Captec Franchise Capital Partners LP Iii 10QSB 2002 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 endedJune 30, 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
	Balance Sheets, June 30, 2002 and December 31, 2001
	Statement of Operations for the three and six months ended June 30, 2002 and 2001
	Statement of Changes in Partners’ Capital for the six months ended June 30, 2002
	Statement of Cash Flows for the six months ended June 30, 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
CERTIFICATION

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, June 30, 2002 and December 31, 2001	3
	Statement of Operations for the three and six months ended June 30, 2002 and 2001	4
	Statement of Changes in Partners’ Capital for the six months ended June 30, 2002	5
	Statement of Cash Flows for the six months ended June 30, 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 – 11
PART II	OTHER INFORMATION Other Information	12 – 13
SIGNATURES		14-15

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Captec Franchise Capital Partners L.P. III
Balance Sheet

					June 30,		December 31,
					2002		2001
					(Unaudited)
				Assets
Cash and cash equivalents					$	400,932	$	781,658
Restricted cash						481,263		387,302
Investment in property under leases:
	Operating leases, net					17,425,573		17,565,762
	Financing leases, net					942,429		1,111,307
	Impaired financing leases, net					12,693		48,693
Accounts receivable						9,901		60,401
Unbilled rent, net						1,262,911		1,190,584
Due from related parties						8,914		5,524
Deferred financing costs, net						310,641		334,536
		Total assets			$	20,855,257	$	21,485,767
			Liabilities and Partners’ Capital
Liabilities:
	Notes payable				$	7,955,314	$	8,042,570
	Accounts payable and accrued expenses					82,729		161,935
	Due to related parties					1,477		15,025
	Security deposits held on leases					31,960		45,607
		Total liabilities				8,071,480		8,265,137
Partners’ capital:
Limited partners’ capital						12,745,403		13,188,344
General partner’s capital						38,374		32,286
		Total partners’ capital				12,783,777		13,220,630
		Total liabilities and partners’ capital			$	20,855,257	$	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
(Unaudited)

			Three months ended					Six months ended
			June 30,					June 30,
			2002		2001			2002		2001
Operating revenue:
	Rental income		$	551,477	$	540,993		$	1,104,273	$	1,081,987
	Finance income			18,841		31,202			39,210		68,171
		Total operating revenue		570,318		572,195			1,143,483		1,150,158
Operating costs and expenses:
	Interest expense			179,355		182,991			359,630		366,623
	Depreciation			70,094		73,737			140,189		147,474
	General and administrative			28,466		24,079			47,979		40,967
	Provision for impaired financing leases			—		—			—		92,908
	Provision for unbilled rent			—		—			36,000		77,000
		Total operating costs and expenses		277,915		280,807			583,798		724,972
		Income from operations		292,403		291,388			559,685		425,186
Other income (expense):
	Interest and other income			5,383		2,792			6,270		4,525
	Gain (loss) on sale of equipment			42,874		(27,357	)		42,874		(18,271	)
		Total other income (expense)		48,257		(24,565	)		49,144		(13,746	)
Net income				340,660		266,823			608,829		411,440
Net income allocable to general partner				3,407		2,668			6,088		4,114
Net income allocable to limited partners			$	337,253	$	264,155		$	602,741	$	407,326
Net income per limited partnership unit			$	17.05	$	13.31		$	30.48	$	20.53
Weighted average number of limited partnership units outstanding				19,776		19,842			19,776		19,842

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, 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 — ($52.88 per unit)		—		(1,045,682	)		—		(1,045,682	)
Net income		—		602,741			6,088		608,829
Balance, June 30, 2002		19,776	$	12,745,403		$	38,374	$	12,783,777

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, 2002 and 2001
(Unaudited)

			2002			2001
Cash flows from operating activities:
	Net Income		$	608,829		$	411,440
	Adjustments to net income:
		Depreciation		140,189			147,474
		Amortization of debt issuance costs		23,895			23,895
		(Gain) loss on sale of equipment		(42,874	)		18,271
		Provision for credit losses		36,000			77,000
		Increase in unbilled rent		(72,327	)		(13,409	)
		Decrease (increase) in accounts receivable		50,500			(26,524	)
		(Decrease) increase in accounts payable and accrued expenses		(79,206	)		49,029
		Increase in restricted cash		(93,961	)		(43,125	)
		Increase in due from related parties		(3,390	)		(8,737	)
		Decrease in due to related parties		(13,549	)		(2,715	)
		Decrease in security deposits		(13,647	)		—
Net cash provided by operating activities				540,459			632,599
Cash flows from investing activities:
	Proceeds from sale of equipment			85,548			267,745
	Principal payments on financing leases			126,205			130,959
Net cash provided by investing activities				211,753			398,704
Cash flows from financing activities:
	Repayments of notes payable			(87,256	)		(47,578	)
	Distributions to limited partners			(1,045,682	)		(970,656	)
	Distributions to general partner			—			—
Net cash used in financing activities				(1,132,938	)		(1,018,234	)
Net (decrease) increase in cash and cash equivalents				(380,726	)		13,069
Cash and cash equivalents, beginning of period				781,658			95,992
Cash and cash equivalents, end of period			$	400,932		$	109,061

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”), 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, the general partnership interests of the Partnership were acquired by Captec Net Lease Realty, Inc., an affiliate. 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. In accordance with the terms of an agreement with Commercial Net Lease, immediately upon the closing of the merger and until such time as the consent of the Partnership’s secured lender is obtained, GP3 Asset Acquisition has assumed all of the General Partner’s 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. During 1997 the Partnership repurchased a total of 37 units for $31,450, or approximately $850 per unit. 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. At June 30, 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 June 30, 2002, the statements of operations and cash flows for the periods ending June 30, 2002 and June 30, 2001 and the statement of changes in partners’ capital for the period ending June 30, 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 June 30, 2002 is comprised of the following:

Land	$	7,695,896
Building and improvements		11,214,344
		18,910,240
Less accumulated depreciation		(1,484,667	)
Total	$	17,425,573

3.	NET INVESTMENT IN FINANCING LEASES:
	The net investment in financing leases as of June 30, 2002 is comprised of the following:

Minimum lease payments to be received	$	1,065,305
Estimated residual value		48,736
Gross investment in financing leases		1,114,041
Less unearned income		(156,770	)
Less direct origination costs		( 14,842	)
Net investment in financing leases	$	942,429

4.	NOTES PAYABLE:
	In November 1998, the Partnership entered into a $6.2 million term note. The note has a ten-year term, is collateralized 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 collateralized 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 the 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 which may arise in the future. Any statements in this Form 10-Q which are not statements of historical fact may be deemed to be forward-looking statements. When used in this discussion, 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 described herein. Such risks and uncertainties, some of which are beyond the Partnership’s control, include the following: (i) tenant defaults in making rent payments, (ii) a fire or other casualty may interrupt the cash flow stream from a property, (iii) properties may not be able to be leased at the assumed rental rates, (iv) unexpected expenses may be incurred and (v) properties may not be able to be sold at the presently anticipated prices and / or 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 June 30, 2002.During the three months ended June 30, 2002 total operating revenue was approximately $570,000, nearly unchanged as compared to $572,000 for the three months ended June 30, 2001.

Operating expenses were approximately $278,000 for the three months ended June 30, 2002, nearly unchanged as compared to approximately $281,000 for the three months ended June 30, 2001.

Other income for the three months ended June 30, 2002 was approximately $48,000 as compared to other expense of approximately $25,000 for the three months ended June 30, 2001. The other income for the three months ended June 30, 2002 is primarily due to a gain on the disposition of an equipment lease in April 2002. The other expense during the three months ended June 30, 2001 is primarily due to a loss on the sale of equipment.

As a result of the foregoing, the Partnership’s net income increased 27.7% to approximately $341,000 for the three months ended June 30, 2002 as compared to approximately $267,000 for the three months ended June 30, 2001.

Six Months Ended June 30, 2002.During the six months ended June 30, 2002 total operating revenue was approximately $1,143,000, nearly unchanged as compared to $1,150,000 for the six months ended June 30, 2001. Rental revenue from operating leases for the six months ended June 30, 2002 increased 2.1% to approximately $1,104,000, as compared to $1,082,000 for the six months ended June 30, 2001. The increase in rental income is the result of rent escalations since the prior year period attributed to changes in the Consumer Price Index. Such rent escalations are in addition to any fixed, contractual rental increases that are recognized as rental income on a straight-line basis over the term of each lease. Earned income from financing leases for the six months ended June 30, 2002 decreased 42.5% to approximately $39,000 as compared to approximately $68,000 for the six months ended June 30, 2001 as a result of the amortization of principal balances.

9

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

Operating expenses were approximately $584,000 for the six months ended June 30, 2002, a decrease of 19.5% as compared to approximately $725,000 for the six months ended June 30, 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 six months ended June 30, 2002 was approximately $49,000 as compared to other expense of approximately $14,000 for the six months ended June 30, 2001. The other income for the six months ended June 30, 2002 is primarily due to a gain on the disposition of an equipment lease in April 2002. The other expense during the six months ended June 30, 2001 is primarily due to a loss on the sale of equipment.

As a result of the foregoing, the Partnership’s net income increased 48.0% to approximately $609,000 for the six months ended June 30, 2002 as compared to approximately $411,000 for the six months ended June 30, 2001.

Distributions.The Partnership announced second quarter distributions of $340,000, of which $281,905 was distributed to limited partners on July 15, 2001. The balance of $58,095 was distributed to those partners who elected to receive distributions on a monthly basis on May 15, 2002 and June 15, 2002.

10

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

LIQUIDITY AND CAPITAL COMMITMENTS

The Partnership commenced an offering of up to 20,000 limited partnership units registered under the Securities Act of 1933, as amended, by means of a registration statement that 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 each have a ten-year term, are collateralized 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 June 30, 2002, the Partnership had a portfolio of 14 properties located in 10 states, with a total cost basis of $19.0 million and 7 performing equipment leases with an original investment of $2.0 million. The partnership also has a net investment of approximately $13,000 in one repossessed equipment package, which amount is net of an allowance for losses of approximately $169,000.

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, assessments, maintenance, repairs and casualty and other insurance premiums thereby minimizing the Partnership’s operating expenses and capital requirements. The Partnership management 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.

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.None.

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
4.1	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, 2002.

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.

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:	August 14, 2002

14

CERTIFICATION

I, Patrick L. Beach, the President of GP3 Asset Acquisition, LLC, the manager of Captec Franchise Capital Partners L.P. III (the “Partnership”), certify that:

(1) The Quarterly Report on Form 10-Q of the Partnership for the period ended June 30, 2002 which this certification accompanies fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.

/s/ Patrick L. Beach
President
GP3 Asset Acquisition, LLC
August 14, 2002

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