Captec Franchise Capital Partners LP Iii 10QSB 2001 Q2 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    June 30, 2001

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) as 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       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

Part I Financial Information
Item 1. Financial Statements
	Balance Sheet June 30, 2001 and December 31, 2000
	Statement of Operations for the three and six months ended June 30, 2001 and 2000
	Statement of Changes in Partners' Capital for the six months ended June 30, 2001
	Statement of Cash Flows for the six months ended June 30, 2001 and 2000
	Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Part II Other Information
	Other Information
Signatures

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, June 30, 2001 and December 31, 2000		3
	Statement of Operations for the three and six months ended June 30, 2001 and 2000		4
	Statement of Changes in Partners' Capital for the six months ended June 30, 2001		5
	Statement of Cash Flows for the six months
	ended June 30, 2001 and 2000		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)
					June 30,		December 31,
					2001		2000
				Assets
Cash and cash equivalents					$	109,061	$	95,992
Restricted cash						312,562		269,437
Investment in property under leases:
	Operating leases, net					18,662,468		18,809,942
	Financing leases, net					1,331,403		2,049,441
	Impaired financing leases, net					251,555		27,492
Accounts receivable						86,722		60,198
Unbilled rent, net						1,087,843		1,074,434
Due from related parties						8,737		—
Deferred financing costs, net						358,432		382,327
		Total assets			$	22,208,783	$	22,769,263
			Liabilities & Partners’ Capital
Liabilities:
	Notes payable				$	8,146,422	$	8,194,000
	Accounts payable and accrued expenses					132,176		83,147
	Due to related parties					690		3,405
	Security deposits held on leases					54,774		54,774
		Total liabilities				8,334,062		8,335,326
Partners’ capital:
Limited partners’ capital accounts						13,843,738		14,407,068
General partner’s capital accounts						30,983		26,869
		Total partners’ capital				13,874,721		14,433,937
		Total liabilities & partners’ capital			$	22,208,783	$	22,769,263

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

3

Captec Franchise Capital Partners L.P. III
Statement of Operations
(Unaudited)

			Three months ended					Six months ended
			June 30,					June 30,
			2001			2000		2001			2000
Operating revenue:
	Rental income		$	540,993		$	584,084	$	1,081,987		$	1,158,628
	Finance income			31,202			51,266		68,171			106,730
		Total operating revenue		572,195			635,350		1,150,158			1,265,358
Operating costs and expenses:
	Interest expense			182,991			186,445		366,623			372,890
	Depreciation			73,737			73,737		147,474			147,474
	General and administrative			24,079			11,514		40,967			32,009
	Provision for unbilled rent			—			—		77,000			—
	Provision for impaired financing leases			—			—		92,908			—
		Total operating costs and expenses		280,807			271,696		724,972			552,373
		Income from operations		291,388			363,654		425,186			712,985
Other income (expense):
	Interest and other income			2,792			3,271		4,525			2,910
	(Loss) gain on sale of equipment			(27,357	)		15,000		(18,271	)		15,000
		Total other income (expense)		(24,565	)		18,271		(13,746	)		17,910
Net income				266,823			381,925		411,440			730,895
Net income allocable to general partner				2,668			3,819		4,114			7,309
Net income allocable to limited partners			$	264,155		$	378,106	$	407,326		$	723,586
Net income per limited partnership unit			$	13.31		$	19.02	$	20.53		$	36.39
Weighted average number of limited partnership units outstanding				19,842			19,884		19,842			19,884

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

4

Captec Franchise Capital Partners L.P. III
Statement of Changes in Partners’ Capital
for the six months ended June 30, 2001
(Unaudited)

	Limited		Limited			General		Total
	Partners’		Partners’			Partner’s		Partners’
	Units		Accounts			Accounts		Capital
Balance, December 31, 2000		19,842	$	14,407,068		$	26,869	$	14,433,937
Distributions — ($48.92 per unit)		—		(970,656	)		—		(970,656	)
Net income		—		407,326			4,114		411,440
Balance, June 30, 2001		19,842	$	13,843,738		$	30,983	$	13,874,721

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

5

Captec Franchise Capital Partners L.P. III
Statement of Cash Flows
for the six months ended June 30, 2001 and 2000
(Unaudited)

			2001			2000
Cash flows from operating activities:
	Net Income		$	411,440		$	730,895
	Adjustments to net income:
		Depreciation		147,474			147,474
		Amortization of debt issuance costs		23,895			28,675
		Loss (gain) on sale of equipment		18,271			(15,000	)
		Provision for credit losses		77,000			—
		Increase in unbilled rent		(13,409	)		(129,739	)
		(Increase) decrease in accounts receivable		(26,524	)		47,519
		Increase (decrease) in accounts payable and accrued expenses		49,029			(12,527	)
		(Increase) decrease in restricted cash		(43,125	)		4,868
		(Increase) decrease in due from related parties		(8,737	)		4,352
		Decrease in due to related parties		(2,715	)		(22,800	)
Net cash provided by operating activities				632,599			783,717
Cash flows from investing activities:
	Proceeds from sale of equipment			267,745			75,000
	Principal payments on financing leases			130,959			252,508
Net cash provided by investing activities				398,704			327,508
Cash flows from financing activities:
	Repayments of notes payable			(47,578	)		—
	Distributions to limited partners			(970,656	)		(1,011,726	)
	Distributions to general partner			—			(5,326	)
Net cash used in financing activities				(1,018,234	)		(1,017,052	)
Net increase in cash and cash equivalents				13,069			94,173
Cash and cash equivalents, beginning of period				95,992			327,903
Cash and cash equivalents, end of period			$	109,061		$	422,076

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. During 1999, the Partnership repurchased 79 units for $59,625, or 75% of the investor’s capital account. An additional 42 Units were repurchased in December 2000 for $28,432, or 69% of the investorÎs 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 June 30, 2001, the Partnership had 19,842 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 June 30, 2001 and the statements of operations and cash flows for the periods ending June 30, 2001 and 2000 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, 2000 filed with the United States Securities and Exchange Commission on March 30, 2001.
2.	LAND AND BUILDING SUBJECT TO OPERATING LEASES:
	The net investment in operating leases as of June 30, 2001 is comprised of the following:

Land	$	8,163,346
Building and improvements		11,796,894
		19,960,240
Less accumulated depreciation		(1,297,772	)
Total	$	18,662,468

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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 June 30, 2001 is comprised of the following:

Minimum lease payments to be received	$	1,492,946
Estimated residual value		89,678
Gross investment in financing leases		1,582,624
Less unearned income		(195,509	)
Less direct origination costs		(55,712	)
Net investment in financing leases	$	1,331,403

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 June 30, 2001.   During the three months ended June 30, 2001 total operating revenue decreased 9.9% to approximately $572,000 as compared to approximately $635,000 for the three months ended June 30, 2000. Rental revenue from operating leases for the three months ended June 30, 2001 decreased to approximately $541,000 as compared to approximately $584,000 for the three months ended June 30, 2000 due to the impairment of the Raleigh, North Carolina Boston Market property. Earned income from financing leases for the three months ended June 30, 2001 decreased 39.1% to approximately 31,000 as compared to approximately $51,000 for the three months ended June 30, 2000 as a result of the disposition of one equipment lease in January 2001 as well as amortization of principal balances.

Operating expenses were approximately $281,000 for the three months ended June 30, 2001, nearly unchanged as compared to approximately $272,000 for the three months ended June 30, 2000.

Other expense for the three months ended June 30, 2001 was approximately $25,000 as compared to other income of approximately $18,000 for the three months ended June 30, 2000. The other expense is primarily due to a loss on the sale of equipment during the three months ended June 30, 2001. The other income for the three months ended June 30, 2000 is primarily due to a gain on the sale of equipment.

As a result of the foregoing, the Partnership’s net income decreased 30.1% to approximately $267,000 for the three months ended June 30, 2001 as compared to approximately $382,000 for the three months ended June 30, 2000.

Six Months Ended June 30, 2001.   During the six months ended June 30, 2001 total operating revenue decreased 9.1% to approximately $1,150,000 as compared to approximately $1,265,000 for the six months ended June 30, 2000. Rental revenue from operating leases for the six months ended June 30, 2001 decreased to approximately $1,082,000 as compared to approximately $1,159,000 for the six months ended June 30, 2000 due to the impairment of the Raleigh, North Carolina Boston Market property. Earned

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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART I — FINANCIAL INFORMATION

income from financing leases for the six months ended June 30, 2001 decreased 36.1% to approximately $68,000 as compared to approximately $107,000 for the six months ended June 30, 2000 as a result of the disposition of two equipment leases, one in April 2000 and the other in January 2001, as well as the amortization of principal balances.

Operating expenses were approximately $725,000 for the six months ended June 30, 2001, an increase of 31% as compared to approximately $552,000 for the six months ended June 30, 2000. The increase is principally due to a reserve for unbilled rent of approximately $93,000 and a reserve for impaired financing leases of $77,000, both of which were non-recurring charges incurred in the first quarter of 2001.

The reserve for unbilled rent is for the Raleigh, North Carolina Boston Market property, which was vacated by Platinum Properties in January 2001. The Partnership recognized a one-time charge of approximately $93,000 to write-off the unbilled rent related to this lease and is seeking a new tenant for this property.

The reserve for impaired financing leases relates to the equipment contract with Olajuwon Holdings, which has filed under Chapter 11 bankruptcy. The Partnership is in the process of selling the equipment and has reserved for a loss of $77,000, based upon the estimated proceeds expected to be realized from that sale.

Other expense for the six months ended June 30, 2001 was approximately $14,000 as compared to other income of approximately $18,000 for the six months ended June 30, 2000. The other expense is primarily due to a loss on the sale of equipment during the six months ended June 30, 2001. The other income for the six months ended June 30, 2000 is primarily due to a gain on the sale of equipment.

As a result of the foregoing, the Partnership’s net income decreased 43.7% to approximately $411,000 for the six months ended June 30, 2001 as compared to approximately $731,000 for the six months ended June 30, 2000. Exclusive of non-recurring items described above, the Partnership’s net income decreased approximately 20.5% for the six months ended June 30, 2001 as compared to the same period in 2000.

Distributions.   The Partnership announced second quarter distributions of $425,000, including net sale proceeds of $85,000, of which $353,719 was distributed to its Limited Partners on July 16, 2001. The balance of $71,281 was distributed to those partners who elected to receive distributions on a monthly basis on May 15, 2001 and June 15, 2001.

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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART I — FINANCIAL INFORMATION

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 June 30, 2001 the Partnership had a portfolio of 15 properties located in 10 states, with a cost of $20.0 million, and 8 performing equipment leases with an original investment of $2.3 million. As of June 30, 2001 the Partnership’s investments were allocated approximately 87% to properties and 13% to equipment.

In December of 2000, Platinum Properties, LLC abandoned the Boston Market property in Raleigh, North Carolina. Annualized rent prior to abandonment was approximately $124,000. The Partnership is seeking a new tenant for this property.

The Partnership has two impaired equipment leases at June 30, 2001, with a recorded investment of $482,392 offset by an impairment allowance of $230,837. The net investment in the impaired leases represent the estimated net proceeds that the Partnership expects to receive from the sale or re-leasing of these assets.

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.

11

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. Captec Net Lease Realty, Inc. (“CRRR”), the general partner of Captec Franchise Capital Partners L.P. III (the “Partnership”), has entered into a definitive merger agreement with Commercial Net Lease Realty, Inc. (NYSE: NNN). The proposed merger is expected to close in the fourth quarter of 2001. In connection with the merger, CRRR has agreed to sell its general partnership interest in the partnership to a wholly-owned subsidiary of CRC Acquisition LLC which is a Michigan liability company of which Patrick L. Beach, the Chairman of the Board of Directors and President and Chief Executive officer of CRRR, is the sole member. This will insure continuity of the management of the Partnership following the acquisition of CRRR by CNL pursuant to the merger.

In recognition of the above facts and to facilitate the transaction, an affiliate of Mr. Beach will purchase, immediately after the closing of the merger, certain non-real estate assets of CRRR and assume liabilities associated with those assets. The assets to be purchased by Mr. Beach include the general partner’s interest in the Partnership.

In order to complete this transition, the limited partners will need to consent to the transfer of the general partner interest to the affiliate of Mr. Beach. A proxy statement regarding this consent will be filed with the Securities and Exchange Commission. Once declared effective, the proxy statement will be mailed to all limited partners.

12

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)
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 June 30, 2001.

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:	August 14, 2001

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