 2, 1997 Consent of Coopers & Lybrand, L.L.P.*..................
23.2 Consent of Baker & Hostetler LLP (included in Exhibit 5.1 hereto).**.....
24.1 Powers of Attorney (included on page II-5 hereto).*......................
27.1 Financial Data Schedule.*................................................
- ---------------
* Filed herewith.
** To be filed by Amendment.
II-7