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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 March 31, 1997
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[ ] 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 33-77510-C
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
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(Exact name of small business issuer as specified in its charter)
Delaware 38-3160141
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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. III
INDEX TO FORM 10-QSB
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements 1
Balance Sheet, March 31, 1997 2
Statement of Operations for the three month periods
ended March 31, 1997 and 1996 3
Statement of Cash Flows for the three month periods
ended March 31, 1997 and 1996 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
ART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The balance sheet of Captec Franchise Capital Partners L.P. III (the
"Partnership") as of March 31, 1997 and the statements of operations and cash
flows for the periods ending March 31, 1997 and 1996 are unaudited and have not
been examined by independent public accountants. 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. All such
adjustments are of a normal and recurring nature.
These financial statements should be read in conjunction with the audited
financial statements and accompanying notes thereto included in the
Partnership's report on Form 10-KSB for the fiscal year ended December 31,
1996.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
BALANCE SHEET
March 31, 1997
(Unaudited)
ASSETS
Cash $ 367,337
Investment in property under leases:
Operating leases, net 14,060,380
Direct financing leases, net 2,801,567
Accounts receivable 198
Unbilled rent 217,840
Due from related parties 10,690
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Total assets $17,458,012
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LIABILITIES & PARTNERS' CAPITAL
Liabilities:
Accounts payable $ 17,530
Due to related parties 32,650
Security deposits held on leases 59,329
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Total liabilities 109,509
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Partners' Capital:
Limited partners' capital accounts 17,327,880
General partners' capital accounts 20,623
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Total partners' capital 17,348,503
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Total liabilities & partners' capital $17,458,012
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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 month periods ended March 31, 1997 and 1996
(Unaudited)
1997 1996
Operating revenue:
Rental income $393,115 $118,217
Finance income 84,492 72,933
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Total operating revenue 477,607 191,150
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Operating costs and expenses:
Depreciation 48,831 21,594
General and administrative 45,509 14,799
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Total operating costs and expenses 94,340 36,393
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Income from operations 383,267 154,757
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Other income (expense):
Interest income 28,670 19,154
Other 231 907
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Total other income, net 28,901 20,061
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Net income 412,168 174,818
Net income allocable to general partners 4,122 1,748
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Net income allocable to limited partners $408,046 $173,070
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Net income per limited partnership unit $ 20.40 $ 18.75
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Weighted average number of limited partnership
units outstanding 20,000 9,228
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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 month periods ended March 31, 1997 and 1996
(Unaudited)
1997 1996
Cash flows from operating activities:
Net Income $ 412,168 $ 174,818
Adjustments to net income:
Depreciation 48,831 21,594
Increase in unbilled rent (7,167) (22,783)
Decrease (increase) in receivables 1,761 (2,451)
(Decrease) increase in payables (31,238) 8,556
Decrease in security deposits held on leases (6,624) -
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Net cash provided by operating activities 417,731 179,734
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Cash flows from investing activities:
Purchase of real estate for operating leases - (2,819,849)
Construction loan draws (376,890)
Purchase of equipment for financing leases - (601,793)
Reduction of net investment in financing leases 104,183 64,022
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Net cash used in investing activities (272,707) (3,357,620)
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Cash flows from financing activities:
Decrease in due from related parties 9,899 5,800
Increase in due to related parties 24,922 411,440
Issuance of limited partnership units - 3,513,913
Offering costs - (450,783)
Distributions to limited partners (502,683) (214,170)
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Net cash provided by financing activities (467,862) 3,266,200
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Net increase in cash (322,838) 88,314
Cash, beginning of period 690,175 1,283,655
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Cash, end of period $ 367,337 $ 1,371,969
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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 of the Partnership are 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. 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 August 12, 1994. A minimum of 1,150 Units and a
maximum of 20,000 Units, priced at $1,000 per Unit, were offered on a "best
efforts, part or none" basis. The Partnership broke impound on January 24,
1995, at which time funds totaling $1,155,255 were released from escrow and
the Partnership immediately commenced operations. At March 31, 1997, the
Partnership had accepted subscriptions for the entire 20,000 Units, and
funds totaling $20,000,000.
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.
In no event will the Sponsor be allocated less than one percent 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
subject to operating leases are stated at cost less accumulated
depreciation. Buildings are depreciated on the straight-line method
over their estimated useful lives (40 years).
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
NOTES TO FINANCIAL STATEMENTS
1. THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES, CONTINUED:
C. NET INVESTMENT IN FINANCING LEASES: Leases classified as
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 a ten percent (10%) 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 eleven percent (11%) preferred return plus return of the
original contributions to the limited partners.
The Partnership distributed approximately $503,000 during the three month
period ended March 31, 1997, representing quarterly distributions of cash
flow from operations for the quarter ended December 31, 1996 and elective
monthly distributions for the current quarter.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
NOTES TO FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS AND AGREEMENTS:
Organization and offering expenses, excluding selling commissions, were
initially paid by the General Partners and/or their Affiliates and were
reimbursed by the Partnership in an amount equal to up to three percent
(3%) of the gross proceeds of the offering (less any amounts paid directly
by the Partnership). In addition, the Sponsors and/or their affiliates
were paid a non-accountable expense allowance by the Partnership in an
amount equal to two percent (2%) of the gross proceeds of the offering.
There were no organizational and offering costs paid during the three month
period ended March 31, 1997.
The Partnership also paid to Participating Dealers, including affiliates of
the general partners, selling commissions in an amount equal to eight
percent (8%) of the purchase price of all Units placed by them directly.
There were no commissions paid or incurred during the three month period
ended March 31, 1997. The Sponsor had also guaranteed payment of
organization and offering expenses which exceed 13%, including selling
commissions, of the gross proceeds of the offering.
An acquisition fee is charged, not to exceed the lesser of: (i) four
percent (4%) of gross proceeds plus an additional .0624% for each 1% of
indebtedness incurred in acquiring properties and/or equipment but in no
event will acquisition fees exceed five percent (5%) of the aggregate
purchase prices of properties and equipment; or (ii) compensation
customarily charged in arm's length transactions by others rendering
similar services. There were no acquisition fees paid by the Partnership
during the three month period ended March 31, 1997.
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.
A subordinated asset management fee is 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 ten percent (10%) per annum on their adjusted
invested capital. There were $24,433 of subordinated asset management fees
paid to the Sponsor during the three month period ended March 31, 1997.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
NOTES TO FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS AND AGREEMENTS, CONTINUED:
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
liquidations during the three month period ended March 31, 1997.
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 eleven percent (11%) per annum on their adjusted
invested capital plus distributions of sale or refinancing proceeds equal
to 100% of their original contributions. There were no real estate
liquidations during the three month period ended March 31, 1997.
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.
4. LAND AND BUILDING SUBJECT TO OPERATING LEASES:
The net investment in operating leases as of March 31, 1997 is comprised of
the following:
Land $ 5,127,875
Building and improvements 7,812,917
Construction draws on properties (including land of $555,000) 1,316,668
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14,257,460
Less accumulated depreciation (197,080)
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Total $14,060,380
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As indicated above, at March 31, 1997 the Partnership had made investments
in properties under construction. All construction draws are subject to
the terms of a standard lease agreement with the Partnership which fully
obligates the tenant to the long-term lease of all amounts advanced under
construction draws. At March 31, 1997, the Partnership had approximately
$339,000 of unfunded commitments on properties under construction.
The following is a schedule of future minimum lease payments to be received
on the operating leases as of March 31, 1997. This schedule excludes
additional rents due under unfunded commitments on properties under
construction which are estimated to be equal to an additional $553,000 in
aggregate.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
NOTES TO FINANCIAL STATEMENTS
4. LAND AND BUILDING SUBJECT TO OPERATING LEASES, CONTINUED:
1997 $ 1,120,952
1998 1,520,568
1999 1,537,124
2000 1,558,121
2001 1,595,801
Thereafter 21,619,515
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Total $28,952,081
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5. NET INVESTMENT IN FINANCING LEASES:
The net investment in financing leases as of March 31, 1997 is comprised of
the following:
Minimum lease payments to be received $ 3,346,584
Estimated residual value 269,811
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Gross investment in financing leases 3,616,395
Less unearned income (814,828)
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Net investment in financing leases $ 2,801,567
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The following is a schedule of future minimum lease payments to be received
on the direct financing leases as of March 31, 1997:
1997 $ 660,476
1998 799,737
1999 799,737
2000 602,496
2001 262,247
Thereafter 221,891
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Total $ 3,346,584
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6. SUBSEQUENT EVENT:
In April 1997, the Partnership made a distribution to its limited partners
totaling approximately $472,000, which represented the aggregate quarterly
distribution of cash flow from operations for the quarter ended March 31,
1997 in the amount of $540,000 less $68,000 of elective monthly
distributions previously distributed during that quarter.
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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
LIQUIDITY AND CAPITAL COMMITMENTS:
The Partnership commenced the Offering of up to 20,000 limited partnership
units ("Units") registered under the Securities Act of 1933, as amended by
means of a Registration Statement, filed on form SB-2 which was declared
effective by the Securities and Exchange Commission on August 12, 1994.
The Partnership accepted subscriptions for the Minimum Number of Units on
January 24, 1995 and immediately commenced operations. The Offering reached
final funding as of August 12, 1996, having accepted subscriptions for the
entire 20,000 Units and funds totaling $20,000,000.
At March 31, 1997, the Partnership had invested in eleven net leased real
estate properties and ten equipment packages in amounts totaling approximately
$17,617,000, including capitalized acquisition fees. The Partnership has
committed additional funds of approximately $339,000 for the final construction
draw on the Golden Corral Restaurant located in Lakeland, Florida. In April
1997, the Partnership provided funding in the amount of $241,765 for the
re-imaging of the Kettle Restaurant located in Virginia Beach, Virginia to a
Denny's Restaurant ( the "Virginia Beach Property"). The Virginia Beach
Property is currently being operated as a Denny's Restaurant.
The Partnership had cash totaling $367,337 as of March 31, 1997, none of
which is available for investment. The Sponsor has agreed to lend moneys to
the Partnership, to the extent necessary for the Partnership to fulfill the
existing investment commitments described above, until such time as the
Partnership obtains the leverage described below.
During 1997, the Partnership expects to obtain leverage of up to 30% of
the sum of gross proceeds and the aggregate amount of Partnership indebtedness
secured by Partnership assets (approximately 35% of the aggregate purchase
prices of the Partnership's assets). Such leverage, when incurred, will
provide additional funds to be used by the Partnership to purchase additional
income-producing commercial Properties and Equipment which will be leased on a
"triple net" basis primarily to operators of nationally franchised fast-food,
family style and dinner house restaurants as well as other franchised
service-type businesses. The Property leases are expected to provide for a
base minimum annual rent, with provisions for fixed increases on specific dates
or indexation of rent to indices such as the Consumer Price Index and/or
percentage rents. Equipment will be leased only pursuant to Full Payout
Leases. Presently, the Partnership does not have a financing commitment for
this leverage.
During the three month period ending March 31, 1997, the Partnership did
not acquire any additional properties. The number of Properties and/or the
amount of Equipment to be acquired will depend upon the additional debt.
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Once substantially all of the Partnership's funds have been applied as
intended, the Partnership expects to require limited amounts of liquid assets
since the form of lease which it intends to use for its Properties and
Equipment will require lessees to pay all taxes and assessments, maintenance
and repairs 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.
The General Partners are not aware of any known trends or uncertainties,
other than national economic conditions, which reasonably may be expected to
have a material impact, favorable or unfavorable, on liquidity and capital
resources of the Partnership other than those referred to herein and in the
Partnership's Prospectus.
RESULTS OF OPERATIONS:
For the three month period ended March 31, 1997 the Partnership earned
revenues totaling approximately $507,000, compared to approximately $211,000
for the corresponding period of the preceding year. The increase in
year-to-date revenues over the prior year's period (140%) was due to the effect
of the Partnership's additional investment in income producing triple net
leased real estate properties and full payout equipment leases.
For the three month period ended March 31, 1997, the Partnership incurred
expenses totaling approximately $94,000, compared to $36,000 for the
corresponding period of the preceding year. The increase in year-to-date
expenses over the prior year's period (159%) was due to the same effects which
produced the increase in revenues. This growth caused corresponding increases
in depreciation expense (due to the growth in depreciable assets) and general
and administrative expenses.
For the three month period ended March 31, 1997, the Partnership earned
net income of approximately $412,000 compared to approximately $175,000 for
the corresponding period of the previous year. The increase in year-to-date
net income over the prior year's period (136%) was primarily due to the
increase in revenues discussed above.
Based upon the results of operations for the three month period ended
March 31, 1997, the Partnership distributed to its limited partners a total of
$540,000 representing cash flow from operations for that period. These amounts
were distributed as follows: $35,805 paid in February 1997 and $32,340 paid in
March 1997 to investors that have elected to receive monthly distributions and
$471,855 paid in April 1997 to all investors. On a comparative basis, the
Partnership distributed to its limited partners a total of $254,000 for the
corresponding three month period of the preceding year. The increase in
distributions over the prior year's period (113%) was due to the increase in
net income discussed above and the reduction in net investment in financing
leases (i.e. capital returned on equipment lease investments) resulting from
the growth in the equipment lease portfolio.
TENANT DEFAULT:
The Partnership has invested in a financing lease, which lease has a net
investment value of $241,765 as of March 31, 1997. The lessee under this
lease, Kenny Rogers Roasters of Arizona, Inc., has defaulted on the lease
agreement due to non-payment of rents. As of March 31, 1997, the Partnership
is owed $59,615 of rents past due from February 1, 1996 and
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forward. Presently, this default has caused the suspension of cash flows from
rents to the Partnership in an amount equal to $4,258 per month, which amount
represents 2.3% of the Partnership's aggregate current monthly rental income
(excluding additional rent which may be received from any future acquisitions).
On May 1, 1997, the Partnership executed a lease agreement with
Captec-Roasters, L.L.C., a Michigan limited liability company DBA Kenny Rogers
Roasters ("Captec-Roasters"). The equipment is being used in the operation of
the Kenny Rogers Roasters restaurant located at 1949 E. Camelback, Suite 160,
Phoenix, Arizona ("Arizona KRR Equipment"). The address of Captec-Roasters is
899 W. Cypress Creek Road. Suite 500, Ft. Lauderdale, Florida 33309. Captec
Financial Group, Inc., an affiliate of the Managing General Partner of the
Partnership, is a member of Captec-Roasters. Roasters Corp., a Florida
corporation and the franchisor of Kenny Rogers Roasters Restaurants, is also a
member of Captec-Roasters and is responsible for the operation of the
restaurant.
The lease dated May 1, 1997 is the Partnership's standard form of
equipment lease (the "KRR Lease"). Under the terms of the KRR Lease,
Captec-Roasters is responsible for all expenses related to the Arizona KRR
Equipment including taxes, insurance, maintenance and repair costs. The KRR
Lease term is 70 months. The annual rent for the first 12 months of the KRR
Lease is $6,869 and is $4,849 for the 58 months thereafter. At the end of the
KRR Lease term, upon at least 90 days prior irrevocable notice of the
Partnership, Captec-Roasters shall have the option to purchase all of the
Arizona KRR Equipment for one dollar $1.00.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
No. Exhibit
4 Agreement of Limited Partnership of Registrant
(Incorporated by reference from Exhibit A of the final
Prospectus dated August 12, 1994, as supplemented and filed
with the Securities and Exchange Commission, S.E.C. File No.
33-77510C).
27 Financial Data Schedule
(b) Reports on Form 8-K. There were no reports on Form 8-K filed
during the three month period ending March 31, 1997.
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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 III
Managing General Partner of
Captec Franchise Capital Partners L.P. III
By: /w/ W. Ross Martin
-------------------------
W. Ross Martin
Chief Financial Officer and Vice President,
a duly authorized officer
Date: May 19, 1997
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
Exhibit 27 Financial Data Schedule