Captec Franchise Capital Partners LP Iii 10QSB 2000 Q3 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-QSB

	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2000
	OR
	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number: 33-77510-C

CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

38-3160141
(IRS Employer Identification Number)

24 Frank Lloyd Wright Drive, Lobby L, 4th Floor
P.O. Box 544, Ann Arbor, Michigan 48106-0544
(Address of principal executive offices, including zip code)

(734) 994-5505
(Issuer’s telephone number)

Not Applicable
(Former name, former address and former fiscal year, if changed since last year)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by court: Not applicable

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Not applicable

Transitional Small Business Disclosure Format (check one) Yes No

TABLE OF CONTENTS

Financial Data Schedule

CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

Index to Form 10-QSB

Item No.		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Balance Sheet, September 30, 2000 and December 31, 1999		3
	Statement of Operations for the three and nine months ended September 30, 2000 and 1999		4
	Statement of Changes in Partners’ Capital for the nine months ended September 30, 2000		5
	Statement of Cash Flows for the nine months ended September 30, 2000 and 1999		6
	Notes to Financial Statements		7–8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
			9–11
PART II	OTHER INFORMATION Other Information		12–13
SIGNATURES			14

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Captec Franchise Capital Partners L.P. III

Balance Sheet

					(Unaudited)
					September 30,		December 31,
					2000		1999
				Assets
Cash and cash equivalents					$	233,849	$	327,903
Restricted cash						308,565		266,452
Investment in property under leases:
	Operating leases, net					18,883,679		19,104,889
	Financing leases, net					2,165,080		2,574,417
	Impaired financing leases, net					27,492		27,492
Accounts receivable						5,838		56,405
Unbilled rent, net						998,976		816,948
Due from related parties						14,850		17,184
Deferred financing costs, net						394,275		430,118
		Total assets			$	23,032,604	$	23,621,808
			Liabilities & Partners’ Capital
Liabilities:
	Notes payable				$	8,194,000	$	8,194,000
	Accounts payable and accrued expenses					56,549		73,796
	Due to related parties					16,872		40,214
	Security deposits held on leases					54,774		54,774
		Total liabilities				8,322,195		8,362,784
Partners’ capital:
Limited partners’ capital accounts						14,686,693		15,240,812
General partner’s capital accounts						23,716		18,212
		Total partners’ capital				14,710,409		15,259,024
		Total liabilities & partners’ capital			$	23,032,604	$	23,621,808

The accompanying notes are an integral part of the financial statements.

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Captec Franchise Capital Partners L.P. III

Statement of Operations

(Unaudited)

			Three months ended				Nine months ended
			September 30,				September 30,
			2000		1999		2000		1999
Operating revenue:
	Rental income		$	573,732	$	571,628	$	1,732,360	$	1,704,590
	Finance income			48,158		66,116		154,887		143,262
		Total operating revenue		621,890		637,744		1,887,247		1,847,852
Operating costs and expenses:
	Interest expense			179,276		183,920		552,166		510,430
	Depreciation			73,737		72,870		221,210		217,041
	General and administrative			19,955		13,352		51,964		56,497
		Total operating costs and expenses		272,968		270,142		825,340		783,968
		Income from operations		348,922		367,602		1,061,907		1,063,884
Other income (expense):
	Interest and other income			3,150		1,685		6,059		9,998
	Gain on sale of equipment			—		6,528		15,000		1,012
	Loss on sale of real estate			—		—		—		(159,422	)
		Total other income (expense)		3,150		8,213		21,059		(148,412	)
Net income				352,072		375,815		1,082,966		915,472
Net income allocable to general partner				3,521		3,758		10,830		9,155
Net income allocable to limited partners			$	348,551	$	372,057	$	1,072,136	$	906,317
Net income per limited partnership unit			$	17.53	$	18.64	$	53.92	$	45.40
Weighted average number of limited partnership units outstanding				19,884		19,963		19,884		19,963

The accompanying notes are an integral part of the financial statements.

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Captec Franchise Capital Partners L.P. III

Statement of Changes in Partners’ Capital
for the nine months ended September 30, 2000

(Unaudited)

	Limited		Limited			General			Total
	Partners’		Partners’			Partner’s			Partners’
	Units		Accounts			Accounts			Capital
Balance, December 31, 1999		19,884	$	15,240,812		$	18,212		$	15,259,024
Distributions — ($81.79 per unit)		—		(1,626,255	)		(5,326	)		(1,631,581	)
Net income		—		1,072,136			10,830			1,082,966
Balance, September 30, 2000		19,884	$	14,686,693		$	23,716			14,710,409

The accompanying notes are an integral part of the financial statements.

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Captec Franchise Capital Partners L.P. III

Statement of Cash Flows
for the nine months ended September 30, 2000 and 1999

(Unaudited)

			2000			1999
Cash flows from operating activities:
	Net Income		$	1,082,966		$	915,472
	Adjustments to net income:
		Depreciation		221,210			217,041
		Amortization of debt issuance costs		35,843			35,538
		Gain on sale of equipment		(15,000	)		(1,012	)
		Loss on sale of real estate		—			159,422
		Increase in unbilled rent		(182,028	)		(203,784	)
		Decrease in accounts receivable		50,567			57,373
		Decrease in security deposits		—			(4,555	)
		Decrease in accounts payable and accrued expenses		(17,247	)		(78,751	)
		Increase in restricted cash		(42,113	)		(22,624	)
		Decrease in due from related parties		2,334			128,118
		Decrease in due to related parties		(23,342	)		(32,551	)
Net cash provided by operating activities				1,113,190			1,169,687
Cash flows from investing activities:
	Purchase and construction advances for properties subject to operating leases			—			(1,127,119	)
	Proceeds from disposition of properties subject to operating leases			—			912,128
	Proceeds from sale of equipment			75,000			98,389
	Purchase of equipment for financing leases			—			(1,955,999	)
	Principal payments on financing leases			349,337			401,568
Net cash used in investing activities				424,337			(1,671,033	)
Cash flows from financing activities:
	Proceeds from issuance of notes payable			—			1,994,000
	Debt issuance costs			—			(83,771	)
	Distributions to limited partners			(1,626,255	)		(1,473,986	)
	Distributions to general partner			(5,326	)		(35,663	)
Net cash provided by financing activities				(1,631,581	)		400,580
Net (decrease) increase in cash and cash equivalents				(94,054	)		(100,766	)
Cash and cash equivalents, beginning of period				327,903			493,136
Cash and cash equivalents, end of period			$	233,849		$	392,370

The accompanying notes are an integral part of the financial statements.

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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

NOTES TO FINANCIAL STATEMENTS

1. THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:

Captec Franchise Capital Partners L.P. III (the “Partnership”), a Delaware limited partnership, was formed on February 18, 1994 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 and nationally franchised fast food and family style restaurants, as well as other national and regional retail chains. The general partners of the Partnership upon formation of the Partnership were Captec Franchise Capital Corporation III (the “Corporation”), a wholly owned subsidiary of Captec Financial Group, Inc. (“Captec”), and Patrick L. Beach, an individual, hereinafter collectively referred to as the Sponsor. Patrick L. Beach is also the Chairman of the Board of Directors, President and Chief Executive Officer of the Corporation and Captec. In August, 1998 the general partnership interest of the Partnership was acquired by Captec Net Lease Realty, Inc., an affiliate of Captec, for $1,483,000.

The Partnership commenced a public offering of 20,000 limited partnership interest units on August 12, 1994 and reached final funding in August, 1996. Net proceeds after offering expenses were approximately $17.4 million. During 1997, the Partnership repurchased a total of 37 units for $31,450, or 85% of the investor’s capital account. An additional 79 units were repurchased during 1999 for $59,625, or 75% of the investor’s capital account. The repurchase of the units was completed pursuant to the terms of the Repurchase Plan set forth in the Partnership’s Prospectus. At September 30, 2000, the Partnership had 19,884 units issued and outstanding.

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.

The balance sheet of the Partnership as of September 30, 2000 and the statements of operations and cash flows for the periods ending September 30, 2000 and 1999 have not been audited. In the opinion of the Management, these unaudited financial statements contain all adjustments necessary to present fairly the financial position and results of operations and cash flows of the Partnership for the periods then ended. Results of operations for the interim periods are not necessarily indicative of results for the full year. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Partnership’s annual report on Form 10-KSB for the year ended December 31, 1999 filed with the United States Securities and Exchange Commission on March 30, 2000.

2. LAND AND BUILDING SUBJECT TO OPERATING LEASES:

The net investment in operating leases as of September 30, 2000 is comprised of the following:

Land	$	8,163,346
Building and improvements		11,796,894
		19,960,240
Less accumulated depreciation		(1,076,561	)
Total	$	18,883,679

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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

NOTES TO FINANCIAL STATEMENTS

3. NET INVESTMENT IN FINANCING LEASES:

The net investment in financing leases as of September 30, 2000 is comprised of the following:

Minimum lease payments to be received	$	2,551,019
Estimated residual value		117,101
Gross investment in financing leases		2,668,120
Less unearned income		(416,678	)
Less direct origination costs		( 86,362	)
Net investment in financing leases	$	2,165,080

4. NOTES PAYABLE:

In November, 1998, the Partnership entered into a $6.2 million term note, the proceeds of which were used to acquire additional properties. The note has a 10-year term, is collaterized by certain properties subject to operating leases, and bears an interest rate of 8.37% per annum.

In March, 1999, the Partnership entered into an additional $2.0 million term note. The note also has a 10-year term, is collaterized by certain properties subject to operating leases, and bears an interest rate of 8.5% per annum.

Debt issuance costs of approximately $478,000 in aggregate were incurred in connection with the issuance of the notes, and are being amortized using the straight-line method over the 10-year term.

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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When used in this discussion, the words, “intends”, “anticipates”, “expects”, and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Such risks and uncertainties include the following: (i) a tenant may default in making rent payments, (ii) a fire or other casualty may interrupt the cash flow stream from a property, (iii) the properties may not be able to be leased at the assumed rental rates, (iv) unexpected expenses may be incurred in the ownership of the properties, and (v) properties may not be able to be sold at the presently anticipated prices and times.

As a result of these and other factors, the Partnership may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect its business, financial condition and operating results. These forward-looking statements speak only as of the date hereof. The Partnership undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2000. During the three months ended September 30, 2000 total operating revenue decreased 2.5% to approximately $622,000 as compared to approximately $638,000 for the three months ended September 30, 1999. Rental revenue from operating leases for the three months ended September 30, 2000 increased to approximately $574,000 as compared to approximately $572,000 for the three months ended September 30, 1999. Earned income from financing leases for the three months ended September 30, 2000 decreased 27.2% to approximately $48,000 as compared to approximately $66,000 for the three months ended September 30, 1999 as a result of the disposition of one equipment lease in August, 1999 and one equipment lease in April, 2000 as well as amortization of principal balances.

Operating expenses were approximately $273,000 for the three months ended September 30, 2000 as compared to approximately $270,000 for the three months ended September 30, 1999. Total operating expenses for the three months ended September 30, 2000 is comprised of approximately $74,000 of depreciation expense, approximately $20,000 of general and administrative expenses, and approximately $179,000 of interest expense.

Other income for the three months ended September 30, 2000 decreased to approximately $3,000 as compared to approximately $8,000 for the three months ended September 30, 1999. The decrease in other income is primarily due to a gain on the sale of equipment during the three months ended September 30, 1999.

As a result of the foregoing, the Partnership’s net income decreased 6.3% to approximately $352,000 for the three months ended September 30, 2000 as compared to approximately $376,000 for the three months ended September 30, 1999.

Nine Months Ended September 30, 2000. During the nine months ended September 30, 2000 total operating revenue increased 2.1% to $1.89 million as compared to $1.85 million for the nine months ended September 30, 1999. Rental revenue from operating leases for the nine months ended September 30, 2000 increased 1.6% to $1.73 million as compared to $1.70 million for the nine months ended September 30, 1999 primarily from the benefit of a full period of rental revenue from properties acquired and leased in

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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

PART I – FINANCIAL INFORMATION

preceding periods. Earned income from financing leases for the nine months ended September 30, 2000 increased 8% to approximately $155,000 as compared to approximately $143,000 for the nine months ended September 30, 1999 as a result of a full period of financing income on the seven equipment leases acquired during 1999 offset by the loss of income from one equipment lease sold in August, 1999 and amortization of principal balances.

Operating expenses were approximately $825,000 for the nine months ended September 30, 2000 as compared to approximately $784,000 for the nine months ended September 30, 1999. Total operating expenses for the nine months ended September 30, 2000 is comprised of approximately $221,000 of depreciation expense, approximately $52,000 of general and administrative expenses, and approximately $552,000 of interest expense. The increase in operating expenses for the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999 is primarily due to additional interest expense for the note payable issued in March, 1999.

Other income for the nine months ended September 30, 2000 is comprised primarily of a $15,000 gain on the sale of equipment and approximately $6,000 of interest and other income. Other expense for the nine months ended September 30, 1999 is comprised primarily of a net loss of approximately $158,000 on the disposition of vacant property and impaired equipment leases, offset by approximately $10,000 in interest and other income.

As a result of the foregoing, the Partnership’s net income increased 18% to $1.1 million for the nine months ended September 30, 2000 as compared to approximately $915,000 for the nine months ended September 30, 1999.

Distributions. The Partnership announced third quarter distributions of $565,000, including net sale proceeds of $75,000, of which $493,871 was distributed to its Limited Partners on October 15, 2000. The balance of $71,129 was distributed to those partners who elected to receive distributions on a monthly basis on August 15, 2000 and September 15, 2000.

LIQUIDITY AND CAPITAL COMMITMENTS

      The Partnership commenced the offering of up to 20,000 limited partnership units registered under the Securities Act of 1933, as amended, by means of a Registration Statement which was declared effective by the Securities and Exchange Commission on August 12, 1994. The offering reached final funding on August 12, 1996 with subscriptions for the entire offering of 20,000 units. Net proceeds after offering expenses were approximately $17.4 million.

In November, 1998 the Partnership entered into a $6.2 million term note. The Partnership entered into an additional $2.0 million term note in March, 1999. Proceeds from the notes were used to acquire additional properties. The notes have a 10-year term, are collaterized by certain properties subject to operating leases, and bear interest at rates ranging from 8.37 to 8.5% per annum. Debt issuance costs of approximately $478,000 in aggregate incurred in connection with the issuance of the notes are being amortized into interest expense over the life of the notes using the straight-line method.

At September 30, 2000 the Partnership had a portfolio of 15 properties located in 10 states, with a cost of $20.0 million, and 10 performing equipment leases with an original investment of $2.9 million. As of September 30, 2000 the Partnership’s investments were allocated approximately 87% to properties and 13% to equipment.

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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

PART I – FINANCIAL INFORMATION

The Partnership expects to require limited amounts of liquid assets since the properties and equipment leases require the lessees to pay all taxes and assessments, maintenance and repair items (except, with respect to double net properties, costs associated with maintenance and repair of the exterior walls and roof of the property) and insurance premiums, including casualty insurance. The general partners expect that the cash flow to be generated by the Partnership’s properties and equipment will be adequate to pay operating expenses and provide distributions to Limited Partners.

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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS. None.

ITEM 2. CHANGES IN SECURITIES. None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.

ITEM 5. OTHER INFORMATION. None.

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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

PART II – OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

      (a) The following exhibits are included herein or incorporated by reference:

Number	Exhibit
4	Agreement of Limited Partnership of Registrant. (Incorporated by reference from Exhibit B of the final Prospectus dated August 12, 1994, as supplemented and filed with the Securities and Exchange Commission, SEC File No. 33-77510C)
4.1	Amended Agreement of Limited Partnership of Registrant. (Incorporated by reference to the corresponding exhibit in the Registrant’s Form 10-K for the year ended December 31, 1998)
10.1	Promissory Note dated November 28, 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 year ended December 31, 1998)
10.2	Promissory Note dated March 31, 1999 between Registrant and National Realty Funding L.C. (Incorporated by reference to the corresponding exhibit in the Registrant’s Form 10-QSB for the quarter ended March 31, 1999)
27	Financial Data Schedule
99.1	Pages 12-16 of the final Prospectus dated August 12, 1994, as supplemented. (Incorporated by reference from the final Prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) promulgated under the Securities Act of 1933, as amended. SEC File No. 33-77510C)

      b) Reports on Form 8-K:

      There were no reports filed on Form 8-K for the quarter ended September 30, 2000.

13

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

By:	Captec Net Lease Realty, Inc. Managing General Partner of Captec Franchise Capital Partners L.P. III
By:	/s/ W. Ross Martin W. Ross Martin Executive Vice President, Chief Financial Officer
Date:	November 14, 2000

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Exhibit Index

Exhibit No.	Description
27	Financial Data Schedule