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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
OR
| o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition period from to
Commission file number 333-9371
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
(Exact name of registrant as specified in its charter)
| Delaware | 38-3304096 | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | Identification No.) | |
| 24 Frank Lloyd Wright Drive, Lobby L, 4th Floor, P.O. | ||
| Box 544, Ann Arbor, Michigan | 48106-0544 | |
| (Address of principal executive offices) | (Zip Code) | |
| Issuer’s telephone number, including area code: (734) 994-5505 | ||||
| Securities registered under Section 12(b) of the Exchange Act: | None | |||
| Securities registered under Section 12(g) of the Exchange Act: | None | |||
| (Title of Class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.YesoNoþ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.YesoNoþ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.YesþNoo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.þ
Form 10-K or any amendment to this Form 10-K.þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
oLarge Accelerated Filer oAccelerated Filer þNon-accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YesoNoþ
At December 31, 2006, subscriptions for 30,000 Units of limited partnership interest (the “Units”) had been accepted, representing an aggregate amount of $30,000,000. The aggregate sales price does not reflect market value and reflects only the price at which the Units were offered to the public. Currently, there is no market for the Units and no market is expected to develop. At December 31, 2006, there were 28,975 Units issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in Part III of this Annual Report on Form 10-K:
(1) Portions of the Registrant’s Form 10-K for the fiscal year ended December 31, 1998; and
(2) A portion of the Registrant’s Form 10-Q for the quarter ended March 31, 1999.
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PART I
Item 1. Business.
Captec Franchise Capital Partners L.P. IV, a Delaware limited partnership, was organized on July 23, 1996 for the purpose of acquiring income-producing commercial real properties and equipment leased on a “triple net” or “double net” basis, primarily to operators of national and regional chain franchised fast food and family style restaurants, as well as other national and regional retail chains.
The initial general partners of the Partnership were Captec Franchise Capital Corporation IV (the “Corporation”), a wholly-owned subsidiary of Captec Financial Group, Inc. (“Captec”), an affiliate, and Patrick L. Beach, the Chairman of the Board of Directors, President and Chief Executive Officer of the Corporation and Captec. In August 1998, Captec Net Lease Realty, Inc. (“Captec Net Lease”), an affiliate, acquired the General Partnership interest of the Partnership. In December 2001, Captec Net Lease merged with and into Commercial Net Lease Realty, Inc. (“Commercial Net Lease”). In connection with the merger, Commercial Net Lease agreed to sell and assign its General Partnership interest in the Partnership to GP4 Asset Acquisition, LLC (“GP4 Asset Acquisition”), which is wholly-owned by Mr. Beach and is an affiliate of Captec. Effective January 15, 2002, the limited partners consented to the transfer of the General Partnership interest. On September 11, 2003, the Partnership’s secured lender consented to the transfer of the general partnership interest to GP4 Asset Acquisition. Upon receipt of the secured lender’s consent, the general partnership interest was immediately transferred to GP4 Asset Acquisition. Therefore, as of September 11, 2003, GP4 Asset Acquisition became the general partner of the Partnership.
The Partnership commenced a public offering of up to 30,000 limited partnership units, priced at $1,000 per Unit, registered under the Securities Act of 1933, as amended, by means of a Registration Statement filed on Form S-11, which was declared effective by the Securities and Exchange Commission on December 23, 1996. The Partnership accepted subscriptions for the minimum number of Units on March 5, 1997 and immediately commenced operations. The Offering was fully subscribed in December 1998. Since 1999, 1,025 Units have been repurchased by the Partnership pursuant to the terms of the Repurchase Plan set forth in the Partnership’s December 23, 1996 prospectus with respect to the Offering. At December 31, 2006, the Partnership had 28,975 Units issued and outstanding.
The principal investment objectives of the Partnership are: (i) preservation and protection of capital; (ii) distribution of cash flow generated by the Partnership’s leases; (iii) capital appreciation of Partnership properties; (iv) generation of increased income and protection against inflation through escalation of base rents or participation in gross revenues of tenants of Partnership properties; and (v) deferred taxation of cash distributions to the limited partners.
The properties generally were leased on terms which provided for a base minimum annual rent with fixed increases on specific dates or indexation of rent to indices such as the Consumer Price Index. The equipment was leased only pursuant to leases under which the present value of non-cancellable rental payments payable during the initial term of the lease was at least sufficient to permit a lessor to recover the purchase price of the equipment.
The Partnership has no employees. The General Partner and its affiliates, however, are permitted to perform services for the Partnership as described in greater detail under “Certain Relationships and Related Transactions and Director Independence.”
Effective November 8, 2004, the limited partners consented to a Plan of Liquidation and Dissolution, which involves the dissolution of the Partnership, the liquidation of its assets and the winding up of its affairs. As a result, the general partner is authorized to liquidate the assets of the Partnership and distribute the net proceeds from such liquidation after the repayment of all debt in accordance with the partnership agreement. The Partnership is undertaking steps to liquidate and dispose of its assets in accordance with the Plan of Liquidation and Dissolution. Effective February 8, 2007, the Partnership has liquidated all of its real assets in accordance with the Plan of Liquidation and Dissolution.
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On December 18, 2006, the Partnership entered into a contract to sell the last remaining asset of the Partnership. Effective with the execution of the contract, and in accordance with generally accepted accounting principles, the Partnership adopted the liquidation basis of accounting as of the close of business on December 18, 2006. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts. These estimates are and will be periodically reviewed and adjusted as appropriate. A Statement of Net Assets in Liquidation and a Statement of Changes in Net Assets in Liquidation are the principal financial statements presented under the liquidation basis of accounting. Under the liquidation basis of accounting, the Partnership is required to estimate and accrue the costs associated with implementing and completing the plan of liquidation. These amounts can vary significantly due to, among other things, the timing and amounts associated with the discharging known and contingent liabilities and the costs associated with cessation of the Partnership’s operations including an estimate of costs subsequent to that date (which would include reserve contingencies for the appropriate statutory periods). As a result, the Partnership has accrued the projected costs, including miscellaneous wind-down costs, expected to be incurred during the projected period required to complete the liquidation of the Partnership. These projections could change materially and will be adjusted from time to time as projections and assumptions change.
Under the liquidation basis of accounting, the carrying amounts of the last remaining real estate assets were adjusted to their estimated net realizable values and liabilities, including the estimated costs associated with implementing the liquidation, which were adjusted to estimated settlement amounts. The net realizable value of the remaining assets were based on contract sales price, less costs associated with the sale and closing of the transactions. Cash balances, accounts receivable and accounts payable are presented at face value.
The sales of the remaining two real assets were completed on January 22, 2007 and February 8, 2007. The Partnership made a liquidating distribution in the first quarter of 2007 of approximately $2,000,000 which included proceeds from the 2007 sales. The timing and amount of any additional future final liquidating distribution, if any, will depend on the extent to which reserves for current or future liabilities are required. Accordingly, there can be no assurance that will be any further distributions after the liquidating distribution mentioned above. It is anticipated that the final distribution, if any, of the Partnership will occur by the end of the second quarter of 2007.
Prior to December 18, 2006, the Partnership’s financial statements are presented on the going concern basis of accounting.
Additional Information
The Partnership does not make financial reports available on its web site; however copies of filings with the Commission may be obtained at the Commission’s website at www.sec.gov. In addition, copies of the foregoing may be mailed, free of charge, upon request to Captec Franchise Capital Partners L.P. IV, Investor Relations, 24 Frank Lloyd Wright Dr, P.O. Box 544, Ann Arbor, Michigan 48106.
Item 1A. Risk Factors.
The Partnership units are not listed on any exchange. Therefore, there is presently no public market for the units and none is expected to develop. The units are also subject to certain restrictions on transfer set forth in the Partnership Agreement. As a result, an investment in the units should be considered illiquid, since holders of units may be required to bear the financial risks of unit ownership for an indefinite period of time. The illiquid nature of this investment could result in loss of all or a substantial portion of a unit holder’s investment in the Partnership.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of December 31, 2006, the Partnership had a portfolio of one real estate property in Riverdale, Georgia and one financing lease in Plano, Texas for a total cost basis of approximately $2.3 million.
The real property located in Riverdale, Georgia was sold on January 22, 2007 pursuant to a contract of sale which was executed on September 12, 2006. In connection with the sale, the Partnership terminated the lease with Blockbuster Entertainment Corp., the
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tenant on the property, on November 30, 2006. The property was sold for a purchase price of $900,000. The financing lease in Plano, Texas was sold on February 8, 2007 pursuant to a contract of sale which was executed on December 18, 2006. The property was sold for a purchase price of $900,000. During 2006, in conjunction with the adoption of the liquidation basis of accounting, both properties’ carrying values were adjusted to the net realized values based on actual sales prices.
The following is a summary description of the property and financing lease as of December 31, 2006.
| Original | ||||||||||||||||||||||||||||||||||||
| Asset Cost | Asset | Date of | Annual | Building | ||||||||||||||||||||||||||||||||
| Concept | Date of | Date of | Including | State | Monthly | Next Rent | Rate of | Size | ||||||||||||||||||||||||||||
| Tenant/Lessee Name | Name | Commence | Expiration | Acquisiton Fees | Location | Rent | Increase | Increase | (SQFT) | |||||||||||||||||||||||||||
PROPERTIES | ||||||||||||||||||||||||||||||||||||
| Vacant (1) | Vacant | na | na | 1,170,000 | GA | na | na | na | 6,500 | |||||||||||||||||||||||||||
| Sterling Jewelers | Jared Jewelers | 02/01/99 | 02/01/19 | 1,131,619 | TX | 12,833 | 02/01/09 | 1.92% | 5,227 | |||||||||||||||||||||||||||
| 2,301,620 | 12,833 | 11,727 | ||||||||||||||||||||||||||||||||||
| (1) | Property was previously leased to Blockbuster Entertainment Corp. Lease was terminated effective 11/30/06 in connection with the sale of the property to O’Reilly Automotive, Inc. |
Leases
Real Estate Leases:Prior to their sale, all of the properties owned by the Partnership were subject to triple net leases pursuant to which the tenant was responsible for all expenses related to the cost of operating the properties, including real estate taxes, insurance, maintenance and repair costs. Certain of the leases provided the tenant with one or more options to renew the lease upon expiration of the base term at predetermined or market rental rates.
On April 12, 2006, the Partnership sold the property located in Southgate, Michigan and the related lease for a purchase price of $1 million. There were no debt retirement costs associated with the disposition of this property.
On August 15, 2006, the Partnership sold the property located in Cincinnati, Ohio and the related lease for a purchase price of $1.5 million. There were no debt retirement costs associated with the disposition of this property.
On October 17, 2006, the Partnership sold the property located in Hamilton, Ohio and the related lease for a purchase price of $875,000. There were no debt retirement costs associated with the disposition of this property.
The real property located in Riverdale, Georgia was sold on January 22, 2007 pursuant to a contract of sale which was executed on September 12, 2006. In connection with the sale, the Partnership terminated the lease with Blockbuster Entertainment Corp., the tenant on the property, on November 30, 2006. The property was sold for a purchase price of $900,000. There were no debt retirement costs associated with the disposition of this property. On December 19, 2006, under the liquidation method of accounting, the Partnership decreased its investment in the property by approximately $3,000, which represented the net loss realized on the sale of this property.
The financing lease in Plano, Texas was sold on February 8, 2007 pursuant to a contract of sale which was executed on December 18, 2006. The property was sold for a purchase price of $900,000. There were no debt retirement costs associated with the disposition of this property. On December 19, 2006, under the liquidation method of accounting, the Partnership decreased its investment in the property by approximately $108,000, which represented the net loss realized on the sale of this property.
Equipment Leases:Prior to their sale, all of the equipment leases were on the Partnership’s standard form of lease pursuant to which the lessee is responsible for all expenses related to the equipment, including taxes, insurance, and maintenance and repair costs. All of the equipment was purchased with cash from Offering proceeds. As of December 31, 2005, all of the equipment leases have been paid in full according to the terms of the lease or have been sold.
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Summary of Investment Objectives and Policies
The Partnership was initially formed to acquire income-producing property and equipment to be leased primarily to operators of nationally franchised fast-food, family style and dinner house restaurants as well as other franchised service-type businesses such as automotive and specialty retail franchises. Properties were selected for acquisition based on an examination and evaluation by the General Partner, or an affiliate, of the potential value of the site, the financial condition and business history of the proposed tenant or lessee, area demographics, prospective purchase price and lease terms, geographic and market diversification, and potential operating results. Similar analyses were utilized in selecting equipment for inclusion in lease packages. The Partnership intended to acquire fee interests in real property, although other interests (including acquisitions of buildings subject to a long-term ground lease) could be acquired if it was deemed to be advantageous to the Partnership. In no event was property or equipment acquired unless a satisfactory lease commitment was obtained from a suitable tenant or lessee as further described below.
In selecting specific properties, the General Partner generally required the following:
(i) Base annual rent providing for a specified minimum return on the contract purchase price of the property; and
(ii) An initial lease term of between ten and twenty years.
In selecting specific equipment, the General Partner typically required the following:
(i) Leases providing for fixed rents structured to return 100% of the cost of the equipment plus yield a return equivalent to market interest rates over the lease term; and
(ii) Terms of five to seven years with residual values of equipment at the end of such terms expected to be minimal.
The determination of whether particular properties or equipment should be sold or otherwise disposed of was made after consideration of relevant factors, including performance or projected performance of the property or equipment and market conditions, with a view toward achieving the principal investment objectives of the Partnership.
On or about September 24, 2004, the Partnership filed with the Securities and Exchange Commission and mailed to its limited partners a consent solicitation statement pursuant to which the Partnership began soliciting the consent of its limited partners to (i) dissolve the Partnership, liquidate its assets and wind up its affairs; and (ii) amend the partnership agreement to permit, on a limited basis, the sale of Partnership assets to certain affiliates in connection with the dissolution, liquidation and winding up of the Partnership. Effective November 8, 2004, the requisite limited partner consents for each proposal were obtained and the consent solicitation was closed
Item 3. Legal Proceedings.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant’s Limited Partnership Interests and Related Security Holder Matters and Issuer Purchases of Equity Securities.
There is no public market for the Units and the Partnership does not expect that any market will develop. There are restrictions upon the transferability of Units, including the requirement that the General Partner consent to any transferee becoming a substituted Limited Partner (which consent may be granted or withheld at the sole discretion of the General Partner). In addition, restrictions on transfer may be imposed under state securities laws. As of December 31, 2006, Units were held by 1,473 investors of record. In the last three years, the Partnership has not engaged in the sale of any Units. The Partnership declared cash distributions of approximately
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$3.0 million, $13.0 million and $4.4 million for the years ended December 31, 2006, 2005, and 2004 respectively. The Partnership made no Unit repurchases in the year ended December 31, 2006.
Item 6. Selected Financial Data.
On December 18, 2006, the Partnership entered into a contract to sell the last remaining asset of the Partnership. Effective with the execution of the contract, and in accordance with generally accepted accounting principles, the Partnership adopted the liquidation basis of accounting as of the close of business on December 18, 2006. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts. These estimates are and will be periodically reviewed and adjusted as appropriate. A Statement of Net Assets in Liquidation and a Statement of Changes in Net Assets in Liquidation are the principal financial statements presented under the liquidation basis of accounting. Under the liquidation basis of accounting, the Partnership is required to estimate and accrue the costs associated with implementing and completing the plan of liquidation. These amounts can vary significantly due to, among other things, the timing and amounts associated with the discharging known and contingent liabilities and the costs associated with cessation of the Partnership’s operations including an estimate of costs subsequent to that date (which would include reserve contingencies for the appropriate statutory periods). As a result, the Partnership has accrued the projected costs, including miscellaneous wind-down costs, estimated to be incurred through June 2007, the estimated date for the completion of the liquidation of the Partnership. These projections could change materially and will be adjusted from time to time as projections and assumptions change.
Under the liquidation basis of accounting, the carrying amounts of the remaining real estate assets were adjusted to their estimated net realizable values and liabilities, including the estimated costs associated with implementing the liquidation, were adjusted to estimated settlement amounts. The net realizable value of the remaining assets were based on contract sales price, less costs associated with the sale and closing of the transactions. Cash balances, accounts receivable and accounts payable are presented at face value.
Prior to December 18, 2006, the Partnership’s financial statements are presented on the going concern basis of accounting. In accordance with Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long Lived-Assets” (“FAS 144”), as a result of the approval of the Plan of Liquidation and Dissolution, as of December 31, 2004 all assets, excluding cash were previously classified as Assets Held for Sale, and the results of the operations for these Assets Held for Sale were classified as discontinued operations for all years presented, since the operations are directly related to the assets held for sale. Depreciation of real estate assets ceased at that time. The four real properties and one financing lease owned by the Partnership as of December 31, 2005 which were not disposed of within one year from the initial held for sale designation were reclassified to investment in operating leases and financing leases at December 31, 2005. Also, in accordance with FAS 144, the partnership recognized $80,407 of depreciation expense for these assets for the year ended December 31, 2005 in the fourth quarter of 2005 to cumulatively catch-up depreciation since its cessation in December 2004 upon reclassification of these assets. All income statement activity has been classified as discontinued operations for the period from January 1, 2006 through December 18, 2006 and for the years ended December 31, 2005, and 2004, reflecting the fact that all properties have been disposed of as of February 8, 2007.
Selected Financial Data
| Statement of | ||||||||||||||||||||||||
| Changes in Net | ||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| (Liquidation | Summary Statement of Discontinued Operations Data | |||||||||||||||||||||||
| Basis) | (Going Concern Basis) | |||||||||||||||||||||||
| Period from | Period from | |||||||||||||||||||||||
| December 19 | January 1, | |||||||||||||||||||||||
| through | through | Year Ended | Year Ended | Year Ended | Year Ended | |||||||||||||||||||
| December 31, | December 18, | December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||
| 2006 | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
| Net assets in liquidation — December 18, 2006 | $ | 3,172,192 | ||||||||||||||||||||||
| Adjustments relating to adoption of liquidation basis of accounting | ||||||||||||||||||||||||
| Adjustment of real estate investments and other assets to net realizable value, net of liabilities | (110,958 | ) | ||||||||||||||||||||||
| Accrual of estimated costs of liquidation | (336,499 | ) | ||||||||||||||||||||||
| Operating loss | 5,742 | |||||||||||||||||||||||
| Net assets in liquidation — December 31, 2006 | $ | 2,730,477 | ||||||||||||||||||||||
| Operating revenue: | ||||||||||||||||||||||||
| Rental income | $ | 376,019 | $ | 1,644,276 | $ | 2,874,064 | $ | 3,666,636 | $ | 3,363,815 | ||||||||||||||
| Finance income | 110,074 | 125,092 | 146,330 | 199,059 | 310,428 | |||||||||||||||||||
| Total operating revenue | 486,093 | 1,769,368 | 3,020,394 | 3,865,695 | 3,674,243 | |||||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||||||
| Interest expense | — | 555,865 | 1,182,993 | 1,271,165 | 1,266,420 | |||||||||||||||||||
| Depreciation | 54,218 | 80,407 | 473,108 | 506,298 | 489,976 | |||||||||||||||||||
| Provision for losses | 781,876 | — | 15,000 | — | 195,542 | |||||||||||||||||||
| Debt retirement costs | — | 1,690,354 | 209,010 | — | — | |||||||||||||||||||
| General and administrative | 385,507 | 360,461 | 617,557 | 218,997 | 166,788 | |||||||||||||||||||
| Total operating costs and expenses | 1,221,601 | 2,687,087 | 2,497,668 | 1,996,460 | 2,118,726 | |||||||||||||||||||
| (Loss) income from discontinued operations before other income | (735,508 | ) | (917,719 | ) | 522,726 | 1,869,235 | 1,555,517 | |||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||
| Interest and other income | 84,237 | 128,754 | 5,340 | 4,857 | 1,478 | |||||||||||||||||||
| Gain on sale of equipment | — | 1,997 | 8,040 | 45,741 | — | |||||||||||||||||||
| Gain on sale of real estate | 446,059 | 4,754,452 | 262,045 | — | — | |||||||||||||||||||
| Total other income from discontinued operations | 530,296 | 4,885,203 | 275,425 | 50,598 | 1,478 | |||||||||||||||||||
| Net (loss) income from discontinued operations | (205,212 | ) | 3,967,484 | 798,151 | 1,919,833 | 1,556,995 | ||||||||||||||||||
| Net income from discontinued operations allocable to general partners | 2,878 | 9,034 | 7,982 | 19,198 | 15,570 | |||||||||||||||||||
| Net (loss) income from discontinued operations allocable to limited partners | $ | (208,090 | ) | $ | 3,958,450 | $ | 790,169 | $ | 1,900,635 | $ | 1,541,425 | |||||||||||||
| Net (loss) income from discontinued operations per limited partnership unit | $ | (7.18 | ) | $ | 136.62 | $ | 27.23 | $ | 65.00 | $ | 52.49 | |||||||||||||
| weighted average units outstanding | 28,975 | 28,975 | 29,020 | 29,239 | 29,369 | |||||||||||||||||||
Other Data: | ||||||||||||||||||||||||
| Cash flows from operating activities | $ | 2,062 | $ | 138,754 | $ | (560,434 | ) | $ | 1,173,309 | $ | 1,951,899 | $ | 1,934,582 | |||||||||||
| Cash flows from investing activities | (3,809 | ) | 3,399,790 | 27,936,743 | 4,110,489 | (97,459 | ) | 1,402,096 | ||||||||||||||||
| Cash flows from financing activities | — | (3,004,067 | ) | (26,623,608 | ) | (5,835,077 | ) | (2,292,589 | ) | (3,461,189 | ) | |||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,428,894 | $ | 1,430,641 | $ | 896,164 | $ | 476,469 | $ | 928,132 | $ | 1,367,069 | ||||||||||||
| Investment in property under leases | 1,662,760 | 1,769,909 | 5,513,042 | 27,231,464 | 31,262,517 | 31,516,729 | ||||||||||||||||||
| Total assets | 3,098,617 | 3,208,385 | 6,466,143 | 29,220,279 | 34,246,143 | 34,612,180 | ||||||||||||||||||
| Total liabilities | 368,140 | 36,193 | 84,672 | 13,780,645 | 15,120,012 | 14,552,078 | ||||||||||||||||||
| Total partners’ capital | — | 3,172,192 | 6,381,471 | 15,439,634 | 19,126,131 | 20,060,102 | ||||||||||||||||||
| Net assets in liquidation | 2,730,477 | — | — | — | — | — | ||||||||||||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
When used in this discussion, words such as “intends,” “anticipates,” “expects,” “will,” “could,” “estimate,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those described herein. Such risks and uncertainties, some of which are beyond the Partnership’s control, include, but are not limited to, the following: (i) the possibility that tenants and lessees may default in making rent payments, (ii) the risk of fire or other casualty interrupting cash flow from a property, (iii) the inability to enter into leases at the assumed rental rates, (iv) unexpected expenses, and (v) the inability to sell properties at anticipated prices and/or times. Any statements contained in this report or any documents incorporated herein by reference that are not statements of historical fact may be deemed to be forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Partnership disclaims, except as may be required by law, any obligations to update or release revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
See discussion above regarding the Partnership’s adoption of the liquidation basis of accounting as of December 18, 2006. Prior to that date, the Partnership’s financial statements are presented on the going concern basis of accounting.
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Changes in Net Assets and Results of Operations – 2006 compared to 2005
Liquidation Basis — Changes in net assets in liquidation from December 19 to December 31, 2006
During the period from December 19, 2006 through December 31, 2006, the Partnership realized an operating income of approximately $6,000 which primarily represents finance income on the financing lease and interest income.
Going Concern Basis — Comparison of results of operations from January 1, 2006 through December 18, 2006 to the year ended
December31, 2005
December31, 2005
For the period from January 1, 2006 through December 18, 2006 total operating revenue was approximately $486,000 compared to approximately $1,769,000 for the year ended December 31, 2005. Rental revenue decreased to $376,000 for the period January 1, 2006 through December 18, 2006 compared to $1,644,000 for the year ended December 31, 2005. The decrease in rental revenue is due to the sale of twelve operating leases in June 2005 and one property sold in each of the months of August 2005, September 2005, April 2006, August, 2006 and October 2006. Finance income during the period January 1, 2006 through December 18, 2006 decreased to approximately $110,000 compared to approximately $125,000 for the year ended December 31, 2005 due to the amortization of principal balances on the lease.
Operating expenses from discontinued operations decreased to approximately $1,222,000 for the period January 1, 2006 through December 18, 2006 compared to approximately $2,687,000 for the year ended December 31, 2005. The decrease is due to debt retirement costs of approximately $1,690,000 and interest expense costs of approximately $556,000 in the year ended December 31, 2005. With the sale of properties in June 2005 and August 2005, the Partnership defeased the remaining notes payable, therefore there were no interest or debt retirement costs incurred in 2006. General and administrative expenses increased during the period January 1, 2006 through December 18, 2006 due primarily to expenses and professional fees associated with the disposition of properties. The Partnership recorded provision for losses of approximately $782,000 which included provisions for $299,000 in the second quarter of 2006 due to losses expected on the finance lease asset that was sold in February 2007, approximately $390,000 in the third quarter of 2006 for the Hamilton, Ohio property sold in October 2006 and approximately $93,000 for the Riverdale, Georgia property sold in January 2007.
Other income for 2006 was approximately $530,000 for the period January 1, 2006 through December 18, 2006 compared to approximately $4,885,000 for the year ended December 31, 2005. Gain on sale of equipment was approximately $2,000 for the year ended December 31, 2005 due to sale of one equipment lease in February 2005 for net cash proceeds of approximately $15,000. Gain on the sale of real estate was approximately $446,000 for the period January 1, 2006 through December 18, 2006 due to the sale of properties in April, August and October 2006 for sale proceeds of approximately $1.0 million, $1.5 million and $875,000, respectively, resulting in gains (loss) on sale of $213,000, $248,000 and ($15,000), respectively. The loss on the sale of the property in October 2006 does not include the approximately $390,000 recorded as provision for loss. The gain on sale of real estate was approximately $4.8 million for the year ended December 31, 2005 due to the sale of twelve properties in June 2005 for net cash of approximately $20.8 million, and one property sold in each of August 2005 and September 2005 for net cash of approximately $7.1 million. Interest and other income decreased to approximately $84,000 for the period January 1, 2006 through December 18, 2006 compared to approximately $129,000 for the year ended December 31, 2005 due to higher temporary cash balances in 2005 resulting from the sale of twelve properties in June 2005.
As a result of the foregoing, the Partnership incurred a net loss of approximately $205,000 for the period from January 1, 2006 through December 18, 2006 compared to net income of $3,967,000 for the year ended December 31, 2005.
The Partnership is not subject to income taxation as all of its income and expenses flow through to the Partners. During the period from January 1, 2006 through December 18, 2006 the Partnership made distributions to limited partners totaling approximately $3.0 million, compared to approximately $13.0 million for the year ended December 31, 2005.
Results of Operations — 2005 compared to 2004
For the year ended December 31, 2005, operating revenue decreased to approximately $1,769,000, compared to approximately $3,020,000 for the year ended December 31, 2004. Rental revenue from operating leases for the year ended December 31, 2005 decreased to approximately $1,644,000 compared to $2,874,000 for the prior year due to the sale of two operating leases in March 2004, one operating lease in the second quarter of 2004, twelve operating leases in June 2005 and one operating lease in each of
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August 2005 and September 2005. Earned income from financing leases for the year ended December 31, 2005 decreased to approximately $125,000 compared to approximately $146,000 for the year ended December 31, 2004, due to the amortization of principal balances.
Operating expenses from discontinued operations increased 7.6% to approximately $2,687,000 for the year ended December 31, 2005 compared to approximately $2,498,000 for the year ended December 31, 2004. Debt retirement costs increased to approximately $1,690,000 during the year ended December 31, 2005 compared to $209,000 for the year ended December 31, 2004 due to debt retirement costs incurred on the sale of twelve properties in June 2005 and one property in August 2005 compared to the sale of one property in the second quarter of 2004. This increase is offset by decreases in interest expense and depreciation due to the sale of twelve properties in June 2005, one property each in August and September 2005, one property in the second quarter of 2004 and two properties in the first quarter of 2004. General and administrative expenses decreased to approximately $360,000 for the year ended December 31, 2005 compared to $633,000 for the year ended December 31, 2004 due primarily to decreased property taxes, professional fees, maintenance costs and bad debt expense as a result of the sale of two vacant properties in 2005. In June 2004, the leases on these properties (for which rental payments were over eighteen months past due), along with the rights to pursue remedies against the tenant and all Guarantors, were terminated as the Partnership entered into a Settlement Agreement with the former tenants and Guarantors. Under that Settlement Agreement, the Partnership received $100,000 as full and final payment from all parties involved. The remaining receivable of $277,000 associated with these leases was written off as bad debt expense in 2004.
Other income was approximately $129,000 for the year ended December 31, 2005 compared to approximately $5,000 for the year ended December 31, 2004. The increase in other income is due primarily to increased interest income due to increased investments in commercial paper from the proceeds of asset sales.
Gain on sale of equipment was approximately $2,000 for the year ended December 31, 2005 due to sale of one equipment lease in February 2005 for net cash proceeds of approximately $15,000, compared to a gain of $8,000 for the year ended December 31, 2004 due to the sale of one equipment lease for net cash proceeds of approximately $40,000. Gain on sale of real estate was approximately $4.8 million for the year ended December 31, 2005 due to the sale of twelve properties in June 2005 for net cash, prior to repayment of debt and related debt retirement costs of approximately $20.8 million, and a net gain of approximately $3.3 million and one property sold in each of August 2005 and September 2005 for net cash, prior to repayment of debt and related debt retirement costs of approximately $7.1 million for a net gain of approximately $1.5 million. Gain on sale of real estate was approximately $262,000 for the year ended December 31, 2004 due to the sale of two properties in the first quarter of 2004 for a net gain of approximately $252,000 and one property in the second quarter of 2004 for a net gain of approximately $10,000. These properties were sold for net cash, prior to repayment of debt and related debt retirement costs of approximately $2.1 million and $1.8 million, respectively.
As a result of the foregoing, the Partnership’s net income from discontinued operations for the year ended December 31, 2005 increased to approximately $3,967,000 compared to approximately $798,000 for the year ended December 31, 2004.
The Partnership is not subject to income taxation as all of its income and expenses flow through to the Partners. During the year ended December 31, 2005, the Partnership made distributions to limited partners totaling approximately $13.0 million, compared to approximately $4.4 million for the preceding year.
Liquidity and Capital Resources
In December 1996, the Partnership commenced its Offering of up to 30,000 limited partnership Units. Net proceeds after offering expenses were approximately $26.1 million.
In December 1998, the Partnership entered into a $6.4 million term note. The note had a 10-year term, was collateralized by certain properties that had a carrying value of approximately $11.6 million subject to operating leases, and bore interest at a rate of 8.13% per annum. The Partnership defeased all the remaining amounts payable under this note using the proceeds from the sale of twelve properties in June 2005. The Partnership incurred approximately $841,000 of yield maintenance costs and $46,000 of professional fees related to the defeasance.
In March 1999, the Partnership entered into an additional $3.3 million term note. The note had a 10-year term, was collateralized by certain properties that had a carrying value of approximately $3.4 million, subject to operating leases, and bore interest at a rate of 8.5% per annum. In March 2004, the partnership defeased approximately $466,000 of this note payable with proceeds from the sale of a property. The Partnership defeased all the remaining amounts payable under this note using the proceeds from the sale of twelve
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properties in June 2005. The Partnership incurred approximately $427,000 of yield maintenance costs and $46,000 of professional fees related to the June 2005 defeasance.
The Partnership purchased one net leased real estate property in October 2000 and assumed a $3.75 million term note in connection with the acquisition of a property. The note had a 10-year term and was collateralized by a property that had a carrying value of approximately $4.6 million and bore interest at the rate of 8.35% per annum. The Partnership prepaid all remaining amounts payable under this note using the proceeds from the sale of the collateralized property in August 2005. The Partnership incurred approximately $295,000 of yield maintenance costs and $35,000 of professional fees related to the prepayment.
In November 2001, the Partnership entered into an additional $1.5 million term note. In June 2004, the Partnership sold a property subject to an operating lease that secured this note. Using proceeds from the sale, the note was paid down to a balance of $874,000, and the maturity date was extended to July 2006. The remaining note was secured by a certain property subject to an operating lease that had a carrying value of $1.5 million, and bore interest at a rate of prime plus 2% per annum. The Partnership prepaid all remaining amounts payable under this note using the proceeds from the sale of the secured property in June 2005.
In April 2003, the Partnership entered into an $862,500 term note. The note has a 5-year term, was collateralized by a certain property subject to an operating lease that had a carrying value of $1.1 million, and bore interest at a rate of 6.25%, per annum. The Partnership prepaid all remaining amounts payable under this note using the proceeds from the sale of the collateralized property in June 2005.
In April 2003, the Partnership entered into a $57,500 unsecured revolving note. The note initially had a 2-year term and bore interest at a variable rate equivalent to the Wall Street Journal (WSJ) prime rate plus 1/2%. The interest rate was adjusted monthly for changes in the WSJ prime rate. In April 2005, the maturity date on the note was extended to April 2006. The Partnership prepaid the remaining amounts payable under this note using the proceeds from the sale of the twelve properties in June 2005.
Debt issuance costs of $646,349 were incurred in connection with the issuance of the notes, and are being amortized over the life of the notes to interest expense using the straight-line method, which is not materially different than the interest rate method. Upon the defeasance and prepayment of the notes payable in June 2005, the remaining unamortized debt issuance costs associated with the debt that was prepaid were expensed.
As of December 31, 2006, the Partnership had a portfolio of one real estate property in Riverdale, Georgia and one financing lease in Plano, Texas for a total cost basis of approximately $2.3 million. As of December 31, 2005 and 2006, all of the equipment leases have been paid in full according to the terms of the lease or have been sold. The Partnership has received approximately $7.1 million of aggregate principal collections on its equipment financing leases during the life of those investments. As of December 31, 2006, the Partnership has not made, nor does it intend to make, any commitments to purchase additional properties.
The Partnership semi-annually considers written requests to repurchase Units pursuant to the terms of the repurchase plan set forth in the Partnership’s prospectus with respect to the Offering. Since 1999, 1,025 Units have been repurchased by the Partnership pursuant the repurchase plan. At December 31, 2006, the Partnership had 28,975 Units issued and outstanding. The Partnership is not obligated to accept Unit repurchase requests if the annualized Cash Flow for the three months prior to the redemption period is less than 10% per annum of the adjusted investment and/or if such repurchases would impair the capital of the Partnership. In connection with the announcement of the Partnership’s liquidation plans, the general partner has indefinitely suspended the repurchase plan.
Effective November 8, 2004, the limited partners consented to the Plan of Liquidation and Dissolution, which involves the dissolution of the Partnership, the liquidation of its assets and the winding up of its affairs. As a result, the general partner is authorized to liquidate the assets of the Partnership and distribute the net proceeds from such liquidation after the repayment of all debt in accordance with the partnership agreement. Effective February 8, 2007, the Partnership has liquidated all of its real assets in accordance with the Plan of Liquidation and Dissolution. The Partnership intends to make a liquidating distribution in the first quarter of 2007 of approximately $2,000,000 which will include proceeds from the 2007 sales. The timing and amount of any additional future final liquidating distribution, if any, will depend on the extent to which reserves for current or future liabilities are required. Accordingly, there can be no assurance that will be any further distributions after the liquidating distribution mentioned above. It is anticipated that the final distribution, if any, of the Partnership will occur by the end of the second quarter of 2007.
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Contractual Obligations
As of December 31, 2006, the Partnership has entered into two contractual obligations to sell the real assets in Riverdale, Georgia and Plano, Texas for $900,000 each, prior to closing and selling costs. These assets were sold on January 22, 2007 and February 8, 2007, respectively.
Critical Accounting Policies
Going Concern Basis of Accounting
The financial statements are prepared in accordance with United States generally accepted accounting principles, which require the Partnership to make certain estimates and assumptions. A summary of the Partnership’s significant accounting policies is provided in note 1 to the financial statements. The following section is a summary of certain aspects of those accounting policies that require management estimates and judgment.
When real estate properties are acquired, acquisition costs are allocated to components of the property using relative fair values based on historical experience and the Partnership’s current judgment. These assumptions and estimates impact the amount of costs allocated between land and building, depreciation expense, and gains or losses recorded on sales of properties. The cost of the properties acquired is allocated among land, buildings and equipment and recognized intangibles based upon estimated far values in accordance with the provisions of SFAS No 141, “Business Combinations”. Recognized intangibles include the value of acquired lease contracts. In computing the value of acquired lease contracts, consideration is given to (a) whether the lease is at market rates (b) origination fees typically incurred to negotiate a contract and (c) recovery costs to replace the tenant. Assets classified as held for sale are recorded at the lower of carrying value or fair value, less costs to sell.
Leases classified as financing leases are stated as the sum of the minimum lease payments plus the unguaranteed residual value accruing to the benefit of the lessor, less unearned income. Unearned income is amortized to income over the lease term so as to produce a constant periodic rate of return on the net investment in the lease. Direct origination costs are deferred and amortized over the life of the lease as an adjustment to yield. The Partnership periodically reviews its financing lease portfolio for impairment whenever events or changes in circumstances indicate that the carrying value of a lease may not be recoverable. If impairment is indicated, a loss reserve is calculated based on the estimated amounts recoverable.
Receivables are reported net of allowance for doubtful accounts and may be uncollectible in the future. The Partnership reviews its receivables regularly for potential collection problems in computing the allowance recorded against its receivables. This review process requires the Partnership to make certain judgments regarding collections that are inherently difficult to predict.
The Partnership’s operating and financing leases may have had scheduled rent increases which occur at various dates throughout the lease terms. Increases to rental income on leases that provide for rental increases based on changes in the Consumer Price Index commence being recognized when the increase is known. The Partnership recognizes the total rent, as stipulated by the lease agreement, as income on a straight-line basis over the term of each lease for those leases with fixed percentage increases subject to reasonably assured collectibility. To the extent rental income on the straight-line basis exceeds rents billable per the lease agreement, an amount is recorded as unbilled rent.
The Partnership periodically reviews its real estate portfolio for impairment whenever events or changes in circumstances indicate that the carrying amount of the property may not be recoverable. If an impairment loss is indicated using undiscounted cash flows, the loss is measured as the amount by which carrying amount of the asset exceeds the estimated fair or present value of the asset on a discounted cash flow basis.
Liquidation Basis of Accounting
Effective November 8, 2004, the limited partners consented to a Plan of Liquidation and Dissolution, which involves the dissolution of the Partnership, the liquidation of its assets and the winding up of its affairs. As a result, the general partner is authorized to liquidate the assets of the Partnership and distribute the net proceeds from such liquidation after the repayment of all debt in accordance with the partnership agreement. The Partnership is undertaking steps to liquidate and dispose of its assets in accordance with the Plan of Liquidation and Dissolution. Effective February 8, 2007, the Partnership has liquidated all of its real assets in accordance with the Plan of Liquidation and Dissolution.
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On December 18, 2006, the Partnership entered into a contract to sell the last remaining real asset of the Partnership. Effective with the execution of the contract, and in accordance with generally accepted accounting principles, the Partnership adopted the liquidation basis of accounting as of the close of business on December 18, 2006. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts. These estimates are and will be periodically reviewed and adjusted as appropriate. A Statement of Net Assets in Liquidation and a Statement of Changes in Net Assets in Liquidation are the principal financial statements presented under the liquidation basis of accounting. Under the liquidation basis of accounting, the Partnership is required to estimate and accrue the costs associated with implementing and completing the plan of liquidation. These amounts can vary significantly due to, among other things, the timing and amounts associated with the discharging known and contingent liabilities and the costs associated with cessation of the Partnership’s operations including an estimate of costs subsequent to that date (which would include reserve contingencies for the appropriate statutory periods). As a result, the Partnership has accrued the projected costs, including miscellaneous wind-down costs, expected to be incurred during the projected period required to complete the liquidation of the Partnership. These projections could change materially and will be adjusted from time to time as projections and assumptions change.
Under the liquidation basis of accounting, the carrying amounts of remaining assets were adjusted to their estimated net realizable values and liabilities, including the estimated costs associated with implementing the liquidation, were adjusted to estimated settlement amounts. The net realizable value of the remaining assets were based on contract sales price, less costs associated with the sale and closing of the transactions. Cash balances, accounts receivable and accounts payable are presented at face value.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk.
Credit risk relates to investment in leases and accounts receivable balances and results from the possibility that a lessee defaults on its contractual obligation to the Partnership. Both the ability of the lessees to pay rent on a timely basis and the amount of the rent (which is the Partnership’s principal source of income) are affected by general economic conditions. A default by a lessee or other premature termination of a lease agreement will interrupt rental payments and Partnership cash flows would be temporarily impacted. In such an instance, the General Partner expects that it would find a substitute lessee, however, there can be no assurances that the property or equipment could be leased on comparable or acceptable terms. The Partnership monitors this risk by performing ongoing credit evaluations of lessees and maintains allowances for potential credit losses.
Item 8. Financial Statements and Supplementary Data.
See Index to Financial Statements on Page F-I of this Form 10-K for Financial Statements and Financial Statement Schedules, where applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
Mr. Beach, acting in his capacity as the principal executive officer of GP4 Asset Acquisition, is ultimately responsible for the disclosure controls and procedures of the Partnership. Disclosure controls and procedures are established and maintained by the Partnership to ensure the information required to be disclosed by the Partnership in the reports that it files or submits pursuant to the Securities Exchange Act of 1934, as amended (the “Act”), is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Mr. Beach has evaluated the effectiveness of the Partnership’s disclosure controls and has determined that, as of the end of the period covered by this report, the Partnership’s disclosure controls and procedures effectively communicate the information required to be disclosed by the Partnership in the reports it files or submits under the Act in a manner that allows timely decisions regarding such disclosure.
There have been no significant changes in the Partnership’s internal control over financial reporting identified in connection with the foregoing evaluation that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The Partnership has no directors, officers or other employees. To the best knowledge of the Partnership, as of December 31, 2006, no person beneficially owned more than 5.0% of the outstanding Units.
Patrick L. Beach is the sole member of CRC Asset Acquisition LLC, the sole member of GP4 Asset Acquisition and the President of GP4 Asset Acquisition, the Partnership’s General Partner.
Mr. Beach attended the University of Michigan and graduated from its School of Business Administration in 1977 with a Bachelor of Business Administration degree. From 1997 until 2001, Mr. Beach served as the Chairman, President and Chief Executive Officer of Captec Net Lease. Since 1981, he has served as Chairman and Chief Executive Officer of Captec Financial Group, Inc., an affiliate of the Partnership that is involved in the acquisition and development of single tenant restaurant properties, shopping centers, and multi-family residential properties.
Since the Partnership has no directors, officers or employees, it has not adopted a code of ethics.
Item 11. Executive Compensation.
The Partnership does not have directors, officers or employees. All amounts paid by the Partnership for management and administration services are pursuant to agreements described under Item 13, Certain Relationships and Related Transactions and Director Independence.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Securityholder Matters.
The Partnership has no directors or officers and, to the best knowledge of the Partnership, as of December 31, 2006, no person known by the Partnership beneficially owned more than 5% of the outstanding Units.
Item 13. Certain Relationships and Related Transactions and Director Independence.
Pursuant to the Partnership Agreement, the General Partner receives acquisition fees of 4% of the aggregate purchase prices of properties and equipment, plus an additional .00624% for each 1% of indebtedness incurred in acquiring properties and equipment, (not to exceed a total 5% acquisition fee). The Partnership did not incur any acquisition fees in 2006, 2005 or 2004.
The Partnership has entered into an asset management agreement with the General Partner and its affiliates, pursuant to which the General Partner and the General Partner’s affiliates provide various property and equipment management services for the Partnership. An asset management fee in an amount equal to 1% of the gross rental revenues derived from the properties and equipment, is charged to the Partnership in exchange for these services. Payment of the asset management fee is subordinated to receipt by the limited partners of annual distributions equal to a cumulative, non-compounded return of 10% per annum on their adjusted invested capital. Management fees of $5,385, $17,822, and $32,180 were incurred during 2006, 2005, and 2004, respectively.
The Partnership Agreement provides for the General Partner to receive real estate and equipment liquidation fees limited to the lesser of 3% of the gross sales price or 50% of the customary real estate commissions in the event of a real estate liquidation. This fee is payable only after the limited partners have received distributions equal to a cumulative, non-compounded return of 10.5% per annum on their adjusted invested capital plus distributions of sale or refinancing proceeds equal to 100% of their original contributions. The Partnership did not pay any real estate or equipment liquidation fees during 2006, 2005 or 2004 and does not anticipate the payment of any fees under this provision.
In April 2003, the Partnership acquired a property located in Harrison, Ohio subject to an existing lease with a Taco Bell franchisee. The property was purchased from an affiliate for a price of $1,100,000, plus acquisition fees of $55,000, which the Partnership funded with $230,000 of cash and $920,000 of proceeds from two term notes issued in connection with the purchase. The lease was an absolute net lease that expires in September 2019. The property was sold in June 2005 and the notes were paid in full with proceeds from the sale.
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On February 8, 2007, the Partnership sold its real property interests located in Plano, Texas to an affiliate for a price of $900,000. On November 8, 2004, the limited partners approved an amendment to the Partnership Agreement to permit, on a limited basis, the sale of Partnership assets to affiliates in connection with the dissolution, liquidation and winding up of the Partnership. This transaction complies with the requirements of the amendment.
The Partnership does not have any written policies and procedures with respect to the review, approval or ratification of any related party transactions. However, all partnership transactions (including those with related parties) must be consummated in accordance with the terms of the Partnership Agreement.
The agreements and arrangements, including those relating to compensation, between the Partnership and the General Partner or any of its affiliates have not been and will not be the result of arm’s-length negotiations, although the General Partner believes that such agreements and arrangements will approximate those which would be arrived at through arm’s-length negotiations. While the Partnership will make no loans to the General Partner or its affiliates the Partnership Agreement permits the Partnership to borrow money from the General Partner or its affiliates but only on such terms as to interest rate, security, fees and other charges at least as favorable to the Partnership as are charged by unaffiliated lending institutions in the same locality on comparable loans for the same purpose. The General Partner and its affiliates are not prohibited from providing services to, and otherwise dealing or doing business with, persons (for example, franchisees), who may deal with the Partnership. However, the Partnership Agreement prohibits receipt of rebates or participation in any reciprocal business arrangements which would have the effect of circumventing any of the provisions of the Partnership Agreement.
The Partnership has no directors, independent or otherwise.
Item 14. Principal Accountant Fees and Services.
Audit Fees
The aggregate fees billed to the Partnership for professional services rendered by the Partnership’s principal accountant for the audit of the Partnership’s annual financial statements and review of the financial statements included in the Partnership’s quarterly reports on Form 10-Q or for services normally provided by the Partnership’s accountant in connection with statutory or regulatory filings were $57,500, $55,000, and $51,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
Audit-Related Fees
The aggregate fees billed to the Partnership for assurance and related services by the Partnership’s principal accountant that were reasonably related to the performance of the audit or review of the Partnership’s financial statements were $0 for each of the years ended December 31, 2006, 2005 and 2004.
Tax Fees
The aggregate fees billed to the Partnership for professional services rendered by the Partnership’s principal accountant for tax compliance, tax advice and tax planning were $0 for each of the years ended December 31, 2006, 2005 and 2004.
All Other Fees
The aggregate fees billed to the Partnership for products and services provided by the Partnership’s principal accountant were $0 for each of the years ended December 31, 2006, 2005 and 2004.
The Partnership has no directors, nor does it maintain an Audit Committee.
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Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements
| Statement of Net Assets in Liquidation (liquidation basis) at December 31, 2006 | F - 2 | |
| Statement of Changes in Net Assets in Liquidation (liquidation basis) for the period December 19, 2006 through December 31, 2006 | F - 3 | |
| Balance Sheet (going concern basis) at December 31, 2005 | F - 4 | |
| Statements of Discontinued Operations (going concern basis) for the period January 1, 2006 through December 18, 2006 and the years ended December 31, 2005 and 2004 | F - 5 | |
| Statements of Changes in Partners’ Capital (going concern basis) for the period January 1, 2006 through December 18, 2006 and the years ended December 31, 2005 and 2004 | F - 6 | |
| Statements of Cash Flows for the period December 19, 2006 through December 31, 2006 (liquidation basis) and for the period January 1, 2006 through December 18, 2006 and the years ended December 31, 2005 and 2004 (going concern basis) | F - 7 | |
| Notes to Financial Statements | F - 8 |
(a)(2) Financial Statements Schedule
Schedule III – Properties and Accumulated
Depreciation F-13
Depreciation F-13
(a)(3) The following exhibits are included herein or incorporated by reference:
| Number | Exhibit | |
| 2 | Plan of Liquidation and Dissolution (Incorporated by reference to the Registrant’s Definitive Proxy Statement on Schedule 14A, filed on September 21, 2004) | |
| 4 | Amended Agreement of Limited Partnership of Registrant. (Incorporated by reference to the Registrant’s Definitive Proxy Statement on Schedule 14A, filed on September 21, 2004 and the corresponding exhibit in the Registrant’s Form 10-K for the fiscal year ended December 31, 1998) | |
| 10.1 | Promissory Note dated December 17, 1998 between Registrant and National Realty Funding L.C. (Incorporated by reference to the corresponding exhibit in the Registrant’s Form 10-K for the fiscal year ended December 31, 1998) | |
| 10.2 | Promissory Note dated March 30, 1999 between Registrant and National Realty Funding L.C. (Incorporated by reference to the corresponding exhibit in the Registrant’s Form 10-Q for the quarter ended March 31, 1999) | |
| 31 | Certification Pursuant to section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV | ||
| By: | GP4 Asset Acquisition, LLC Its Manager | |
| By: | /s/ Patrick L. Beach Patrick L. Beach President | |
| Date: | March 29, 2007 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Patrick L. Beach Patrick L. Beach President | |
| Date: | March 29, 2007 |
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Captec Franchise Capital Partners L.P. IV
Contents
| Page(s) | ||
Report of Independent Registered Public Accounting Firm | F - 1 | |
Financial Statements | ||
| Statement of Net Assets in Liquidation (liquidation basis) at December 31, 2006 | F - 2 | |
| Statement of Changes in Net Assets in Liquidation (liquidation basis) for the period December 19, 2006 through December 31, 2006 | F - 3 | |
| Balance Sheet (going concern basis) at December 31, 2005 | F - 4 | |
| Statements of Discontinued Operations (going concern basis) for the period January 1, 2006 through December 18, 2006 and the years ended December 31, 2005 and 2004 | F - 5 | |
| Statements of Changes in Partners’ Capital (going concern basis) for the period January 1, 2006 through December 18, 2006 and the years ended December 31, 2005 and 2004 | F - 6 | |
| Statements of Cash Flows for the period December 19, 2006 through December 31, 2006 (liquidation basis) and for the period January 1, 2006 through December 18, 2006 and the years ended December 31, 2005 and 2004 (going concern basis) | F - 7 | |
| Notes to Financial Statements | F - 8 |
F-I
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Report of Independent Registered Public Accounting Firm
To the partners of Captec Franchise Capital Partners L.P. IV
We have audited the accompanying statement of net assets in liquidation (liquidation basis) of Captec Franchise Capital Partners L.P. IV (the Partnership) as of December 31, 2006, and the related statements of changes in net assets in liquidation (liquidation basis) and cash flows (liquidation basis) for the period from December 19, 2006 to December 31, 2006. We have also audited the accompanying balance sheet of the Partnership as of December 31, 2005, and the related statements of discontinued operations, changes in partners’ capital, and cash flows for the period from January 1, 2006 through December 18, 2006 and each of the two years in the period ended December 31, 2005. Our audit also included the financial statement schedule listed at Item 15(a). These financial statements and schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnershp’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Partnership entered into a contract to sell its last remaining asset on December 18, 2006 and in connection therewith has changed its basis of accounting for periods subsequent to December 18, 2006 from the going concern basis to a liquidation basis.
In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets in liquidation (liquidation basis) of the Partnership at December 31, 2006 and the related changes in net assets in liquidation (liquidation basis) and cash flows (liquidation basis) for the period from December 19, 2006 through December 31, 2006 and the financial position of the Partnership at December 31, 2005, and the results of its operations and its cash flows for the period from January 1, 2006 through December 18, 2006 and for each of the two years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young
Toledo, Ohio
March 27, 2007
March 27, 2007
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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Captec Franchise Capital Partners L.P. IV
Statement of Net Assets in Liquidation
(Liquidation Basis)
December 31, 2006
Statement of Net Assets in Liquidation
(Liquidation Basis)
December 31, 2006
| Assets | ||||
| Cash and cash equivalents | $ | 1,428,894 | ||
| Investment in leases: | ||||
| Operating leases, net | 892,200 | |||
| Financing leases, net | 770,560 | |||
| Unbilled rent, net | 3,503 | |||
| Accounts receivable | 3,460 | |||
| Total assets | $ | 3,098,617 | ||
| Liabilities and Net Assets in Liquidation | ||||
| Liabilities: | ||||
| Reserve for estimated costs during liquidation period | 368,140 | |||
| Net assets in liquidation | $ | 2,730,477 | ||
The accompanying notes are an integral part of the financial statements.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Captec Franchise Capital Partners L.P. IV
Statement of Changes in Net Assets in Liquidation
(Liquidation Basis)
For the period December 19, 2006 to December 31, 2006
Statement of Changes in Net Assets in Liquidation
(Liquidation Basis)
For the period December 19, 2006 to December 31, 2006
| Shareholder’s equity — December 18, 2006 | $ | 3,172,192 | ||
| Adjustments relating to adoption of liquidation basis of accounting | ||||
| Adjustment of real estate investments and other assets to net realizable value | (110,958 | ) | ||
| Accrual of estimated costs of liquidation | (336,499 | ) | ||
| Net assets in liquidation — December 19, 2006 | 2,724,735 | |||
| Operating income | 5,742 | |||
| Net assets in liquidation — December 31, 2006 | $ | 2,730,477 | ||
The accompanying notes are an integral part of the financial statements.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Captec Franchise Capital Partners L.P. IV
Balance Sheets (Going Concern Basis)
As of December 31, 2005
Balance Sheets (Going Concern Basis)
As of December 31, 2005
| Assets | ||||
| Cash and cash equivalents | $ | 896,164 | ||
| Investment in leases: | ||||
| Operating leases, net | 4,295,457 | |||
| Financing leases, net | 1,217,585 | |||
| Unbilled rent, net | 53,437 | |||
| Accounts receivable | 3,500 | |||
| Total assets | $ | 6,466,143 | ||
| Liabilities and Partners’ Capital | ||||
| Liabilities: | ||||
| Accounts payable and accrued expenses | $ | 63,800 | ||
| Due to related parties | 20,872 | |||
| Total liabilities | 84,672 | |||
| Partners’ capital: | ||||
| Limited partners’ capital accounts | 6,377,000 | |||
| General partner’s capital account | 4,471 | |||
| Total partners’ capital | 6,381,471 | |||
| Total liabilities and partners’ capital | $ | 6,466,143 | ||
The accompanying notes are an integral part of the financial statements.
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Captec Franchise Capital Partners L.P. IV
Statements of Discontinued Operations (Going Concern Basis)
For the period January 1, 2006 through December 18, 2006 and for the Years Ended December 31, 2005, and 2004
Statements of Discontinued Operations (Going Concern Basis)
For the period January 1, 2006 through December 18, 2006 and for the Years Ended December 31, 2005, and 2004
| For the period | ||||||||||||
| January 1 to | ||||||||||||
| December 18, 2006 | 2005 | 2004 | ||||||||||
| Operating revenue: | ||||||||||||
| Rental income | $ | 376,019 | $ | 1,644,276 | $ | 2,874,064 | ||||||
| Lease termination fee | — | — | — | |||||||||
| Finance income | 110,074 | 125,092 | 146,330 | |||||||||
| Total operating revenue | 486,093 | 1,769,368 | 3,020,394 | |||||||||
| Operating costs and expenses: | ||||||||||||
| Interest expense | — | 555,865 | 1,182,993 | |||||||||
| Depreciation | 54,218 | 80,407 | 473,108 | |||||||||
| Debt retirement costs | — | 1,690,354 | 209,010 | |||||||||
| Provision for losses | 781,876 | — | — | |||||||||
| General and administrative | 385,507 | 360,461 | 632,557 | |||||||||
| Total operating costs and expenses | 1,221,601 | 2,687,087 | 2,497,668 | |||||||||
| (Loss) income from discontinued operations before other income | (735,508 | ) | (917,719 | ) | 522,726 | |||||||
| Other income : | ||||||||||||
| Gain on sale of equipment | — | 1,997 | 8,040 | |||||||||
| Gain on sale of real estate | 446,059 | 4,754,452 | 262,045 | |||||||||
| Interest and other income | 84,237 | 128,754 | 5,340 | |||||||||
| Total other income | 530,296 | 4,885,203 | 275,425 | |||||||||
| Net (loss) income from discontinued operations | $ | (205,212 | ) | 3,967,484 | 798,151 | |||||||
| Net (loss) income from discontinued operations allocable to general partner | $ | 2,878 | $ | 9,034 | $ | 7,982 | ||||||
| Net (loss) income from discontinued operations allocable to limited partners | $ | (208,090 | ) | $ | 3,958,450 | $ | 790,169 | |||||
| Net (loss) income from discontinued operations per limited partnership unit | $ | (7.18 | ) | $ | 136.62 | $ | 27.23 | |||||
| Weighted average number of limited partnership units outstanding | 28,975 | 28,975 | 29,020 | |||||||||
The accompanying notes are an integral part of the financial statements.
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Captec Franchise Capital Partners L.P. IV
Statement of Changes in Partners’ Capital (Going Concern Basis)
For the period ended December 18, 2006 and for the years ended December 31, 2005 and 2004
Statement of Changes in Partners’ Capital (Going Concern Basis)
For the period ended December 18, 2006 and for the years ended December 31, 2005 and 2004
| Limited | Limited | General | Total | |||||||||||||
| Partners’ | Partners’ | Partner’s | Partners’ | |||||||||||||
| Units | Accounts | Account | Capital | |||||||||||||
| Balance, January 1, 2004 | 29,155 | $ | 19,138,676 | $ | (12,545 | ) | $ | 19,126,131 | ||||||||
| Distributions — ($150.24 per limited partnership unit) | — | (4,359,932 | ) | — | (4,359,932 | ) | ||||||||||
| Repurchase of limited partnership units | (180 | ) | (124,716 | ) | — | (124,716 | ) | |||||||||
| Net income | — | 790,169 | 7,982 | 798,151 | ||||||||||||
| Balance, December 31, 2004 | 28,975 | 15,444,197 | (4,563 | ) | 15,439,634 | |||||||||||
| Distributions — ($449.55 per limited partnership unit) | — | (13,025,647 | ) | — | (13,025,647 | ) | ||||||||||
| Net income | — | 3,958,450 | 9,034 | 3,967,484 | ||||||||||||
| Balance, December 31, 2005 | 28,975 | 6,377,000 | 4,471 | 6,381,471 | ||||||||||||
| Distributions — ($103.68 per limited partnership unit) | — | (3,004,067 | ) | — | (3,004,067 | ) | ||||||||||
| Net loss | — | (208,090 | ) | 2,878 | (205,212 | ) | ||||||||||
| Balance, December 18, 2006 | 28,975 | 3,164,843 | 7,349 | 3,172,192 | ||||||||||||
The accompanying notes are an integral part of the financial statements.
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Captec Franchise Capital Partners L.P. IV
Statements of Cash Flows
Statements of Cash Flows
| 2006 | ||||||||||||||||
| Liquidation | ||||||||||||||||
| Basis | Going Concern Basis | |||||||||||||||
| December 19 to | January 1 to | For the years ended December 31, | ||||||||||||||
| December 31, | December 18, | 2005 | 2004 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Change in net assets in liquidation from operating activity | $ | 5,742 | $ | — | $ | — | $ | — | ||||||||
| Net income (loss) from discontinued operation (period prior to liquidation accounting) | (205,212 | ) | 3,967,484 | 798,151 | ||||||||||||
| Adjustments to net income: | ||||||||||||||||
| Depreciation | — | 54,218 | 80,407 | 473,108 | ||||||||||||
| Amortization of debt issuance costs | — | — | 25,749 | 50,920 | ||||||||||||
| Gain on sale of equipment | — | — | (1,997 | ) | (8,040 | ) | ||||||||||
| Gain on sale of real estate | — | (446,059 | ) | (4,754,452 | ) | (262,045 | ) | |||||||||
| Provision for losses | — | 781,876 | 9,961 | 15,000 | ||||||||||||
| (Increase) decrease in unbilled rent | — | 3,282 | (66,804 | ) | 72,591 | |||||||||||
| (Increase) decrease in accounts receivable | 872 | (872 | ) | (85,678 | ) | 122,178 | ||||||||||
| (Decrease) increase in accounts payable and accrued expenses | (2,025 | ) | (28,274 | ) | (78,013 | ) | 11,202 | |||||||||
| Increase (decrease) in due to related parties | (667 | ) | (20,205 | ) | 9,903 | (140 | ) | |||||||||
| Decrease (increase) in restricted cash | — | — | 333,006 | (99,616 | ) | |||||||||||
| Reserve for estimaestimated costs during liquidation period | (1,860 | ) | — | — | — | |||||||||||
| Net cash (used in) provided by operating activities | 2,062 | 138,754 | (560,434 | ) | 1,173,309 | |||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Proceeds from sale of equipment | — | — | 15,000 | 40,200 | ||||||||||||
| Proceeds from sale of real estate | — | 3,355,864 | 27,895,673 | 3,849,338 | ||||||||||||
| Payment of lease commissions | — | — | (59,805 | ) | — | |||||||||||
| Principal collections on financing leases | (3,809 | ) | 43,926 | 85,875 | 220,951 | |||||||||||
| Net cash provided by (used in) investing activities | (3,809 | ) | 3,399,790 | 27,936,743 | 4,110,489 | |||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Repayments of notes payable | — | — | (13,597,961 | ) | (1,350,429 | ) | ||||||||||
| Repurchase of limited partnership units | — | — | — | (124,716 | ) | |||||||||||
| Distributions to limited partners | — | (3,004,067 | ) | (13,025,647 | ) | (4,359,932 | ) | |||||||||
| Net cash used in financing activities | — | (3,004,067 | ) | (26,623,608 | ) | (5,835,077 | ) | |||||||||
| Net increase (decrease) in cash and cash equivalents | (1,747 | ) | 534,477 | 752,701 | (551,279 | ) | ||||||||||
| Cash and cash equivalents, beginning of period | 1,430,641 | 896,164 | 143,463 | 694,742 | ||||||||||||
| Cash and cash equivalents, end of period | 1,428,894 | 1,430,641 | $ | 896,164 | $ | 143,463 | ||||||||||
| Cash paid for interest | $ | — | $ | — | $ | 597,661 | $ | 1,129,074 | ||||||||
The accompanying notes are an integral part of the financial statements.
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Captec Franchise Capital Partners, L.P. IV
Notes to Financial Statements
Notes to Financial Statements
| 1. | The Partnership and Its Significant Accounting Principles |
Captec Franchise Capital Partners L.P. IV (the “Partnership”), a Delaware limited partnership, was organized on July 23, 1996 for the purpose of acquiring income-producing commercial real properties and equipment leased on a “triple net” or “double net” basis, primarily to operators of national and regional chain franchised fast food and family style restaurants, as well as other national and regional retail chains.
The initial general partners of the Partnership were Captec Franchise Capital Corporation IV (the “Corporation”), a wholly-owned subsidiary of Captec Financial Group, Inc. (“Captec”), an affiliate, and Patrick L. Beach, the Chairman of the Board of Directors, President and Chief Executive Officer of the Corporation and Captec. In August 1998, Captec Net Lease Realty, Inc. (“Captec Net Lease”), an affiliate, acquired the General Partnership interest of the Partnership. In December 2001, Captec Net Lease merged with and into Commercial Net Lease Realty, Inc. (“Commercial Net Lease”). In connection with the merger, Commercial Net Lease agreed to sell and assign its General Partnership interest in the Partnership to GP4 Asset Acquisition, LLC (“GP4 Asset Acquisition”), which is wholly-owned by Mr. Beach and is an affiliate of Captec. Effective January 15, 2002, the limited partners consented to the transfer of the General Partnership interest. On September 11, 2003, the Partnership’s secured lender consented to the transfer of the general partnership interest to GP4 Asset Acquisition. Upon receipt of the secured lender’s consent, the general partnership interest was immediately transferred to GP4 Asset Acquisition. Therefore, as of September 11, 2003, GP4 Asset Acquisition became the general partner of the Partnership.
The Partnership commenced a public offering (the “Offering”) of up to 30,000 limited partnership units (the “Units”), priced at $1,000 per Unit, registered under the Securities Act of 1933, as amended, by means of a Registration Statement filed on Form S-11, which was declared effective by the Securities and Exchange Commission on December 23, 1996. The Partnership accepted subscriptions for the minimum number of Units on March 5, 1997 and immediately commenced operations. The Offering was fully subscribed in December 1998. Since 1999, 1,025 Units have been repurchased by the Partnership pursuant to the terms of the Repurchase Plan set forth in the Partnership’s December 23, 1996 prospectus with respect to the Offering. At December 31, 2006, the Partnership had 28,975 Units issued and outstanding.
The principal investment objectives of the Partnership are: (i) preservation and protection of capital; (ii) distribution of cash flow generated by the Partnership’s leases; (iii) capital appreciation of Partnership properties; (iv) generation of increased income and protection against inflation through escalation of base rents or participation in gross revenues of tenants of Partnership properties; and (v) deferred taxation of cash distributions to the limited partners.
Allocation of profits, losses and cash distributions from operations and cash distributions from sale or refinancing are made pursuant to the terms of the Partnership Agreement. Profits and losses from operations are allocated among the limited partners based upon the number of Units owned.
Following is a summary of the Partnership’s significant accounting policies:
Basis of presentation
In November 2004, the limited partners approved a plan to liquidate the Partnership and dispose of all the assets of the Partnership. With this approval, the Partnership commenced activities to liquidate and dispose of the assets of the Partnership, which included entering into an exclusive listing agreement with a third party to oversee the marketing and offering for sale of all the real estate assets and equipment leases and loans on behalf of the Partnership. On December 18, 2006, the Partnership entered into a contract to sell the last remaining real asset of the Partnership. Effective with the execution of the contract, and in accordance with generally accepted accounting principles, the Partnership adopted the liquidation basis of accounting as of the close of business on December 18, 2006. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts. These estimates are and will be periodically reviewed and adjusted as appropriate. A Statement of Net Assets in Liquidation and a Statement of Changes in Net Assets in Liquidation are the principal financial statements presented under the liquidation basis of accounting. Under the liquidation basis of accounting, the Partnership is required to estimate and accrue the costs associated with implementing and completing the plan of liquidation. These amounts can vary significantly due to, among other things, the timing and amounts associated with the discharging known and contingent liabilities and the costs associated with cessation of the Partnership’s operations including an
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estimate of costs subsequent to that date (which would include reserve contingencies for the appropriate statutory periods). As a result, the Partnership has accrued the projected costs, including miscellaneous wind-down costs, estimated to be incurred through June 2007, the estimated date for the completion of the liquidation of the Partnership. These projections could change materially and will be adjusted from time to time as projections and assumptions change. Operating income in the statement of changes in net assets in liquidation consists of rental income earned during the liquidation period ended December 31, 2006.
Under the liquidation basis of accounting, the carrying amounts of remaining assets were adjusted to their estimated net realizable values and liabilities, including the estimated costs associated with implementing the liquidation, were adjusted to estimated settlement amounts. The net realizable value of the remaining assets were based on contract sales price, less costs associated with the sale and closing of the transactions. Cash balances, accounts receivable and accounts payable are presented at face value.
The sales of the remaining two real assets were completed on January 22, 2007 and February 8, 2007. The Partnership made a liquidating distribution in the first quarter of 2007 of approximately $2,000,000 which included proceeds from these sales. The timing and amount of any additional future final liquidating distribution, if any, will depend on the extent to which reserves for current or future liabilities are required. Accordingly, there can be no assurance that will be any further distributions after the liquidating distribution mentioned above. It is anticipated that the final distribution, if any, of the Partnership will occur by the end of the second quarter of 2007.
Prior to December 18, 2006, the Partnership’s financial statements are presented on the going concern basis of accounting. In accordance with Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long Lived-Assets” (“FAS 144”), as a result of the approval of the Plan of Liquidation and Dissolution, as of December 31, 2004 all assets, excluding cash were previously classified as Assets Held for Sale, and the results of the operations for these Assets Held for Sale were classified as discontinued operations for all years presented, since the operations are directly related to the assets held for sale. Depreciation of real estate assets ceased at that time. The four real properties and one financing lease owned by the Partnership as of December 31, 2005 which were not disposed of within one year from the initial held for sale designation were reclassified to investment in operating leases and financing leases at December 31, 2005. Also, in accordance with FAS 144, the partnership recognized $80,407 of depreciation expense for these assets for the year ended December 31, 2005 in the fourth quarter of 2005 to cumulatively catch-up depreciation since its cessation in December 2004 upon reclassification of these assets. All income statement activity has been classified as discontinued operations for the period from January 1, 2006 through December 18, 2006 and for the years ended December 31, 2005, and 2004, reflecting the fact that all properties have been disposed of as of February 8, 2007.
Cash and cash equivalents
The Partnership considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Rental income from operating leases
The Partnership’s operating leases may have scheduled rent increases which occur at various dates throughout the lease terms. Increases to rental income on leases that provide for rental increases based on changes in the Consumer Price Index commence being recognized when the increase is known. The Partnership recognizes the total rent, as stipulated by the lease agreement, as income on a straight-line basis over the term of each lease for those leases with fixed percentage increases subject to reasonably assured collectibility. To the extent rental income on the straight-line basis exceeds rents billable per the lease agreement, an amount is recorded as unbilled rent.
Land and buildings subject to operating leases
Land and buildings 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). Depreciation ceases upon designation of depreciable property as held for sale. The Partnership periodically reviews its real estate portfolio for impairment whenever events or changes in circumstances indicate that the carrying amount of the property may not be recoverable. If an impairment loss is indicated using undiscounted cash flows, the loss is measured as the amount by which the carrying amount of the asset exceeds the estimated fair or present value of the asset on a discounted cash flow basis.
The cost of the properties acquired is allocated among land, buildings and equipment and recognized intangibles based upon estimated far values in accordance with the provisions of SFAS No 141, “Business Combinations”. Recognized intangibles include
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the value of acquired lease contracts. In computing the value of acquired lease contracts, consideration is given to (a) whether the lease is at market rates (b) origination fees typically incurred to negotiate a contract and (c) recovery costs to replace the tenant.
The real property located in Riverdale, Georgia was sold on January 22, 2007 for a purchase price of $900,000 pursuant to a contract of sale which was executed on September 12, 2006. There were no debt retirement costs associated with the disposition of this property. In connection with the sale, the Partnership terminated the lease with Blockbuster Entertainment Corp on November 30, 2006. An impairment charge of approximately $93,000 was recognized in the third quarter of 2006 based on the estimated excess of the carrying value over the expected proceeds. On December 19, 2006, under the liquidation method of accounting, the Partnership decreased its investment in the property by approximately $3,000, which represented the net loss realized on the sale of this property.
On April 12, 2006, the Partnership sold the property located in Southgate, Michigan and the related lease for a purchase price of $1 million, resulting in a gain of approximately $213,000. There were no debt retirement costs associated with the disposition of this property.
On August 15, 2006, the Partnership sold the property located in Cincinnati, Ohio and the related lease for a purchase price of $1.5 million, resulting in a gain of approximately $248,000. There were no debt retirement costs associated with the disposition of this property.
On October 17, 2006, the Partnership sold the property located in Hamilton, Ohio and the related lease for a purchase price of $875,000. An impairment charge of approximately $390,000 was recognized in the third quarter of 2006 based on the excess of the carrying value over the expected proceeds. An additional loss of approximately $15,000 was recorded at closing. There were no debt retirement costs associated with the disposition of this property.
In the second quarter of 2005, the Partnership sold twelve properties for net cash, prior to repayment of debt and related debt retirement costs, for approximately $20.8 million, resulting in a gain of approximately $3.3 million. There were approximately $1.36 million of debt retirement costs associated with the disposition of these properties.
In the third quarter of 2005, the Partnership sold two properties for net cash, prior to repayment of debt and related debt retirement costs, for approximately $7.1 million, resulting in a gain of approximately $1.5 million. There were approximately $330,000 of debt retirement costs associated with the disposition of one of these properties.
For year ended December 31, 2004, the Partnership sold three properties that were triggered by the tenant’s exercise of purchase option clauses in the lease agreements. The properties were sold for net cash proceeds of approximately $3.9 million, resulting in a gain of approximately $262,000. There were approximately $209,000 of debt retirement costs associated with the disposition of the Capital Food property.
All of the properties were subject to triple net leases pursuant to which the tenant was responsible for all expenses related to the cost of operating the properties, including real estate taxes, insurance, maintenance and repair costs. Certain of the leases provided the tenant with one or more options to renew the lease upon expiration of the base term at predetermined or market rental rates.
Net investment in financing leases
Net investment in financing leases at December 31, 2006 includes one building used as a retail store that is subject to a long-term ground lease and in prior years included equipment used in restaurant operations which are leased on a triple-net basis. Leases classified as financing leases are stated as the sum of the minimum lease payments plus the unguaranteed residual value accruing to the benefit of the lessor, less unearned income. Unearned income is amortized to income over the lease term so as to produce a constant periodic rate of return on the net investment in the lease. Direct origination costs are deferred and amortized over the life of the lease as an adjustment to yield. The Partnership periodically reviews its financing lease portfolio for impairment whenever events or changes in circumstances indicate that the carrying value of a lease may not be recoverable. If impairment is indicated, a loss reserve is calculated based on the estimated amounts recoverable. At December 31, 2004, the Partnership had provided an allowance of $275,542 for uncollectible amounts associated with one of its financing leases. Amounts due under this lease and the related reserve were written off in 2005 resulting in no gain or loss. The Partnership recorded a provision for losses of approximately $299,000 in the second quarter of 2006 due to losses expected on the finance lease asset that was sold in February 2007 pursuant to a contract of sale which was executed on December 18, 2006. The lease was sold for a purchase price of $900,000. On December 19, 2006, under the liquidation method of accounting, the Partnership decreased its investment in this financing lease by approximately $108,000, which represented the net loss realized on the sale of this asset upon sale in February 2007.
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Net income per limited partnership interest
Net income per limited partnership interest is calculated using the weighted average number of limited partnership Units outstanding during the period and the limited partners’ allocable share of the net income.
Distributions per limited partnership Unit
Distributions per limited partnership Unit is calculated using the actual distributions disbursed during the period and the weighted average number of limited partnership Units outstanding during the period. Actual individual limited partner distributions realized may vary from this calculation as a result of a variety of factors including: (i) actual distributions are computed based on quarterly operating results and outstanding limited partnership units, which are disbursed in the subsequent quarter; (ii) certain limited partners have elected to receive monthly distributions versus quarterly distributions which creates timing differences between comparative calculations, (iii) the calculation ignores the timing of repurchases and (iv) liquidating distributions are determined based on the tax account balances of the partners per the Partnership agreement.
Income taxes
No provision for income taxes is included in the accompanying financial statements, as the Partnership’s results of operations are passed through to the partners for inclusion in their respective income tax returns. The principal reasons for the difference between net income passed through the partners for federal income tax purposes and financial statement purposes are the recognition of straight-line rent for reporting purposes, different useful lives and depreciation methods for real property and the provision for losses for reporting purposes versus bad debt expense for tax purposes.
Estimates
The preparation of financial statements in conformity with United States generally accepted accounting 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.
| 2. | Distributions |
Cash flows of the Partnership are allocated 99% to the limited partners and 1% to the General Partner, except that the General Partner’s share is subordinated to a 10% per annum cumulative, non-compounded preferred return to the limited partners. Net sale or refinancing proceeds of the Partnership are allocated 90% to the limited partners and 10% to the General Partner, except that the General Partner’s share is subordinated to a 10.5% per annum cumulative, non-compounded return on their adjusted investment plus return of the original contributions to the limited partners.
Distributions of cash flow from operations are paid quarterly in arrears.
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| 3. | Related Party Transactions and Agreements |
Pursuant to the Partnership Agreement, the General Partner receives acquisition fees of 4%, plus an additional .00624% for each 1% of indebtedness incurred in acquiring properties and equipment, of the aggregate purchase prices of properties and equipment (not to exceed a total 5% acquisition fee). The acquisition fees are capitalized as part of the Partnership’s investment in land and buildings subject to operating leases and net investment in financing leases. The Partnership incurred no acquisition fees during 2006, 2005 or 2004.
The Partnership has entered into an asset management agreement with the General Partner and its affiliates, whereby the General Partner and the General Partner’s affiliates provide various property and equipment management services for the Partnership. A subordinated asset management fee is charged in an amount equal to 1% of the gross rental revenues derived from the properties and equipment. Payment of the asset management fee is subordinated to receipt by the limited partners of annual distributions equal to a cumulative, non-compounded return of 10% per annum on their adjusted invested capital. Management fees of $5,385, $17,822 and $32,180 were expensed as incurred for the period from January 1, 2006 through December 18, 2006 and for the years ended December 31, 2005 and 2004, respectively.
The Partnership Agreement provides for the General Partner to receive real estate and equipment liquidation fees limited to the lesser of 3% of the gross sales price or 50% of the customary real estate commissions in the event of a real estate liquidation. This fee is payable only after the limited partners have received distributions equal to a cumulative, non-compounded return of 10.5% per annum on their adjusted invested capital, plus distributions of sale or refinancing proceeds equal to 100% of their original contributions. The Partnership did not pay any real estate or equipment liquidation fees during 2006, 2005 or 2004 and does not anticipate the payment of any fees under this provision.
In April 2003, the Partnership acquired a property located in Harrison, Ohio subject to an existing lease with a Taco Bell franchisee. The property was purchased from an affiliate for a price of $1,155,000, which the Partnership funded with $230,000 of cash and $920,000 of proceeds from two term notes issued in connection with the purchase. The lease is an absolute net lease that expires in September 2019. This property was sold in June 2005 and the note was paid in full with proceeds from the sale.
On February 8, 2007, the Partnership sold its real property interests located in Plano, Texas to an affiliate for a price of $900,000. On November 8, 2004, the limited partners approved an amendment to the Partnership Agreement to permit, on a limited basis, the sale of Partnership assets to affiliates in connection with the dissolution, liquidation and winding up of the Partnership. This transaction complies with the requirements of the amendment.
| 4. | Land and Building Subject to Operating Leases |
The net investment in operating leases as of December 31, 2005 (going concern basis), is comprised of the following:
| December 31, | ||||
| 2005 | ||||
| Land | $ | 1,705,200 | ||
| Building and improvements | 3,214,980 | |||
| 4,920,180 | ||||
| Less accumulated depreciation | (624,723 | ) | ||
| $ | 4,295,457 | |||
The remaining real property at December 31, 2006 located in Riverdale, Georgia was sold on January 22, 2007 pursuant to a contract of sale which was executed on September 12, 2006. In connection with the sale, the Partnership terminated the lease with Blockbuster Entertainment Corp on November 30, 2006. An impairment charge of approximately $93,000 was recognized in the third quarter of 2006 based on the excess of the carrying value over the estimated proceeds. On December 19, 2006, under the liquidation method of accounting, the Partnership decreased its investment in the property by approximately $3,000, which represented the net loss realized on the sale of this property.
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| 5. | Net Investment in Financing Leases |
The net investment in financing leases as of December 31, 2005 (going concern basis) is comprised of the following:
| December 31, | ||||
| 2005 | ||||
| Minimum lease payments to be received | $ | 1,880,854 | ||
| Gross investment in financing leases | 1,880,854 | |||
| Less unearned income | (663,268 | ) | ||
| Less reserve for loss | 0 | |||
| Net investment in financing leases | $ | 1,217,585 | ||
The Partnership recorded a provision for losses of approximately $299,000 in the second quarter of 2006 due to losses expected on the finance lease asset that was sold in February 2007 pursuant to a contract of sale which was executed on December 18, 2006. The lease was sold for a purchase price of $900,000. On December 19, 2006, under the liquidation method of accounting, the Partnership decreased its investment in this asset by approximately $108,000, which represented the net loss realized on the sale of this asset.
| 6. | Notes Payable |
In December 1998, the Partnership entered into a $6.4 million term note. The note had a 10-year term, was collateralized by certain properties that had a carrying value of approximately $11.6 million subject to operating leases, and bore interest at a rate of 8.13% per annum. The Partnership defeased all the remaining amounts payable under this note using the proceeds from the sale of twelve properties in June 2005. The Partnership incurred approximately $841,000 of yield maintenance costs and $46,000 of professional fees related to the defeasance.
In March 1999, the Partnership entered into an additional $3.3 million term note. The note had a 10-year term, was collateralized by certain properties that had a carrying value of approximately $3.4 million subject to operating leases, and bore interest at a rate of 8.5% per annum. In March 2004, the partnership defeased approximately $466,000 of this note payable with proceeds from the sale of a property. The Partnership defeased all the remaining amounts payable under this note using the proceeds from the sale of twelve properties in June 2005. The Partnership incurred approximately $427,000 of yield maintenance costs and $46,000 of professional fees related to the June 2005 defeasance.
The Partnership purchased one net leased real estate property in October 2000 and assumed a $3.75 million term note in connection with the acquisition of a property. The note had a 10-year term and was collateralized by a property that had a carrying value of approximately $4.6 million and bore interest at the rate of 8.35% per annum. The Partnership prepaid all remaining amounts payable under this note using the proceeds from the sale of the collateralized property in August 2005. The Partnership incurred approximately $295,000 of yield maintenance costs and $35,000 of professional fees related to the prepayment.
In November 2001, the Partnership entered into an additional $1.5 million term note. In June 2004, the Partnership sold a property subject to an operating lease that secured this note. Using proceeds from the sale, the note was paid down to a balance of $874,000, and the maturity date was extended to July 2006. The remaining note was secured by a certain property subject to an operating lease that had a carrying value of $1.5 million, and bore interest at a rate of prime plus 2% per annum. The Partnership prepaid all remaining amounts payable under this note using the proceeds from the sale of the secured property in June 2005.
In April 2003, the Partnership entered into an $862,500 term note. The note has a 5-year term, was collateralized by a certain property subject to an operating lease that had a carrying value of $1.1 million, and bore interest at a rate of 6.25%, per annum. The Partnership prepaid all remaining amounts payable under this note using the proceeds from the sale of the collateralized property in June 2005.
In April 2003, the Partnership entered into a $57,500 unsecured revolving note. The note initially had a 2-year term and bore interest at a variable rate equivalent to the Wall Street Journal (WSJ) prime rate plus 1/2%. The interest rate was adjusted monthly for changes in the WSJ prime rate. In April 2005, the maturity date on the note was extended to April 2006. The Partnership prepaid the remaining amounts payable under this note using the proceeds from the sale of the twelve properties in June 2005.
Debt issuance costs of $646,349 were incurred in connection with the issuance of the notes, and were being amortized over the life of the notes to interest expense using the straight-line method, which is not materially different than the interest rate method. Upon
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the defeasance and prepayment of the notes payable in June 2005, the remaining unamortized debt issuance costs associated with the debt that was prepaid were expensed.
| 7. | Change in Estimate |
As of December 31, 2004, the Partnership held two vacant properties. In June 2004, the leases on these properties (for which rental payments were over eighteen months past due), along with the rights to pursue remedies against the tenant and all Guarantors, were terminated as the Partnership entered into a Settlement Agreement with the former tenants and Guarantors. Under that Settlement Agreement, the Partnership received $100,000 as full and final payment from all parties involved. The remaining receivable of $277,000 associated with these leases was written off as bad debt expense in 2004.
| 8. | Subsequent Events |
The real property located in Riverdale, Georgia was sold on January 22, 2007 pursuant to a contract of sale which was executed on September 12, 2006. In connection with the sale, the Partnership terminated the lease with Blockbuster Entertainment Corp on November 30, 2006. The property was sold for a purchase price of $900,000.
The financing lease in Plano, Texas was sold on February 8, 2007 to an affiliate of the Partnership pursuant to a contract of sale which was executed on December 18, 2006 for a purchase price of $900,000. On November 8, 2004, the limited partners approved an amendment to the Partnership Agreement to permit, on a limited basis, the sale of Partnership assets to affiliates in connection with the dissolution, liquidation and winding up of the Partnership. This transaction complies with the requirements of the amendment.
| 9. | Quarterly Results of Operations (Unaudited) |
The following is a summary of the Partnership’s unaudited quarterly results of operations for the period from January 1, 2006 through December 18, 2006 and for the year ended December 31, 2005:
| Period | ||||||||||||||||
| Three Months Ended | October 1, to | |||||||||||||||
| March 31, | June 30, | September 30, | December 18, | |||||||||||||
| 2006 | 2006 | 2006 | 2006 | |||||||||||||
| Total revenues from discontinued operations | 162,833 | 150,866 | 120,897 | 51,497 | ||||||||||||
| Income from discontinued operations | 65,916 | (269,029 | ) | (469,836 | ) | (62,559 | ) | |||||||||
| Other income from discontinued operations | 9,297 | 233,330 | 283,742 | 3,927 | ||||||||||||
| Net income | 75,213 | (35,699 | ) | (186,094 | ) | (58,632 | ) | |||||||||
| Net income allocable to limited partner | 74,461 | (33,213 | ) | (181,756 | ) | (67,582 | ) | |||||||||
| Net income per limited partnership unit | 2.57 | $ | (1.15 | ) | (6.27 | ) | (2.33 | ) | ||||||||
| Year Ended December 31, 2005 | ||||||||||||||||
| 1st | 2nd | 3rd | 4th | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| Total revenues from discontinued operations | 736,405 | 604,656 | 264,808 | 163,499 | ||||||||||||
| Income from discontinued operations | 341,742 | (1,063,024 | ) | (201,353 | ) | 4,916 | ||||||||||
| Other income from discontinued operations | 2,347 | 3,247,260 | 1,600,265 | 35,331 | ||||||||||||
| Net income | 344,089 | 2,184,236 | 1,398,912 | 40,247 | ||||||||||||
| Net income allocable to limited partner | 340,648 | 2,162,236 | 1,396,850 | 58,716 | ||||||||||||
| Net income per limited partnership unit | 11.76 | 74.63 | 48.21 | 2.02 | ||||||||||||
As discussed in Note 1, the Partnership adopted the liquidation basis of accounting as of December 18, 2006. Prior to that date, the Partnership’s financial statements are presented on the going concern basis of accounting.
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SCHEDULE III
PROPERTIES AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2006
PROPERTIES AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2006
| Gross Amount | ||||||||||||||||||||||||||||||||||||||||
| Decrease | At Which | |||||||||||||||||||||||||||||||||||||||
| due to | Carried At | Date of | ||||||||||||||||||||||||||||||||||||||
| Type of | State | Initial Cost | Impairment | Close | Accumulated | Acquisition/ | Acquisition/ | |||||||||||||||||||||||||||||||||
| Concept | Property | Location | Encumbrances | To Company | Charges | Of Period | Depreciation | Construction | Construction | Depreciation | ||||||||||||||||||||||||||||||
| Vacant | Retail | GA | — | 1,170,000 | (95,450 | ) | 1,074,550 | 182,350 | 1997 | Acquisition | 40 Years | |||||||||||||||||||||||||||||
Total Properties | $ | 1,170,000 | $ | (95,450 | ) | $ | 1,074,550 | $ | 182,350 | |||||||||||||||||||||||||||||||
Notes:
The following schedule of real estate assets and accumulated depreciation is presented on the going concern basis of accounting at historical estimates:
| 2006 | 2005 | |||||||
| Balance, beginning of year | $ | 4,920,180 | $ | 28,240,688 | ||||
| Acquisitions | — | — | ||||||
| Dispositions | (3,362,620 | ) | (23,320,508 | ) | ||||
| Decrease due to impairment charges | (483,010 | ) | — | |||||
| Balance, end of year | $ | 1,074,550 | $ | 4,920,180 | ||||
The changes in accumulated depreciation for the years ended December 31, 2006 and 2005 are as follows:
| 2006 | 2005 | |||||||
| Balance, beginning of year | $ | 624,723 | $ | 2,335,649 | ||||
| Depreciation expense | 54,218 | 80,407 | ||||||
| Dispositions | (496,591 | ) | (1,791,333 | ) | ||||
| Balance, end of year | $ | 182,350 | $ | 624,723 | ||||
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