<PAGE> 1
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, 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
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II
- ------------------------------------------------------------------------
(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
----- -----
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 .
----- -----
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
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements 1
Consolidated Balance Sheet, March 31, 1996 2
Consolidated Statement of Operations for the
three month periods ended March 31, 1996 and 1995 3
Consolidated Statement of Cash Flows for the
three month periods ended March 31, 1996 and 1995 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART 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
</TABLE>
i
<PAGE> 3
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 March 31, 1996 and the consolidated statements of
operations and cash flows for the periods ending March 31, 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.
1
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 1996
(Unaudited)
ASSETS
<TABLE>
<S> <C>
Cash $ 112,568
Investment in leases:
Operating leases, net 1,893,845
Direct financing leases, net 478,866
Rent receivable 5,200
Unbilled rent 86,045
Due from related parties 7,584
----------
Total assets $2,584,108
==========
LIABILITIES & PARTNERS' CAPITAL
Liabilities:
Note payable $ 775,347
Accounts payable 509
Due to related parties 2,950
Operating lease rents paid in advance 13,500
Security deposits held on leases 43,131
----------
Total liabilities 835,437
----------
Partners' Capital:
Limited partners' capital accounts 1,744,099
General partner's capital accounts 4,572
----------
Total partners' capital 1,748,671
----------
Total liabilities & partners' capital $2,584,108
==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 5
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
for the three month periods ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Operating revenue:
Rental income $ 71,507 $ 65,792
Finance income 18,781 14,378
---------- ----------
Total operating revenue 90,288 80,170
---------- ----------
Operating costs and expenses:
Depreciation 7,118 6,078
General and administrative 4,357 4,450
---------- ----------
Total operating costs and expenses 11,475 10,528
---------- ----------
Income from operations 78,813 69,642
---------- ----------
Other Income (expense):
Interest income 0 0
Interest expense (20,242) (21,262)
Other 525 0
---------- ----------
Total other income, net (19,717) (21,262)
---------- ----------
Net income 59,096 48,380
Net income allocable to general partners 591 484
---------- ----------
Net income allocable to limited partners $ 58,505 $ 47,896
========== ==========
Net income per limited partnership unit $15.07 $12.34
========== ==========
Weighted average number of limited partnership
units outstanding 3,881 3,881
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 6
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
for the three month periods ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 59,096 $ 48,380
Adjustments to net income:
Depreciation 7,118 6,078
Increase in unbilled rent (16,155) (150)
Decrease (increase) in receivables (4,951) (30,449)
Increases in payables 1,150 6,676
Security deposits received - 21,798
------------- -------------
Net cash provided by operating activities 46,258 52,333
------------- -------------
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 19,318 23,723
------------- -------------
Net cash provided by (used in) investing activities 19,318 (74,801)
------------- -------------
Cash flows from financing activities:
Principal payments on note payable (10,421) (9,401)
Distributions to limited partners (61,000) (49,800)
------------- -------------
Net cash used in financing activities (71,421) (59,201)
------------- -------------
Net increase in cash (5,845) (81,669)
Cash, beginning of period 118,413 136,984
------------- -------------
Cash, end of period $ 112,568 $ 55,315
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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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).
5
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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
March 31, 1996, representing cash flow from operations for the quarter
ended December 31, 1995.
6
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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 March 31, 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 March 31,
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 March 31, 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.
7
<PAGE> 10
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 March 31, 1996 is comprised of
the following:
<TABLE>
<S> <C>
Land $ 805,900
Building and improvements 1,138,902
----------
1,944,802
Less accumulated depreciation (50,957)
----------
Total $1,893,845
==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on the operating leases as of March 31, 1996:
<TABLE>
<S> <C>
1996 $ 169,335
1997 231,400
1998 238,400
1999 245,500
2000 252,900
Thereafter 4,183,000
----------
Total $5,320,535
==========
</TABLE>
5. NET INVESTMENT IN DIRECT FINANCING LEASES:
The net investment in direct financing leases as of March 31, 1996 is
comprised of the following:
<TABLE>
<S> <C>
Minimum lease payments to be received $563,215
Estimated residual value 54,707
--------
Gross investment in direct financing leases 617,922
Less unearned income (139,056)
--------
Net investment in direct financing leases $478,866
========
</TABLE>
8
<PAGE> 11
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 March 31, 1996:
<TABLE>
<S> <C>
1996 $114,298
1997 152,396
1998 152,396
1999 138,880
2000 5,245
--------
Total $563,215
========
</TABLE>
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 March 31, 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 March 31, 1996 of $775,347. 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.
9
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTE PAYABLE, CONTINUED:
At March 31, 1996, annual maturities of the note payable are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996 $ 32,922
1997 48,051
1998 53,261
1999 641,113
--------
Total $775,347
========
</TABLE>
8. SUBSEQUENT EVENT:
In April 1996, the Partnership made a distribution to its limited partners
totaling $61,000 which represented distribution of cash flow from
operations for the quarter ended March 31, 1996.
10
<PAGE> 13
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 March 31, 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 March 31, 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 month period ended March 31, 1996, the Partnership earned
revenues totaling approximately $91,000, compared to approximately $80,000 for
the corresponding period of the preceding year. The increase in revenues over
the prior year's period (13.3%) was
11
<PAGE> 14
due to the effect of the Partnership having not completed its acquisition
activities during the entire portion of the prior period.
For the three month period ended March 31, 1996, the Partnership incurred
expenses totaling approximately $32,000, compared to $32,000 for the
corresponding period of the preceding year. On a comparative basis, expenses
remained approximately level.
For the three month period ended March 31, 1996, the Partnership earned
net income of approximately $59,000, compared to approximately $48,000 for the
corresponding period of the previous year. The increase in net income over the
prior year's period (22.2%) was due to the increase in revenues discussed
above.
During the three month period ended March 31, 1996, the Partnership made
distributions to the limited partners totaling $61,000, as compared with
$49,800 for the corresponding period of the preceding year. In addition, in
April 1996, the Partnership made a distribution to its limited partners
totaling $61,000, which represented distribution of cash flow from operations
for the quarter ended March 31, 1996, as compared with a distribution of
$67,000 for the corresponding period of the preceding year.
12
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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
Exhibit 27 - Financial Data Schedule
No reports on the Form 8-K were filed for the three month period
ending March 31, 1996.
13
<PAGE> 16
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: May 13, 1996
14
<PAGE> 17
Exhibit Index
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 112,568
<SECURITIES> 0
<RECEIVABLES> 577,695
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 690,263
<PP&E> 1,944,802
<DEPRECIATION> 50,957
<TOTAL-ASSETS> 2,584,108
<CURRENT-LIABILITIES> 835,437
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,748,671
<TOTAL-LIABILITY-AND-EQUITY> 2,584,108
<SALES> 90,288
<TOTAL-REVENUES> 90,813
<CGS> 0
<TOTAL-COSTS> 11,475
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,242
<INCOME-PRETAX> 59,096
<INCOME-TAX> 0
<INCOME-CONTINUING> 59,096
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,096
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
