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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
EXCHANGE ACT
For the transition period from to
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Commission file number 33-44654-C
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II
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(Exact name of small business issuer as specified in its charter)
Delaware 38-3019164
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
24 Frank Lloyd Wright Drive, Lobby L, 4th Floor
P.O. Box 544, Ann Arbor, Michigan 48106-0544
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(Address of principal executive offices)
(313) 994-5505
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(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
year)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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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. Yes No .
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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 X
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II
INDEX TO FORM 10-QSB
PART I FINANCIAL INFORMATION Page
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Item 1. Financial Statements 1
Consolidated Balance Sheet, June 30, 1996 2
Consolidated Statement of Operations for the
three month periods ended June 30, 1996 and 1995 3
Consolidated Statement of Operations for the
six month periods ended June 30, 1996 and 1995 4
Consolidated Statement of Cash Flows for the
six month periods ended June 30, 1996 and 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II OTHER INFORMATION
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Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated balance sheet of Captec Franchise Capital Partners L.P.
II (the "Partnership") as of June 30, 1996 and the consolidated statements of
operations and cash flows for the periods ending June 30, 1996 and 1995 are
unaudited and have not been examined by independent public accountants. In the
opinion of the Management, these unaudited consolidated 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. All such adjustments are of a normal and recurring nature.
These financial statements should be read in conjunction with the
audited consolidated financial statements and accompanying notes thereto
included in the Partnership's report on Form 10-KSB for the fiscal year ended
December 31, 1995.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 1996
(Unaudited)
ASSETS
Cash $ 95,165
Investment in leases:
Operating leases, net 1,886,727
Direct financing leases, net 458,356
Rent receivable 20,052
Unbilled rent 102,201
Due from related parties 7,584
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Total assets $ 2,570,085
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LIABILITIES & PARTNERS' CAPITAL
Liabilities:
Note payable $ 764,654
Accounts payable 509
Due to related parties 3,932
Operating lease rents paid in advance 13,500
Security deposits held on leases 43,131
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Total liabilities 825,726
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Partners' Capital:
Limited partners' capital accounts 1,739,220
General partner's capital accounts 5,139
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Total partners' capital 1,744,359
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Total liabilities & partners' capital $ 2,570,085
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The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
for the three month periods ended June 30, 1996 and 1995
(Unaudited)
1996 1995
Operating revenue:
Rental income $ 71,507 $ 68,882
Finance income 17,590 22,355
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Total operating revenue 89,097 91,237
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Operating costs and expenses:
Depreciation 7,118 8,148
General and administrative 5,875 1,644
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Total operating costs and expenses 12,993 9,792
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Income from operations 76,104 81,445
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Other Income (expense):
Interest income - -
Interest expense (19,970) (21,017)
Other 554 -
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Total other income, net (19,416) (21,017)
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Net income 56,688 60,428
Net income allocable to general partners 567 604
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Net income allocable to limited partners $ 56,121 $ 59,824
======== ========
Net income per limited partnership unit $ 14.46 $ 15.42
======== ========
Weighted average number of limited partnership
units outstanding 3,881 3,881
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
for the six month periods ended June 30, 1996 and 1995
(Unaudited)
1996 1995
Operating revenue:
Rental income $ 143,014 $ 134,674
Finance income 36,371 36,733
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Total operating revenue 179,385 171,407
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Operating costs and expenses:
Depreciation 14,236 14,226
General and administrative 10,232 6,094
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Total operating costs and expenses 24,468 20,320
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Income from operations 154,917 151,087
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Other Income (expense):
Interest income - -
Interest expense (40,212) (42,279)
Other 1,079 -
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Total other income, net (39,133) (42,279)
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Net income 115,784 108,808
Net income allocable to general partners 1,158 1,088
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Net income allocable to limited partners $114,626 $ 107,720
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Net income per limited partnership unit $ 29.54 $ 27.76
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Weighted average number of limited partnership
units outstanding 3,881 3,881
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The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
for the six month periods ended June 30, 1996 and 1995
(Unaudited)
1996 1995
Cash flows from operating activities:
Net Income $ 115,784 $ 108,808
Adjustments to net income:
Depreciation 14,236 14,226
Increase in unbilled rent (32,311) (12,721)
Decrease (increase) in receivables (19,803) (12,095)
Increases in payables 2,133 4,951
Security deposits received - 21,798
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Net cash provided by operating activities 80,039 124,967
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Cash flows from investing activities:
Disposition (purchase) of real estate for operating leases - 326,760
Purchase of equipment for financing leases - (425,284)
Reduction of net investment in financing leases 39,827 34,220
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Net cash provided by investing activities 39,827 (64,304)
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Cash flows from financing activities:
Principal payments on note payable (21,114) (19,047)
Distributions to limited partners (122,000) (116,800)
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Net cash used in financing activities (143,114) (135,847)
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Net increase in cash (23,248) (75,184)
Cash, beginning of period 118,413 136,984
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Cash, end of period $ 95,165 $ 61,800
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:
Captec Franchise Capital Partners L.P. II (the "Partnership") is a
Delaware limited partnership formed on November 19, 1991 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 business. The Partnership includes a subsidiary,
CFCP II, L.C., a limited liability company, of which it owns 61.4%. The
general partners of the Partnership are Captec Franchise Capital
Corporation II (the "Corporation"), a wholly owned subsidiary of Captec
Financial Group, Inc. ("Captec") and Patrick L. Beach, an individual,
herein after 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. The general partners
have each contributed $100 in cash to the Partnership as a capital
contribution.
The Partnership commenced a public offering of limited partnership
interests ("Units") on May 7, 1992. A minimum of 2,300 Units and a
maximum of 15,000 Units, priced at $500 per Unit, were offered on a "best
efforts, part or none" basis. The Partnership broke impound on April 4,
1994 and reached final funding on May 6, 1994. At March 31, 1996, 3,881
Units were issued and outstanding.
Due to the nature of the Partnership's business operations (acquiring,
leasing and selling real properties) and other factors, in certain cases
the financial activity is not directly comparable from year to year as
the Partnership's revenue generating assets increase and decrease.
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
will be allocated among the limited partners based upon the number of
Units owned. In no event will the Sponsor be allocated less than 1% of
profits and losses in any year.
Following is a summary of the Partnership's significant accounting
policies:
A. RENTAL INCOME FROM OPERATING LEASES: The Partnership's operating
leases have scheduled rent increases which occur at various dates
throughout the lease terms. The Partnership recognizes the total
rent, as stipulated by the lease agreement, as income on a
straight-line basis over the term of each lease. To the extent
rental income on the straight-line basis exceeds rents billable per
the lease agreement, an amount is recorded as unbilled rent.
B. LAND AND BUILDING ON OPERATING LEASES: Land and buildings on
operating leases are stated at cost. Buildings are depreciated
on the straight-line method over their estimated useful life (40
years).
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES, CONTINUED:
C. NET INVESTMENT IN DIRECT FINANCING LEASES: Leasing operations
classified as direct financing leases are stated as the sum of the
minimum lease payments plus the unguaranteed residual value accruing
to the benefit of the lessor, less unearned income. Unearned income
is amortized to income over the lease term so as to produce a
constant periodic rate of return on the net investment in the lease.
D. NET INCOME PER LIMITED PARTNERSHIP INTEREST: Net income per
limited partnership interest is calculated using the weighted
average number of limited partnership Units outstanding during the
period and the limited partners' allocable share of the net income.
E. INCOME TAXES: No provision for income taxes is included in the
accompanying financial statements, as the Partnership's results of
operations are passed through to the partners for inclusion in their
respective income tax returns.
F. ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. DISTRIBUTIONS:
Cash flows of the Partnership are allocated ninety-nine percent (99%) to
the limited partners and one percent (1%) to the Sponsor, except that the
Sponsor's share is subordinated to an eleven percent (11%) preferred
return to the limited partners. Net sale or refinancing proceeds of the
Partnership will be allocated ninety percent (90%) to the limited partners
and ten percent (10%) to the Sponsor, except that the Sponsor's share will
be subordinated to a twelve percent (12%) preferred return plus return of
the original capital contributions to the limited partners. Distributions
are paid quarterly in arrears approximately 15 days following the end of
each calendar quarter.
The Partnership distributed $61,000 during the three month period ended
June 30, 1996, representing cash flow from operations for the quarter
ended March 31, 1996.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS AND AGREEMENTS:
The Partnership has entered into an asset management agreement with the
Sponsor and its affiliates whereby the Sponsor provides various property
and equipment management services for the Partnership. An acquisition
fee is charged, not to exceed the lesser of five percent (5%) of the
aggregate purchase price of properties and equipment or the customary
charge by others rendering similar services. No acquisition fees were
paid by the Partnership during the three month period ended June 30,
1996.
A subordinated asset management fee may be charged, in an amount equal to
one percent (1%) of the gross rental revenues derived from the properties
and equipment. Payment of the asset management fee is subordinated to
receipt by the limited partners of annual distributions equal to a
cumulative noncompounded return of eleven percent (11%) per annum on
their adjusted invested capital. There were no subordinated asset
management fees paid to the Sponsor during the three month period ended
June 30, 1996.
An equipment liquidation fee limited to the lesser of three percent (3%)
of the sales price or customary fees for similar services will be paid in
conjunction with asset liquidation services. There were no equipment
liquidation fees paid during the three month period ended June 30, 1996.
The Partnership agreement provides for the Sponsor to receive a real
estate liquidation fee limited to the lesser of three percent (3%) of the
gross sales price or fifty percent (50%) of the customary real estate
commissions in the event of a real estate liquidation. This fee is
payable only after the limited partners have received distributions equal
to a cumulative, noncompounded return of twelve percent (12%) per annum
on their adjusted invested capital plus distributions of sale or
refinancing proceeds equal to 100% of their original contributions.
The Partnership has agreed to indemnify the Sponsor and their affiliates
against certain costs paid in settlement of claims which might be
sustained by them in connection with the Partnership. Such
indemnification is limited to the assets of the Partnership and not the
limited partners.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LAND AND BUILDING ON OPERATING LEASES:
The net investment in operating leases as of June 30, 1996 is comprised
of the following:
Land $ 805,900
Building and improvements 1,138,902
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1,944,802
Less accumulated depreciation (58,075)
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Total $1,886,727
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The following is a schedule of future minimum lease payments to be
received on the operating leases as of June 30, 1996:
1996 $ 113,577
1997 231,429
1998 238,377
1999 245,534
2000 252,901
Thereafter 4,182,980
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Total $5,264,798
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5. NET INVESTMENT IN DIRECT FINANCING LEASES:
The net investment in direct financing leases as of June 30, 1996 is
comprised of the following:
Minimum lease payments to be received $525,116
Estimated residual value 54,707
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Gross investment in direct financing leases 579,823
Less unearned income (121,467)
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Net investment in direct financing leases $458,356
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NET INVESTMENT IN DIRECT FINANCING LEASES, CONTINUED:
The following is a schedule of future minimum lease payments to be
received on the direct financing leases as of June 30, 1996:
1996 $ 76,199
1997 152,396
1998 152,396
1999 138,880
2000 5,245
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Total $525,116
========
6. JOINT VENTURE:
In order to more fully utilize its capital, the Partnership entered into
a joint venture with an affiliate of Captec to acquire one net leased
real property. As of June 30, 1996, the Partnership had invested
approximately $491,000 in CFCP II, L.C., representing 61.4% ownership of
the joint venture.
The Partnership accounts for its investment in CFCP II, L.C. on a
flow-through basis, whereby the Partnership's share of the assets and
liabilities and income and expense of CFCP II, L.C. are reflected in the
Partnership's financial statements.
7. NOTE PAYABLE:
The Partnership has a note payable to a financial institution with a
principal balance as of June 30, 1996 of $764,654. This note bears
interest at a fixed rate of 10.35 percent per annum and is payable in
equal monthly installments of $10,221 with a balloon payment for all
remaining principal, approximately $603,000, due in October 1999. This
note is secured by a mortgage in the Partnership's two real estate
investments which comprise its entire investment in operating leases.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTE PAYABLE, CONTINUED:
At June 30, 1996, annual maturities of the note payable are as follows:
Year ending December 31:
1996 $ 22,229
1997 48,051
1998 53,261
1999 641,113
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Total $764,654
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8. SUBSEQUENT EVENT:
In July 1996, the Partnership made a distribution to its limited partners
totaling $59,500 which represented distribution of cash flow from
operations for the quarter ended June 30, 1996.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources:
The Partnership commenced the Offering of up to 15,000 limited
partnership units ("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 May 7, 1992. The Partnership reached
final funding as of May 6, 1994 from the sale of 3,881 Units in the amount of
$1,940,500. After payment of all offering expenses (including selling
commissions) totaling $252,265, net proceeds available for investment from the
sale of units totaled $1,688,235. Proceeds from issuance of a note payable
equaled $831,000. Therefore, the Partnership received net capital available
for investment totaling $2,519,235.
As of June 30, 1996, the Partnership has fully invested all of its
capital available for investment. This capital has been used to invest in two
net leased real estate properties (including land and building) in amounts
totaling $1,852,202 and four equipment leases in amounts totaling $547,069. In
addition, in prior quarters, the Partnership paid affiliates acquisition fees
associated with the acquisition and leasing of these assets in amounts totaling
$119,954. There were no new acquisition investments made during the three
month period ended June 30, 1996.
The Partnership believes that it has sufficient liquidity to maintain
its operations through cash reserves and cash flows from operations. All of
the Partnership's leases provide for monthly rental payments to be paid to the
Partnership. The form of lease used for both real estate and equipment is an
absolute net lease, which requires lessees to pay all taxes and assessments,
repairs and maintenance and insurance premiums, including casualty insurance.
As such, the Partnership does not anticipate incurring any expenses associated
with the operation of real estate properties or equipment. Therefore,
management expects that its cash reserves and the cash flow from leases will
be sufficient to pay installments on the note payable and other general and
administrative expenses, and further, to provide quarterly distributions to the
limited partners.
Results of Operations:
For the three and six month periods ended June 30, 1996, the
Partnership earned revenues totaling approximately $90,000 and $180,000,
respectively, compared to approximately $91,000 and $171,000 for the
corresponding periods of the preceding year. The increase in year-to-date
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revenues over the prior year's period (5.3%) was due to the effect of rental
increases on the Partnership's investment in operating leases.
For the three and six month periods ended June 30, 1996, the
Partnership incurred expenses totaling approximately $32,000 and $65,000,
respectively, compared to $31,000 and $62,000 for the corresponding periods of
the preceding year. On a comparative basis, there were no significant
fluctuations in expenses.
For the three and six month periods ended June 30, 1996, the
Partnership earned net income of approximately $57,000 and $116,000,
respectively, compared to approximately $60,000 and $109,000, for the
corresponding periods of the previous year. The increase in year-to-date net
income over the prior year's period (6.4%) was due to the increase in revenues
discussed above.
During the six month period ended June 30, 1996, the Partnership made
distributions to the limited partners totaling $122,000, as compared with
$116,800 for the corresponding period of the preceding year. In addition, in
July 1996, the Partnership made a distribution to its limited partners totaling
$59,500, which represented distribution of cash flow from operations for the
quarter ended June 30, 1996, as compared with a distribution of $58,400 for the
corresponding period of the preceding year.
Tenant Default
The Partnership has invested in an operating lease under a joint
venture arrangement described in Note 6 to the consolidated financial
statements included herein. The Partnership's net investment in the property
underlying this lease is $514,344. The tenant under this lease, Kenny Rogers
Roasters of Tampa Bay, Inc., has defaulted on the lease agreement due to
non-payment of rents. As of June 30, 1996, the Partnership is owed $19,803 of
rents past due from March 1, 1996 and forward. The Partnership holds a $5,581
security deposit which can be applied against these past due rents, at the
Partnership's discretion. Presently, this default has caused the suspension of
cash flows from rents to the Partnership in an amount equal to $4,950 per
month, which amount represents 15.7% of the Partnership's aggregate current
monthly rental income. The General Partners are unable to determine at this
time whether any of these past due rents will be recovered.
The General Partners have been conducting ongoing discussions with the
tenant and with the franchisor and other franchisees in the Kenny Rogers
Roasters franchise system, as well as with other parties interested in the
property for operation of other restaurant and non-restaurant uses. These
discussions have been focused on determining whether the tenant can cure the
default, and identifying alternate tenants that are interested in taking over
the operations of this restaurant or purchasing the property for conversion to
other concepts.
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Additionally, the General Partners have obtained revised estimates of
the market value of the property from local real estate experts. These
estimates have indicated that the current market value the Partnership's 61.4%
share of the property is equal to or greater than the Partnership's net
investment in the property. Based upon this analysis, the General Partners
believe that the Partnership's net investment in this property is fairly
stated.
To date, no agreements have been reached as a result of the
discussions described above. However, based upon these discussions the General
Partners believe that, if necessary, the property can be re-leased to a new
tenant within a 3 to 6 month period, although such new lease may not provide
for the same amount of monthly rent as required under the existing lease.
Furthermore, the General Partners will pursue the default remedy provisions
under the lease, to the extent that pursuing such remedies is determined to be
in the best interest of the Partnership, taking into account such factors as
the cost of any legal actions and the probability of recovery. The General
Partners will continue to seek a resolution to this lease default and will
report any commitments or definitive agreements regarding this default.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II
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
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as a part of this report.
Number Exhibit
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27 Financial Data Schedule
No reports on the Form 8-K were filed for the three month period
ending June 30, 1996.
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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.
BY: Captec Franchise Capital Corporation II
Managing General Partner of
Captec Franchise Capital Partners L.P. II
By: /s/ W. Ross Martin
----------------------------------------
W. Ross Martin
Chief Financial Officer and Vice President,
a duly authorized officer
DATE: August 13, 1996
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
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27 FINANCIAL DATA SCHEDULE