Captec Franchise Capital Partners LP Iii 10QSB 2002 Q1 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 March 31, 2002

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         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:
Item 1. Financial Statements:
	Balance Sheets, March 31, 2002 and December 31, 2001
	Statement of Operations for the three months ended March 31, 2002 and 2001
	Statement of Changes in Partners’ Capital for the three months ended March 31, 2002
	Statement of Cash Flows for the three months ended March 31, 2002 and 2001
	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 Sheets, March 31, 2002 and December 31, 2001	3
	Statement of Operations for the three months ended March 31, 2002 and 2001	4
	Statement of Changes in Partners’ Capital for the three months ended March 31, 2002	5
	Statement of Cash Flows for the three months ended March 31, 2002 and 2001	6
	Notes to Financial Statements	7 — 8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9 — 10
PART II	OTHER INFORMATION Other Information	11 — 12
SIGNATURES		13

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Captec Franchise Capital Partners L.P. III
Balance Sheets

					March 31,		December 31,
					2002		2001
					(Unaudited)
				Assets
Cash and cash equivalents					$	373,427	$	781,658
Restricted cash						434,282		387,302
Investment in leases:
	Operating leases, net					17,495,667		17,565,762
	Financing leases, net					1,048,945		1,111,307
	Impaired financing leases, net					12,693		48,693
Accounts receivable						69,164		60,401
Unbilled rent, net						1,223,656		1,190,584
Due from related parties						9,033		5,524
Deferred financing costs, net						322,589		334,536
		Total assets			$	20,989,456	$	21,485,767
			Liabilities and Partners’ Capital
Liabilities:
	Notes payable				$	7,999,398	$	8,042,570
	Accounts payable and accrued expenses					143,921		161,935
	Due to related parties					2,176		15,026
	Security deposits held on leases					45,607		45,607
		Total liabilities				8,191,102		8,265,138
Partners’ capital:
Limited partners’ capital accounts						12,763,386		13,188,343
General partner’s capital accounts						34,968		32,286
		Total partners’ capital				12,798,354		13,220,629
		Total liabilities and partners’ capital			$	20,989,456	$	21,485,767

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
for the three months ended March 31, 2002 and 2001
(Unaudited)

			2002		2001
Operating revenue:
	Rental income		$	552,796	$	540,993
	Finance income			20,369		36,969
		Total operating revenue		573,165		577,962
Operating costs and expenses:
	Interest expense			180,275		183,631
	Depreciation			70,095		73,737
	General and administrative			19,513		16,888
	Provision for unbilled rent			—		92,908
	Provision for impaired financing leases			36,000		77,000
		Total operating costs and expenses		305,883		444,164
		Income from operations		267,282		133,798
Other income (expense):
	Gain on sale of equipment			—		9,086
	Interest and other income			—		1,733
	Other			887		—
		Total other income (expense)		887		10,819
Net income				268,169		144,617
Net income allocable to general partner				2,682		1,446
Net income allocable to limited partners			$	265,487	$	143,171
Net income per limited partnership unit			$	13.42	$	7.22
Weighted average number of limited partnership units outstanding				19,776		19,842

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 three months ended March 31, 2002
(Unaudited)

	Limited		Limited			General		Total
	Partners'		Partners'			Partner's		Partners'
	Units		Accounts			Accounts		Capital
Balance, December 31, 2001		19,776	$	13,188,344		$	32,286	$	13,220,630
Distributions — ($34.91 per unit)				(690,446	)		—		(690,446	)
Net income		—		265,487			2,682		268,169
Balance, March 31, 2002		19,776	$	12,763,386		$	34,968	$	12,798,354

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 three months ended March 31, 2002 and 2001
(Unaudited)

			2002			2001
Cash flows from operating activities:
	Net Income		$	268,169		$	144,617
	Adjustments to net income:
		Depreciation		70,095			73,737
		Amortization of debt issuance costs		11,948			11,948
		Gain on sale of equipment		—			(9,085	)
		Provision for credit losses		36,000			77,000
		(Increase) decrease in unbilled rent		(33,072	)		37,016
		(Increase) decrease in accounts receivable		(8,763	)		4,289
		(Decrease) increase in accounts payable and accrued expenses		(18,013	)		24,381
		Increase in restricted cash		(46,980	)		(32,551	)
		Increase in due from related parties		(3,509	)		(1,533	)
		Decrease in due to related parties		(12,850	)		(7	)
Net cash provided by operating activities				263,025			329,812
Cash flows from investing activities:
	Proceeds from sale of equipment			—			267,745
	Principal payments on financing leases			62,362			74,344
Net cash provided by investing activities				62,362			342,089
Cash flows from financing activities:
	Repayments of notes payable			(43,172	)		(10,192	)
	Distributions to limited partners			(690,446	)		(448,189	)
	Distributions to general partner			—			—
Net cash used in financing activities				(733,618	)		(458,381	)
Net (decrease) increase in cash and cash equivalents				(408,231	)		213,520
Cash and cash equivalents, beginning of period				781,658			95,992
Cash and cash equivalents, end of period			$	373,427		$	309,512

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” basis, primarily to operators of national and regional franchised businesses.
	The general partners 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, 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. In December 2001, Captec Net Lease Realty, Inc. merged with and into Commercial Net Lease Realty, Inc. In connection with the merger, Commercial Net Lease agreed to sell and assign its general partnership interest in the Partnership to GP3 Asset Acquisition, LLC, which is wholly-owned by Mr Beach and is an affiliate of Captec. The Limited Partners have consented to the transfer of the general partner interest and the consent of the Partnership’s secured lender is pending. In accordance with the terms of an agreement with Commercial Net Lease, immediately upon the closing of the merger and until such time as lender consent is obtained, GP3 Asset Acquisition has assumed all of the General Partners obligations and liabilities prescribed under the terms of the Partnership Agreement.
	The Partnership commenced a public offering of 20,000 limited partnership interests (“units”), priced at $1,000 per unit, on August 12, 1994. The Partnership commenced operations on January 24, 1995. In August 1996 the Partnership had accepted subscriptions for all 20,000 units. In 1999 the Partnership repurchased a total of 79 units for $59,625, or approximately $755 per unit. During 2000 the Partnership repurchased a total of 42 units for $28,432, or approximately $677 per unit. In 2001 the Partnership repurchased a total of 66 units for $42,839, or approximately $649 per unit. The repurchase of the units was completed pursuant to the terms of the Repurchase Plan set forth in the Partnership’s Prospectus. At March 31, 2002, the Partnership had 19,776 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 March 31, 2002, the statements of operations and cash flows for the periods ending March 31, 2002 and March 31, 2001 and the statement of changes in partners’ capital for the period ending March 31, 2002 have not been audited. In the opinion of 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, 2001 filed with the United States Securities and Exchange Commission on March 29, 2002.

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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
NOTES TO FINANCIAL STATEMENTS

2.	LAND AND BUILDING SUBJECT TO OPERATING LEASES:
	The net investment in operating leases as of March 31, 2002 is comprised of the following:

Land	$	7,695,896
Building and improvements		11,214,344
		18,910,240
Less accumulated depreciation		(1,414,573	)
Total	$	17,495,667

3.	NET INVESTMENT IN FINANCING LEASES:
	The net investment in financing leases as of March 31, 2002 is comprised of the following:

Minimum lease payments to be received	$	1,148,034
Estimated residual value		89,678
Gross investment in financing leases		1,237,712
Less unearned income		(163,708	)
Less direct origination costs		(25,059	)
Net investment in financing leases	$	1,048,945

4.	NOTES PAYABLE:
	In November 1998, the Partnership entered into a $6.2 million term note. The note has a ten-year term, is collaterized by certain properties subject to operating leases, and bears interest at a rate of 8.37% per annum.
	In March 1999, the Partnership entered into an additional $2.0 million term note. The note has a ten-year term, is collaterized by certain properties subject to operating leases, and bears interest at a rate of 8.5% per annum.
	Debt issuance costs of approximately $477,909 in aggregate were incurred in connection with the issuance of the notes, and are being amortized using the straight-line method over the ten-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

This Quarterly Report or Form 10-Q contains “forward-looking statements” which represent the Partnership’s beliefs or expectations with respect to matters arising in the future. Any statements on the Form 10-Q which are not statements of historical fact may be deemed to be forward-looking statements. When used in this discussion, the words such as “intends”, “anticipates”, “expects”, “will”, “could”, “estimate” 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, some of which are beyond the Partnership’s control, 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. Undue reliance should not be placed on these forward-looking statements which 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 March 31, 2002.During the three months ended March 31, 2002 total operating revenue was approximately $573,000, nearly unchanged as compared to $578,000 for the three months ended March 31, 2001.

Operating expenses decreased 31.1% to approximately $306,000 for the three months ended March 31, 2002, as compared to approximately $444,000 for the three months ended March 31, 2001. The decrease is principally due to a decline of approximately $134,000 in non-recurring charges related to reserves for defaults on operating and financing leases that occurred in 2001.

Other income for the three months ended March 31, 2002 declined by approximately $10,000 as compared with the same period in 2001, principally due to the fact that there were no asset sales in the 2002 period. There was a gain of approximately $9,000 in the 2001 quarter from the sale of equipment.

As a result of the foregoing, the Partnership’s net income increased 85.4% to approximately $268,000 for the three months ended March 31, 2002 as compared to approximately $145,000 for the three months ended March 31, 2001.

Distributions.The Partnership announced first quarter distributions of $340,000 of which $298,000 was distributed to its Limited Partners on April 15, 2002. The balance of $42,000 was distributed to those partners who elected to receive distributions on a monthly basis on February 15, 2002 and March 15, 2002.

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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 ten-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 the 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 March 31, 2002, the Partnership had a portfolio of 14 properties located in 10 states, with a cost basis of 19.0 million, 8 performing equipment leases with an original investment of $2.3 million and two repossessed equipment packages related to defaulted equipment contracts. The Partnership’s investment in repossessed equipment packages is approximately $13,000, which is net of an allowance of approximately $445,000.

The Partnership expects that only limited amounts of liquid assets will be required for existing properties and equipment since its property and equipment leases require lessees to pay all taxes and assessments, maintenance and repairs and insurance premiums, including casualty insurance thereby minimizing the Partnership’s operating expenses and capital requirements. The general partner expects that the cash flow to be generated by the Partnership’s properties and equipment will provide adequate liquidity and capital resources to pay operating expenses and provide distributions to Limited Partners.

10

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 merged with and into Commercial Net Lease effective on December 1, 2001. In connection with the merger, Commercial Net Lease agreed to sell and assign its general partnership interest in the Partnership to GP3 Asset Acquisition. In order to complete this transaction, the consent of a majority in interest of the Limited Partners and the Partnership’s lender is required. Effective January 15, 2002, the requisite Limited Partner consents to the transfer of the general partnership interest to GP3 Asset Acquisition were obtained and the consent solicitation was closed. Lender consent is still pending.

11

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 March 31, 2002.

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SIGNATURES

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

	CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III By: GP3 Asset Acquisition, LLC Its Manager
By:	/s/ Patrick L. Beach Patrick L Beach Sole Member
Date:	May 13, 2002

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